The I.R.S. Scandal Decoded

The I.R.S. Scandal Decoded

While the word "scandal" normally gets people’s ears to perk up, the phrase "I.R.S. scandal" probably makes eyes glaze over.

If you've been following the news, you've likely gleaned that the Internal Revenue Service—in trying to determine which groups were eligible for tax-exempt status—singled out conservative and Tea Party groups for closer scrutiny, leading to an outcry from Republican lawmakers and trouble for President Barack Obama.

But that’s not the whole picture. Considering that the furor over the I.R.S.’s actions has not died down—and hearings are expected to continue—here’s a quick breakdown of everything you need to know about the scandal.

Learnvest

Get started with a free financial assessment.


What Happened Here?

The I.R.S. allows certain nonprofit organizations to be tax-exempt. The parties of concern here are called 501(c)(4) groups. The I.R.S. code states that these nonprofits must be "operated exclusively to promote social welfare," and they "may engage in some political activities, so long as that is not its primary activity."

The I.R.S. division in Cincinnati, Ohio, is tasked with determining whether such groups that apply for 501(c)(4) status actually qualify. It’s one of only three I.R.S. divisions that does not collect tax revenue—and the work it does is considered especially dreary. "Nobody wants to be a determination agent," a former lawyer in the office that oversaw the department told The New York Times.

RELATED: The I.R.S. Has $917 Million for You

In recent years, the work of I.R.S determination agents has become even more burdensome: Congress changed the tax code slightly, and suddenly 400,000 nonprofit groups that don’t engage in lobbying were at risk of losing their tax-exempt status—prompting tens of thousands of them to reapply for their exemptions.

Additionally, the Supreme Court’s Citizens United decision, which gave corporations the right to spend on elections, spurred hundreds of new organizations—such as those affiliated with the Tea Party—to apply for 501(c)(4) status. In general, 501(c)(4) groups receive greater scrutiny because they engage in political activity, and some of them may do so to an extent that disqualifies them for nonprofit status.

On May 10, the I.R.S. official who oversees tax-exempt groups, Lois G. Lerner, revealed that agency personnel had targeted certain conservative groups for heightened scrutiny. One specialist, who was assigned the Tea Party cases, used words like "patriots" and "we the people" to filter through applications and find ones that may not qualify for the tax exemption.

RELATED: Oops! How to Correct a Mistake on Your Filed Taxes

Why Is It Such a Big Deal?

The agency’s then-acting chief, Steven Miller (he resigned mid-May), called the practice "triage," saying it was a way of trying to efficiently get through a glut of 501(c)(4) applications. He also pointed out that groups of other political stripes were caught in the dragnet, as well, not just conservative groups.

As former I.R.S. lawyer Philip Hackney put it, "We’re talking about an office overwhelmed by 60,000 paper applications trying to find efficient means of dealing with that. There were times where they came up with shortcuts that were efficient, but didn’t take into consideration the public perception."

RELATED: 10 Crazy Tax Laws You Need to Know

Former officials also explained that I.R.S. specialists often seek patterns in applications, partially to detect frauds and scams but also to maintain consistency in the way similar groups are treated.

There’s no question the way the I.R.S. apparently went about it was wrong. But the fact that they were doing it is right.

The reaction from Republicans: The actions were part of a culture of "intimidation." As a result, several investigations are now looking into who knew about the Cincinnati office's doings—and how high up the ladder they were. The Department of Justice has opened a criminal investigation, multiple Congressional committees are holding hearings, and the new I.R.S. agency head will conduct a 30-day review.

Congress is also looking into whether any White House or senior Obama administration officials had any role in influencing the inappropriate behavior from the I.R.S. However, a release issued last Wednesday of the procedures that the division used to target conservative groups seems to indicate that they were developed by lower-level employees.

How Does This Affect Me?

While the consequences of the scandal are unlikely to have a direct impact on you, it could affect how the I.R.S. determines which nonprofit groups actually deserve tax-exempt status. According to Time, "Many of the nonprofit groups who claim 501(c)(4) status either flout tax law or flirt with the murky line between electioneering and issue advocacy, all while using their tax-exempt status to conceal their donors."

RELATED: 4 Top Tax Scams to Avoid

In fact, after the Supreme Court’s Citizens United decision, the number of groups applying for 501(c)(4) status doubled, and donors have rushed to such groups in order to influence elections without having their contributions publicly disclosed. Last year, such groups spent $300 million in what’s called "dark money," according to the nonprofit transparency group The Sunlight Foundation.

Campaign-finance watchdog groups say this scandal could have one negative consequence: It will scare the I.R.S. off from pursuing groups that are using this tax-exempt status to influence elections. As Lisa Rosenberg of the Sunlight Foundation told Time, "There’s no question—the way the I.R.S. apparently went about it was wrong. But the fact that they were doing it is absolutely right."

RELATED: 10 Tax Filing Mistakes to Avoid

 

Learnvest

Financial planning made simple.

Get your free financial assessment.

Related Tags

Get the latest in your inbox.

Subscription failed!

You're Now Subscribed!