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The Two Scandals at the IRS

As Prepared for Delivery on the Senate Floor

Washington, D.C., and the right wing outrage machine, are all abuzz about the scandal that the IRS appears to have targeted organizations for inquiry based on Tea Party affiliation.  Obviously, that's wrong, but let's not forget that it's not the only IRS scandal.  This is not the only scandal in town.

There are two IRS scandals.  The other is allowing big shadowy forces to meddle in elections anonymously through front groups that file false IRS statements.

Let's go through this.  It's pretty clear that Americans have a strong interest in knowing who is trying to influence their vote in elections.  That's kind of Democracy 101.  Even the Supreme Court, which can hardly agree 8-1 on what time it is, agreed 8-1 that knowing who's trying to influence your vote is really important.  Here's what they said:  They said that the Bipartisan Campaign Reform Act created a regime of “effective disclosure” that would “provide shareholders and citizens with the information needed to hold corporations and elected officials accountable for their positions and supporters.”

But some folks don't want you to know who they are when they meddle in politics.  Big companies taking positions that would annoy their customers; secretive billionaires who want influence without accountability; polluters, Wall Street, Big Oil, and other folks that the public is fed up with – they have lots of reasons for wanting to stay secret. 

But the law in America requires lots of disclosure, and the Supreme Court has emphasized the importance of lots of disclosure, so what's a company or a billionaire trying to hide their influence-seeking going to do?  How does the secret money get in? 

Easy –  Create a front organization with a phony-baloney happy name and hide behind that.  Except it's not quite that easy.  There aren’t that many kinds of organizations that can hide their donors that way.  The most commonly used is called a 501(c)(4), a tax-exempt non-profit form of corporation regulated by guess who, the IRS.

There is one big problem. That kind of organization, a 501(c)(4), needs to be set up “for the promotion of social welfare.”  Indeed, “exclusively” for that purpose, according to the statute by which they were created.  And the IRS’s own regulations explicitly state that “the promotion of social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office,” so it’s hard to see how these groups should be allowed to spend millions on elections. 

But somehow, the IRS decided that an organization is organized “exclusively” for the promotion of social welfare if it is “primarily” engaged in social welfare activities, that “primarily” means 51%, and that the other 49% can be purely political.  Worse still, the 51% of “non-political” activities can be bogus “educational” or “legislative” activities that are really just the same political ads given another name. 

This, in and of itself, is a scandal.  The IRS allowing a bunch of political operatives to form non-profit groups that don’t disclose its donors, and then collect millions of dollars and spend them on elections in contravention of  a clear statute, and seemingly even their own rules.  

Yet the scandal is worse than this.  On the 1024 application form for 501(c)(4) status, Question 15 asks: “Has the organization spent or does it plan to spend any money attempting to influence the selection, nomination, election, or appointment of any person to any Federal, state, or local public office or to an office in a political organization?”  Several groups appear to have lied on their applications for non-profit status and on their returns, with absolutely no consequences. 

The Pulitzer Prize-winning nonpartisan investigative group ProPublica has investigated these 501(c)(4) filings.  They looked at 104 organizations that had reported electioneering activity to the Federal Election Commission or state equivalents, saying “here is what we spent on elections.”  ProPublica cross-checked; 32 of them had told the IRS they spent no money to influence elections, either directly or indirectly.  Both statements cannot be true.  You cannot tell one federal agency how much you spent to influence elections, and tell another federal agency that you spent no money to influence elections, and have both statements be true.

And when you look at these organizations' behavior, the false statements look even worse.  One organization said it would spend 50% of its effort on a website and 30% on conferences.  Investigation showed its website consisted of one photograph and one paragraph; no sign of any conferences.  The same group declared it would take contributions “from individuals only” and then took $2 million from PhRMA, the pharmaceutical lobby.  Another declared to the IRS it had spent $5 million on political activities, but told the FEC it had spent $19 million on political ads.  Another pledged its political spending would be “limited in amount and will not constitute the organization's primary purpose,” and then went out and spent $70 million on ads and robocalls in one election season.

Making a material false statement to a federal agency is not just bad behavior, it's a crime.  It is a statutory offense under 18 U.S. Code Section 1001.  The Department of Justice indicts and prosecutes violations of this statute all the time.  But they never do for this. 

Why?  It appears that there is a bad agreement between the Department of Justice and the Internal Revenue Service that the Department of Justice won't prosecute false statements if they're made on this form, unless the case has been referred by the IRS. 

And that brings us to Scandal Two.  Apparently, no matter how flagrant the false statement, no matter how great the discrepancy between the statements filed at the IRS and the statements filed at the election agencies, no matter how baldly the organization in practice contradicts how it answered IRS questions about political activity, the IRS never makes a referral to the Department of Justice.  Thirty-two flagrantly false statements, and as far as we know, not one referral to the Department of Justice as a false statement.  It is a mockery of the law and it is a mockery of the truth.

There is an easy solution.  The Department of Justice prosecutes these false statements in lots of other instances.  Prosecute these.  Juries are good at sorting out what's a lie and what's not.  Investigations, interviews, statements and subpoenas can see behind the statement, and prosecutors can get a full sense of the case, in a grand jury, before any charges are finalized. 

But not if they don’t look.  Right now, organizations lie with impunity, and in large numbers, and it is indeed a scandal that the IRS won't even make a referral.  Frankly, it is no credit to the Department of Justice that the Department won't act on its own, with all of this so public and so plain.  Hiding behind their agreement with the IRS, on these facts, is not that great Department's finest hour.

So it is very wrong that the IRS required additional information from a number of organizations based on a screen incorporating their Tea Party orientation.  But it is also wrong that the IRS goes AWOL when wealthy and powerful forces want to break the law in order to hide their wrongful efforts at secret political influence.  Picking on the little guy is a pretty lousy thing to do; rolling over for the powerful and letting them file false statements is pretty lousy too.  Two scandals –  let's not let one drown out the other.