IRS Targeting Scandal Rooted in Campaign-Finance Politics

Conservative groups were unfairly targeted, but liberal groups more savvy.

Ousted IRS Chief Steve Miller takes his seat on Capitol Hill in Washington, Friday, May 17, 2013, after a break as he testifies before the House Ways and Means Committee hearing on the Internal Revenue Service (IRS) practice of targeting applicants for tax-exempt status based on political leanings.
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The current Internal Revenue Service controversy is rife with outrage, indignance, ignorance and inappropriateness. But there's also a complex set of circumstances that led to the IRS targeting conservative political groups seeking 501(c)(4) a tax-exempt status.

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According to political money consultants and tax experts, there was a noticeable shift in how many groups sought to legally raise and spend political monies following the Supreme Court decision known as Citizens United in 2010.

Lois Lerner was the official who first admitted the IRS improperly targeted groups applying for tax-exempt status with the words "tea party," "patriot" or "9/12" last Friday in what is now known to be a plannedacknowledgment. She said then the total number of groups applying for the special exemption, which allowed them to raise unlimited amounts of money from undisclosed individual and corporate donors to be widely but not wholly spent on political purposes, more than doubled from 2010 to 2012, from 1,500 to 3,400.

At the same time, Democrats from President Barack Obama to Sen. Chuck Schumer of New York, were decrying the court decision for opening the floodgates to anonymous corporate spending designed to influence the outcomes of elections. Obama even used his State of the Union speech to attempt to shame the Supreme Court justices present for their decision.

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"Well I don't think American elections should be bankrolled by America's most powerful interests, and worse, by foreign entities," Obama said. "They should be decided by the American people, and that's why I am urging Democrats and Republicans to pass a bill that helps to right this wrong."

Schumer launched a legislative effort in April 2010 following the court decision to try and blunt its impacts by requiring stronger disclosure provisions, but that and subsequent efforts failed.

Senate Finance Committee Chairman Max Baucus, D-Mont., issued a letter Sept. 29, 2010 to then IRS Commissioner Doug Shulman to investigate "the use of tax-exempt groups for political advocacy," specifically including 501(c)(4), but also similar tax-exempt groups that included unions as well as others, like the U.S. Chamber of Commerce.

"Recent media reports on various 501(c)(4) organizations engaged in political activity have raised serious questions about whether such organizations are operating in compliance with the Internal Revenue Code," Baucus wrote. "If it is determined the primary purpose of the 501(c)(4), (c)(5) and (c)(6) organization is political campaign activity the tax exemption for that nonprofit can be terminated."

Schumer led a group of Democratic senators in writing another letter to the IRS on March 12, 2012 asking the agency to take immediate steps "to prevent abuse of the tax code by political groups focused on federal election activities."

[READ: Ousted IRS Director Miller: 'I Never Said I Didn't Do Anything Wrong']

Meanwhile, the Mississippi Tea Party, which had applied for the status in spring 2009, received a letter from the IRS on Sept. 28, 2010 (the day before Baucus's request) asking for more information from the local group including its relationship to "Tea Party Patriots," a national organization, according to a timeline provided to U.S. News and World Report by Julia Hodges, head of the Mississippi group.

Hodges says after a litany of letters and requests for information from 2009 to 2012, her group abandoned its bid for the official designation.

"Basically for us, we just pass a hat and that's how money would come in," she said of their small fundraising efforts. "It's just kinda like, well, if that's what you want to know, it's a big hat, I can't tell you what kind of hat it was, it was a baseball hat if you want to know."

The group currently has less than $800 in the bank, Hodges says.

Conversely, a Democratic group that spent much greater sums of money promoting campaign positions and issues leading up to the 2012 election than Hodges' group – Priorities USA – operated as a 501 (c)(4) but never applied for the official designation because it's not technically required.