Senators from both sides of the aisle were eager to pile on the pair of former Internal Revenue Service chiefs who appeared before them Tuesday during a committee hearing investigating the scandal that involved the targeting of conservative political groups. But the IRS officials put the blame back on Congress.
Former IRS commissioner Douglas Shulman, who headed the agency during the time lower-level officials were unfairly scrutinizing conservative political groups seeking a tax-exempt status, told lawmakers on the Senate Finance Committee the laws and regulations dictating the criteria for granting the status were vague and in need of congressional clarification.
"I actually don't think it's fair to blame the IRS for not fixing [the ambiguity]," he said. "The IRS can give input, but this is actually something that if Congress decides it should be changed, Congress should either clarify or it should be done in regulation."
Treasury Department Inspector General Russell George, who authored a scathing audit of the IRS practice of using keywords such as "tea party," "patriot" and "9/12" to select groups for additional scrutiny agreed with Shulman that IRS officials had been put in a difficult position.
"The way the law has been interpreted by the IRS over the course of a number of decades – I, in all candor, don't know whether that was done as the result of court decisions or simply internal policies – but further explanation is needed," he said in response to questioning by Sen. Bill Nelson, D-Fla.
The lawmakers and former tax officials both acknowledged that the 2010 Supreme Court decision on Citizens United helped create the rush for political groups to seek the 501(c)(4) tax-exemption status. That's because it paved the way for unlimited corporate spending in political campaigns, but under the regulations set up for such groups following the court decision the donors have to be disclosed. That led to groups seeking anonymity to take advantage of the 501(c)(4) designation, which exists as a "social welfare" group but allows for anonymous donations and campaign spending.
"Clearly a Mack truck is being driven through the 501(c)(4) loophole," said Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee. Baucus directed the IRS to begin scrutinizing the proliferation of 501(c)(4) groups in 2010, prompting outcry on the right he was part of a concerted effort to punish conservatives who had been taking advantage of the designation.
But lawmakers pushed back on the notion that they bear responsibility for the confusing campaign finance law.
Sen. Ron Wyden, D-Oregon, said while the "lines have blurred" between Super PACs, blatantly political spending groups that have to disclose their donors, and 501(c)(4)s, which are supposed to be "social welfare" organizations that can spend a portion of their money on political activity but don't have to reveal their donors, the onus was on the IRS to clarify who counted as what.
"There's an incentive for people to chose their tax status based on whether they want to hide their donors," he said. "The lines blurred and you don't seem to have done anything about it and I want to know why not."
Shulman, who was appointed to head the IRS by President George W. Bush, said it was a difficult task for the IRS – whose main job is to process the nation's tax receipts and returns – to also make determinations about whether or not the political activities of thousands of groups seeking tax-exemptions crossed a vague threshold.
"This is a place where Congress should look because from where I sit, the IRS is given a very, very, very difficult task of trying to go in and figure out [that] you can do some political activity, but you can't do too much," he said. "The confusion and break down that you saw happen in the Cincinnati office is inexcusable, but I would also posit that part of it was because of the very difficult task given to these people."
Top committee Republican Sen. Orrin Hatch of Utah admitted Congress was partially to blame, but took the former IRS officials to task for what he called "lies of omission" for failing to come clean to lawmakers once it learned certain groups were being targeted.
"We've had some criticism of the Congress because they haven't passed certain laws that would make things clearer – it's also your obligation to come back and tell us," he said.
But even though the IRS scandal has put campaign finance in the crosshairs, reform proponents don't expect the controversy to help their cause.
Sen. John McCain, R-Ariz., who championed the last reform effort to limit outside spending in campaigns, says the latest IRS scandal has left voters skeptical anything can be fixed.
"It has been harmful to the effort in the short term because we have to make sure that the American people will know that any changes we make will not be used in a discriminatory fashion," he says. "It has hurt because it conveys the conception out there that there is an out of control agency and to give them more power and authority would be a terrible mistake."
Lawrence Lessig, a professor at Harvard Law School who supports campaign finance reform, says the easiest solution would be to eliminate the 501(c)(4) designation.
"The core problem is not a bunch of IRS agents in Ohio, the core problem is the law's deep ambiguity and uncertainty about what's a (c)(4) and how do you qualify for a (c)(4)," he says. "This could be simplified radically if you just either eliminated (c)(4)s."
Lessig points out groups that are purely charities already have their own tax-exempt code and political spending groups have their own code as well. The rub is that many political donors, particularly on the Republican side, don't want to give up their anonymity, he says.
"What's obviously happening here is politically there is very little desire, at least among the Republicans, to adopt reforms that further extend the requirements of disclosure," Lessig says.
Meanwhile, a pair of groups filed lawsuits today against the IRS for their discriminatory practices – one was a conservative Texas group that it took more than three years to get its 501(c)(4) application processed and the other was one seeking to compel the IRS to address the differences between law and regulation about what it means to be a social welfare group, filed by Citizens for Responsibility and Ethics in Washington, a pro-campaign finance reform group.
And Lois Lerner, a top IRS official at the heart of the controversy – including the decision to first broach the issue during a private tax panel discussion by planting a question about it in the audience and reading off prepared remarks – is expected to decline to testify under oath before a House committee Wednesday in order to avoid incriminating herself.