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Replace All Federal Taxes on Income with the Fair Tax Act , HR 25 and S 122

TREASURY INSPECTOR GENERAL FINGERS THE IRS
Agency Reels from Revelation of Abuse

 

A firestorm of controversy preceded the release of the report of Treasury Inspector General for Tax Administration (TIGTA) on the IRS’s handling of the applications for exempt status of certain advocacy groups. The report, released May 14, 2013, is the culmination of work by TIGTA that began because of complaints made to various congressmen about the way the IRS was handling applications for tax-exempt status under code section 501(c)(4). See: “Inappropriate Criteria Were Used to Identify Tax-Exempt Applications for Review,” TIGTA Reference No. 2013-10-053, May 14, 2013.   CLICK HERE FOR PDF FILE

The trouble surrounds the IRS’s Exempt Organizations (EO) division, the working unit of which was centralized in the IRS’s Cincinnati service center. The purpose of the EO function is to, among other things, receive, evaluate and pass upon the applications for exempt status filed by religious and other organizations seeking federal income tax exemption under section 501 of the Internal Revenue Code.

It should come as no surprise that there is a long list of well-established laws and regulations the EO unit must follow in discharging its duties. As it turns out, the EO unit failed to follow the proper laws and regulations in discharging its duties, and in fact, instituted arbitrary guidelines that it applied to only a select number of organizations seeking exempt status. And finally, it has come to light that organizations singled out for this illegal treatment were advocacy organizations generally opposed to the policies of the administration. 

Well you could have knocked me over with a feather.

Not all Tax Exempt Organizations are the Same

Section 501 of the tax code is a large and complicated animal, much like most of the code. I have no intention in this article of breaking it down in any comprehensive way. But for the sake of this discussion, it is important to understand two basic elements of the law. First, code section 501(c)(3) is the provision under which churches, educational organizations and charities seek exempt status. That section allows churches and others to solicit tax-deductible contributions. However, such organizations may not participate, either directly or indirectly, or intervene in any political campaign on behalf of or in opposition to any candidate for public office.

Under code section 501(c)(4), groups may be exempt from federal income tax but contributions to such organizations are not tax deductible. These groups may engage in limited political activity as long as the primary activity of the organization does not involve intervening in political campaigns. Such groups may carry on lobbying and general advocacy activities. General advocacy involves: 1) working to influence public opinion on issues germane to the organization’s tax-exempt purposes and 2) encouraging voter participation through “get out the vote” drives, voter guides and candidate debates in a nonpartisan, neutral manner. General advocacy includes all types of advocacy other than direct political campaign intervention and lobbying.

The Criteria For Exempt Status

The criteria for determining whether an organization is qualified for tax-exempt status under any provision of code section 501 are dictated by very express provisions of both the law and IRS regulations. These guidelines have been established for some time. They focus on just two key elements of the applicant: 1) the manner in which the applicant is organized, and 2) the manner in which it operates. These are referred to as the organizational and operational tests.

If an applicant group meets both the organizational and operational tests, it doesn’t matter what the group believes. In the case of advocacy groups, there are groups from across the full spectrum of political, social and economic beliefs that enjoy section 501(c)(4) exempt status. The IRS is not permitted to grant or deny exempt status on the basis of the organization’s beliefs. As long as the group is organized properly and operates within the bounds of the law, it is entitled to exempt status.

It is entirely reasonable and necessary that a group’s beliefs cannot and should not determine whether it is entitled to tax exempt status. If that were the case, the IRS or the administration could dictate with the stroke of a pen which kind of organizations were granted the decided advantage of having federal tax-exempt status and which were not. Any administration could then use the “power to tax” as the principle means of either crippling or destroying its political enemies. It is simply intolerable in a free society for any such power to vest in the hands of a government agency or an elected official.

The IRS’s “Inappropriate” Evaluation Criteria

The actions the IRS is now called upon to explain involve the applications for exempt status of various Tea Party organizations and other conservative groups whose political philosophy is at odds with the current administration. Beginning in 2010, the number of groups seeking application for exempt status under section 501(c)(4) approximately doubled to about 3,000.

During the course of the evaluation process, certain reviewers (whose names have yet to be released) made the decision to pull aside for special review any organization with a “political sounding name.” In July of 2010, management officials made the decision to create a “be on the lookout for” file. They referred to it as the BOLO list. In August of 2010, the BOLO list consisted of just three types of organizations:

  • Those with the words “Tea Party” in the name,
  • Those with the word “patriot” in the name, and
  • Those with “9/12” in the name. (9/12 is the organization Glenn Beck created to educate people about America’s founding principles and values.

The applicant organizations that found themselves on the BOLO list were singled out for review and analysis far above that which other applicants received. Their files were referred to a “specialist” who personally carried out that heightened scrutiny. Lois Lerner, the IRS’s Director of Exempt Organizations, admitted on May 10th that the agency’s actions were “wrong and completely inappropriate.” She apologized for the act. The TIGTA report itself states that the IRS “developed and used inappropriate criteria to identify applications” for special scrutiny.  

The use of the word “inappropriate” in this context is wrong and outrageous. Something that is inappropriate is that which is not suitable or fitting for a particular use, occasion or purpose. For example, many consider that it’s inappropriate to drink white wine with red meat. Likewise, it might be inappropriate to wear a skimpy cocktail dress to a wedding. However, in neither of these examples is there any unlawful behavior.

As to the act of singling out the “patriot” sounding applications for special scrutiny based upon only their names, the TIGTA report declares:

The criteria focused narrowly on the names and policy positions of organizations instead of tax-exempt laws and Treasury Regulations. Criteria for selecting applications for the team of specialists should focus on the activities of the organizations and whether they fulfill the requirements of the law. TIGTA report, pages 6-7.

The bottom line is that the IRS acted more than merely “inappropriately.” The IRS acted illegally.

What Apology?

Media reports early in the week of May 13 were awash with the claim that the IRS “apologized” for its unlawful conduct. The IRS did no such thing. To that point, many referred to the statement from Lerner in a speech she made on the 10th.

However, the IRS’s official statement, released May 13, reads as follows:

Between 2010 and 2012, the IRS saw the number of applications for section 501(c)(4) status double. As a result, local career employees in Cincinnati sought to centralize work and assign cases to designated employees in an effort to promote consistency and quality. This approach has worked in other areas. However, the IRS recognizes we should have done a better job of handling the influx of advocacy applications. While centralizing cases for consistency made sense, the way we initially centralized them did not. Mistakes were made initially, but they were in no way due to any political or partisan rationale. We fixed the situation last year and have made significant progress in moving the centralized cases through our system. To date, more than half of the cases have been approved or withdrawn. It is important to recognize that all centralized applications received the same, even-handed treatment, and the majority of cases centralized were not based on a specific name. In addition, new procedures also were implemented last year to ensure that these mistakes won’t be made in the future. The IRS also stresses that our employees — all career civil servants — will continue to be guided by tax law and not partisan issues.

In this statement, the IRS takes no responsibility for any illegal actions. They blame the problem on “centralizing” the evaluation process due to the increase in the number of applications. I can tell you that centralizing was not the problem. The IRS has centralized many processes over the past several years – Offers in Compromise, lien management, innocent spouse applications, just to name a few. The mere fact that a singe unit handles like transactions does not explain why those in that unit failed to follow the law in carrying out their duties.

In fact, you could argue (and the IRS would argue) that the very act of centralizing an activity is designed to ensure that those working the centralized files are better trained and equipped in the particular area of law in question. The very idea of centralizing work is to ensure that a highly trained team of specialists works every file as opposed to individuals who may or may not be fully trained in the relevant area of law. So for the IRS to suggest that the act of centralizing these files is the cause of the illegal behavior is a quite shallow explanation of what happened.

In his testimony before the House Ways and Means Committee on May 17, the former acting IRS commissioner, Steven Miller, said that the IRS erred in singling out conservative groups applying for tax-exempt status but “did not do so for partisan purposes.” What does that even mean? What other reason would there be for specifically targeting groups with words “Tea Party” or “Patriot” in their name? As I illustrated above, the particular beliefs of an organization are entirely irrelevant in determining whether they qualify for section 501(c)(4) exempts status. Moreover, a highly trained team of “specialists” in a “centralized unit” absolutely should have known this.

More to Come

J. Russell George, the Treasury Inspector General for Tax Administration also testified to the House Ways and Means Committee on May 17. He confirmed that TIGTA could uncover new information as the agency probes deeper into what went on. Committee Chairman Dave Camp (R-Mich.), said in a statement that: 

This committee wants the facts and the American people deserve answers to why they were targeted on the basis of their political beliefs. The IRS has demonstrated a culture of cover up and has failed time and time again to be completely open and honest with the American people.

Lerner is herself now under the gun for allegedly lying to Congress about the number of groups who were singled out for mistreatment, the manner in which they were mistreated and specifically who was responsible making the decisions on how they were mistreated. On top of everything else, Attorney General Eric Holder announced that the Justice Department has launched a criminal investigation of the IRS’s actions in this affair.

One thing is for sure, Lerner’s claim that the unauthorized scrutiny was conducted solely in the IRS’s Cincinnati office and instigated solely by low-level IRS officials cannot be true. The TIGTA report presents a detailed time line of activities that shows e-mails running back and forth between EO’s Determinations unit in Cincinnati and top IRS officials in Washington, D.C. The implication seems clear to me; this matter was actually being directed by the IRS in Washington, not minions in Cincinnati.

Even more specific, recent new reports now offer evidence to show that the president of the Treasury Employees Union, Colleen Kelly, met with the president at the White House on March 31, 2010, just one day before the EO’s unlawful activities began in Cincinnati. The significance of the meeting is that under Kelly’s direction, the Treasury employees union PAC contributed hundreds of thousands of dollars, during both the 2010 and 2012 election cycles, to anti-Tea Party candidates throughout the country.

Senate Minority Leader Mitch McConnell (R-Ky.) declared that lawmakers have “only scratched the surface” in asking questions about what went on at IRS. He called on the president to make available, “completely and without restriction, everyone who can answer the questions lawmakers have as to what was going on at the IRS, who knew about it and how high it went.” It will be interesting to see how the president explains the substance of his meeting with Kelley the day before the fuse was lit in Cincinnati.

McConnell warned the president, saying, "No more stonewalling, no more incomplete answers, no more misleading responses, no holding back witnesses, no matter how senior their current or former positions."

 

House speaker Rep. John Boehner (R-Ohio) denounced the actions and Senator McConnell called on the White House to conduct “a transparent, government-wide review aimed at assuring the American people that these thuggish practices are not under way at the IRS or elsewhere.”

Even the Democrats are getting into the act of condemning the IRS. Senate Finance Committee Chairman Max Baucus (D-Mont.) promised a full investigation. He said, the “actions by the IRS are an outrageous abuse of power and a breach of the public’s trust. Targeting groups based on their political views is not only inappropriate but it is intolerable.”

Why Resignations Will NOT Solve the Problem

In a letter to a top treasury official early the week of May 13, Senator Marco Rubio (R-Fla.) and other lawmakers called for the resignation of IRS Acting Commissioner Steve Miller. Miller in fact tendered his resignation and other top IRS officials could lose their jobs over this. Rubio’s letter stated, in part:

It is clear the IRS cannot operate with even a shred of the American people’s confidence under the current leadership. I strongly urge that you and President Obama demand the IRS Commissioner’s resignation, effectively immediately. No government agency that has behaved in such a manner can possibly instill any faith and respect from the American public.

Rubio is entirely correct that these actions strike directly at the heart of the issue of faith and trust in a government agency. But let me ask you this? When is the last time the American people had any faith and trust in the IRS? I’m telling you based upon first hand experience with people I deal with every day that there is very little trust in the IRS to begin with.

The problem is not that there are people in the IRS who don’t care about the law. That has been the case for years. I have documented over and over the manner in which the IRS violates taxpayers’ protections with monotonous regularity. We saw these kinds of hearings into IRS abuse in 1997, when the Senate Finance Committee conducted jaw-dropping investigations into what was going on inside the IRS. Those hearings led to the National Commission on Restructuring the IRS and eventually to the IRS Restructuring and Reform Act of 1998. That legislation was supposed to stop all the abuse. Will, guess what?

So please excuse my cynicism but nothing that has been revealed in all of this surprises me.

That’s why there is simply no amount of resignations that will solve the problem of IRS abuse. What we are dealing with here is a culture of lawlessness. It’s true that many people in the IRS try hard to do an honest job while functioning under impossible circumstances. I have worked directly with many of them. But it’s also true that too many people in the IRS just don’t care about the law. They only care about power. I’ve dealt with too many those people also.

That’s why the ONLY solution to this problem is to abolish the federal income tax and the IRS along with it. You cannot fix this problem through legislative tinkering, now matter how many new “taxpayer protections” are added to the code.  I stated repeatedly during the 1997 Senate hearings into IRS abuse that abuse of taxpayers by the IRS was not an isolated event. It’s something that goes on day after day and it happens at every level. In 1998 when the IRS Restructuring Act was passed, Congress and then-President Clinton promised that IRS abuse was a thing of past. Well, it’s not.

The vast power and authority this agency wields cannot be controlled by lawmakers who pay attention to these matters only about once every fifteen years. The IRS has to be abolished. The income tax has to be abolished. It’s time that we all recognize and accept the fact that this system is broken beyond repair, not because it degenerated over time, but because it was never sound to begin with.

The IRS and the income tax are an unholy alliance born of un-American and unconstitutional ideas. The system is unsound morally, unsound constitutionally and unsound economically. Why waste any more time killing this beast? Get on with it now.

 

GO TO TIGTA IRS REPORT

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Comment by Dr. Bill Smith / Ozark Guru on May 31, 2013 at 12:04pm

Dan, Great article!!

Comment by Dave Boone on May 24, 2013 at 3:47pm

A comprehensive indictment of the IRS.  For those of us who have been playing the FairTax game for too many years already, it's "all in" time.

Comment by John Wesley Nobles on May 24, 2013 at 12:59pm

We are so fortunate to have Dan as a Fair Tax Supporter and spokesperson!  His body of work is incredible!

Comment by William Payne on May 24, 2013 at 12:56pm
Excellent analysis as usual, Dan. Thank you!

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