• October 24, 2014

Congress Has Only Itself to Blame for IRS Troubles

When the House Ways and Means Committee holds yet another hearing Thursday to examine the IRS’s revelations that it gave some applications for tax-exempt status extra scrutiny, it will probably point fingers at the tax agency when it looks for wrongdoing.

But really it should be pointing fingers at itself and wondering why it has never asked the IRS to deal with the real problems of abuses at nonprofits or given the agency sufficient money and clout to serve as a serious watchdog.

To be sure, the IRS made mistakes in how it screened conservative groups. And this week it admitted that liberal groups, too, were on a special “be on the lookout” list and called out for greater attention.

However, it has never taken sufficient action against the very largest conservative or progressive organizations that clearly have been abusing their tax status by engaging in substantial partisan political activities.

For years it has also permitted foundations run by politicians for their own political interests to gain tax-exempt status. And the agency has repeatedly refused to revoke the tax-exempt status of churches that have crossed the political line.

But no members of Congress have complained about those continuous assaults on the integrity of the nonprofit world.

The IRS has always lacked the political will to take effective action to stop major abuses of any kind. It is a relatively low-level bureaucracy buried in a Treasury Department that has never considered the welfare of nonprofits much of a priority, and it rarely gets much support from lawmakers or the president to give such issues more attention.

That’s why the federal government is so incapable today of ensuring nonprofits avoid inappropriate expenditures, conflicts of interest, or inappropriate politicking. 

So what Congress really should do at its hearing this week is focus on what it takes to produce a strong nonprofit watchdog.

The first improvement would be to give the agency more money to hire more people to enforce the law.

The agency has far too few employees both to review the rapidly growing applications for tax-exempt status and to make certain that nonprofits comply with the rules and regulations through audits and other enforcement measures. In short, IRS staff members are overwhelmed by the work they are called on to do.

Even though the 1969 Tax Reform Act stipulated that the fees annually collected from private foundations were to be used to oversee nonprofits, that has never happened. To date, only a small portion this revenue has actually been allocated for this purpose.

When lawmakers have been pressed to provide these funds, they have repeatedly cited budget shortages as their excuse for channeling the excise tax elsewhere.

Nor have they been willing to provide any financial support to cash-strapped state attorney-general offices, which could assist the IRS in maintaining public accountability in the nonprofit world.

The hypocrisy of a Congress that complains about the inadequacies of the IRS yet is unwilling to grant the agency the money it needs to do its job is all too apparent.

The second challenge is the ambiguity of IRS regulations, and that’s something Congress can urge the agency to fix.

Congress originally intended that social-welfare groups should be operated to do just that—promote society’s welfare. In 1959, IRS regulators interpreted “exclusively” to mean that these organizations had to be primarily involved in promoting social welfare, thereby opening the doors to the idea that groups could also get involved political activity.

It has never been clear what “primarily” really means. Some groups, and probably some regulators, seem to have interpreted this definition as permitting up to 49 percent of an organization’s operations to be political. The agency has never bothered to clarify the limits of permitted political activity among social-welfare groups, and Congress has never questioned the opaqueness of the regulations. No wonder IRS agents have struggled with setting clear criteria for political activity.

Other IRS regulations are equally fuzzy. While the agency prohibits excessive executive compensation for nonprofits, it has never specified exactly what this means, permitting nonprofit compensation that is comparable to that of the corporate world without setting any limits. This lack of precision is probably why so few organizations have been penalized for paying their leaders too much.

IRS regulations also prohibit self-dealing among private foundations yet create several major exemptions that virtually render the regulations inoperative. Though these loopholes have been pointed out to agency officials, they have done nothing to change the rules.

Regulations dealing with unrelated business-income taxes are another example of muddled enforcement. As nonprofits have tried more ways to get into money-making ventures to finance their work, it’s unclear what income is taxable and what is considered an extension of a group’s charitable mission.

The poorly drafted rules compound another problem at the IRS: Congress has never given the agency the muscle it needs to enforce regulations.

The House Ways and Means Committee in recent years has shown no concern about nonprofits or the role of the IRS in overseeing tax-exempt groups. It is the Senate Finance Committee that has tried to maintain some modicum of nonprofit public accountability, notably through the efforts of Sen. Charles Grassley, Republican of Iowa.

While Senator Grassley’s efforts to hold nonprofits’ feet to the fire have been commendable—especially during the tenure of his outstanding former investigative aide, Dean Zerbe—they have often been symbolic, not following up by tough action. He continues to write probing letters of inquiry to colleges, hospitals, and other nonprofits suspected of regulatory violations, to hold press conferences, and to sponsor hearings raising serious questions. But none of these activities appear to have materialized into some form of change. Nor have he and his colleagues authorized or pushed the IRS to take bolder measures to oversee nonprofits.

The villain in the IRS story is Congress, not the faceless employees of the agency who gave extra screening to organizations seeking status as social-welfare groups. Irresponsible legislators deprived regulators of the resources, the authority, and political will to do their job. They deserve our opprobrium.

Pablo Eisenberg, a regular Chronicle contributor, is a senior fellow at the Center for Public and Nonprofit Leadership at the Georgetown Public Policy Institute. His e-mail address is pseisenberg@verizon.net.

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