Special tax status played role in IRS ‘mistakes’

A Treasury Inspector General report released Tuesday criticized the use of “inappropriate criteria” during a review of requests for tax-exempt—or 501(c)(4)—groups, but the criteria currently in place to vet what organizations should qualify are vague enough to cause problems. Now the IRS is trying to deflect criticism over the additional scrutiny the agency gave to conservative groups applying for tax-exempt status.

At the heart of the controversy is the 501(c) tax code designation, which is reserved for non-profit organizations. A 501(c)(3) is favored by charitable organizations such as the Red Cross and the Boys & Girls Clubs of America and allows donations to be tax deductible but bars political activity.

Typically, groups that want to be involved in politics opt for a 501(c)(4) designation. Examples include the lobbying arm of the NRA, AARP and some of the super PACs that were prevalent ahead of last year’s election. Groups with the 501(c)(4) designation don’t have to pay taxes or reveal their donors. Most importantly, political activity is allowed—to a point.

The problem is that the IRS language on those limits is vague—it allows “some” political activity, but politics cannot constitute the group’s “primary” activity. The IRS itself admitted to the problem in responding to the Inspector General’s report, noting that “there are no bright-line tests” for what these groups can and can’t do. In addition, the IRS says the applications themselves were “vague as to the activities the applicants planned to conduct.”