Will the Legacy of the 501(c)(4) Mess Be a Better IRS or Just a Smaller One?
National Taxpayer Advocate Recommendations: In her 2014 Annual Report to Congress, Nina Olson called on Congress ot create an optional “safe harbor” election for section 501(c)(4) organizations that would give such organizations a numerical test they could use to ensure that their level of political campaign activity is permissible given their tax-exempt status (similar to the existing section 501(h) election for section 501(c)(3) organizations with respect to lobbying) (Legislative Recommendation #5). Ms. Olson also recomended that Congress give groups seeking section 501(c)(4), (c)(5), or (c)(6) status the ability to seek a declaratory judgement in the same manner as groups seeking section 501(c)(3) status now enjoy, and that the IRS adopt administrative review procedures for groups that have had their tax-exempt status automatically revoked (Legislative Recommendation #12).
IRS Modification of Section 501(c)(4) Expedited Application Process: In a memo released just before Christmas, the Acting Director, EO, Rulings and Agreements provided revised and clarified previously issued procedures for applicants seeking recognition under section 501(c)(4) that are given the option of choosing an expedited application process. The new procedures only apply to applicants that are given this option after the issue date (12/23/14) for the memo. Applicants who were told they were eligible for this option before that date are subject to slightly different procedures (included as Appendix B to the memo).
Omnibus Spending Bill Again Limits (?) IRS: As was the case a year ago in Public Law 113-76 (see “Cryptic Legislation” section of this post), Congress has once again included with the funding of the IRS the following limitations (Hat Tip: EO Journal):
SEC. 107. None of the funds made available under this Act may be used by the Internal Revenue Service to target citizens of the United States for exercising any right guaranteed under the First Amendment to the Constitution of the United States.
SEC. 108. None of the funds made available in this Act may be used by the Internal Revenue Service to target groups for regulatory scrutiny based on their ideological beliefs.
It is still unclear what exactly the effect, if any, of these provisions actually is.
House Oversight & Government Reform Committee Staff Report: Released by outgoing Chairman Darrell Issa, the report, not surprisingly, slams the IRS and the Obama Administration, and also promises more fact-finding.
The Shrinking IRS: As numerous news outlets have reported, the IRS faces a shrinking budget – likely at least in part because of the 501(c)(4) mess – even as the demand for its services from taxpayers continues to increase. According to Taxpayer Advocate Nin Olson, the decline is 17.5 percent since 2010, taking inflation into account (see NPR). IRS Commissioner John Koskinen has even said the agency might have to shut down for two days, with employees put on unpaid furlough (see The Hill). For other examples of the flood of coverage, see Forbes, NBC News, the NY Times, and the Washington Post.
It is too soon to make a final call, but at least some positive changes may result – clarification of the standards for political activity by noncharitable 501(c) organizations and clearance of the exemption application backlog come to mind. At the same time, the damage to the Service and the tax system seems greater – trading speed for accuracy in the application process, damaged morale among the remaining IRS employees and greater difficulty in recruiting future such employees, and a collapsing budget even as the tax law continues to become more complex.
Lloyd Mayer