IRS and U.S. House Respond to Treasury Audit; All Better Now?

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This week IRS Commissioner John Koskinen responded before a U.S. House Subcommittee to the recently issued report from the U.S. Treasury Inspector General for Tax Administration (TIGTA).  The 224-page report addressed the well-known improper processing of tax-exemption applications, particularly those of conservative Section 501(c)(4) social welfare organizations. Koskinen defended the IRS by stating that it has demonstrated continued cooperation with the investigation. He cited voluminous production of documentation in response to the TIGTA investigation and other requests.  According to Koskinen, the IRS remains committed and able to administer our nation’s tax laws “in an unbiased, non-political manner.” 

Koskinen’s representations stand in stark contrast to the inferences drawn by others over the confusion surrounding IRS emails.  The existence of the emails in question and the IRS’s continued access thereto have been the subject of much scrutiny.  Inconsistent and questionable IRS explanations of how tax-exemption applications were processed have been unsatisfying, and  there have been other indications of IRS incompetence in handling such applications.  Whether any of the IRS’s misconduct or other malfeasance was politically motivated has been, and likely will be, the subject of much debate.  What is clear, however, is that the IRS was allowed to use inappropriate selection criteria, burdensome questions, and lengthy delays in processing tax exemption applications. 

The foregoing problems, while unacceptable, are not surprising given the IRS’s procedure in evaluating tax-exempt organizations’ advocacy activities.  The IRS’s official policy is “to maintain a position of disinterested neutrality.” Nevertheless, the IRS employs a problematic “facts and circumstances” test.  Under this test, the IRS may scrutinize activities that are otherwise protected under the First Amendment, even if politically related.  This constitutionally suspect test combined with now-admitted IRS mismanagement, poor training, and other extensive operational dysfunction viewpoint discrimination is a clear recipe for IRS abuse.

What can be done?  Yesterday, the US House of Representatives quickly followed up on Koskinen’s testimony and passed five bills – all intended to curb IRS abuses.  Among other things, the House legislation provides increased sanctions for destruction of federal records, use of personal emails for government business, and other misconduct as surfaced through the recent IRS scandal.   But this will not cure the significant underlying problem.  The IRS still maintains it may engage in content-based viewpoint discrimination regarding tax-exempt organizations’ advocacy.

Last fall, in the wake of the IRS scandal, the IRS purportedly sought to address this issue through proposed regulations.  The regulations, however, were poorly developed.  Indeed, the regulations would have given the IRS even more ability to abuse tax-exempt organizations’ free speech rights.  Thankfully, after thousands of publicly filed comments attacked the regulations on constitutional, practical, and other grounds, the proposed regulations were resoundingly shot down. 

The news isn’t all bad, though.  One promising proposal that has surfaced through the “Bright Lines Project” calls for increased clarification on tax-exempt organizations’ advocacy rights, particularly in the political arena.  Whatever the solution, it should be squarely aimed at curtailing the IRS’s too-broad discretion. Any effective solution must require adherence to already established constitutional standards protecting tax-exempt organizations’ advocacy rights.