IRS funding controversy overlooks real solutions

Take vast increase in workload. Add a vague, difficult-to-understand standard for getting the work done. Now subtract training and decrease the number of workers available to solve the problem. This recipe for disaster is exactly what Congress has imposed on the IRS by cutting its funding and ignoring a valuable rulemaking that could lead to fairer standards for nonprofits.

According to a recent report by the Center on Budget and Policy Priorities, funding cuts since 2010 have caused the IRS to reduce its workforce and cut back on training. During the same time, applications for nonprofit status have nearly doubled. Despite these facts, last week the House Appropriations Committee voted to decrease the agency’s funding by an additional $341 million.

{mosads}Arguments about the IRS’s funding level likely will continue, spurred on by recent revelations that some emails from the former director of the IRS’s Exempt Organizations division, Lois Lerner, were lost in a hard-drive crash, and the desire to keep the political scandal simmering until the midterm elections. But the real scandal is lawmakers willing to reduce the IRS’s funding rather than spend time finding real solutions for the definition of political activity for nonprofits.

The underlying problem, which has been lost amid the bickering on Capitol Hill, is that the subjective language of the Internal Revenue Code fails to define political activity clearly enough to give the IRS a neutral way to measure that activity. Without a clear definition (and without the money to do sufficient training), IRS employees are tempted to use seemingly unacceptable shortcuts to figure out whether an organization should be granted nonprofit status.

The current test bases a judgment of whether an entity will do too much political activity to be eligible for tax exemption on all the “facts and circumstances” surrounding the case. Requiring employees to make a decision based on this undefined universe of data while at the same time reducing their funding level for training creates an unworkable nightmare.

Ambiguous rules stifle the IRS in its enforcement of tax law. When there is no clear definition of political activity, deciding when an organization is doing so much that it is violating the boundaries of its exempt status is difficult and subjective. Groups willing to game the system and abuse the tax code have been taking advantage of the difficulty of enforcement, especially after the U.S. Supreme Court’s 2010 Citizens United decision made 501(c)(4) organizations irresistible to those corporate entities and the super-rich seeking avenues to manipulate elections by laundering their money through nonprofits without disclosure of where the money came from.

The “facts and circumstances” test isn’t just hard to administer. It also may hold back organizations on both sides of the aisle from speaking out on issues that matter to them. When the lines are unclear, justifiably cautious groups may hold off engaging in activity that furthers their mission but seems like it might be political, even when the IRS would not actually deem it to be.

In good news, the IRS began a rulemaking last November with the intent to end these problems. We agree with this goal (as do many other commenters on the rulemaking), and urge the agency to implement a clear, bright-line standard that will offer a fair guide to IRS employees and those participating in the system concerning what is and is not political activity, while also protecting civil engagement like grassroots lobbying, voter registration drives and candidate debates. The IRS is expected to issue a revised rule in early 2015.

At the IRS, massively increasing application numbers coupled with decreasing staff and training make for an environment ripe for scandal. Without clear, fair rules, no amount of funding will end the agency’s woes.

Gilbert is director of Public Citizen’s Congress Watch division.