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IRS SCANDALS – WHAT ARE THE CONSEQUENCES?

The IRS has apologized for playing politics, but Congress isn’t satisfied with the apology. Most believe there will be significant repercussions. As a side note, this is not the first time the Internal Revenue Service has been used to affect political enemies. Most observers believe Presidents Nixon, Kennedy, and F.D.R. used the Service for political gain. I am not a political commentator, so let’s get into the consequences.

Obviously, some of the high level officials have resigned and some of the lower level staff has been disciplined, but Congress is looking for more than that. First of all, funding for the IRS will probably be very tight. Congress will hold the purse strings tight until the IRS can prove that it has cleaned up its act. Already, the new IRS acting chief has begun a top to bottom review of internal policies and procedures.

You should expect the IRS will do fewer in-person audits. However, their trend of using audits by mail and avoiding the face-to-face exam with agents will continue and perhaps even pick up speed.

Customer service may decline. Because the IRS budget is tighter, we should anticipate longer waits when you call the IRS. In the long run, there will also probably be a slight drop in voluntary compliance. Because of the current environment, the IRS being knocked on their heels, some folks will feel a little bolder in not complying with the Service. Obviously, I do not recommend that, but there are millions of taxpayers and there are always a small percentage of folks who will “seize the opportunity.”

How did this latest scandal all get started? It all starts with a little known tax code section known as 501(c)(4) organizations. The tax code says these organizations must be operated exclusively for the promotion of social welfare; however, IRS regulations adopt the primary purpose test for exemption, which allows these non profits to engage in significant political activity and still remain tax exempt. Additionally, 501(c)(4) organizations don’t have to disclose their donor lists. This is a significant difference from political organizations which do. Both the Republicans and the Democrats use these organizations to promote their agendas. The problem all started when the Service started targeting conservative tax exempt groups. The organizations must fill out and file exemption applications. The IRS started to automatically pull for review applications which contained the words, “Tea Party,” “Patriots,” or “9/12 Project.” The review, of course, was to determine if their primary purpose was social welfare or intervening in political campaigns. On its face, it is a legitimate thing for the IRS to do. The problem is they are supposed to operate with an even hand, but they were not doing that; they were targeting conservative groups.

When the top executives at IRS learned of the improper targeting, they put a stop to it and ordered that the reviews be based on politically neutral criteria. Unfortunately, some of the folks in the field ignored the order and continued to target the conservative groups. The result is that the groups that were targeted have an application process that was greatly delayed, sometimes for years. Both the Democrats and the Republicans have agreed that this kind of profiling or targeting is completely improper on behalf of the IRS. The problem was made worse because once the IRS learned about it they did not disclose it to Congress. Most likely, the rules for tax exempt organizations aren’t going to change because, as said above, both parties use the 501(c)(4) organizations and neither really wants tighter restrictions. Perhaps the best thing to come out of the whole thing is a reminder that we always have to be alert in our system to keep checks and balances in place and we have to do our best to keep those in power operating in the open.