The official at the center of the IRS mess, Lois Lerner, gave indications months ago that she was refusing to provide meaningful guidance about how to interpret and apply ambiguous rules for nonprofit political activity.
Lerner was the head of the IRS' division on tax-exempt organizations, and was recently suspended after declining to testify before a House Committee investigation into the IRS singling-out Tea Party groups for scrutiny based only on their names or political views.
In September, Lerner's response to questions from lawyers at an American Bar Association meeting suggested she had been taking a recklessly hands-off approach to interpreting already-ambiguous rules defining "political intervention" for nonprofits. The IRS' failure to create clearer rules likely contributed to lower-level employees having excessive discretion, which they used to develop inappropriate criteria for flagging nonprofit applications. And if Lerner's responses to the attorneys are any indication, the lack of guidance from the top could have exacerbated the problems uncovered within the exempt organizations division.
Ambiguity Compounded by Lack of Guidance from Top IRS Officials
After the U.S. Supreme Court's 2010 decision in Citizens United opened the door for corporations -- both for-profit and non-profit -- to spend on elections, 501(c)(4) "social welfare" nonprofits became the vehicle of choice for wealthy donors seeking to keep their political spending secret. Many of these groups were pushing the envelope on acceptable levels of political activity for 501(c)(4)s, and the IRS was thrust into the role of a campaign finance regulator.
For years, the IRS has not provided clear guidance about what constitutes "political intervention" under the tax code -- declaring only that it comes down to "facts and circumstances" -- nor has it clarified how much political intervention is too much for 501(c)(4) nonprofits, which are supposed to have social welfare as their primary activity. In the 2012 and 2010 elections this ambiguity was exploited by "dark money" nonprofits passing off obvious political activity as issue advocacy and claiming politics was not their primary purpose, all while keeping their donors secret. And nonprofits genuinely organized to advance social welfare are unsure how to comply with the vague "facts and circumstances" approach.
As the Center for Media and Democracy and others have reported, this ambiguity also gave excessive discretion to lower-level IRS staff to interpret and apply the rules, and their managers little guidance, likely resulting in the use of inappropriate criteria to subject groups to scrutiny.
And given Lerner's attitude towards attorneys specializing in tax-exempt law who sought clarification on the rules, there may have been little effort to provide clearer guidance from the top.
Lerner Dodged Questions Seeking Clarification
For years prior to the IRS mess, attorneys who practice nonprofit tax law had urged the IRS to adopt clearer rules, both so they could fairly advise their clients how to stay within the bounds of the law and to stem the obvious abuses from politically-active "dark money" nonprofits.
In September 2012, at a conference of the American Bar Association Tax-Exempt section, tax attorney Greg Colvin publicly asked Lerner for clarification on rules governing political activity for nonprofits.
Currently, the extent of the guidance on what counts as "political intervention" versus "issue advocacy" consists of two separate IRS rulings, one from 2004 and the other from 2007, with little clarity about whether one supersedes the other or how to reconcile apparent discrepancies between the two.
"Which ruling should I use?" Colvin wondered. "How many bad factors would be fatal to the message? What if the factor can't be evaluated easily (is this a 'wedge' issue)? What about unstated factors, such as the presence of a disclaimer? What does 'close' to an election mean?"
Lerner almost entirely dodged Colvin's questions.
For example, in response to a direct question about how to interpret the 2004 and 2007 rulings, Lerner said only "you need to look at your particular facts and circumstances in the context of how we've done the analysis there and try to make the best judgment you can because if your scenario's at all different, you know, it'll be different."
Colvin told the Center for Media and Democracy that Lerner "displayed a certain 'hands off' attitude in her public remarks to nonprofit tax-exempt lawyers when the subject of political campaign activity came up."
She and other IRS officials charged with regulating the area "seemed very reluctant to make any interpretations of the political tax rules that weren't already spelled out in a ruling somewhere."
Colvin said the "hands-off," you-figure-it-out attitude Lerner displayed at the conference may have been indicative of her overall approach -- including inside the agency.
"Since the guidance in this area is sparse, there wasn't much she had to say externally, to us, or its seems, internally to her own employees."
At the time he discussed the issues with Lerner, Colvin and other experts were already hard at work, trying to establish "bright line" proposals that would, if adopted by the IRS, provide clearer rules for nonprofit political activity.
"Bright Lines Project" Proposes Solutions
"The confidence of the public in the fairness of our elections and the integrity of the IRS is shaken when the law is vague and uncertain, and big money operatives can game the system while small grassroots groups, be they liberal or conservative, get slapped around by the IRS for months and years in the tax-exempt application process," Colvin said.
He is an adviser at the Bright Lines Project, a project led by nine experts on nonprofit tax law and is housed at Public Citizen which aims to develop a clear set of rules defining nonprofit political activity, with clear "safe harbors" for activity such as voter education or influencing official action. (The Center for Media and Democracy is also an advisor to the project).
"The IRS could begin a rule-making process with public hearings, listening to all sides, starting with proposed regulations" such as those from the Bright Lines Project.
Colvin notes that in the late 1980s the IRS successfully issued regulations to define lobbying activity for 501(c)(3) charities, which he says "has sparked no serious controversy while enabling many citizen groups to influence legislative action within allowable limits."
Congress could also clarify a precise upper limit on political spending, he said, such as 10 or 15 percent (rather than the vague "less than primary," which has been interpreted to mean up to 49.9%), and lay out the basic elements defining political intervention.
"Enough heads have rolled. Congress needs to mandate bright-line standards for judging cases of political intervention that minimize the chance that IRS employees will behave inappropriately as public servants," said Colvin.