The Senate Permanent Subcommittee on Investigations has released a report summarizing the Subcommittee’s bipartisan investigation into issues with how the IRS processed applications for 501(c)(4) organizations over the last few years. The Majority staff portion concluded that there was a lack of political bias in how the IRS worked up the applications, but did find that the IRS used inappropriate selection criteria, burdensome questions, and lengthy delays in processing applications from both conservative and liberal groups. The Minority staff dissent disagrees with the bias conclusion.

Background on Controversy. The issue with the 501(c)(4) applications came to light in May 2013, when the then-director of the IRS Exempt Organizations division acknowledged at an ABA meeting that the IRS has subjected the 501(c)(4) applications of conservative groups to heightened scrutiny. See prior post here. Just a few days after that, the Treasury Inspector General for Tax Administration (“TIGTA”) released a report that concluded that the IRS used inappropriate criteria in order to select conservative groups for additional review. The media and public were outraged by the reports of political targeting by the IRS, an organization with immense power that the public must trust to do its job on a nonpartisan basis.

Subsequently, the Subcommittee undertook an investigation into the processing practices. Its review has included nearly 800,000 pages of documents and employee interviews with dozens of IRS and TIGTA staff members.

Majority Staff Conclusions. The report contains the following findings of fact by the Subcommittee’s Majority staff:

• IRS management failures: From 2010 to 2013, the IRS mismanaged the application process by using inappropriate selection criteria, based on applicants’ names or policy positions, to flag applications for heightened review.
• Inadequate guidance: The IRS provided inadequate training and guidance to staff on how to process 501(c)(4) applications, and failed to finalize guidesheets for staff despite nearly a year of work on the project.
• Flawed test: The “facts and circumstances” test used by the IRS to evaluate 501(c)(4) organizations for permissible political activity is difficult to administer, leading to long wait times and subjective and inconsistent results.
• No political bias: The inappropriate targeting and processing of applications was not done on a partisan basis, which is consistent with a later TIGTA letter from June 2014 (though not in TIGTA’s original report).
• Flawed audit report: The TIGTA report released in May 2013 provided a distorted view of the situation, by omitting the determination of lack of bias; focusing only on conservative groups; omitting be-on-the-lookout listings for liberal groups; and omitting mention of email review that had failed to find politically motivated scrutiny of applications.
• TIGTA management failures: TIGTA failed to manage the audit process and ensure the presentation of a balanced report.
• TIGTA failure to disclose: After TIGTA senior officials learned about the key omissions in the TIGTA report, they failed to disclose this information for weeks.

Minority Staff Conclusions. The minority members concluded that conservative groups received the bulk of the unfair and burdensome treatment, and that there was bias in the targeting.

While the fallout from this controversy has been large, it did highlight issues that exempt organizations and their advisers have struggled with for years. There definitely is a lack of clarity in the current rules for measuring permissible political activity, which leads to inconsistent treatment and results. With new regulations on 501(c)(4) political activity in the works, some clarity may finally come.