Getting the real story on the IRS 'scandal' (it's not what you think)

IRS.jpgForget about what you've been reading the last few days. The prevailing narrative about Democratic-leaning tax investigators going after the Tea Party and other right-wing groups is not quite what's going on. The real, more intricate story is that political groups have been trying to claim a special tax status that would allow their donor pool to be kept secret - a status that they shouldn't be entitled to. The IRS's biggest sin is not that it went after these groups, but that it didn't do more, especially with the bigger political players. President Obama has been sucker-punched once again. LAT columnist Mike Hiltzik explains:

The organizations at issue are known as 501(c)4 groups (call them C4s for short) after the section of the tax code that applies to them. They're nonprofit "social welfare" organizations that by law must be devoted primarily to programs broadly serving their communities, not private groups. IRS forms reveal what the agency considers to be mainstream C4s: religious groups; cultural, educational and veterans organizations, homeowners associations, volunteer fire departments. In recent years, however, overtly political groups have been claiming C4 status, which allows them to keep their donor lists secret and to avoid paying taxes on certain income. Our lunatic campaign finance system is what turned the typical C4 from a volunteer fire department into a conduit of anonymous political cash. Big donors were given the green light to spend freely on elections by the Supreme Court's 2010 Citizens United decision. That wasn't good enough for some; they wanted to distribute their largess secretly.

Here's another myth: That only right-wing groups were targeted for extra scrutiny. In fact, they represented just a third of the 300 or so applications selected - too wide a net for what the tax agency was looking for. So the screen was adjusted to capture "political action type organizations involved in limiting/expanding government, educating on the constitution and bill of rights, [and] social economic reform/movement," according to the Inspector General's report that's been used to fuel the firestorm. More from Hiltzik:

Remember the mysterious $11-million donation to the campaign for California's anti-union Proposition 32 last November? When the state Fair Political Practices Commission punctured its anonymity, it found not one, but two 501(c)4 organizations behind it. The FPPC, which is still investigating, has already called this a case of "campaign money laundering." As of September last year, the center found, some $254 million, or 20%, of all outside spending came through C4s. The biggest C4 in the electoral arena was Crossroads GPS, an affiliate of American Crossroads, a campaign organization founded by Rove. The Obama camp's C4 was known as Priorities USA. The IRS was swamped by the wave. The number of groups seeking C4 status from the agency rose from 1,500 in 2010 to 3,400 last year. Meanwhile, the agency was being pulled in two directions. In February last year, seven Democratic senators complained that the IRS was too "permissive" with its rules, which judged a C4 not to be engaged "primarily" in electioneering as long as no more than 49% of its spending went to such activities. In August, 10 GOP senators warned the agency to deep-six any efforts to tighten the rules on C4s.

New Yorker writer Jeff Toobin is on a similar track:

It is certainly true that the I.R.S., and every other part of the government, should be evenhanded in how it applies the law, regarding liberal and conservative groups alike. If left-leaning organizations were disguising their true purposes to obtain 501(c)(4) status, the I.R.S. should have turned them down, too. And there will also be questions about how the Service, which is an independent agency, answered questions from Congress. But let's be clear on the real scandal here. The columnist Michael Kinsley has often observed that the scandal isn't what's illegal--it's what's legal. It's what society chooses not to punish that tells us most about the prevailing ethical standards of the time. Campaign finance operates by shaky, or even nonexistent, rules, and powerful players game the system with impunity. A handful of I.R.S. employees saw this and tried, in a small way, to impose some small sense of order. For that, they'll likely be ushered into bureaucratic oblivion.

Unfortunately, the parallel universe story - that Tea Party groups became the victims of a Washington witch hunt - is already out of the barn, and it's an easier story for much of the media to wrap their arms around. It just doesn't happen to be true.

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Mark Lacter
Mark Lacter created the LA Biz Observed blog in 2006. He posted until the day before his death on Nov. 13, 2013.
Mark Lacter, business writer and editor was 59
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