All In with Chris Hayes, 5/14/13, 8:00 PM ET

There are two IRS scandals: one you've heard of and one you haven't

Chris Hayes talks with Pulitzer Prize-winning journalist David Cay Johnston and Congressman Keith Ellison of Minnesota about the lesser-known IRS scandal that started with the Citizens United decision.

Two IRS scandals hit Washington: One you’ve heard of, one you haven’t

Updated

There are two IRS scandals that are boiling over Washington—one that is positively roiling the beltway and the country, and another that has received so little attention is might as well be a secret.

The president Monday responded to the scandal everyone’s heard about—the one that broke open on Friday when an IRS official admitted that the agency had specifically targeted for extra scrutiny, conservative and tea party groups seeking nonprofit status.

“This is pretty straightforward. If in fact IRS personnel engaged in the kind of practices that have been reported on, and were intentionally targeting conservative groups, then that’s outrageous. And there’s no place for it. And they have to be held fully accountable,” Obama said during a press conference.

“I’ve got not patience with it. I will not tolerate it, and we will make sure that we find out exactly what happened on this,” he added.

The president, taking the position that pretty much all reasonable people are taking on this scandal—which is that it’s outrageous that a government agency would be targeting political groups based on ideology. It’s unacceptable and the sort of thing that cannot be allowed to happen in this country. But that scandal does not exist in a vacuum. In order to fully understand the IRS targeting conservatives scandal, you really need to know about the other, hidden, untold IRS scandal because that virtually unknown, secondary scandal is actually the fertile soil in which the seed for this new scandal was planted.

So, here’s what you need to know about the scandal-behind-the-scandal: It starts with groups applying to the IRS for 501(c)4 status. That’s a classification given to groups dedicated to social welfare—because they are dedicated to social welfare, they don’t have to pay taxes. Makes sense. But, and here’s where the scandal part starts, what exactly counts as “social welfare”? How does the IRS decide if your group, applying for this special no-tax-paying status, qualifies?

The IRS’s own documentation on this question, flagged in recent days by Ezra Klein, shows such examples of social welfare organizations: a group aimed at helping unemployed people over a certain age find work, a group working to build a stadium for a school district, a group dedicated to counseling for people in financial trouble, a group that subsidizes kids’ tickets to sporting events to get them interested, a neighborhood beautification group and on, and on.

Now, those all sound like the sorts of groups that should be counted as tax exempt and most people are probably more or less fine with groups like that not paying taxes. Now, there has been a very bright line for a very long time between organizations like those and organizations that were engaged directly in political campaigning. And anyone who has worked in politics, on the left or the right, or in nonprofits, knows that there has been a genuinely important separation in tax law based on that distinction—are you doing campaigning? Or are you on this other side, the social welfare side?

And then the Supreme Court’s decision in Citizens United came along and blew up that distinction. Citizens United said, essentially, that any organization of any kind can spend money out of its general treasury to run political ads. And that decision brought about a pivotal moment for politics and taxes and campaign spending in this country. Karl Rove looked at this ruling and said hey wait a second, maybe I wanna make a “social welfare” organization. A social welfare organization that also happens to lots of ads during campaign season. Ya know, as part of bettering the community and stuff. Ads like these from Crossroads GPS.

Now, here’s why the Karl Rove move was so brilliant. Those 501(c)4’s, the social welfare organizations—the ones that are helping the unemployed or building stadiums—not only do they not have to pay taxes, they also don’t  have to disclose their donors. So Karl Rove figured out how he could have his cake and eat it, too. And so Karl Rove subsequently went around the country looking us all straight in the face, telling us he’s started up a social welfare organization. Nevermind that it was dumping $70 million into partisan campaign ads.

But it’s not just Karl Rove. It’s also Bill Burton on the progressive end with Priorities USA. They also have a 501(c)4, which is supposed to be a social welfare organization. In fact, pretty much every super PAC worth its salt has its own non-profit, tax-exempt 501(C)4 group fueled by secret donors. And this is the context for the untold IRS scandal. Suddenly, this distinction, between political campaign groups and social welfare groups, which the IRS is tasked with patrolling and maintaining, is effectively obliterated by the Citizens United decision.

People are running around the country making an obvious mockery of the social welfare nonprofit rule. And the folks at the IRS are not idiots—they can turn on the television and see Karl Rove. They know that what he is doing is political campaigning, plain and simple. But then it turns out Rove’s great success is a great inspiration and suddenly the IRS starts getting a flood of new applications from other  political groups and strategists saying, oh, you know what, it turns out I, too want to set up a social welfare organization that just so happens to be focused on, say, taking the country back from Barack Hussein Obama.

Now, here’s the thing the IRS appears to have done unequivocally wrong, that we all agree was absolutely inexcusable: they reacted to all of this by targeting one part of the ideological spectrum in looking at whether this flood of new applicants passed the smell test. But being skeptical about a new wave of wolves in sheeps’ clothing, invading the social welfare nonprofit game was entirely appropriate.

And the question Monday is how is this scandal going to unfold? Are we gonna spend the next few months beating-up-on the IRS and the Bush-appointed former head of the IRS who was in charge when all of this happened? Or are we  also gonna take the opportunity to try to figure out what exactly we should be doing to sort out this completely intractable mess in tax law created by Citizens United?

Two IRS scandals hit Washington: One you've heard of, one you haven't

Updated