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How to apply (or not) for tax-exempt status

There's been an interesting trajectory to the IRS controversy over the last several days. Initially, the condemnations were just about universal -- no one was
How to apply (or not) for tax-exempt status
How to apply (or not) for tax-exempt status

There's been an interesting trajectory to the IRS controversy over the last several days. Initially, the condemnations were just about universal -- no one was prepared to defend a policy in which the tax agency treated some groups unfairly based solely on ideological grounds. The IRS has to be neutral and even-handed at all times, and anything short of that standard is scandalous.

But yesterday, I started noticing some pushback from credible observers wondering whether the story isn't quite what it appeared to be at first blush. Jeffrey Toobin, for example, asked whether the IRS actually did anything wrong.

How can anyone still wonder about that, given the apparent consensus? Noam Scheiber raised an interesting point I hadn't seen elsewhere.

It turns out that the applications the conservative groups submitted to the IRS -- the ones the agency subsequently combed over, provoking nonstop howling -- were unnecessary. The IRS doesn't require so-called 501c4 organizations to apply for tax-exempt status. If anyone wants to start a social welfare group, they can just do it, then submit the corresponding tax return (form 990) at the end of the year. To be sure, the IRS certainly allows groups to apply for tax-exempt status if they want to make their status official. But the application is completely voluntary, making it a strange basis for an alleged witch hunt.So why would so many Tea Party groups subject themselves to a lengthy and needless application process? Mostly it had to do with anxiety -- the fear that they could run afoul of the law once they started raising and spending money. "Our business experience was that we had to pay taxes once there was money coming through here," says Tom Zawistowski, the recent president of the Ohio Liberty Coalition, which tangled with the IRS over its tax status. "We felt we were under a microscope. ... We were on pins and needles at all times." In other words, the groups submitted their applications because they perceived themselves to be persecuted, not because they actually were.

Jamelle Bouie added, "This helps explain why the IRS decided to apply scrutiny at all. Applications are unusual, and when you receive a large number of them from a particular set of right-leaning groups, it's bound to raise suspicion. As Scheiber notes, 'The IRS was unexpectedly flooded by dodgy 501(c)4 applications and was at a loss over how to manage them.'"

I have a little background covering tax law as it relates to non-profits, and I'll confess this is new to me. But it turns out, it's true -- 501(c)4 don't have to apply to the IRS; they can simply claim the status and proceed accordingly.

Indeed, there's a handy visual in the IG report (pdf) that came out this week, responding to the controversy. (I added the red oval to highlight the relevant portion.)

How to apply (or not) for tax-exempt status

This seems important rather important. All of these groups sent in applications, overwhelming confused IRS bureaucrats who struggled, not only to deal with the paperwork, but with the ambiguities of tax law as it relates to political groups seeking tax-exempt status.

So, it would appear that the overwhelmed officials, seeing tons of Tea Party groups filing for (c)4 status, started wondering if perhaps these political entities didn't really deserve it. As we know, some liberal groups ran into trouble, too.

The angle I don't understand, though, is why these groups would send in unnecessary applications in the first place. Scheiber's report says the groups were worried about adverse tax consequences down the road, but why would that stop them? If they hoped to influence the elections, by the time they faced after-the-fact scrutiny, the elections would be over.

(If there any experts on tax law and non-profits reading this, and want to weigh in, I'm eager to hear from you.)

Regardless, these details seem to cast the story in a different light. More from Scheiber:

So the crime here had nothing to do with "targeting" conservatives. The targeting was effectively done by the conservative groups themselves, when they filed their gratuitous applications. The crime, such as it is, was twofold. First, in the course of legitimately vetting questionable applications, the IRS appears to have been more intrusive than justified, asking for information about donors whose privacy it should have respected. This is unfortunate and intolerable, but not quite a threat to democracy.Second, the IRS was tone deaf to how its scrutiny would look to the people being scrutinized, given that they all subscribed to the same worldview, and that they were already nursing a healthy persecution complex. Which is to say, the IRS didn't go about its otherwise legitimate vetting in a very politically-correct way.

Just to clarify, I'm not endorsing a "nothing to see here" argument, and I'd like to see more information about all of this. But these additional details do cast the story in a different light, and raise questions about just how "scandalous" the actions were.

It's another angle to consider as the story unfolds further.