IRS Warned Employees Not to Target 501(c)4 Donors in 2011

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IRS Scandal

The Internal Revenue Service (IRS) admitted on May 10 that “low level” staff in its Cincinnati office, supposedly “not motivated by political bias,” targeted 75 conservative tax-exempt organizations, including many Tea Party organizations applying for exemption under Section 501(c)4 of the tax code. The groups were singled out for audit and investigation because they used the names “Tea Party” and “Patriot.” Yet in July 2011, the IRS had warned employees to drop audits of donors to similar 501(c)4 organizations.

A hand-signed memorandum from Steven T. Miller, IRS Acting Commissioner for Services and Enforcement, was issued on July 7, 2011 and instructed employees to cease examinations dealing with gift taxes to 501(c)4 organizations because of difficult "legal, administrative, and policy implications" that could only be resolved "after notice to the public." 

guidance_for_irs_sbse_estate_and_gift_tax_and_tege_exempt_organizations -

Like last week's unexpected apology by the IRS to conservative groups, Miller's action was partly triggered by questions raised by lawyers at a meeting of the American Bar Association.

On May 10, Lois G. Lerner, IRS Director of Exempt Organizations, apologized for the "inappropriate" targeting of conservative political groups during the 2012 election to “see if they were violating their tax-exempt status.”  

Ms. Lerner stated that IRS agents singled out dozens of organizations for additional reviews, because they included the words "tea party" or "patriot" in their exemption applications.  She also stated that in some cases, groups were asked for lists of donors, which violates IRS policy in most cases. Ms. Lerner blamed low-level employees, saying no high-level officials were aware.

Yet prior to being appointed to her current position on August 15, 2012, Ms. Lerner had served since 2005 as the Director of the Exempt Organizations Rulings & Agreements Division, where she managed the “determinations letter program” for Exempt Organization, public guidance, and technical assistance for IRS agents conducting examinations of tax-exempt organizations.  

Steven T. Miller’s “Guidance Memo” was sent directly to IRS TE/GE (Tax Exempt and Government Exempt) management. As the head of “Tax Exempt” determinations, Ms. Lerner would likely have been aware of the hand signed July 7, 2011 memorandum that reiterated the March 23, 2011 policy against examining gift tax donations to 501(c)(4) tax exempt entities. 

IRS Commissioner Miller’s guidance memo clearly warned that the IRS: “should not expend examination resources initiating referrals or developing audits.”  This was likely meant to be a klaxon horn going off in every IRS office across the nation warning that no IRS agent should step into a highly politicized area.

However, the IRS investigations of Tea Party groups included excessive questions that included questions about income--including not just past donations, but future, anticipated donations.

The IRS is wildly sensitive regarding the use of its powers to intimidate political opponents.  Despite a substantial lead in the 1972 polls, Richard Nixon’s Committee to Reelect the President (CREEP) created what became known as the “Enemies List” of supporters of Democrat George McGovern's 1972 Presidential campaign.  

IRS Commissioner Donald C. Alexander later refused to use tax audits and investigations to punish the "Enemies List."  No evidence indicated that President Nixon was personally involved, but the combination of the IRS activity and a break-in at the Democratic National Headquarters became the Watergate scandal. 

Ms. Lerner told an American Bar Association conference the IRS practice was initiated by low-level workers in Cincinnati and was not motivated by political bias.  Ms. Lerner said that Agency officials found out about the practice last year and moved to correct it:  “That was absolutely incorrect, it was insensitive and it was inappropriate. That's not how we go about selecting cases for further review....The IRS would like to apologize for that.” 

Yet the hand-signed July 7, 2011 memorandum from Miller suggests that IRS management and employees understood in March 2011, just four months after the 2010 Congressional elections, that they were to suspend the examinations of gift taxes to 501(c)4 organizations until the policy towards these groups had been resolved. 

The targeting of Tea Party and conservative 501(c)4 groups continued regardless--either because employees chose to ignore a direct instruction from senior management, or because they received contrary instructions from elsewhere. 

The House Ways and Means Committee plans to hold hearings on the IRS's behavior.

Joel B. Pollak contributed to this report.


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