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National Taxpayer Advocate Special Report to Congress: Political Activity and the Rights of Applicants for Tax-Exempt Status

 

The IRS must administer the requirements for tax-exempt status in a nonpartisan and even-handed manner. When an organization seeks exempt status, it is essentially asking all other taxpayers for a contribution to its activities. Thus, the IRS has an obligation to review these applications closely.

According to a report by the Treasury Inspector General for Tax Administration (TIGTA), IRS Tax Exempt Organization (EO) function employees inappropriately selected for further review applications for tax-exempt status under Internal Revenue Code (IRC) § 501(c)(4) from organizations with “Tea Party” or similar terms in their names. These terms were on a “Be on the Lookout” or BOLO list, which flagged 298 applicants for further review. According to TIGTA, the IRS also asked the applicants unnecessary questions, including questions about donors, and delayed processing their applications while awaiting guidance about how to handle them. TIGTA found that IRS employees used inappropriate selection criteria because they did not understand the law or believed it was unworkable, and they created inappropriate job aids and information requests that were not vetted.

TAS has reviewed the TIGTA report, researched the applicable legal standards and IRS procedures, searched for TAS cases involving these issues, and reviewed known systemic issues in EO. Although TAS agrees with TIGTA’s recommendations, we reviewed these materials to further analyze the causes of the problem, and determine why it was not identified or corrected sooner. Our goal was to develop additional recommendations to help prevent the problem from recurring and restore trust with the taxpaying public.

 

“To promote voluntary compliance with the tax laws, the IRS must be impartial both in fact and in appearance. The revelation that the IRS used’tea party’ and similar labels to select tax-exemption applicants for further review, even if intended solely as a workload management tool, has created the appearance that the IRS was not impartial. It is imperative the IRS move quickly to regain the public’s trust and take steps to prevent this kind of incident from happening again.”

 

ARC 2014