On May 14, the Inspector General for Tax Administration released its audit of IRS review of applications for IRC 501(c)(4) tax exempt status. TIGTA’s conclusion does not address the Paperwork Reduction Act issues noted in Part 1 and Part 2 of this series. For that reason, some of its conclusions are premature.
Here are the relevant conclusions in the Highlights section of TIGTA’s audit report:
The IRS used inappropriate criteria that identified for review Tea Party and other organizations applying for tax-exempt status based upon their names or policy positions instead of indications of potential political campaign intervention. Ineffective management 1) allowed inappropriate criteria to be developed and stay in place for more than 18 months, 2) resulted in substantial delays in processing certain applications, and 3( allowed unnecessary information requests to be issued.
Although the processing of some applications with potentially significant political campaign intervention was started soon after receipt, no work was completed on the majority of these applications for 13 months. THis was due to delays in receiving assistance from the Exempt Organizations function Headquarters office. For the 296 total political campaign intervention applications TIGTA reviewed as of December 17, 2012, 108 had been approved, 28 were withdrawn by the applicant, none had been denied, and 106 were open from 206 to 1,138 calendar days (some for more than three years and crossing two election cycles).
The transmittal memorandum from Acting Deputy Inspector General for Audit Michael E. McKenney to the Acting Commissioner, Tax Exempt and Government Entities Division, also indicates that disagreements remain between TIGTA and senior IRS managers about these conclusions:
We would like to clarify a few issues based on the IRS response to our report. The response states that our report views approvals as evidence that the Exempt Organizations function should not have looked closely at those applications. We disagree with this statement. Our objection was to the criteria used to identify these applications for review. We believe all applications should be reviewed prior to approval to determine whether tax-exempt status should be granted. The IRS’s response also states that issues discussed in the report have been resolved. We disagree with this statement as well. Nine recommendations were made to correct concerns we raised in the report, and corrective actions have not been fully implemented. Further, as our report notes, a substantial number of applications have been under review, some for more than three years and through two election cycles, and remain open. Until these cases are closed by the IRS and our recommendations are fully implemented, we do not consider the concerns in this report to be resolved.
TIGTA’s audit addressed primarily the criteria used for selecting applications for review and the extent to which these criteria had adverse effects on applicants. TIGTA
determined that there appeared to be some confusion by Determinations Unit specialists and applicants on what activities are allowed by I.R.C. § 501(c)(4) organizations. We believe this could be due to the lack of specific guidance on how to determine the “primary activity” of an I.R.C. § 501(c)(4) organization. Treasury Regulations state that I.R.C. § 501(c)(4) organizations should have social welfare as their “primary activity”; however, the regulations do not define how to measure whether social welfare is an organization’s “primary activity.”
Prior to a two-day workshop organized by Exempt Organizations Headquarters in May 2012, the Determinations Unit had approved six (2 percent) of 298 flagged applications, but by December 2012 it was able to approve an additional 102 applications, 29 (28 percent) involving “Tea Party, Patriots, or 9/12 organizations.”
This is a plausible explanation for why the Determinations Unit stopped delaying the processing of these applications, but it does not explain why applicants were subjected to extraordinary scrutiny in the first place. Nor does it explain why the Determinations Unit imposed on these applicants additional information collection burdens.
Meanwhile, nothing in the report suggests that TIGTA examined whether these additional information collection burdens were violations of the Paperwork Reduction Act. TIGTA says only that the Determinations Unit requested “unnecessary” information:
The Determinations Unit sent requests for information that we later (in whole or in part) determined to be unnecessary for 98 (58 percent) of 170 organizations that received additional information request letters. According to the Internal Revenue Manual, these requests should be thorough, complete, and relevant. However, the Determinations Unit requested irrelevant (unnecessary) information because of a lack of managerial review, at all levels, of questions before they were sent to organizations seeking tax-exempt status. We also believe that Determinations Unit specialists lacked knowledge of what activities are allowed by I.R.C. § 501(c)(3) and I.R.C. § 501(c)(4) tax-exempt organizations. This created burden on the organizations that were required to gather and forward information that was not needed by the Determinations Unit and led to delays in processing the applications. These delays could result in potential donors and grantors being reluctant to provide donations or grants to organizations applying for I.R.C. § 501(c)(3) tax-exempt status. In addition, some organizations may not have begun conducting planned charitable or social welfare work.
This means the IRS imposed an unapproved collection of information in violation of the Paperwork Reduction Act. The PRA does not permit agencies to collect information that isn’t “necessary for the proper performance of the agency’s functions.” 44 USC 3506(c)(3)(A) and 5 CFR 1320.5(e). If the additional information was “unnecessary,” then it could not have complied with the PRA.
INTERNAL GUIDANCE TO THE DETERMINATIONS UNIT FAILED TO ACCOUNT FOR THE PAPERWORK REDUCTION ACT
TIGTA also says that when Exempt Organizations Headquarters provided draft guidance, matters went from bad to worse:
After receiving draft guidance in November 2011, the team of specialists began sending requests for additional information in January 2012 to organizations that were applying for tax-exempt status. For some organizations, this was the second letter received from the IRS requesting additional information, the first of which had been received more than a year before this date. These letters requested that the information be provided in two or three weeks (as is customary in these letters) despite the fact that the IRS had done nothing with some of the applications for more than one year. After the letters were received, organizations seeking tax-exempt status, as well as members of Congress, expressed concerns about the type and extent of questions being asked. For example, the Determinations Unit requested donor information from 27 organizations that it would be required to make public if the application was approved, even though this information could not be disclosed by the IRS when provided by organizations whose tax-exempt status had been approved.
Headquarters guidance either exacerbated confusion within the Determinations Unit, or the Unit interpreted it as authorizing it to demand information for which the IRS lacked a valid OMB control number. Either way, the result was the same: applicants were subjected to an illegal collection of information. Had the Exempt Organizations Headquarters office paid more attention to its obligations under the PRA, it seems likely that its guidance would have clearly forbade the Determinations Unit from collecting information illegally.