On Capitol Hill today, Acting Commissioner Steven Miller testified about the IRS scandal. Based on news reports (a transcript is not available), he was asked whether what the IRS Exempt Organizations division had done was illegal. He characterized it as a “foolish mistake,” but denied that it was illegal.
Whether it was in fact illegal depends on what statute is used as the reference. Lacking expertise in tax law, Neutral Source focuses on whether the IRS’ actions violated the Paperwork Reduction Act. For the sample case we have examined, the IRS’ screening or targeting actions that were the subject of the question posed to Miller would not be affected by the Paperwork Act. For the Paperwork Act to be relevant, the IRS screening or targeting would have had to be undertaken in the context of a survey or research project.
Nonetheless, it does appear that several of the questions posed in the IRS’ follow-up demand letters were illegal under the PRA.
The importance of the Paperwork Reduction Act has been described previously here, here, and here. In Part 2, we reproduced two sets of follow-up questions sent by the IRA to one civil group that applied for Section 501(c)(4) tax-exempt status. We noted that many of the questions appeared to seek information well beyond what the IRS is authorized to collect under OMB control number 1545-0057. That inference was confirmed by the report of the Treasury Inspector General for Tax Administration, which as we reported in Part 3 described many of these information demands as “unnecessary.” We further noted that if they were unnecessary, they were not included in OMB’s approval because OMB is not permitted to approve collections of information that are not “necessary for the proper performance of the functions of the agency.”
Still, it is essential to recognize that OMB has approved rather broad authority for the IRS to collection information to ascertain whether an applicant qualifies for tax exempt status. To understand this, readers should peruse the 19-page Form 1024 and its six pages of instructions, We do not address whether the IRS should collect this information; we address only whether it was legally entitled to collect the additional information it demanded subsequent to the filing of the application.
Also, it should be noted that some of the information the IRS demanded in these letters was supposed to have been supplied by the civic group as part of its application. We cannot discern whether the civic group failed to provide this information it its original application or the IRS asked for it again without fully reviewing what it had already received. The IRS is fully authorized to demand that this information be provided if the group had failed to include it in its application. but the IRS had no authority to demand that the applicant produce the same information twice.
With these caveats noted, we compared the first list of questions, sent September 17, 2010, with the questions included on OMB-approved Form 1024. The table below shows that many of these questions were legitimate provided that the applicant had failed to answer them in its application. Several of these questions, including the most controversial ones, were never approved by OMB. Irrespective of whether the IRS had statutory authority to ask them, because it lacked OMB approval it could not deny an applicant approval of Section 501(c)(4) status if the applicant failed or refused to answer them.
Of course, to exercise the right not to comply, the applicant would have to have known about the Paperwork Reduction Act and been well aware of the public protection provisions in the law. And to avoid having to sue in federal court, the applicant would have had to reply to the IRS citing the Paperwork Act’s public protection provisions and thereby persuade it to rescind the letter.
Of course, that might not have been enough. Indeed, such a protest might have led the Determinations Unit to kick the issue to headquarters for resolution and postpone its review even longer. But kicking the issue upstairs also would have alerted management that the Determinations Unit had violated the Paperwork Act, something that even at this date there is no evidence that headquarters understands. We have no way of knowing whether such an alert would haver led management to limit demands to the approved information collection. Had IRS management declined to obey the law, the civic group would have had no other recourse but to wait until the IRS acted on its application, and if the IRS denied it, sue in federal court to force reversal of the decision.
That would have been expensive, to be sure, and few civic groups would have had either the expertise or the resources to contest the IRS in court. And that fact exposes a fundamental weakness of the Paperwork Act’s public protection provisions. When an agency conducts an illegal information collection, but it is in the business of assigning public benefits (such as section 501(c)(4) tax exemptions), the Paperwork Act’s public protection protection provisions do not provide much protection to the public.
|9/17/10 Letter to Richmond Tea Party, Inc.
|OMB Approved Item on IRS Form 1024|
|1||Enclosed is a copy of web pages from
http://www.richmondteaparty.com/ dated September 17, 2010. Verify that this is your website.
|II.1 nexus and trivial burden.|
|2||Provide a resume for each member of your governing body.||Not approved.|
|3||Provide copies of all your newsletters.||II.1|
|4||Provide promotional literature developed by your Activist Committee.||II.16
|5||Provide a list and description of specific events that your Activist Committee has organized. In particular, describe motivational activities and copies of any literature presented.||II.1|
|6||Provide copies of literature developed and distributed by your Community Events Committee.||II.1|
|7||Provide a list and description of your specific educational programs developed by the Education Committee.`||II.1|
|8||Provide materials used in your educational programs.||II.1
|9||Describe how your educational programs are used to support up coming [sic] legislative actions.||Not approved.|
|10||Provide copies of voter guides developed by your Research Committee.||II.1
|11||Provide a list of your committee chairpersons, and the names of the committees they chair.||Not approved.|
|12||Give examples of citizen lobbying.||II.1|
|13||Describe in detail your fundraising through mail solicitations, email solicitations, and personal solicitations. Please provide
copies of any material you provide to the persons or organizations you are soliciting from.
|14||Provide copies of any sponsorship agreements.||Not approved.|
|15||Provide copies of your materials on Face Book [sic].||II.16 nexus but unduly burdensome|
|16||According to your income statement in your Form 1024, you have performed activities resulting in Unrelated Business Income. Describe in detail such activities. Also, indicate the percentage of time devoted to such activities.||Not approved|
|17||Describe in detail how you will become involved in events of other organizations. In addition, name the other organizations and the activities conducted for such events.||Not approved.II.5 concerns organizational interrelationships, not events|
OMB Approved Information Collections in IRS Form 1024, Part II
II.1: Provide a detailed narrative description of all the activities of the organization—past, present, and planned. Do not merely refer to or repeat the language in the organizational document. List each activity separately in the order of importance based on the relative time and other resources devoted to the activity. Indicate the percentage of time for each activity. Each description should include, as a minimum, the following: (a) a detailed description of the activity including its purpose and how each activity furthers your exempt purpose; (b) when the activity was or will be initiated; and (c) where and by whom the activity will be conducted.
II.3: Give the following information about the organization’s governing body
II.4: If the organization is the outgrowth or continuation of any form of predecessor, state the name of each predecessor, the period during which it was in existence, and the reasons for its termination. Submit copies of all papers by which any transfer of assets was effected.
II.5: If the applicant organization is now, or plans to be, connected in any way with any other organization, describe the other organization and explain the relationship (e.g., financial support on a continuing basis; shared facilities or employees; same officers, directors, or trustees).
II.6: If the organization has capital stock issued and outstanding, state: (1) class or classes of the stock; (2) number and par value of the shares; (3) consideration for which they were issued; and (4) if any dividends have been paid or whether your organization’s creating instrument authorizes dividend payments on any class of capital stock.
II.7: State the qualifications necessary for membership in the organization; the classes of membership (with the number of members in each class); and the voting rights and privileges received. If any group or class of persons is required to join, describe the requirement and explain the relationship between those members and members who join voluntarily. Submit copies of any membership solicitation material. Attach sample copies of all types of membership certificates issued.
II.9: Has the organization made or does it plan to make any distribution of its property or surplus funds to shareholders or members? Yes/No. If “Yes,” state the full details, including: (1) amounts or value; (2) source of funds or property distributed or to be distributed; and (3) basis of, and authority for, distribution or planned distribution.
II.10: Does, or will, any part of your organization’s receipts represent payments for services performed or to be performed? If “Yes,” state in detail the amount received and the character of the services performed or to be performed.
II.11: Has the organization made, or does it plan to make, any payments to members or shareholders for services performed or to be performed? If “Yes,” state in detail the amount paid, the character of the services, and to whom the payments have been, or will be, made.
II.12: Does the organization have any arrangement to provide insurance for members, their dependents, or others (including provisions for the payment of sick or death benefits, pensions, or annuities)? If “Yes,” describe and explain the arrangement’s eligibility rules and attach a sample copy of each plan document and each type of policy issued.
II.13:Is the organization under the supervisory jurisdiction of any public regulatory body, such as a social welfare agency, etc.? If “Yes,” submit copies of all administrative opinions or court decisions regarding this supervision, as well as copies of applications or requests for the opinions or decisions.
II.14: Does the organization now lease or does it plan to lease any property? If “Yes,” explain in detail. Include the amount of rent, a description of the property, and any relationship between the applicant organization and the other party. Also, attach a copy of any rental or lease agreement. (If the organization is a party, as a lessor, to multiple leases of rental real property under similar lease agreements, please attach a single representative copy of the leases.)
II.15: Has the organization spent or does it plan to spend any money attempting to influence the selection, nomination, election, or appointment of any person to any Federal, state, or local public office or to an office in a political organization? If “Yes,” explain in detail and list the amounts spent or to be spent in each case.