In her mid-year report to Congress, National Taxpayer Advocate Nina Olson proposes remedies that she believes would prevent similar scandals from occurring in the future.
Olson’s proposal — a “taxpayer’s bill of rights” — has been made numerous times, and it may well have merit. But there is no reason to believe that it would have prevented the IRS Exempt Organizations scandal, or that it would prevent similar future scandals.
|Part 1||Are targets protected by the Paperwork Reduction Act?|
|Part 2||The unapproved information collection sent to one applicant|
|Part 3||The Inspector General’s report|
|Part 4a||Which information demands were illegal? [September 17, 2010 letter]|
|Part 4b||Which information demands were illegal? [January 9, 2012 letter]|
|Part 5||Can repeat occurrences be prevented?|
Olson’s June 30, 2013 proposal is contained within a “Special Report to Congress” titled Political Activity and the Rights of Applicants for Tax-Exempt Status. The report correctly identifies several problems affecting the EO Division. First, Congress gave the IRS responsibility for making determinations that lie outside its core competency. The IRS is well equipped to perform accounting and auditing functions, but it has no expertise for evaluating the substantive merits of claims for nonprofit status. Second, determining which organizations qualify and which do not requires the exercise of substantial administrative discretion. Trouble is inevitable when an organization that lacks expertise is given broad authority to interpret the law. Third, the determinations which must be made are inherently controversial. That is, after all, why Congress did not make them in statute and instead delegated this legislative task to the Executive Branch.
Olson’s diagnosis also falls short for a more fundamental reason: Each of the problems she identifies is not new. If any of them were the proximate cause of the scandal, why did the scandal occur now?
OLSON’S PROPOSED REMEDIES
To solve the expertise problem, Olson recommends that Congress shift responsibility from the IRS to another agency, such as the Federal Election Commission. This certainly would solve the IRS’ problem, but there is no reason to believe that it would make nonprofit status determinations any less controversial or any more efficient. The FEC is widely regarded as a thoroughly dysfunctional agency that cannot effectively manage its existing statutory responsibilities. This means the IRS’ lack of technical expertise was not the proximate cause of the scandal. EO chief Lois Lerner, now on administrative leave, came to the IRS from the FEC. Presumably her expertise in the regulation of politics was a key reason she was hired.
To solve the administrative delay problem, Olson recommends that Congress extend to 501(c)(4) applicants the right to force action by seeking declaratory judgment after 270 days, the same right that 501(c)(3) applicants already have. This solves the problem of delay only in theory. In practice, it appears that (c)(3) applicants only rarely exercise this right because doing so invites even greater delay. Administrative review stops and cases are shunted off to a time-consuming litigation track. (Applicants who face either a real or perceived threat of retaliation by the IRS are even less likely to seek declaratory judgment.)
To solve the administrative discretion problem, Olson recommends that Congress clarify the meaning of crucial terms that it has left to the IRS to define. For example, Congress has never clearly stated how much political activity is too much for a (c)(4) social welfare organization, nor for that matter has it ever defined social welfare. But Congress has left these terms vague for a reason: they are inherently controversial, and Congress prefers to delegate controversial legislative decisions to the Executive Branch. And if Congress did act, it would trigger the need for the IRS EO Division to review every existing (c)(4) organizations to ensure that it met the new, presumably clearer, statutory standards.
Olson identifies one problem that the IRS could attempt to solve on its own — improving the utility of Forms 1023 and 1024, which organizations file to obtain determination of (c)(3) and (c)(4) tax exempt status. These forms must be approved by the Office of Management and Budget pursuant to triennial information collection requests required by the Paperwork Reduction Act. As we have shown in our previous posts, this is where the IRS EO division clearly strayed into illegal conduct. OMB approval of Forms 1023 and 1024 authorized the IRS to collect certain information from applicants, but it did not authorize the IRS to collect any information it wants. In particular, the EO Division abused its legal authority to collect information necessary to make tax exempt determinations, transforming it into illegal fishing expeditions supported by the extraordinary power to deny tax exempt status to some organizations based on their social or political views.
Unfortunately, Olson’s proposed changes to Form 1024 are not so much revisions as they are a significant expansion of the Form’s scope and intrusiveness:
Form 1024 has not been revised since 1998 – 15 years ago. Adding relevant questions to Form 1024 could help the IRS make a determination about excessive political activity. Requiring all IRC § 501(c)(4) applicants to answer further questions would reduce concerns about partisanship and reduce the IRS’s need to burden organizations with follow-up requests. Moreover, with additional information available to the IRS on the application, it may be able to approve more applications during its “first read” process, thereby reducing the number of requests it makes for follow-up information, which in turn might reduce delays and the backlog of cases awaiting development.
Additionally, more detailed questions could help educate applicants about activity that could potentially disqualify the organization and enable them to provide relevant information with their applications to proactively address the IRS’s potential concerns. Finally, with the benefit of answers to specific questions, it might be easier for the IRS to determine during an audit whether an applicant’s subsequent political activity significantly exceeds the activity described on the Form 1024.
Olson believes that asking more (and more intrusive) questions in Form 1024 would “make further review unnecessary in most cases.” This conclusion is mere speculation, however. Without specificity concerning what additional (or different) information might be included on Form 1024, there is no way to know that future abuses would be deterred. It is equally likely a priori that additional paperwork requirements would make future abuses easier or more frequent. Given the political controversy that erupted over what the inspector general called “inappropriate” follow-up questions, Olson’s suggestion that the IRS be encouraged to be more intrusive seems strange indeed.
In her discussion of how to revise Form 1024, Olson does not mention the Paperwork Reduction Act. Olson simply assumes that more information has what the PRA calls practical utility for the IRS’ legitimate statutory purposes and that the additional burden imposed on the public is either minor or unimportant. A clear lesson from this report is that the National Taxpayer Advocate, who should know the Paperwork Reduction Act inside and out, needs a great deal more training.