An advocacy group has filed a lawsuit in a Washington, D.C., federal court on behalf of 25 Tea Party and conservative organizations against the Internal Revenue Service and top IRS officials, in addition to the U.S. Attorney General and Treasury Secretary, arguing that the Obama administration overstepped its authority in subjecting applications for tax-exempt status from Tea Party groups to extra scrutiny.

The lawsuit, from the American Center for Law and Justice, urges the court to find that the Obama administration violated the First and Fifth Amendments of the U.S. Constitution, the Administrative Procedure Act, along with the IRS’s own rules and regulations. The lawsuit requests a declaratory judgment that the defendants unlawfully delayed and obstructed the organizations’ applications for a determination of tax-exempt status by means of conduct that was based on unconstitutional criteria and impermissibly disparate treatment of the groups. The suit also seeks injunctive relief to protect its clients—and their officers and directors—from further IRS abuse or retaliation. Further, the lawsuit seeks compensatory and punitive monetary damages to be determined at trial at a later date.

The IRS has come under fire in the past month after the former director of its Exempt Organizations division revealed that it had screened applications for tax-exempt status by filtering them out using terms like “Tea Party” and “patriot” to group them together. The disclosure came just days before the release of a critical report from the Treasury Inspector General for Tax Administration after several years of questioning from lawmakers in Congress who had written to the IRS asking about delays in applications for 501(c)4 tax exemptions (see TIGTA: ‘Ineffective Management ‘ Led to Targeting Tea Party Groups and Senate Republicans Urge IRS to Hasten Approval of Tax-Exempt Political Groups).

The director, Lois Lerner, pleaded the Fifth Amendment when she was called before Congress and has been put on administrative leave (see IRS Exempt Organization Director Lois Lerner Replaced on an Acting Basis). Former acting commissioner Steven T. Miller has also been pressured to step down and has been replaced by Daniel Werfel from the Office of Management and Budget (see Werfel Has a Month for ‘Thorough Review’ at IRS).

“The IRS and the federal government are not going to get away with this unlawful targeting of conservative groups,” said ACLJ chief counsel Jay Sekulow in a statement. “As this unconstitutional scheme continues even today, the only way to stop this flagrant and arrogant abuse of our clients’ rights is to file a federal lawsuit, which we have done. The lawsuit sends a very powerful message to the IRS and the Obama administration—including the White House: Americans are not going to be bullied and intimidated by our government. They will not be subjected to unconstitutional treatment and unlawfully singled out and punished because of their ideological beliefs. Those responsible for this unprecedented intimidation ploy must be held accountable.”

In the lawsuit, the ACLJ cites six counts arguing the federal government violated the Constitution, federal law, and even its own rules and regulations.

The suit contends that the Obama Administration “unlawfully delayed and thereby effectively denied approval of Plaintiffs’ applications for tax exempt status by means of a comprehensive, pervasive, invidious and organized scheme that purposefully established unnecessary and burdensome inquiries and scrutiny of Plaintiffs’ applications based solely upon Plaintiffs’ political viewpoints (or Defendants’ assumption of Plaintiffs’ viewpoints, based on their organizational names).”

Further, the complaint asserts that the federal government’s “unlawful conduct included but was not limited to excessive scrutiny of Plaintiffs’ applications by requiring donor names, listing of issues important to Plaintiffs’ organizations, including their positions on such issues, the contents of communications between the organizations and legislative bodies, the applicants’ criteria for membership, volunteer names and the political affiliations of persons associated with the organizations . . .”

The ACLJ said Wednesday it is representing a total of 25 organizations in the lawsuit, with additional groups likely to be added to the suit as it progresses. The names of the organizations represented are available here. Of the 25 groups, 13 organizations received tax-exempt status after lengthy delays, 10 are still pending, and two withdrew applications because of frustration with the IRS process.

The ACLJ lists as defendants in the case: U.S. Attorney General Eric Holder; the Internal Revenue Service; Treasury Secretary Jacob Lew; Steven Miller, former acting commissioner of the IRS; Lois Lerner, director of Exempt Organizations Division for the IRS; Holly Paz, director, Office of Rulings and Agreements; and unknown named officials inside the IRS.

The ACLJ noted that the IRS contends that the targeting scheme originated with a couple of rogue IRS agents out of the Cincinnati, Ohio office and contends the abusive conduct has been halted. However, the ACLJ said it has correspondence showing this tactic was used not only in the Cincinnati office, but also from two offices in California—El Monte and Laguna Niguel—as well as the national office in Washington, D.C. It said the Washington office sent a letter to one of its clients as recently as one month ago.

Furthermore, the ACLJ said it has letters signed by Lerner suggesting her personal involvement in sending invasive questionnaires to 15 of our clients in March 2012 nine months after she was told about the scheme and promised to stop it.

CREW Lawsuit
The IRS has also been facing lawsuits from the other side of the political divide, with the advocacy group Citizens for Responsibility and Ethics in Washington filing multiple lawsuits encouraging the agency to crack down on political groups seeking tax-exempt status (see Group Sues IRS over Enforcement of Laws against Politicking by Tax-Exempt Organizations and Group Challenges IRS Tax-Exempt Criteria). CREW filed another lawsuit last week against the IRS in the same D.C. federal district court where the ACLJ filed its lawsuit. CREW’s suit aims to compel the agency to initiate a rulemaking procedure to address conflicts between the Tax Code’s requirements for Section 501(c)(4) groups and implementing IRS regulations.  Current IRS regulations grant tax-exempt status under section 501(c)(4) of the Tax Code to groups “primarily engaged” in promoting social welfare.  The tax laws, however, require such groups to be “operated exclusively” for social welfare purposes.

“As the ongoing IRS scandal shows, the 501(c)(4) regulation is unmanageable,” said CREW executive director Melanie Sloan in a statement. “It clearly conflicts with the Tax Code, and IRS employees are simply at a loss as to how to apply it.  Remarkably, the IRS has known the regulation presents enforcement issues for more than 50 years, but has failed to act.  CREW has sued to force the IRS to finally deal with this issue.”

CREW pointed out that groups seeking or claiming 501(c)(4) status have interpreted the IRS regulation to mean they can spend up to 49 percent of their annual expenditures on electoral activities, while still maintaining tax-exempt status. During the 2012 election cycle, Section 501(c)(4) groups spent nearly $255 million on elections. In April, following up on its earlier lawsuit against the IRS, CREW filed a rulemaking petition with the agency seeking a revision to this regulation to eliminate the glaring loophole that allows these tax-exempt groups to engage in substantial political activity while keeping the identities of their donors secret.

The discrepancy between the “operated exclusively” standard of the law and the “primarily engaged” language of the regulations has been controversial within the IRS ever since the regulations were enacted in 1959.  The IRS revisited the problem multiple times in the 1960s and 1970s, but did nothing.  Additionally, since 2011, at least two rulemaking petitions seeking to correct the problem have been filed, with the IRS responding merely that it is “aware” of the issue.

“Until now, it has been impossible to persuade the IRS or Congress to confront this issue,” said Sloan. “But now that the entire country has been educated about this previously obscure tax matter, this lawsuit may finally spur reform. The current IRS scandal directly stems from the problematic regulation. Only by changing it can we be sure we won’t see a repeat of the current debacle.”