Congress Introduces Bill to Change IRS Reviews of Tax-Exempt Organizations

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House Ways and Means Oversight Subcommittee chairman Charles Boustany, R-La., has introduced legislation to reform the Internal Revenue Service’s review of applications for tax-exempt status to avoid unfair targeting of some groups.

Boustany’s subcommittee convened hearings earlier this year in which it grilled IRS officials over the extra scrutiny they gave to applications from conservative groups with “Tea Party” and “Patriot” in their names. Lois Lerner, the former head of the IRS’s Exempt Organizations unit, disclosed the targeting ahead of the release of a report on the practice by the Treasury Inspector General for Tax Administration. She and several other top IRS officials lost their jobs amid the outcry over the revelations.

It later emerged that the IRS had also used terms like “progressive” and “Occupy” on its so-called “BOLO,” or “Be on the Lookout,” lists, of terms that IRS employees should watch out for when determining whether an organization that was applying for tax-exempt status under Section 501(c)4 of the Tax Code was primarily engaged in social welfare activities or in politics.

Boustany introduced H.R.3520, the Exempt Organization Simplification and Taxpayer Protection Act of 2013, last week, saying it would defend taxpayers from unfair targeting by the IRS. 

“I’m proud to introduce this legislation as a way to defend taxpayers from the unfair partisan targeting the IRS has recently employed,” Boustany said in a statement. “As a result of the recent investigative work conducted by the House Ways and Means Committee’s Subcommittee on Oversight, the need for internal reforms at the IRS is obvious. This added layer of security levels the playing field by ensuring the United States court system is now an option available to groups hurt by the IRS. The IRS can no longer allow for appeals to languish within its walls. By instituting concrete reforms and shedding light on the audit practices of the IRS, this legislation provides a checks-and-balances system to the actions of unelected Washington bureaucrats like ousted IRS official Lois Lerner. The abuse of American taxpayers by the IRS must be stopped and this legislation advances that goal.”

IRS acting commissioner Danny Werfel, who took on the job after the former acting commissioner, Steven T. Miller, became implicated in the targeting scandal, introduced a series of reforms, including the ability for groups to “self-certify” themselves as tax-exempt while awaiting approval of their applications for tax-exempt status. He also introduced streamlined procedures for handling the large backlog of applications, although groups continue to complain that their applications are still taking too long to process or are being unfairly rejected.

On the other hand, advocacy groups such as Citizens for Responsibility and Ethics in Washington, or CREW, have sued the IRS for allowing too many groups to claim tax-exempt status while funneling money to political campaigns. Meanwhile, Democratic lawmakers have pressed the IRS to clarify the rules around how much political activity is permitted for tax-exempt organizations. The IRS and the Treasury said Tuesday that they are issuing initial guidance to help distinguish between political and social welfare activity (see Treasury and IRS to Issue Guidance for 501(c)(4) Tax-Exempt Social Welfare Organizations).

The IRS and the Treasury said Tuesday that they are issuing initial guidance to help distinguish between political and social welfare activity (see Treasury and IRS to Issue Guidance for 501(c)(4) Tax-Exempt Social Welfare Organizations).

“Through the Committee’s investigation, we found there were many simple and practical reforms needed to protect taxpayers and exempt organizations from abuse and to help the IRS stay focused on its core mission,’ said House Ways and Means Committee chairman Dave Camp, R-Mich. “This legislation is a step forward to bringing greater safeguards and transparency to the IRS, and I commend Charles for his hard work to provide a real legislative solution.”

Under Boustany’s bill, an organization would have to notify the Treasury (that is, the IRS) no later than 60 days after it has established itself as a 501(c)4 that it is operating as such. The notice would include the name, address and taxpayer identification number of the organization, the date on which it was set up, and the state in which it was organized. The notice would also include a statement of the purpose of the organization. Within 60 days after receiving the notice, the Treasury would send the organization an acknowledgment of receiving the application, but for reasonable cause, could extend the 60-day period. There would also be a “reasonable” user fee for the notice. Once the organization had requested to be treated as a 501(c)4, the Treasury would make a determination on treating it as tax-exempt.

Any organization that failed to submit a notice of its intention to operate as a 501(c)(4) would be subject to a penalty of $20 for each day it fails to provide notice, up to a maximum of $5,000.

The rules would apply to organizations set up after Dec. 31, 2014. Existing organizations would need to submit a notice within 180 days after the legislation is enacted if they have not already applied for recognition as a 501(c)(4) or filed at least one annual tax return as a tax-exempt group.

The bill also provides for declaratory judgments for 501(c)(4) organizations as well as pleadings filed after enactment of the proposed legislation.

The IRS would also be required to release information on the status of its investigations of such groups, including whether an investigation based on the information provided by a person had been initiated and whether it is currently open or closed, whether any investigation substantiated such a violation by any individual, and whether any action had been taken, including whether a referral had been made for prosecution.

Boustany’s bill would also require the Comptroller General (that is, the Government Accountability Office) to conduct a study of each IRS operating division to assess the process used for determining how enforcement cases are selected and processed. The study would include a review of the standards each operating division has established for enforcement case selection (including any automated or discretionary selection processes) and case work, and whether those standards meet IRS objectives of impartiality, objectivity, compliance and minimizing taxpayer burden.

The GAO study would also look into the extent to which any cases are initiated by referrals or complaints from inside or outside of the operating division (including from outside the IRS). It would also examine the IRS controls, including management reviews and regular updates, for assuring that its standards for enforcement cases and handling of referrals and complaints in each operating division are sufficient for achieving the objectives above. The study would also examine any IRS controls (including training, monitoring and quality assessments) for assuring that its standards are adhered to by all division personnel and the effectiveness of those controls. In addition, it would discuss whether the existing standards and controls provide reasonable assurance that each division’s enforcement processes meet IRS objectives of impartiality, objectivity, compliance and minimizing taxpayer burden.

The report would be submitted to Congress within a year of enactment of the legislation. Follow-up studies would be initiated as well on how the IRS’s operating divisions are implementing the recommendations for improving case selection and case work processes.

In addition, Boustany’s legislation would forbid any IRS officer or employee from using a personal email account to conduct any official government business.

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