IRS Commissioner Koskinen Says Proposed Tax-Exempt Rules Won't Be Finalized Soon

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The Internal Revenue Service's new commissioner, John Koskinen, told a congressional hearing Wednesday that the IRS has received an unprecedented number of comments on its proposed regulations for 501(c)4 tax-exempt groups and they will not be finalized anytime soon.

The Treasury and the IRS issued initial guidance last November to clarify how much political activity the groups, which are supposed to be primarily devoted to social welfare, are allowed to engage in, after a scandal erupted last year over the IRS's so-called “targeting” of Tea Party groups that had applied for tax-exempt status (see Treasury and IRS Issue Guidance for 501(c)4 Tax-Exempt Social Welfare Organizations). The IRS was forced to admit that it used terms such as “Tea Party” and “Patriot” to filter out and group together applications from conservative groups for extra scrutiny, although it later emerged that it also screened for terms such as “Progressive” and “Occupy” in the names of left-leaning groups. The revelations led to the ouster of several high-ranking IRS officials along with revised procedures for dealing with the applications.

The IRS has been pressed by Congress to clarify the rules for tax-exempt groups, but the initial guidance it issued has provoked a further outcry that the IRS is trying to stifle legitimate political activity.

“There are a number of steps in the regulatory process that must be taken before any final guidance can be issued,” said Koskinen in his prepared testimony. “I believe it is extremely important to make this area of regulation as clear as possible, not only because it will help guide the IRS in proper enforcement, but will also give a better roadmap to applicants and help those that already have section 501(c)(4) status understand the applicable standards and properly administer their organizations. The proposed guidance also seeks comments regarding whether standards similar to those that have been proposed should be adopted to define the political activities that do not further the tax-exempt purposes of other tax-exempt organizations and to promote consistent definitions across the tax-exempt sector. The Treasury and IRS have requested public comment on the proposed regulations, and will carefully consider all public feedback in working to ensure that the standards for tax exemption under section 501(c)(4) are clear and can be applied consistently.”

Koskinen also noted that improving the application for section 501(c)3 tax-exempt status is another significant area of focus for the IRS after a backlog developed in applications there as well.

Lawmakers repeatedly pressed Koskinen on turning over the documents requested in various congressional investigations of the scandal, which had been prompted last year by the impending release of a report by the Treasury Inspector General for Tax Administration.

“Following the release of the TIGTA audit, the committee sought and reviewed roughly 400,000 internal IRS documents and interviewed dozens of IRS personnel, ranging from front-line screeners in Cincinnati all the way up to the former commissioner,” said House Ways and Means Oversight Subcommittee chairman Charles Boustany, R-La., in his opening statement. “However, the ongoing investigation has hit a roadblock because the IRS has yet to provide all emails of the former Director of Exempt Organizations, Lois Lerner. Despite the fact that committees investigating the matter have not—in six months—received all the documents requested, nor conducted all of the interviews sought, the IRS released a report just weeks after the TIGTA report declaring that no wrongdoing had occurred. The IRS came to this conclusion without conducting an investigation or interviewing any of the managers involved. Commissioner Koskinen, if you have been told that the investigation is complete and no targeting occurred, you have been misled. Last weekend, the President claimed there was not 'even a smidgeon of corruption' at the IRS, and he blamed the targeting on 'bone-headed decisions' by 'a local office.' Now, this committee has actually investigated the matter, and found otherwise. The President’s staff is either ill informed or they are misleading him.”

Boustany noted that there is also an unprecedented backlog in applications for 501(c)(3) applications, which is up over 500 percent from a year ago. “They come in the context of an estimated $140 billion in improper payments processed by the IRS in the past 10 years, and a growing plague of identity theft,” he added. “In some cases, identity theft has led to over $1 million in fraudulent refunds going to single addresses or bank accounts, and in one case $156,000 was sent to a single address in Shanghai, China. This gross waste of taxpayer dollars must end.”

Koskinen contended that the IRS has made progress on combating identity theft, noting that the IRS stopped 5 million suspicious returns in 2012, up from 3 million suspicious returns stopped in 2011, and the upward trend has continued in 2013. “Through November, we suspended or rejected 6.7 million suspicious returns, worth more than $15.9 billion,” he said.

Koskinen also said in his prepared testimony that the IRS was making progress in efforts to safeguard against fraud in other areas, particularly with refundable tax credits such as the Earned Income Tax Credit, by increasing the use of data analytics, “which, among  other things, helps us better select tax return preparers who may benefit from additional outreach, education and compliance activities to significantly reduce improper payments associated with refundable tax credits, particularly the Earned Income Tax Credit (EITC), on returns and claims for refund they prepare.”

However, he defended the EITC, noting that it remained an effective tool in welfare-to-work efforts. He had worked for the Senate during the Nixon administration when it was introduced and quoted Ronald Reagan as saying it was the best anti-poverty and job creation measure to come out of Congress.

Koskinen was also asked about the IRS's work on implementing the Affordable Care Act. He noted that the systems and processes that the IRS developed to support enrollment in the new health insurance marketplace were launched on schedule last fall and are working as planned. “In addition, the IRS has been working to implement the ACA’s tax provisions,most of which are already in effect, such as the branded prescription drug fee, the tanning tax and the medical device excise tax. We continue to focus on two significant tax provisions that go into effect in 2014: the premium assistance tax credit and the individual shared responsibility provision. These two provisions will have a profound impact on IRS forms and procedures beginning with the 2015 filing season, and will require additional taxpayer service and education activities. Preparations are already well underway to modify forms and instructions,enhance education and outreach to taxpayers and their advisors, and update our systems and processes in time for the 2015 filing season.  The IRS is also focusing on ensuring that returns that erroneously or fraudulently claim refundable premium tax credits (or fail to reconcile advance payments of the credit) are efficiently identified and addressed, using Marketplace information available during the filing season as well as the ever-improving IRS anti-fraud tools used for all returns.”

However, when asked about a recent TIGTA report that pointed to possible problems with the IRS's processes for safeguarding against fraud in the Premium Tax Credit program, Koskinen pointed out that there would be less incentive for fraud because the money goes to the insurance company rather than the individual taxpayer.

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