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The Real Scandal: How the IRS Favors the Rich

For all the outcry about targeting by ideology, IRS has for years unfairly favored a different group: the rich.

Crowdfunding, a practice which allows startup firms to raise money from small investors over the Internet, picked up steam in 2012 with some $2.7 billion invested, a study showed Monday.



For all the talk of scandal regarding the IRS targeting groups named “Tea Party” or “Patriot,” it’s not hard to draw an additional lesson from the facts of the case — a pattern that follows the well-worn model of the modern political age: Benefits flow to the rich and the well-connected, with pain for the rest.

The Cincinnati incident, which has already  cost the job of Acting IRS CommissionerSteven Miller (who was not the commissioner when the scandal occurred – this would be like the State Department reacting to the tragedy at the Libyan consulate by firing a low-level bureaucrat coincidentally named Ben Ghazi), is definitely scandalous in its own right. As the  Treasury Inspector General report details, it’s completely inappropriate for the IRS to burden any subset with invasive information requests based merely on keywords or policy positions.

But let’s consider how this played out. The New York Times’ Nick Confessore  reported this week that the groups applying for tax-exempt 501(c)(4) status and singled out for inspection were primarily small, local conservative (and a  few liberal) organizations, who barely spent any money on elections. Meanwhile, groups like Karl Rove’s Crossroads GPS and the liberal Obama-supporting Priorities USA, who did the lion’s share of campaign spending among these types of organizations, not only faced no such examination, but survived multiple efforts by campaign finance reform advocates to  get the IRS to revoke their tax-exempt status because of their voluminous political activities.

Why would this be the case? First of all, a 501(c)(4) group need not apply with the IRS to prove its tax-exempt status; it can simply self-declare, avoiding an initial review process. The IRS encourages groups to file applications, but those with the resources to hire a smart tax lawyer know they aren’t required to go through the trouble. Needless to say, most local Tea Party groups didn’t have that kind of professional expertise. So generally speaking, the small fish revealed themselves to the IRS initially, and since Congress  requires reviews of every application for tax-exempt status, these groups become the low-hanging fruit, prone to investigation.

Furthermore, Tea Party groups did themselves no favors by filling out the applications in an amateurish manner, according to Pulitzer Prize-winning former reporter for the New York Times and columnist at David Cay Johnston. “It’s like applying for a mortgage,” Johnston told Salon. “If you write it out wrong, you’re going to get flagged. And there are examples of these groups saying they’re not political and then saying their goal is to influence legislation.”

Crossroads GPS apparently did file an application for tax-exempt status, but it had very smart tax form preparers who knew how to exploit the ambiguites in the 501(c)(4) statute. The tax code says these groups must “exclusively” engage in the vague-sounding “social welfare activity,” which suggests a ban on political spending. But the IRS subsequently interpreted this to mean that groups fall within the rule as long as they don’t “primarily engage” in political activities. Since the Citizens United ruling, which heralded the growth of the 501(c)(4) sector because corporations could  donate to these tax-exempt groups without disclosing their donations, savvier groups have simply worked to stay a hair under 50 percent with their campaign spending, putting them in the clear. David Cay Johnston cited this as a major problem with how the IRS defines social welfare organizations. He said, “Is there any married person in America who doesn’t understand exclusivity? 49.9 percent is not exclusive.”

It’s pretty simple, then, to figure out what took place. The IRS, faced with the enormous task of dealing with  a surge of 501(c)(4) groups taking advantage of an often contradictory law, performed triage by taking the path of least resistance – going after the most obvious targets, who didn’t have the resources to artfully stay within the tax laws, or to fight back against invasive reviews. They shied away from the heavily lawyered-up big-money groups, and instead focused on battles they thought they could win.

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