Following the Money

One of the great faults of American journalism – and there seem to be so many in the age of never ending news cycles – is what journalist and tax analyst

David Cay Johnston calls the “unfortunate tendency…to quote people accurately without explaining the underlying context.”

The story of the IRS targeting conservative groups for extra scrutiny when those groups applied for IRS certification of tax-exempt status is a case in point – a breaking political story without a lot of context. Most reporting, as far as it has gone, has appropriately focused on who did what and why? Google Lindsey Graham/IRS and you’ll find 4,500,000 hits with the latest being the senator’s call for a special prosecutor to probe the “a scandal worse than Watergate.”

What has largely been missing is the origin of the whole brouhaha. Of course the who did what and why must be investigated and, trust me, it will be, but nothing ever happens in a vacuum where politics are concerned. The context of the IRS scandal is enormously important to understanding what has happened. Appropriate for the IRS – it always begins with money.

As former Wall Street insider and one-time Treasury Department counselor Steven Rattner tried to provide a little context recently in the New York Times:

“The decision in 2010 to target groups with certain words in their names did not come out of nowhere. That same year, the Supreme Court decision in the Citizens United case substantially liberalized rules around political contributions, stimulating the formation of many activist groups.

“In the year ended Sept. 30, 2010, the division received 1,741 applications from ‘social welfare organizations’ requesting tax-exempt status. Two years later, the figure was 2,774. Meanwhile, the staff of the division tasked with reviewing these applications was reduced as part of a series of budget reductions imposed on the I.R.S. by anti-tax forces.

“A far higher proportion of the new applicants wanted to pursue a conservative agenda than a liberal agenda. So without trying to defend the indefensible profiling, it wouldn’t be that shocking if low-level staff members were simply, but stupidly, trying to find an efficient way to sift through the avalanche of applications.”

In other words, thousands of applications for tax-exempt status for “social welfare organizations” inundated the IRS in the two years after five members of the Supreme Court effectively removed most restrictions on money, especially corporate money, in American politics. A bunch of smart political operatives – think Karl Rove and Bill Burton – seized this historic moment in our political history to create an opportunity to make a lot of money for themselves and spend a lot of money in highly partisan ways with all of it carefully hidden from any public disclosure. The one quasi-public step of the process to receive IRS sanction is to apply for an exemption, which as Steve Rattner notes, thousands of groups were doing in the wake of the Citizens United decision. Other groups just began operating without the formal approval apparently confident that they would eventually get the OK. The most well-financed groups like Rove’s Crossroads GPS and Burton’s Priorities USA could afford the kind of legal talent that is steeped in the nuance of IRS rules thereby virtually ensuring that their applications would thread the tax agency needle.

A little more context. Turns out the IRS rarely denies an application for one of these “social welfare” organizations. The Center for Public Integrity looked at all this and concluded that over the last four fiscal years the IRS has denied the applications of just 60 groups, while approving more than 6,800 applications.

Congress has, of course, delegated the rule making for how to assess these groups to the IRS meaning the bureaucrats are left to determine just what constitutes a “social welfare organization.”

Here’s what the agency’s own internal guidance says:

“Whether an organization is ‘primarily engaged’ in promoting social welfare is a ‘facts and circumstances’ determination.

“Relevant factors include the amount of funds received from and devoted to particular activities; other resources used in conducting such activities, such as buildings and equipment; the time devoted to activities (by volunteers as well as employees); the manner in which the organization’s activities are conducted; and the purposes furthered by various activities.”

Rove’s group, just to take one example, spent more than $300 million in the 2012 election cycle on its version of “social welfare” and is already financing campaign-style attack ads against Hillary Clinton; perhaps the earliest such attack in the history of presidential politics.

Writing in The Atlantic long-time Washington policy and politics observer Norm Ornstein nailed it when he said: “The idea that Crossroads GPS, or the American Action Network, or Priorities USA, or a host of other organizations engaged in partisan campaigning on both sides are ‘social welfare organizations’ is nonsense. Bloomberg’s Julie Bykowicz recently pointed to another example to show the farce here. Patriot Majority USA, run by a Democratic operative, told the IRS its mission was ‘to encourage a discussion of economic issues.’ It spent $7.5 million in ads attacking Republican candidates in 2012–and then virtually disappeared, with Bykowicz unable to reach the group by e-mail or phone. ‘Social welfare?'”

Ornstein’s fundamental point is this: “This is all about disclosure of donors, and about political actors trying to find ways to avoid disclosure.” Bingo.

In Idaho the ultra-conservative Idaho Freedom Foundation, which has never even hinted at the source of most of its money, operates under another section of federal tax law – section 501(c)(3) – and finances a “news service” that generally serves to reinforce the group’s libertarian political agenda, which most recently has been focused on lobbying to keep Idaho from establishing a health insurance exchange under the Affordable Care Act – Obamacare – and publicizing the objections of the group’s executive director to the state’s traffic enforcement mechanism. In order to be exempt under section 501(c)(3) a group must be deemed to be a “public charity” or a “private foundation.”

In Idaho most hospitals are public charities so are many educational foundations and arts and humanities groups, but so too is the Idaho Freedom Foundation, which has become one of the most powerful political forces in the state. It must be noted that IFF received its IRS designation before Citizens United started the avalanche of secret political money flowing to tax code empowered outfits like Rove’s, but still the Idaho group most recent tax return says it collected more than $350,000 in grants and contributions in 2011 to further its “public charity” work.

The real point here is that the IRS code is a confused, often contradictory hodge-podge of rules and dodges. Citizens United further confused the already messy landscape and spawned an entirely new industry where vast amounts of unregulated, unreported money is being used to influence public policy and elections. Money and politics going together is as old as eggs with bacon, but this new political world, illustrated anew by the IRS “scandal,” has perverted the one standard that has a chance of keeping our politics remotely clean and transparent. That standard is disclosure. Perhaps the months of investigation into who did what and why at the IRS will help Congress and the American voter see just who is hell bent on using secret money, with the help of the tax code, to increasingly dominate politics.

If it turns out the IRS willfully targeted certain groups, while not looking closely at others, then heads must roll. But if instead it turns out, as seems entirely possible, that the extra “scrutiny” was based on a fumbling bureaucratic response to a incredibly flawed system then Congress should set about to fix that problem.

As Salon’s David Dayen notes, “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.”

There’s some additional context for you.