Why You Should Feel Sorry for the IRS

Nancy Cook
National Journal

Yes, the Internal Revenue Service was wrong to target dozens of conservative groups for extra scrutiny, even if it was accidental. Everybody agrees on this point. But lost in the frenzy is a bigger question: If the IRS screwed this up so royally through incompetence, rather than political malfeasance, is it possible we’re asking too much of the agency?

The IRS is not just the taxman, responsible for collecting $2.52 trillion in revenue in fiscal 2012 from individuals and corporations to fund the federal government. The agency also implements much of the country’s social policy through the tax code. The Earned Income Tax Credit encourages poor people to work, and other incentives encourage us to buy homes and give money to charity. In the coming year, the IRS will be responsible for implementing much of the Affordable Care Act, the president’s signature piece of legislation: It must collect taxes both to fund the expansion of Medicaid and to determine who needs subsidies to purchase insurance. Also, the agency is now responsible for policing the country’s growing number of 501(c)(4) tax-exempt groups, which played a starring role in the 2012 election. Phew.

“We don’t make it easy for the agency by constantly adding to its responsibility,” says Joseph Thorndike, a tax historian and a contributing editor at Tax Analysts.

The IRS office in Ohio is responsible for screening tax-exempt groups. Following the 1998 restructuring of the agency, individual campuses became responsible for different functions. That move turned the Cincinnati division into ground zero for tax-exempt applications and inadvertently made it one of the key arbiters of what counts as a political campaign. A group can claim tax-exempt status if it is a social-welfare organization, devoted to education or even advocacy. These groups can participate in politics, but politics can’t be their primary focus.

Yet the culture of the IRS has never valued screening nonprofits or political groups as much as collecting taxes, says Jeff Trinca, former chief of staff for the National Commission on Restructuring the Internal Revenue Service. Real agency pros prefer the work of auditing returns and thinking through tax policy. So divisions like the one in Cincinnati may not attract the star talent. “The tax-exempt group is the ugly stepchild. It’s not the IRS’s core function,” Trinca says. “The IRS is much better at finding and collecting taxes under the law than making social or political decisions, but it’s now … what they’re expected to do.”

What’s more, the IRS hasn’t given staff enough training, guidance, or cash for dealing with the influx of tax-exempt groups. Fewer than 200 employees work to screen more than 70,000 applications for exemption that the Cincinnati office receives each year. “They did not have the right set of eyes and ears, or the experience doing it,” says Marcus Owens, who headed the agency’s Exempt Organizations Division from 1990 to 2000, about the increase in 501(c)(4) groups. “The staff was oriented toward moving applications and making sure that names and addresses were spelled the same. Usually, you don’t need to know anything more about a Little League or PTA group for tax-exempt purposes.” That changed in 2010, when the Supreme Court allowed unlimited contributions from corporations, unions, and associations to deluge campaigns through tax-exempt, social-welfare groups overseen by the IRS. Such groups do not have to disclose their donors, and the past few years saw a plethora of new ones.

In 2009, for example, 1,751 groups applied for 501(c)(4) status, according to the recent report by the Treasury inspector general. By 2012, the IRS had received 2,774 applications for tax-exempt social-welfare groups, according to agency data. It approved 2,324 of these, denied eight, and left another 442 in limbo. More than 80 percent of tax-exempt applications remained open for more than year, according to the report, which blamed IRS blunders on mismanagement and rogue employees rather than politics.

Longtime IRS observers and ex-IRS employees say the problem goes much deeper. The agency simply is not equipped to handle all of the problems that the federal government now assigns to it. It has been asked to assume lots of new responsibilities without additional resources or training. From 2011 to 2012, the IRS’s budget was cut by 2.5 percent, according to the National Taxpayer Advocate, which describes the lack of cash as one of the agency’s biggest challenges. IRS employees also now face furloughs, thanks to sequestration.

The burden of collecting taxes and delivering social policy has always overloaded the IRS. But expectations have risen in recent years just as funding has fallen, Thorndike says. “We’re trying to do more and more through the tax code, because our budgetary politics are broken,” he adds.

None of this excuses targeting tax-exempt applications with tea-party search strings. But the Treasury inspector general’s report does not tackle the question of whether the IRS can do everything that is now expected of it—as both a tax collector and a regulator. “Those two functions are banging up against one another,” Owens says. “The regulatory function always comes out on the short end of the stick.”