What was the controversy over the IRS's scrutiny of applications to form social welfare groups?

The sudden interest in promoting social welfare after Citizens United raised suspicions that many of the new 501(c)(4)s would merely be fronts for taxpayer-subsidized politicking.

The IRS is responsible for ensuring that this sort of thing does not happen, but its vague definition of "social welfare" gives it almost no guidance for determining whether a 501(c)(4) deserves its tax exemption or is a political committee in disguise. To determine what kinds of groups were filing the new applications, the IRS sent detailed questionnaires to many of them. Conservatives cried foul, charging that the agency was targeting Tea Party groups, and House Republicans held hearings to grill IRS officials.40

The Treasury Inspector General for Tax Administration (TIGTA), an independent office that oversees the IRS, conducted its own investigation of the Republican complaints. It concluded that IRS staff had used inappropriate criteria for selecting groups to examine and had asked unnecessarily intrusive questions. The report concluded with the seemingly sensible recommendation that the IRS and Treasury provide "guidance on how to measure the 'primary activity' of ... 501(c)(4) social welfare organizations."41

That recommendation did not even come close to the core of the problem, which is whether IRS staff should be regulating political activity at all. And it was the Treasury Department itself that allowed political activity to slip in under the tax code. In the statute that added the 501(c)(4) exemption to the tax code, Congress defined qualifying groups as those that are "operated exclusively for the promotion of social welfare." But the regulation the IRS wrote to administer that statute relaxed Congress's definition by opening the exemption to groups that are only primarily engaged in promoting social welfare.42

It seems clear that Congress wanted to keep political activity out of the tax code; it was the IRS that opened the way for 50i(c)s to participate in elections. Had the agency stayed with the statutory definition, there probably would have been no dark money and it would not now be mired in controversy. The American Bar Association had seen the potential for a political problem nine years earlier, when soft money began migrating to 50i(c)(4)s. It issued a report in 2004 that also called for a better way to define the "primary" activities of tax-exempt groups.

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