Under Internal Revenue Code section 501(c)(4), an organization involved in social welfare activities may be granted tax exempt status. Such an organization, for example, the American Civil Liberties Association, may apply to the IRS for approval of its tax exempt status. However, a § 501(c)(4) organization, while allowed to engage in some political activities, may not be primarily political in nature. Under Internal Revenue Code section 527, a political organization may also be granted tax exempt status. One of the principal differences between the two is that a § 501(c)(4) organization does not have to disclose a list of its donors; a § 527 organization must disclose its donors.
The number of applications submitted to the IRS under § 501(c)(4) in recent years has doubled. To increase its efficiency, the IRS established a unit in Cincinnati to screen such applications and determine which, if any, should be subjected to more intense scrutiny. To accomplish this goal, the unit determined that organizations which had “Tea Party” or “Patriot” in their names should be looked at more closely. This special scrutiny of what appears to be conservative organizations has provoked a firestorm of criticism, and, in fact, led the President to say that partisan inquiries initiated by the IRS are “outrageous” and should not be tolerated. Columnist George Will has even said that the President could be subjected to impeachment.
Others have suggested that often organizations claiming § 501(c)(4) status are overtly political, using that status to funnel funds to political campaigns without identifying those who make those contributions. The Acting Commissioner of the IRS recently stated that the mistakes made by the IRS were due to the absence of a sufficient process for working the increase in the number of applications and a lack of sensitivity to the implications of some of the decisions that were made. It has also been stated that a handful of IRS employees saw campaign finance organizations operating by shaky, or even nonexistent, rules and powerful people gaming the system with impunity, and tried, in some small way, to impose some small sense of order on the process.
In any case, the appearance of partiality has become reality, and the IRS is in for a rough ride as the Congress continues its inquiries.