High-Stakes Word Search: Ensuring Fair and Effective IRS Centralization in Tax Exemption

• Author: Heath C. DeJean
• Pages: 258-301

Louisiana Law Review



Fall 2014

High-Stakes Word Search: Ensuring Fair and

Efective IRS Centralization in Tax Exemption

Heath C. DeJean



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 



High-Stakes Word Search: Ensuring Fair and Efective IRS Centralization in Tax Exemption 



High-Stakes Word Search: Ensuring Fair and

Effective IRS Centralization in Tax Exemption

TABLE OF CONTENTS

Introduction ......................................................................... 260

I. Background: The Determinations Process and IRS

Targeting ............................................................................. 263

A. The Tax-Exempt Determinations Process..................... 266

1. Interpretation Issues in the Determinations

Process .................................................................... 269

2. Social Welfare Organizations in the Wake of

Citizens United ........................................................ 272

3. Benefits of Centralization ....................................... 274

B. Examples of Acceptable Exempt Organization

Targeting ....................................................................... 275

1. Credit Counseling Organizations ............................ 276

2. Donor-Advised Funds ............................................. 278

II. The Tea Party Scandal ........................................................ 280

A. Justification for Targeting by the IRS ........................... 283

B. Propriety of Tea Party Targeting .................................. 284

1. The Section 501/527 Gray Area.............................. 285

2. The Structure of the Tea Party ................................ 287

III. Curative Approaches to the Political Spending Problem .... 289

A. The IRS’s Stopgap Solution .......................................... 290

B. Avoiding Inappropriate Criteria .................................... 293

C. An Argument for IRS Targeting Through the Audit

Process .......................................................................... 294

1. Open-Door Determinations and Targeting

Through Auditing .................................................... 295

2. Organizational Compliance .................................... 297

a. Promoting Compliance

Through Third Parties ....................................... 298

b. Strategic Publicity ............................................. 299

Conclusion .......................................................................... 301

260 LOUISIANA LAW REVIEW [Vol. 75

INTRODUCTION

On May 10, 2013, Lois Lerner, then director of the Internal

Revenue Service (IRS) Exempt Organizations unit, gave a speech

revealing that the IRS had recently decided to review some

organizations’ applications for tax exemption with heightened

scrutiny.1 Lerner admitted that certain organizations were chosen

for “centralization”—a process of assigning applications to a

specialist who is better able to handle issues raised in the

application—based on the presence of certain identifying terms in

their applications, including “Tea Party” and “Patriots.”2 The

purpose of centralization was to treat these applications

consistently, but the process brought added delay in reaching a

decision and introduced heightened scrutiny into the operations of

these organizations.3 In her speech, “Ms. Lerner defended the

practice of centralization, but admitted that referring cases for

centralization based on their names and perceived political

affiliations was wrong.”4

Many in the political world shared Lerner’s belief that the

process, as applied in the context of Tea Party applications, was

improper.5 Although the Acting Commissioner of the IRS claimed

Copyright 2014, by HEATH C. DEJEAN.

1. Lerner, in response to a request for updated information on the IRS’s

review of Tea Party organizations, admitted that “many [organizations]

indicated that they were going to be involved in advocacy work.” Transcript of

the May 10, 2013, ABA Tax Section’s Exempt Organizations Committee

Meeting, THE EXEMPT ORG. TAX REV., Aug. 2013, at 119, 126 [hereinafter ABA

Transcript]. Lerner continued by no ting that the IRS’s “l ine people in Cinci nnati

that handle the applications did what we call centralization of these cases. They

centralized work on these in one particular group.” Id. Steven Miller, the acting

IRS commissioner, admitted that the question asked of Lerner was planted,

“which gave Lerner the leeway to put the scandal into the public domain before

the release of the TIGTA Report.” Washington Alert—Part I, 59 FED. TAXES

WEEKLY ALERT, May 23, 2013, art. 19. See also TREASURY INSPEC TOR

GENERAL FOR TAX ADMIN., INAPPROPRIATE CRITERIA WERE USED TO IDENTIFY

TAX-EXEMPT APPLICATIONS FOR REVIEW 2 (May 14, 2013) [hereinafter TIGTA

Report].

2. See Lily Kahng, The IRS Tea Party Controversy and Administrative

Discretion, 99 CORNELL L. REV. ONLINE 41, 49 (2013); see also Questions and

Answers on 501(c) Organizations, INTERNAL REVENUE SERV. (May 15, 2013),

http://www.irs.gov/uac/Newsroom/Questions-and-Answers-on-501(c)-

Organizations, archived at http://perma.cc/6L48-HP9X.

3. See ABA Transcript, supra note 1, at 119.

4. More Details Emerge on IRS’s Targeting of Conservative Groups

Applying for Exempt Status, 59 FED. TAXES WEEKLY ALERT, May 16, 2013, art.

2 [hereinafter More Details Emerge on IRS’s Targeting].

5. Donald Tobin explained: