Louisiana Law Review
Fall 2014
High-Stakes Word Search: Ensuring Fair and
Efective IRS Centralization in Tax Exemption
Heath C. DeJean
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: