Editorial: Now, fire the 501(c)(4) tax exempt status
President Barack Obama's decision to fire acting IRS Commissioner Steven Miller Wednesday was necessary to begin re-establishing the tax agency's credibility in the face of burgeoning scandal. But it's not enough to get the job done.
A lot of questions remain about who did what, when and why in singling out conservative groups for heightened IRS scrutiny, especially whether the motivation was political and partisan. But fixing the problem at the IRS has to include eliminating the unworkable 501(c)(4) tax status at the heart of the scandal.
What was supposed to be a tax haven for organizations whose primary function is social welfare has been widely abused by political groups of all stripes to keep their donors' identities secret while pouring hundred of millions of dollars into partisan advertising and other political activities.
Even when the coveted tax status is used as intended, its ambiguous requirement that a group's primary function be nonpolitical created a loophole allowing those organizations to spend anything less than half of their time and money on political activity. As a result, the IRS has to determine what activities qualify as political and make subjective judgments, on a case-by-case basis, about how much of an individual group's activities fall into that category.
The difficulty of that task in no way excuses the IRS using words such as "tea party" and "patriot" in the names of groups seeking tax exempt status to flag conservative organizations for heightened scrutiny. Or for subjecting liberal groups, such as the NAACP and Greenpeace, to special attention in years past.
The public needs to be confident that the tax collector goes about its business without favor. The IRS should never be politicized, and scrapping the 501(c)(4) section of the tax code would help ensure that it isn't.
It was inserted in the tax code in 1913, apparently in response to a U.S. Chamber of Commerce request for an exemption for organizations that, while not strictly charitable, worked to promote the general welfare of the community.
In the 1960s, groups such as the Sierra Club sought and got the status so they could lobby Congress. It became a full-blown political dodge after the U.S. Supreme Court ruled in 2010 in the Citizens United case that the First Amendment does not allow the government to limit independent political spending by corporations, unions and other organizations. That opened the floodgates for money to flow into the coffers of 501(c)(4) groups created to promote candidates while guaranteeing its donors anonymity.
Tax exempt groups should be given a clear choice -- either directly engage in political activity or stick exclusively to social welfare activities. Those that opt to be political should have to disclose the identity of their contributors, as is currently required for groups with a 527 tax-exempt status. Groups that choose to keep their contributors' identities secret should be prohibited from engaging in any political activity. They would fit neatly in the existing 501(c)(3) tax status that includes churches and charitable foundations.