IRS scandal: who should be tax-exempt?

The scandal at the Internal Revenue Service over its targeting of conservative groups seeking tax-exempt status has some critics asking what the service is doing to ensure people and organizations aren’t abusing the system.

Eric Epstein runs “Rock the Capital,” a nonprofit focused on voter education. He said a nonprofit he ran was targeted by the IRS a few years ago.

“In the case of our own non-profit, and I think in the case of some of the Tea Party groups, they’re going after people for political reasons and not fiscal, responsible issues,” said Epstein.

In this latest scandal, the focus was on conservative groups seeking 501(c)(4) nonprofit status. That would make them tax-exempt and also allow them to keep their donors anonymous. Under IRS rules, an organization seeking this status is supposed to focus primarily on “social welfare” as opposed to focusing primarily on politics.

“There are individuals, there are corporations that are using nonprofits as a shill and a shell not to pay their fair share. That’s what we ought to be going after, not Americans that are simply dissatisfied with their government and registering a complaint,” said Epstein.

Following the Citizens United Supreme Court ruling in 2010, officials at the IRS said the number of applications for 501(c)(4)s spiked. According to the Huffington Post, Lois Lerner, who heads up the agency’s exempt organizations division, told a group of Washington tax attorneys the applications more than doubled. They increased from 1,500 in 2010 to 3,400 in 2012.

Two of the more famous 501(c)(4)s are Crossroads GPS and Priorities USA, each of which spent millions on TV ads during the 2012 presidential race.

Critics say those groups are not engaged primarily in social welfare. To read an opinion piece about the issue on cnn.com, click here.

But, experts say there’s gray area in terms of defining how much a group should be focused on social welfare versus political activities and what kinds of questions IRS staff should be able to ask to figure out who truly deserves that status and who’s gaming the system.

The Tea Party Patriots of Central Pennsylvania are seeking 501(c)(4) status. A groups spokesman said when the organization formed, leaders thought they would do more in terms of endorsing and advancing certain political candidates. But, he said the mission has changed.

“We’re not an overt political group. What we do is, we try to educate people as well as we can about our issues,” said Allen McCormack, who’s on the group’s steering committee. “As our group has evolved, we’ve really focused in on issues. What our group stands for is: constitutionally limited government, fiscal responsibility and free markets.”

He said the scandal could have a “chilling effect” on groups across the political spectrum. He described his group’s conversations with the IRS as “strange” saying employees used a lot of “stilted language.” But, he doesn’t feel his group has been unduly targeted.

Epstein said the focus on smaller organizations was misplaced.

“It’s not that the IRS is off track in general. It’s that the IRS has lost focus,” he said. “I think people need to distinguish the forest from the trees. There is an issue out there, and that issue is that there’s a lot of corporations using non-profits as a shell.”