The Weaponization of the IRS
The law and norms protecting against abuse of IRS power come under attack—even as one court calls attention to the dangers.
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Donald Trump has demonstrated his administration’s programmatic commitment to weaponizing the government to settle scores with political adversaries or weaken their opposition to him and his policies. Much of the fiercest public controversy has involved the Department of Justice and, so far, the president’s direction of the criminal prosecutions of old foes such as former FBI Director James Comey and New York State Attorney Letitia James. Now, according to Wall Street Journal reporting, his administration is turning its attention to an overhaul of the Internal Revenue Service (IRS) that would enable the agency to “pursue criminal inquiries of left-leaning groups” and “major Democratic donors.”
As reported, this is a full-on assault on a long-standing policy, expressed in law and norm, that the IRS should be kept clear of political misuse. President Nixon was impeached for attempting to abuse the IRS’s power for political gain. Following that incident, and with overwhelming bipartisan support, the tax code was amended to prohibit “the President, the Vice President, any employee of the executive office of the President, and any employee of the executive office of the Vice President” from “conduct[ing] or terminat[ing] an audit or other investigation of any particular taxpayer with respect to the tax liability of such taxpayer.” The law imposes fines and imprisonment as penalties for violations, and it requires that any employee who receives any request or directive to violate the statute report it to the Inspector General for Tax Administration.
It is also a striking development because it comes some years after Republicans in Congress investigated alleged political abuse of the Service’s authority to grant or deny exemptions to nonprofits engaged in various forms of issue advocacy. To simplify a complicated story, the IRS Inspector General found that the IRS had discriminated against conservative organizations in the application of its power over exemptions. Democrats joined Republicans in decrying any such political misuse of tax regulatory authority but argued that the record pointed to “equal opportunity mismanagement and equal opportunity bedlam” that also affected progressive organizations. Congress subsequently enacted a freeze on all further rulemaking activity in this area.
Now the Trump administration appears to be breaking with the bipartisan consensus that the IRS should be insulated from politics. And it is notable that reports of this weaponization policy have surfaced within days of a federal court decision, in Freedom Path v. Internal Revenue Service, that highlighted the dangers of the IRS’s power to grant or deny exemptions from tax for organizations active in the political process. The case brought by Freedom Path, a nonprofit social-welfare organization that supports conservative fiscal policies and has financed ads calling for repeal of the Affordable Care Act, illustrates how this intersection of tax regulation and politics is a problem at all times—and, now, one that could become far worse under the reported plans for IRS weaponization.
Freedom Path and Tax Exemptions for Social Welfare Organizations
Under 501(c)(4) of the Code, the Internal Revenue Code provides for an exemption from tax for “civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare.” These organizations may advocate for particular public policies and lobby directly for their enactment into law, but they may not engage in “direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office.” In deciding whether to recognize these organizations as qualified for the exemption, the IRS reviews their organizational “social welfare” purposes and activities to determine whether they meet the “no campaign activity” test.
The law complicates this task, because while the statute seems to require the organizations to avoid all campaign activity, the IRS regulations allow for some such activity, provided that it does not rise to the level of the organizations’ primary purpose. And how that primary purpose requirement is satisfied depends on whether the campaign activity is “more than . . . insubstantial.” The IRS has declined to say how much is too much, and its regulations offer no clear, quantifiable benchmark. It declines, for example, to adopt and apply a fixed percentage in determining the amount of political activity, among its other activities, a nonprofit social welfare organization has engaged in.
There is even more uncertainty in how the test for “political activity” would be applied, underscoring the IRS’s additional broad discretion. Currently, the agency’s analysis is guided by an inquiry into all “facts and circumstances,” employing an 11-factor test. The IRS adopted this approach to help distinguish between advocacy on public policy—which qualifies as permissible “social welfare” activity—and advocacy intended or timed to influence an election. In the case of public communications, such as ads or mailings, the question may be easily resolved if these call expressly for a candidate’s election or defeat. But the legal issue becomes more complicated when the candidate is also a government official who may be voting on a piece of legislation during a period before an election and a public communication supporting or criticizing his or her position could be considered advocacy on a public policy matter, not electioneering. The Service then applies all the other factors, stressing that the 11 factors it has identified are not exclusive. It may choose to devise and apply other such factors as it sees fit.
In Freedom Path, a U.S. District Court for the District of Columbia concluded that this regulation was unconstitutionally in violation of nonprofit organizations’ First Amendment rights of speech and association. It cited long-standing precedent for the proposition that the discretion afforded to the IRS under these highly imprecise tests gave “latitude to individual IRS officials to pass judgment on the content and quality of an applicant’s views and goals and therefore to discriminate against those engaged in protected First Amendment activities.” The court rejected the Service’s position that all that mattered was “actual” discrimination, not the risk of it: “the possibility of viewpoint discrimination,” it concluded, was sufficient (emphasis in the original). But the court was unable to conclude what law it should be applying in considering whether Freedom Path was entitled to a tax exemption, and it called for further briefing.
In the meantime, because of Congress’s freeze of rulemakings on these issues, the IRS’s hands cannot now fix the constitutional problems in current rules identified in Freedom Path. Organizations like Freedom Path must litigate under current rules to address IRS enforcement issues, but the rules themselves, the very source of the problem, remain in place, with the IRS powerless to either enforce or amend them. In praising the decision in the Wall Street Journal, Bradley Smith, Chairman of the Free Speech Institute and former Chairman of the Federal Election Commission, and his co-author, Eric Wang, note the regulatory stalemate and urge Congress to free the IRS to implement the Freedom Path ruling. They also favor broader reform, which may be most effective if it simply relieves these social welfare organizations of the political activity restriction altogether.
Conclusion
There is a solid case for a strong version of reform: remove the occasion for the IRS’s involvement in politics by removing altogether its power to deny or grant exemptions based on findings of impermissible “political” activity. There may be exceptions. For example, religious, educational, and other types of charitable organizations are exempt from tax under a separate section of the Code, 501(c)(3), and are subject to a stringent prohibition on political campaign activity. In those cases, however, their donors—unlike donors to (c)(4) social welfare organizations—are entitled to take a tax deduction for their financial support. Where a tax subsidy is involved, it seems appropriate for the IRS to enforce the “no political campaign activity” restriction. But clear standards would still be required to guard against the danger of discriminatory enforcement.
The pressing question now is whether Congress will act through reform and vigorous oversight to address both the standing problem of the IRS’s dangerous involvement in politics, as illustrated by Freedom Path, and the looming threat of aggressive weaponization of that authority. This was once a bipartisan issue, with Republicans leading the charge.