The IRS has been under fire recently after it was found to target conservative-leaning organizations that applied for tax-exempt status. The scandal has taken many twists and turns and involves complex portions of the Internal Revenue Code.  The acting IRS commissioner has resigned, the IRS Director of Exempt Organizations has been put on administrative leave, and lawmakers in Washington are discussing ways to help ensure that individuals and groups will not be scrutinized by the tax agency because of their political views.

Question:How did the scandal get started?

Answer: Members of Congress were concerned that the IRS was unfairly handling applications for tax-exempt status based on names with phrases and words such as Tea Party and Patriot.

In response, the Treasury Inspector General for Tax Administration (TIGTA), an oversight body, audited IRS practices to see if certain groups were targeted. On May 14, TIGTA issued a report that stated “the IRS began using inappropriate criteria to identify organizations applying for tax-exempt status” beginning in early 2010.

In addition, TIGTA found that:

·   “Ineffective management” at the IRS allowed the inappropriate criteria to stay in place for more than 18 months;

·   The practices resulted in substantial delays in processing certain applications; and

·   The IRS allowed unnecessary requests for additional information to be issued.

“What is now completely clear is that the management and oversight of the agency’s handling of tax exemption applications have completely failed the American people,” said Rep. Sander Levin (D-Mich.), a member of the House Ways and Means Committee.

Exempt applications sat for years, Levin said. Work on them stopped for 13 months while one department waited to hear back from another department.

Question: Do all tax-exempt organizations follow the same tax rules?

Answer: No. There are different types of tax-exempt groups defined in the tax law under Section 501(c). An Internal Revenue Code Section 501(c)(3) organization is a charity that is prohibited from participating in political campaigns. There are also Section 501(c)(4) social welfare organizations and civic leagues; Section 501(c)(5) agricultural and labor organizations; Section 501(c)(6) business leagues and trade associations; Section 501(c)(7) Social and Recreation Clubs; as well as other types of tax-exempt groups.

Here is a chart from the TIGTA report on the characteristics of some types of tax-exempt organizations:

Question: Do all groups need to apply to the IRS for approval?

Answer: No. As shown in the above chart, Section 501(c)(3) organizations are required to get IRS approval. Others, including section 501(c)(4) organizations, are not required to obtain approval, but often seek it. Receiving a tax-exempt determination letter from the IRS allows them to obtain certain benefits such as exemption from certain state taxes and non-profit mailing privileges.

Question: What is the IRS looking for when it approves applications?

Answer: According to the IRS, it determines whether an organization “meets the legal requirements for tax-exempt status,” including the amount of political campaign intervention.

Question: What type of 501(c) organizations were the Tea Party and other conservative groups applying for?

Answer: The groups were applying for 501(c)(4) status. These organizations are operated on a non-profit basis and organized exclusively to promote social welfare. The IRS asks groups to submit evidence with their applications showing they “will operate primarily to further (in some way) the common good and general welfare of the people of the community (such as by bringing about civic betterment and social improvements).”

Examples of social welfare organizations, according to the IRS, are homeowners’ associations and volunteer fire companies.

Question: Was the IRS performing audits of the conservative groups?

Answer: No. According to the IRS, the issues only “relate to the approval process of organizations that applied to the IRS for recognition of tax-exempt status.”

Question: How does an organization apply to become tax-exempt?

Answer: According to the IRS, applications for tax-exempt status begin by filing the appropriate IRS form, or in the case of certain organizations, submitting a letter. There is a fee required for filing, which ranges from $400 to $850, based on an organization’s gross receipts ($3,000 for group exemption letters).

All organizations applying for tax-exempt status must have an Employer Identification Number (EIN).

The application asks for all types of information including:

·   Applicant identification such as name, address, phone number, contact person, date formed, month the annual accounting period ends and more.

·   Activities carried on by the organization and operational information

·   Financial data, such as revenue, expenses, assets, salaries, benefits, office space, loans and more.

Important: If you are interested in obtaining 501(c) status, consult with your tax adviser for assistance with filing the form since it can be very complex.

The application must be signed by an officer, trustee, or another person authorized by a power of attorney. The organization may be able to appeal if the IRS does not issue a favorable determination letter.

Question: How has the IRS responded to the controversy?

Answer: Current and former IRS officials have testified before Congress. IRS Acting Commissioner Steven Miller, who resigned in the wake of the scandal, apologized in testimony “for the mistakes that we made and the poor service that we provided.”

In addition, the IRS answered some questions on its website. The tax agency, which stated the number of 501(c)(4) applications has “more than doubled in recent years,” added:

“IRS employees had seen cases of organizations with the name Tea Party in which political activity was an issue that needed to be reviewed for compliance with legal requirements. Because of the increased inventory of applications, this inappropriate criterion was used as a shortcut to centralize similar cases,” the IRS stated.

However, the IRS added it has found “no indication of political bias.”

Question:What happens next?

Answer: Congress continues to hold hearings to find out who knew what and when they became aware of it. The Department of Justice is investigating whether any laws were broken. TIGTA has recommended corrective actions the IRS should make to address the issues it uncovered. Organizations that believe they were targeted have announced they are considering filing lawsuits against the IRS.

There are likely to be more twists and turns in the future. Stay tuned.