Asymmetrical Information - Megan McArdle

05.13.13

Why Did the IRS Target Conservative Groups?

Was it a legitimate reaction to an explosion of tax-exempt electioneering?

Kevin Drum outlines what I take to be the emerging case for the defense of the IRS agents who applied special scrutiny to tax-exemption applications from Tea Party groups:

Roughly speaking, what seems to have happened is that three years ago the IRS was facing an explosion of newly formed 501(c)4 groups claiming tax exempt status, something that’s legal only for groups that are primarily engaged in promoting education or social welfare, not electioneering. So some folks in the Cincinnati office tried to come up with a quick filter to flag groups that deserved extra scrutiny. But what should that flag be? Well, three years ago the explosion happened to be among tea party groups, so they began searching their database “for applications with ‘Tea Party,’ ‘Patriots,’ or ‘9/12’ in the organization’s name as well as other ‘political sounding’ names.” This was dumb, and when senior leaders found out about it, they put a quick stop to it ...

The problem is that the explosion of 501(c)4 groups is a genuine problem: they really have grown like kudzu, lots of them really are used primarily as electioneering vehicles, and the IRS has been either unwilling or unable to regulate them properly. So the fact that some of the folks responsible for processing these applications were looking for a way to flag potentially dubious groups is sort of understandable.

However, if I were accused of this thing, and this was my defense, I’d be looking forward to a guilty verdict from any semicompetent jury.  

For one thing, though the IRS is claiming that they told employees to knock it off in 2011, they went back and came up with an almost equally troubling set of standards in January 2012:

The IRS adopted a more generic set of standards the next month, but it changed the criteria again in January 2012, deciding to look at “political action type organizations involved in limiting/expanding Government, educating on the Constitution and Bill of Rights, social economic reform movement,” according to the audit documents.

But even if that weren’t the case, this would be an incredibly stupid defense. It’s not like the IRS needs a way to flag the new groups that were created in the wake of the Citizens United decision. They have all the information they need to do that without any special filter. They can search for the date of the application. If what you’re concerned about is that most of the new groups being created are in fact thinly disguised electioneering vehicles, then what you want to do is take a random sample of the new groups, review them, and see what percentage turn out to be self-dealing or otherwise engaged in inappropriate behavior.  

Video screenshot

On Monday, President Obama said the IRS had to be held fully accountable.

Instead, the IRS method for dealing with the volume was to take an unrandom sample. And how did they decide that you deserved extra scrutiny? Because you had “tea party” or “patriot” in your name. Since the Tea Party was a brand-new movement in 2010, they couldn’t possibly have had any data indicating that such groups were more likely to be doing something improper. So how exactly did they come up with this filter? There is no answer that does not ultimately resolve to “political bias.”

If Tea Party groups really were driving much of the post–Citizens United explosion, there was no need to specifically search for the words “tea party” or “patriot,” because those words would naturally be overrepresented in a random sample of new applications. The reason you specifically search for those words is that you want to target those groups specifically, and not, say, applications with “Progress,” “Organizing,” or “Action” in them.  

For that matter, even if they also targeted liberal keywords, it would still be just as big a problem. It’s hard to think of any reasonable standard for extra review that starts with “I didn’t like their name.”

Further evidence: given that they don’t seem to have taken action against any of the groups they hassled, it seems clear that this was, in fact, an objectively bad filter.

Rather than learning from this, the IRS instead did basically the same thing again, apparently on the logic that people who dislike taxes or complain about the government can’t possibly be promoting social welfare.  

Now, maybe 501(c) organizations are a big scam and don’t promote social welfare and we should get rid of them, as I’ve seen some columnists complain. But this doesn’t actually seem like the right time to have that conversation. Rather, it seems like a distraction from the fact that IRS employees decided that groups that advocated for smaller government were somehow specially untrustworthy, and acted on this opinion by singling them out for extra bureaucratic hassles. This is hugely disturbing, and right now our focus should be on making sure it doesn’t happen again, not reforming the laws governing tax-exempt organizations.