But the particular bias people are angry about is the opposite of the bias they should be angry about. The problem wasn't that the IRS was skeptical of tea party groups registering as 501(c)4s. It's that it hasn't been skeptical of Organizing for America, Crossroads GPS, Priorities USA and Heritage Action Fund registering as 501(c)4s. The IRS should be treating all these groups equally and appropriately -- which would mean much more harshly.
Instead, the IRS has permitted 501(c)4s to grow into something monstrous. And if they cower in the aftermath of this embarrassment, it might make matters even worse.
Social welfare organizations have a couple of neat advantages. They're tax-exempt -- which means, in effect, that your tax dollars subsidize them. And thanks to a 1958 court case, they don't have to disclose their donors.
But they're not meant to be political. A 2003 IRS document says that "organizations that promote social welfare should primarily promote the common good and general welfare of the people of the community as a whole." It goes on to give pages and pages of examples. "A corporation organized for the purpose of rehabilitating and placing unemployed persons over a stated age," for instance. Or "a corporation formed to provide a school district with a stadium." "A memorial association organized to study and develop methods of achieving simplicity and dignity in funeral and memorial services," qualifies, as does "an organization that conducts an annual festival centered around regional customs and traditions."
Nowhere does the IRS mention "an organization formed by top political operatives for the clear and obvious purpose of reelecting or defeating the president." But that's what 501(c)4s have become. According to data collected by OpenSecrets.org, 501(c)4s spent $92 million in the 2010 election. They spent $254 million in the 2012 election. That's a lot of social welfare going to the good people who live in swing states and competitive districts.
The 501(c)4s aren't superPACs. But many superPACs also have a 501(c)4. The reason? The 501(c)4s keep donors anonymous. "The only reason to have two of these is if you wanted to have one that allows people and entities to avoid disclosure," explains Rick Hasen, an election-law expert at the University of California at Irvine.
The culprit here is partly the Citizens United and SpeechNow decisions which lifted the contribution limits on wealthy individuals, corporations, and unions. But it's also the IRS's reticence to regulate the murky world of 501(c)4s -- a reticence partly attributable to the organization's fear of blow-ups just like this one.
Karl Rove wasn't the first to try to use the 501(c)4 to solicit anonymous political donations. But he was the first big player to do it. And the expectation was that he'd had a clever idea that the IRS would quickly reject. "A lot of people thought Rove would get smacked back by the IRS," says Hasen. "It didn’t happen. And then 501(c)4s exploded."
Now everyone from Moveon.org to the Heritage Foundation has a 501(c)4. The number of 501(c)4 applications the IRS is getting more than doubled in recent years, rising from 1,500 to more than 3,400. That, by the way, is their explanation for the added scrutiny of the tea party groups: They weren't trying to look specifically at conservatives. They were just trying to separate out the organizations that seemed likely to be overly political. But that simply speaks to the underlying issue: The IRS hasn't set down clear rules -- either internally or externally -- for dealing with these new organizations.
"This is crystallizing the problem," says Sheila Krumholz, director of Center for Responsive Politics. "On the one hand we want the IRS to fulfill its oversight duties. On the other hand there’s so much uncertainty about what the rules are and what they should be. What are those duties? What should they have been doing? They’re saying they made mistakes. They’ll be held to account for those. But the larger problem still is present."
The IRS, for instance, has ruled that social welfare groups can't be primarily political. But what does it mean to be primarily political? Right now, most groups are assuming it means spending more than half your money on political activities. But no one really knows where their money is going.
"There's no oversight," says Krumholz. "We can try and divine it based on expenditures we see. We’ve been doing a bit of that and finding there’s a lot of disagreement between the expenditures reported to the IRS and the expenditures reported to the FEC. But even if some of the money at Priorities USA or American Crossroads GPS might arguably not be directly political, it will be supportive of their political mission. Their mission is political."
Their missions are more than political. These groups are, in many cases, clearly birthed by political parties and campaigns. Karl Rove's Crossroads acted like a shadow Republican National Committee in the 2012 elections. Bill Burton's Priorities USA was clearly dedicated to reelecting President Obama. The idea that their 501(c)4s weren't primarily devoted to influencing American politics defies belief. And the same could be said for the tea party groups formed after the 2008 election, or the 501(c)4 created by the Center for American Progress.
The danger is that this experience will simply make the IRS even more terrified of regulating 501(c)4s. Recall that none of the tea party groups scrutinized by the agency actually lost the 501(c)4 designation. Even at their most attentive, the IRS is treating these groups with kid gloves. Now they're going to be tempted to leave them almost entirely alone.