Senate Hearing Highlights Threats of IRS Abuse

We talk often here about the importance of the right to give anonymously in fostering our vibrant civil society. This right once again came under fire in a Senate Finance subcommittee hearing Wednesday as Chairman Sheldon Whitehouse slammed so-called “dark money” in politics and called for increased disclosure of nonprofit donors. Of course, such disclosure would chill speech and free association. As former Federal Election Commission (FEC) Chairman Brad Smith noted in his well-informed testimony, the IRS has an unfortunate history of targeting political opponents with the information groups are forced to disclose to the agency. While the hearing examined various perspectives on whether any political activity should affect the tax-exempt status of nonprofit organizations, Smith’s poignant reminder of the agency’s politically-motivated decisions – and its power to award or revoke tax exemption – should give pause to anyone relying on Washington bureaucrats to regulate the charitable sector.

Smith, who was joined by University of Pittsburgh Associate Law Professor Philip Hackney, Former FEC Chair Ann Ravel and Capital Research Center President Scott Walter, opened his testimony by noting his last invitation to testify before the committee, in 2013, occurred merely weeks before the bombshell revelation that the IRS deliberately tried to deny tax-exempt status to conservative organizations affiliated with the Tea Party movement. This politically selective denial of tax status chilled the speech of dozens of conservative advocacy groups during consequential national policy debates, denying Americans the diversity of voices necessary in a pluralistic democracy.

Of course, the 2013 scandal was not the first of its kind for the IRS (nor the last). In his prepared remarks, Smith noted the long history of indiscriminate IRS abuse, telling the committee:

The IRS has frequently been the tool of choice to harass political opposition. President Franklin Roosevelt used it to harass newspaper publishers, including William Randolph Hearst and Moses Annenberg (publisher of the Philadelphia Inquirer). He also used the IRS investigations to harass political rivals including Huey Long and Father Coughlin, and prominent Republicans including former Treasury Secretary Andrew Mellon. 

Smith continued by saying that, under President Kennedy, the IRS established the “Ideological Organizations Audit Project” to audit and harass the president’s conservative critics. Cynically, the project targeted leftist groups for “balance,” as noted in a letter written by former IRS Commissioner Mortimer Caplin that read in part, “We recognized the sensitivity of just going after [the] right wing, so we wanted to add both left- and right-wing groups for balance.” Inevitably, President Nixon emulated the playbook when his administration provided the IRS with an enemies list to target for enhanced enforcement. 

The excesses of politicized IRS enforcement of the 1960s and 1970s ultimately led Congress to prohibit the IRS from gathering political intelligence during the post-Watergate years. Though that reform was a necessary measure, recent history, such as the agency’s targeting of Tea Party groups, leaks of donor information and leaks of private tax returns, demonstrates a weaponized IRS remains a threat to philanthropists. 

In 2020, IRS rulemaking to repeal the Schedule B form that required most 501(c) organizations to report the names and addresses of their major donors was another positive step toward defanging a potentially weaponized IRS. In an additional victory, the U.S. Supreme Court in 2021 echoed concerns about donor disclosure in a landmark ruling asserting that anonymous giving is a constitutionally protected form of speech. This decision came on the heels of attempts by bureaucrats to burden philanthropy with disclosure mandates. 

Nonetheless, risks to the philanthropic sector from the IRS remain. Most recently, as part of his signature Build Back Better initiative, President Biden sought an additional $80 billion in funding to the IRS to expand its enforcement capabilities, an idea endorsed by Professor Hackney and Commissioner Ravel during the hearing. Sadly, a more assertive IRS enforcement regime would risk ensnaring nonprofits in yet another distracting political battle. 

Consequently, advocates for philanthropy must resist efforts to empower a potentially politicized IRS from imposing onerous burdens on the nonprofit sector. Tax-exempt status should be based on an organization’s fulfillment of its charitable mission, not on the arbitrary whims of unaccountable bureaucrats.