IRS Spared Some Budget Cuts But Loses Power to Curb Nonprofits

For two years, Republicans in Congress have pursued budget cuts at the Internal Revenue Service as punishment for its mishandling of applications for tax-exempt status.

But some of those cuts—long protested by Commissioner John Koskinen and others as destructive to taxpayer service—would be restored under the 2,000-page $1.1 trillion omnibus spending bill Congress appears ready to approve on Friday. At the same time, the agency’s ability to further regulate permitted political activities by 501(c)4 social welfare groups would be negated under the bill.

IRS would receive $11.23 billion in fiscal 2016, a hike of some $290 million over the current level—specifically for the issues the agency has struggled with, such as customer service, identity theft and cybersecurity. The National Treasury Employees Union called that amount “an improvement” over the nearly $838 million cut that House Republicans had approved, though it is less than the $12.9 billion total budget President Obama had requested in February.

The bill also specifies that during fiscal 2016 “none of the funds made available in this or any other act may be used by the Department of the Treasury, including the Internal Revenue Service, to issue, revise, or finalize any regulation, revenue ruling, or other guidance not limited to a particular taxpayer relating to the standard which is used to determine whether an organization is operated exclusively for the promotion of social welfare for purposes of section 501(c)(4) of the Internal Revenue Code.”

A proposed rule the IRS released in November 2013 drew thousands of mostly negative comments and was withdrawn.

Also in the bill are new limits on who at the IRS gets bonuses and re-hiring of former employees with tax issues. And a separate bill moving through Congress to extend multiple tax provisions prohibits IRS from imposing the gift tax on contributions to nonprofit organizations.

House Speaker Paul Ryan, R-Wis., praised the provision. “Congress is stopping the IRS from suppressing civic participation in 501(c)(4) organizations,” he said. “We have found that the IRS meddles in the political affairs of people. They turned the IRS into a political weapon in 2012, and we are not going to let them turn the IRS into a political weapon again.”

Less pleased were advocates for greater disclosure of campaign spending. Fred Wertheimer, president of Democracy 21, issued a statement expressing deep disappointment. “The damaging campaign finance riders incorporated into the final omnibus bill include a rider that will prevent the IRS from issuing new regulations to govern the campaign activities of 501(c)(4) groups. Such regulations could have addressed the current problem of 501(c)(4) groups engaging in far more campaign activity than the law allows in order to launder hundreds of millions of dollars in secret contributions into federal elections.”

Attorneys had mixed interpretations. Marcus Owens, former head of the IRS Exempt Organizations division and now a partner with Loeb and Loeb, told Government Executive, “This isn’t the first time Congress has precluded the use of money to finalize or implement a particular piece of Treasury guidance.” He cited legislation from the 1980s that blocked an IRS revenue procedure banning discrimination at tax-exempt private schools. “This is clearly an attempt to prevent the IRS from moving aggressively to enforce the rules generally against political activity by 501(c)4’s. But that regulation wouldn’t actually be the instrument by which the government would move to take an adverse action, he added, citing decades of revenue rulings, regulations and court decisions. “This effort does nothing to effect actual enforcement actions the IRS might take.” In addition, a new appropriations bill the following year could change it.

John Pomeranz, an attorney with Harmon, Curran, Spielberg and Eisenberg, LLP, complained that “hypocrites in Congress have decided to freeze any effort to fix” the problem that, as he put it, delayed many applications for tax-exempt status.

“There are certainly other provisions, good and bad, in this bill and the related tax-extender bill that are relevant to exempt organizations, but this is the one that seems to me the most short-sighted and cynical of all of them,” he said. “I can only hope that the IRS, thwarted in its efforts to create more reasonable rules, doubles down on its enforcement efforts targeting politically active nonprofits (of all ideologies) under the existing vague ‘facts and circumstances’ analysis.”

Paul Streckfus, a tax attorney who edits a newsletter on exempt organizations, doesn’t think the funding ban is all bad. “I never thought Commissioner Koskinen's plan to get the regs done in 2016, to be effective in 2017, had a ghost of a chance. Better to let work on the revised proposed regs slide, as now they must, into 2017 at the earliest,” he said. “The 2016 elections may either help or harm any future efforts, depending on the outcomes.”