The news that IRS officials were subjecting Tea Party groups applying for tax exempt status to extra scrutiny is genuinely disturbing. For those on the left who disagree, imagine President Bush’s IRS investigating liberal groups in the run-up to the 2004 election. This should be investigated, and lessons should be learned to stop this from happening in the future.
The groups in question were applying for a particular kind of tax exempt status under section 501(c)(4) of the tax code. This is not the designation used by charities, which come under section 501(c)(3). The key difference is that donations to 501(c)(3) charities are tax deductible for the donor, but donations to 501(c)(4) groups are not.
Groups organized under section 501(c)(4) are not allowed to be primarily political. The problem is that IRS regulators do not have a clear definition of what that means. Leaving regulators to enforce the current vague rules sets them up for this kind of scandal, as they try to figure it out for themselves.
The IRS needs to develop a clear test for political activity. This would make enforcing the law a simple matter of calling balls and strikes for the regulators. There are well-established and transparent procedures for agency rule-making, which involve a draft notice of the potential rule, followed by a comment period where the public has a chance to read the proposal and weigh in with concerns. The agency considers those comments and makes revisions as necessary before issuing the final rule. As the improper targeting of Tea Party groups by the IRS is investigated, developing a better rule for political activity should be considered as a way to ensure this doesn’t happen in the future.