Regulation / Tax

‘Well, at least we’ll have company’ The IRS becomes the latest regulatory agency to spotlight the need for reform.

It’s been a tough May for Federal Agencies. Amid a backdrop of scrutiny over potential regulatory missteps in the Texas fertilizer plant explosion, accusations of document concealment at the Environmental Protection Agency, and lengthy congressional hearings into State Department action in the aftermath of the Benghazi terror attacks, the Internal Revenue Service (IRS) finished this week with its own unsettling admission.

Moving to get out in front of the controversy, today the IRS publicly apologized for the conduct of self-described, ‘low-level’ employees in the department’s Cincinnati office that the agency admitted had unfairly burdened conservative organizations with extra scrutiny not accorded to other organizations participating in the 2012 election cycle.

At issue is the tax-exempt status often referred to simply as 501(c)(4), a classification for which applications have grown increasingly in the wake of the Supreme Court’s Citizen’s United decision. The appeal of this exemption is that it allows charitable organizations engaged primarily in promoting the general welfare and common good of the community to supplement their activity by taking part in lobbying efforts and campaign advocacy. It is this flexibility to allocate resources toward active political initiatives that has motivated the pull toward 501(c)(4) status.

During the campaigns of 2012 many Tea-Party organizations and other conservative policy groups claimed that they were being unfairly targeted by the IRS. Their grievances were often quickly discounted by pundits and media outlets as typical political noise. It turns out we should have been paying attention.

To be fair, the text of the 501(c)(4) exemption does not yield a bright-line rule, but rather clothes this increasingly important rule in vague language that would necessarily require tough value judgment by the IRS. The result is a twenty page application that mandates extensive general reporting. In accordance with the Paperwork Reduction Act (PRA) the IRS estimates that this application will require 9,692 organizations to spend 291,542 hours filling out the associated compliance paperwork. This translates to 30 hours per entity. Considering that the financial data portion of the application alone is comprised of 43 sub-parts, this hours-per-entity estimate seems, no pun intended, conservative.

This snapshot of the world of regulatory paperwork highlights the ability of the big-data federal agency to manipulate private behavior. Whether the actions of these Cincinnati employees are the product of scienter, or as the IRS claims, a misguided attempt at efficiency, federal regulators have a problem.

At best, this admission reveals an agency struggling to manage the ever increasing regulatory burden of information collection that has not only firmly clamped down on private enterprise, but has now stunted the ability of agency officials to perform their basic investigatory functions without making short-sighted efficiency decisions that penalize the public.

Worse still, the vagaries of federal paperwork obligations have opened the door to concerted manipulation of public behavior by those with ulterior motives.

Either way, this incident taken together with the cumulative impact of this spring’s onslaught of regulatory agency controversies, demonstrates an increasingly apparent lack of oversight.  Not only were these mistakes made but the IRS has also raised the question, by claiming that they addressed the issue last year, of why the public is learning of this systemic lapse in judgment now?

These actions are not without injury, for non-profit organizations which are characteristically short-staffed and supported by limited resources, the continued dedication of employees to answering the dogged requests of regulators for information likely impacted the ability of these organizations to operate effectively.

This post does not portend to offer a solution to what is increasingly becoming a very concerning problem. However the debate that has begun over the need to reform these federal regulatory agencies must continue.

“Mistakes were made,” the IRS told the public today. To miss the growing call to examine how this country regulates would be to turn an agency’s mistake into a government’s failure.