The Not-So-Inside Skinny on the IRS Scandal

President Obama was shocked – shocked! – to learn from press reports that the Internal Revenue Service has been singling out his political opponents for special scrutiny.

Clearly, the top-secret Daily Brief that the CIA prepares for the leader of the free world is a major waste of time. (Even Obama seems to think so, judging from last year’s reports that he skips nearly half of his scheduled briefings.) If the president cares to know what his own administration is doing, he might find it useful to read this column instead. We’re here for you every weekday, Mr. President.

I’m not in Washington, and I’m not in the government, yet I knew and wrote 14 months ago that the IRS had improperly aligned itself with Democrats who were desperate to circumvent the Supreme Court’s Citizens United decision. The latest gambit was to challenge requests for tax-exempt status by non-profit organizations with conservative viewpoints. The IRS commissioner at the time, Douglas Shulman, denied any such political discrimination, but this was unpersuasive in light of his agency’s short-lived attack a year earlier on wealthy donors to such groups, whom the IRS ludicrously threatened to slap with gift taxes.

“Once again, I will confidently predict that the Service will be forced to back off,” I wrote last year, after the targeted non-profits complained about intrusive and irrelevant IRS questioning. “But at the rate things are going, it may not happen before the agency’s professional reputation takes a significant hit, and that is not a good thing for the country.”

Lo and behold, last week the IRS belatedly acknowledged that it inappropriately targeted conservative political groups that applied for tax-exempt status, for which they are eligible under Section 501(c)(4) of the Internal Revenue Code, before and during the 2012 campaign. Lois Lerner, the IRS official who oversees tax-exempt groups, apologized twice but said that the actions, while wrong, were not politically motivated.

Things got worse for the IRS and the Democrats over the weekend. Reuters obtained part of a report that is expected to become public soon, which indicates that, at various times, the IRS targeted certain groups based on “issues” criteria, such as references to government spending or criticism of the current administration. The report also indicates that Lerner was made aware of the targeting as early as June 2011 (when the IRS was also making its gift tax threats).

The president claimed prior ignorance at a news conference on Monday, denounced the IRS behavior as “outrageous” and promised not to tolerate it in the future. I am not sure exactly what he meant, but I hope it is something different than when he pledged not to tolerate the use of chemical weapons in Syria or the development of nuclear arms in North Korea and Iran. I don’t think U.N. Security Council resolutions will work any better at the IRS.

The tax agency’s contention that mere low-level employees in Cincinnati misinterpreted the law, acting alone and with no political motivation or direction, is absurd on its face. The various attacks on politically active 501(c)(4) groups were reported on the front pages of major newspapers and were the subject of congressional inquiries. Though the IRS positions were obviously deeply flawed – any tax professional, myself included, could see that – they fit a pattern of resistance that followed Citizens United, which the administration has bitterly opposed, from the president down.

Whether the policy was directed from the top or initiated at the grass roots (IRS employees belong to a Treasury employees union that does not consider Republicans friendly) and merely permitted by those who could have stopped it, frustrating political activity by conservative-aligned groups was clearly its objective.

Even now, the IRS tries to justify itself on grounds that political activity by a not-for-profit is not authorized as part of a “social welfare” objective. Yet AARP, the National Rifle Association and MoveOn.org are all 501(c)(4) groups, and all are major political forces. Rightly so.

Any discussion of social welfare automatically involves policy. Policy involves politics, and politics involves the First Amendment. Section 501(c)(4) itself does not proscribe political activity by social welfare organizations. The relevant IRS regulation only limits activity in favor of specific candidates, which is debatably valid under the First Amendment, but does not limit groups from taking positions on political issues, an activity that is clearly protected.

Former IRS Commissioner Donald Alexander stood up to Richard Nixon when the former president tried to co-opt the agency into harassing his opponents. The House of Representatives included the misuse of the IRS in its articles of impeachment against Nixon.

But is there any personal accountability for the latest IRS malfeasance? Not thus far. The agency as a whole says it is “sorry” and seems prepared to throw its still-unidentified staff members in Cincinnati under the bus, but not a single individual currently or formerly serving in government has stepped forward to say, “It was my fault.”

We’ll see where the buck stops, but one thing is certain: It doesn’t stop in Cincinnati.

About Larry M. Elkin 564 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

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