by George White
George White is a Tax Notes contributing editor and retired national tax partner at Ernst & Young LLP. Recently he was with the American Institute of Certified Public Accountants. An attorney and CPA, White is the author of several publications on consolidated returns and tax accounting and is an adjunct professor at the George Washington University School of Business, where he teaches graduate courses in tax accounting and corporate tax.
White comments on how, despite current friction, relations between the IRS Tax-Exempt and Government Entities Division and exempt organization practitioners traditionally have been quite cordial.
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The ongoing and expanding controversy over how the IRS handled section 501(c)(4) exemption requests has brought into focus the practices of the Tax-Exempt and Government Entities Division. But it has also presented a distorted picture of the relationship between the practitioners who represent section 501(c)(4) applicants and the agency employees who oversee exempt organizations.
The recent congressional hearings and news coverage of the scandal might give the impression of a bare-knuckled brawl between EO practitioners and TE/GE. That image is unrealistic, based on my experience in dealing with TE/GE while serving as a staffer on the American Institute of Certified Public Accountants' EO Committee. My sense of the relationship between practitioners and TE/GE was that it was generally collegial. That spirit was fostered, if not initiated, by Lois Lerner, the now suspended director of the IRS's EO function. (Prior coverage: Tax Notes, May 27, 2013, p. 990.)
That collegial spirit helps explain why the IRS used a choreographed exchange between Lerner and an EO practitioner at a May 10 session of the American Bar Association Section of Taxation meeting in Washington to break the news about the EO function's inappropriate application practices. Those following the scandal, including lawmakers and general tax practitioners, were probably shocked that the IRS would use a planted question to make such a damaging admission. But it's doubtful that many EO practitioners were surprised that Lerner asked a practitioner to help with such a delicate situation. Collegiality and Lerner's reputation for being a bit thin-skinned meant that few practitioners would have refused her request to ask a loaded question or faulted the practitioner for agreeing to it. The EO function simply has a unique working relationship with those practicing before it -- practitioners know how to get along with Lerner, and they have a vested interest in preserving an atmosphere of collegiality and cooperation.
That relatively cooperative atmosphere stands in contrast to the relationships between other divisions of the IRS and tax practitioners. For example, about five years ago, the IRS in Notice 2007-88, 2007-46 IRB 993, proposed a wholesale revision of how it handles taxpayer requests for changes in accounting methods. The details of the proposal are no longer pertinent because it was quietly abandoned, but not without a less-than-cordial meeting between the AICPA's Tax Accounting Committee, which opposed the proposal, and its primary proponent, then-IRS Chief Counsel Donald Korb. The AICPA's opposition so annoyed Korb that he later described it as motivated by "selfish personal interest." (Prior coverage: Tax Notes, Jan. 19, 2009, p. 331.)
But that kind of exchange isn't typical of the relationship between the EO function and its practitioners, despite Lerner's sometimes prickly attitude.
Lack of Resources
However -- and putting aside the peculiarity of the planted Q&A -- TE/GE does have a big problem. The prevailing view is that the root cause of the current mess is the lack of guidance regarding the rules for 501(c)(4)s. The existing regulations seek to explain the statutory standard on permissible political activity by 501(c)(4)s. The fuzzy line that emerged is that politicking can't be the organization's primary activity. If primary means more than 50 percent, that seems to mean politicking could account for 49.9 percent of the activity (the regs don't explain how to quantify what constitutes "politicking"). But the existing 501(c)(4) regs haven't been updated in over 50 years. (Prior coverage: Tax Notes, May 20, 2013, p. 838.)
The common excuse for the guidance gap is resource constraints, but that's nothing new for government agencies. They're always faced with how to spend budgeted funds. Construction continues apace on the Navy's next mega-billion-dollar nuclear carrier, even as Defense Secretary Chuck Hagel announces furloughs for Department of Defense employees. How is that possible? My son, a Navy "nuke," says the explanation is as simple as it is mind-boggling: Congress has already appropriated the funds for the carrier's construction. No new money is needed.
TE/GE also faced a resource choice in the last decade, albeit on a less grand scale. The regulatory guidance gap had existed since 1959; it was time to bring things up to date. But TE/GE had another priority to consider. Its cornerstone return, Form 990, hadn't been updated in almost 30 years. We know what path TE/GE chose: Leave the regs in limbo and update the form and its accompanying instructions (unlike in other areas of tax law in which form instructions are mostly ignored, the instructions for the revised Form 990 were critical because its questions were open-ended and far more intrusive than those on the old form).
TE/GE asked stakeholders to help in that project. The AICPA's EO Committee and TE/GE held several meetings, most of which were chaired by Lerner and attended by many of her staff. One meeting included a drop-in from Lerner's boss, TE/GE head Steven Miller (yep, that Steven Miller, the first IRS official thrown overboard in the current dust-up).
Hashing out the details of the questions on the form and its instructions took so long that the AICPA suggested delaying the projected rollout date. No can do, said the IRS. TE/GE had been allotted IRS funds to complete the project by the end of the budget cycle. If it wasn't finished on time, the funding authorization would lapse, and the old Form 990 would continue to bump along.
When the AICPA asked why TE/GE couldn't simply request renewed funding for the project, TE/GE staffers said the division didn't rank high among the IRS's budgetary priorities because it processed thousands of returns annually without collecting a dollar of tax.
In other words, money talks -- especially at the budget-constrained IRS.
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