The Internal Revenue Service (IRS) is tasked with ensuring Americans follow tax laws. The IRS not only audits everyday Americans and foreign nationals with US tax liabilities but also maintains the power to investigate wealthy individuals and corporations for tax avoidance or other forms of malfeasance. Despite its crucial role in enforcing federal taxes laws (or, more aptly, because of this role), Republican austerity has systematically dismantled the IRS over the past decade. When accounting for inflation, the IRS has lost over $2 billion in annual funding between 2010 and 2020. The resulting loss of capacity not only has made it easier for the rich to avoid paying their taxes, it has also led to the disproportionate auditing of certain poor Americans. Importantly, however, the loss of capacity coupled with weak leadership has also created an effectively oversight-free environment for tax-exempt organizations and those institutions which apply for tax-exempt status. Rebuilding the IRS must be a priority for the Biden administration not only for the revenue it will generate but because of its role in protecting democracy.
Background
The IRS has suffered from a decline in full time staff in recent decades, experiencing a precipitous drop in staffing levels between fiscal year (FY) 2010 and FY 2019 when the agency lost a combined 29,618 full-time employees. Between FY 2018 and FY 2019 the IRS hired a scant net 1,593 employees, bringing the total number of full-time employees (including seasonal staff) to 78,004. This hiring did little to stem the loss of experienced IRS officers and agents, as the agency lost a significant portion over the same period. In the coming years, should trends continue, the IRS is expected to lose even more staff as a large portion of its aging staff nears retirement age. An examination in 2020 discovered that up to 31 percent of IRS employees were eligible to retire by 2024. The loss of these experienced auditors and agents will wreak more havoc than can be understood through pure staffing numbers, particularly on more complex financial audits, as the institution will be drained of experience in addition to staff.
Further, the decline in IRS staffing and its diminished investigative capacity has been coupled with leadership intent on abdicating any responsibility to enforce US tax law, at least on those most intent to violate it. Under the leadership of Charles Rettig, the current IRS Commissioner who was appointed by Donald Trump in 2018,, the IRS has reduced its already historically low audits of wealthy Americans while holding the rate of audits on low income households relatively steady. This is no surprise to those with knowledge of Commissioner Rettig, who built his career as a tax lawyer in Beverly Hills by parrying IRS audits of his wealthy clients, helping them dodge US tax law. Despite his clear allegiance to the wealthy and previous statements against the IRS doing its basic due-diligence, Rettig has continued to serve well into the Biden administration.
501(c)(4) Tax Exempt Organizations
Campaign finance reform has become a focus for many politicians eager to reverse the influence of Citizens United and other court cases that opened the floodgates for corporations, wealthy individuals, and PACs to effectively buy elections. This effort for reform is popular, too, with 77 percent of Americans supporting new laws to limit outside spending on politician campaigns. But one under-discussed aspect of campaign finance reform is the role the IRS plays in this fight and how the agency could potentially reduce outside expenditures without ever passing new legislation. 501(c)(4) tax exempt organizations are a large source of “dark money,” i.e., anonymous outside campaign expenditures. . These organizations are “social welfare organizations,” distinguished from the other main category of tax-exempt organizations, 501(c)(3)s, by their somewhat higher allowance for political activity.
Registered 501(c)(4)s are also not required to disclose their donors so long as political expenditures are not the organizations’ primary activity. While this rule is somewhat difficult to enforce, the IRS has almost completely abdicated its oversight responsibilities regarding tax-exempt organizations in recent years. This tendency toward inaction accelerated following bad-faith conservative outcry regarding purported anti-conservative bias at the agency. Construction of that “scandal” resulted in the ouster of the then-Director for the Exempt Organizations Unit, Lois Lerner, despite the core elements of the alleged bias ultimately being disproven.
ProPublica reported in 2019 that despite 2,000 claims of 501(c)(4)’s violating the primary activity rules, not a single one was investigated in the two-year window between 2017 and 2019. In 2017, out of almost 1,500 organizations that filed for 501(c)(4) status, all but three were granted their applications, a staggeringly-low .002 percent rejection rate. With limited resources, the IRS has seemingly decided that the enforcement of existing US tax code regarding these tax-exempt organizations is simply less important than performing hundreds of thousands of audits on poor Earned Income Tax Credit claimants each year.
The IRS’s abandonment of its obligations to oversee tax-exempt organizations is a glaring shortcoming in the effort to build a more transparent campaign finance regime. It also is an opportunity for Biden to make an impact upon the campaign finance system without changing current law or facing down the Senate’s archaic procedural rules. By appointing officials intent on reversing the lack of oversight to the IRS Oversight Board and by replacing Trump’s handpicked IRS commissioner, Biden can make a serious impact on dark money spending. Biden also can push Congress to invest in a strong IRS, appropriating more funds to the agency and providing them with the budget necessary to both rebuild staff levels lost over the past decade and hire additional staff to accommodate for the growing tax base and the agency’s steadily growing list of responsibilities. With the midterm elections fast approaching and Democrats’ narrow hold on the Senate majority, the Biden administration should take advantage of laws already on the books to uphold his campaign promise to make American political campaign spending more transparent and guard against the corrupting influence of money in politics.
Header image: “Top of the Internal Revenue Service Building” by IceNineJon is licensed under CC BY-NC-ND 2.0