In 2013, the United States Internal Revenue Service (IRS), under the Obama administration, revealed that it had selected political groups applying for tax-exempt status for intensive scrutiny based on their names or political themes. This led to wide condemnation of the agency and triggered several investigations, including a Federal Bureau of Investigation (FBI) criminal probe ordered by United States Attorney General Eric Holder. Conservatives claimed that they were specifically targeted by the IRS, but an exhaustive report released by the Treasury Department's Inspector General in 2017 found that from 2004 to 2013, the IRS used both conservative and liberal keywords to choose targets for further scrutiny.
Initial reports described the selections as nearly exclusively of conservative groups with terms such as "Tea Party" in their names. According to Republican lawmakers, liberal-leaning groups and the Occupy movement had also triggered additional scrutiny, but at a lower rate than conservative groups. The Republican majority on the House Oversight Committee issued a report, which concluded that although some liberal groups were selected for additional review, the scrutiny that these groups received did not amount to targeting when compared to the greater scrutiny received by conservative groups. The report was criticized by the committee's Democratic minority, which said that the report ignored evidence that the IRS used keywords to identify both liberal and conservative groups.
In January 2014, James Comey, who at the time was the FBI director, told Fox News that its investigation had found no evidence so far warranting the filing of federal criminal charges in connection with the controversy, as it had not found any evidence of "enemy hunting", and that the investigation continued. On October 23, 2015, the Justice Department declared that no criminal charges would be filed. On September 8, 2017, the Trump Justice Department declined to reopen the criminal investigation into Lois Lerner, a central figure in the controversy.
In October 2017, the Trump administration agreed to settle a lawsuit filed on behalf of more than four hundred conservative nonprofit groups who claimed that they had been discriminated against by the Internal Revenue Service for an undisclosed amount described by plaintiffs' counsel as "very substantial." The Trump administration also agreed to settle a second lawsuit brought by forty-one conservative organizations with an apology and an admission from the IRS that subjecting them to "heightened scrutiny and inordinate delays" was wrongful.
Background Tax exemption and donor anonymity United States federal tax law, specifically Section 501(c)(4) of the Internal Revenue Code (), exempts certain types of nonprofit organizations from having to pay federal income tax. The statutory language of IRC 501(c)(4) generally requires civic organizations described in that section to be "operated exclusively for the promotion of social welfare". Treasury regulations interpreting this statutory language apply a more relaxed standard, namely, that the organization "is operated primarily for the purpose of bringing about civic betterments and social improvements".26 CFR 1.501(c)(4)-1(a)(2)(i) As a result, the IRS traditionally has permitted organizations described in IRC 501(c)(4) to engage in lobbying and political campaign activities if those activities are not the organization's primary activity.
Internal Revenue Service rules also protect groups organized under Section 501(c)(4) as nonprofit organizations dedicated to social welfare from having to reveal the names of their donors or the amount of funds the individual donors have contributed. This protection dates back to the United States Supreme Court's 1958 ruling in NAACP v. Alabama, when the Court held that disclosure of names could render private donors vulnerable to retaliation.
Nonprofit organizations dedicated to social welfare are not required to apply for IRS certification in order to operate under Section 501(c)(4) tax exemption rules. However, being certified by the IRS can help organizations attract more donations and provide some protection against further scrutiny.
In 2013, examples of 501(c)(4) groups included Organizing for Action, organized to promote President Obama's legislative priorities, and the conservative advocacy organization Crossroads GPS, founded in part by Karl Rove.
Citizens United ruling and Congressional requests for 501(c) investigations On January 21, 2010, the U.S. Supreme Court decided Citizens United v. Federal Election Commission, which overturned many previous restrictions on political campaign spending and allowed nearly unlimited and often anonymous spending by corporations and other groups to influence elections. Some Tea Party leaders began forming political action committees as offshoots of their 501(c)-tax-exempt organizations. By late September 2010, tax-exempt non-profit groups had spent in excess of $100 million on the mid-term elections, more than double the expenditure from a similar point in the election cycle four years earlier.
Public-interest advocacy groups such as Public Citizen and Democracy 21 complained that the IRS and Federal Election Commission were failing to provide adequate oversight for 501(c) nonprofit organizations that were pouring money into political campaigns. As The New York Times reported at the time:
Almost all of the biggest players among third-party groups, in terms of buying television time in House and Senate races since August, have been 501(c) organizations, and their purchases have heavily favored Republicans....
They include 501(c)(4) "social welfare" organizations, like Crossroads, which has been the top spender on Senate races, and Americans for Prosperity, another pro-Republican group that has been the leader on the House side; 501(c)(5) labor unions, which have been supporting Democrats; and 501(c)(6) trade associations, like the United States Chamber of Commerce, which has been spending heavily in support of Republicans.
Shortly thereafter, Senator Max Baucus, Democratic chair of the Senate Finance Committee, referring to The New York Times and other media reports, asked the IRS to investigate to ensure that nonprofit organizations engaged in political activity were complying with IRS rules and not abusing their tax-exempt status. Republican senators on the finance committee Orrin Hatch and Jon Kyl responded to Baucus' request by writing to the IRS that they were worried this kind of investigation would violate First Amendment rights, and they asked that a Treasury Department inspector general conduct a review of any such investigation to ensure its impartiality.
Senate and House Democrats in early 2012 continued to press the IRS to investigate abuses of 501(c)(4) tax-exempt status by organizations engaged in political activity. In a February 2012 letter to then-IRS Commissioner Douglas Shulman, several Democratic senators led by Senator Chuck Schumer wrote, "We urge you to protect legitimate section 501(c)(4) entities by preventing non-conforming organizations that are focused on federal election activities from abusing the tax code." The senators also urged the IRS to issue new rules to prevent this type of abuse. In a follow-up letter sent in March 2012, the senators asked the IRS to clearly define the amount of political activity that is permissible for "social welfare" groups under 501(c)(4) rules, to require the groups to document in their IRS filings the exact percentage of their activity that is dedicated to "social welfare", and to require the groups to notify their donors of what percentage of donations could be claimed for tax deductions. The senators promised to introduce legislation to accomplish these aims if the IRS did not do so itself by promptly issuing new administrative rules. None of these letters called for the targeting of groups on the basis of political ideology.
Between 2010 and 2012, the number of applications the IRS received each year seeking 501(c)(4) certification doubled. During this period, budget cuts and personnel cuts reduced the IRS's ability to adequately perform its core duties. When the Obama administration requested in 2011 that Congress increase the IRS's $12.1 billion budget by $1 billion to allow the agency to hire 5,100 additional agents, Congress instead reduced the IRS budget to $11.8 billion, and the IRS offered buyouts to 5,400 of its 95,000 employees. The U.S. National Taxpayer Advocate, Nina E. Olson, told The New York Times in January 2012, "The overriding challenge facing the I.R.S. is that its workload has grown significantly in recent years, while its funding is being cut.... This is causing the I.R.S. to resort to shortcuts that undermine fundamental taxpayer rights and harm taxpayers—and at the same time reduces the I.R.S.'s ability to deliver on its core mission of raising revenue."
Controversial IRS conduct Controversial intensive scrutiny of political groups Beginning in March 2010, the IRS more closely scrutinized certain organizations applying for tax-exempt status under sections 501(c)(3) and 501(c)(4) of the Internal Revenue Code by focusing on groups with certain words in their names. In May 2010, some employees of the "Determinations Unit" of the Cincinnati office of the IRS, which is tasked with reviewing applications pertaining to tax-exempt status, began developing a spreadsheet that became known as the "Be On the Look Out" ("BOLO") list.
The list, first distributed in August 2010, suggested intensive scrutiny of applicants with names related to a number of political causes, including names related to the Tea Party movement and other conservative causes. Eventually, IRS employees in Ohio, California, and Washington, D.C. applied closer scrutiny to applications from organizations that: referenced words such as "Tea Party", "Patriots", or "9/12 Project", "progressive," "occupy," "Israel," "open source software," "medical marijuana" and "occupied territory advocacy" in the case file; outlined issues in the application that included government spending, government debt, or taxes; involved advocating or lobbying to "make America a better place to live"; had statements in the case file that criticized how the country is being run; advocated education about the Constitution and the Bill of Rights; were focused on challenging the Patient Protection and Affordable Care Act—known by many as Obamacare; questioned the integrity of federal elections.
Over the two years between April 2010 and April 2012, the IRS essentially placed on hold the processing of applications for 501(c)(4) tax-exemption status received from organizations with "Tea Party", "patriots", or "9/12" in their names. While apparently none of these organizations' applications were denied during this period, only 4 were approved. During the same general period, the agency approved applications from several dozen presumably liberal-leaning organizations whose names included terms such as "progressive", "progress", "liberal", or "equality". However, the IRS also selected several progressive- or Democratic-leaning organizations for increased scrutiny. An affiliate of the liberal group Emerge America had its request for tax-exempt status denied, leading to a review (and the eventual revocation) of the larger Emerge America organization's tax-exempt status. The conservative National Review states that a November 2010 version of the IRS's BOLO list indicates that liberal and conservative groups were in fact treated differently because liberal groups could be approved for tax-exempt status by line agents, while tea party groups could not.