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Unclear Laws May Have Contributed to Tax-Exempt Controversy


Let's turn to another story for now: The acting head of the IRS has resigned, but is still facing questions about the agency. Lawmakers continue their probe into the federal tax agency targeting Tea Party groups seeking tax exemption.

Late last week, the House Ways and Means Committee demanded answers from top IRS officials to find out why the agency singled out conservative groups for scrutiny. Well, now, the Senate Finance Committee gets its chance to grill the outgoing commissioner. It's also hearing from his predecessor, a Bush appointee, who was at the helm when the scrutiny took place. Some experts say confusing rules are partly to blame for the problem, here. NPR's Scott Horsley has more.

SCOTT HORSLEY, BYLINE: Tea Party groups have complained for years they were unfairly subjected to intrusive questions from the IRS. Now a Treasury Department watchdog has validated those claims, and the Finance Senate Committee has some questions of its own. In a six-page letter, the committee's leaders ask for names and titles of every IRS official involved in the scrutiny. They also want to see any communication about the program between the IRS and the White House. A watchdog investigation found no indication the White House was involved in the Tea Party scrutiny. Obama spokesman Jay Carney says the White House counsel's office only learned about the watchdog report in April, and the president himself was in the dark until the IRS apologized earlier this month.


HORSLEY: Carney says once the watchdog report was made public, the president acted quickly to replace the IRS commissioner. Obama also promised new safeguards to prevent such missteps, and he suggested laws governing tax-exempt groups may have to be rewritten.


HORSLEY: Experts say fuzzy laws are part of the problem, here. Joseph Thorndike, who's a contributing editor for Tax Notes magazine, says ambiguity makes it hard for the IRS to determine which organizations deserve tax-exempt status and which do not.

JOSEPH THORNDIKE: None of this excuses the particularly bad way the IRS seems to have pursued this situation. But focusing on the misdeeds of individual people in the Cincinnati field office of the IRS, I think, obscures the larger issue, which is that this is baked into the system.

HORSLEY: Here's the challenge: one section of the tax code - 501(c)(3) - covers traditional charities. They're generally required to steer clear of politics, and they don't have to disclose their donors. Another section - 527 - covers purely political organizations. They can campaign all they want, but they're not allowed to keep their donors secret. The Tea Party groups at the center of the IRS controversy were trying to organize under a third section of the tax code, which occupies a gray area in between.

Under the law, they're supposed to exist exclusively to promote social welfare. But, in practice, that can include some partisan politicking, so long as it's not the group's primary purpose. Law Professor Lloyd Mayer of Notre Dame says that leaves the IRS agents to puzzle over what's politicking and what's primary.

LLOYD MAYER: The IRS agents in the field, the IRS agents considering these applications have two very vague standards to apply, which is part of why they asked for so much information, which led to, frankly, overreaching, asking for information they probably shouldn't have been asking for in the first place.

HORSLEY: Tea Party groups were asked, for example, about the political affiliation of their leaders, whether they plan to run for public office, and even about the conversations at their meetings. Mayer agrees with the watchdog report that some clearer guidelines for the IRS could help. Thorndike suggests going further and doing away with the social welfare category altogether.

THORNDIKE: Either be a real charity, don't get involved in politics and live with that sort of political chastity, or if you can't and you really want to be political active, then be a 527, disclose your donors and do whatever you want.

HORSLEY: President Obama promised to work hand-in-hand with lawmakers to fix the problem, saying it deserves a response that doesn't smack of politics or partisan agendas. Scott Horsley, NPR News, the White House. Transcript provided by NPR, Copyright NPR.

Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.
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