The Department of Justice announced in October that it would not bring charges against Lois Lerner, former director of the Exempt Organizations division of the IRS, marking the end of a political saga that began in 2012. Still, its investigation uncovered “substantial evidence of mismanagement” – amounting to an indictment of the dysfunction rampant within the EO Division itself.
The United States’ social sector needs effective and efficient regulation in order to serve the needs of the public. Congress should act on DOJ’s report by providing the EO Division with the resources it needs to function properly. And foundations, nonprofits and other social sector institutions should push their elected representatives to empower the EO Division with resources that will make this type of mismanagement a thing of the past.
The EO Division, responsible for regulating the tax-exempt sector, has long been a target for Congressional austerity measures, which have only gotten more extreme since President Obama’s election in 2008. When obvious mismanagement was seized on by the conspiratorial far right in 2012, cut after cut had already left the division struggling to make ends meet. Poorly-worded internal instructions on how to best regulate 501(c)(4) organizations on a shoestring budget led outside forces already keen to attack the IRS – and the President – to accuse EO Division of targeting exempt organizations for scrutiny based on their political ideology. The division, and its director Lois Lerner, quickly became the favorite target of conservative political activists. A Congressional investigation, and vociferous calls for criminal prosecution of Lerner, followed.
This political sideshow distracted from what was, and still is, a serious policy and governance issue affecting the country’s nonprofit sector. Tax-exempt organizations enjoy a government subsidy in exchange for serving the public good. The EO Division is responsible for ensuring these organizations – of which there are thousands – don’t abuse this trust. Their regulatory role grows more important each day, as the power and influence of 501(c)(4) organizations increases and the social sector begins to play a more aggressive role in electoral politics. After all, 501(c)(4) organizations are tax-exempt, like their 501(c)(3) brethren, but can spend unlimited dollars on lobbying and a limited, though still significant amount on political activity. It is in the interest of nonprofit organizations to protect their reputation as forces for good, and that means a strong, effective, well-funded EO division that can do its vital work well.
Unfortunately, the DOJ’s investigation made clear that lately the EO Division’s work has been anything but strong and effective, and its lack of funding is partly to blame. The perception that EO Division employees tasked with reviewing exempt status applications were taking part in political discrimination was, the DOJ found, just that: a perception. And the DOJ found that this perception was encouraged in large part by a pattern of mismanagement and bureaucratic ineptitude at the EO Division. In the words of Assistant Attorney General Peter Kadzik, “What occurred is disquieting and may necessitate corrective action – but it does not warrant criminal prosecution.”
There can be no doubt that “corrective action” is desperately needed at IRS-EO. The best way to reform a department starved for resources, however, is to reinvest in it. We cannot turn our back on the EO Division. Its purpose is too vital. And since many of the issues cited by DOJ’s report are at least in part due to a lack of funds (such as competing demands on EO employees’ time), the way forward is to revitalize and reform the division with the help of Congressional funding. Our representatives cannot continue to pillory an ineffective EO Division while actively making its work impossible by cutting off resources. And foundations, nonprofits, think tanks and other tax-exempt organizations whose credibility is inextricable with the Division’s institutional health ought to be stronger advocates on its behalf.
NCRP envisions a nonprofit sector that provides voice and value to those most in need, and where philanthropy operates with the highest standards of integrity and openness. Neither is possible without a robust Exempt Organizations Division that has the tools and resources it needs to function and the support – both political and financial – of Congress. This Department of Justice report ought to encourage the nonprofit sector to take action to ensure the EO Division lives up to its promise.
Ryan Schlegel is research and policy associate at the National Committee for Responsive Philanthropy (NCRP). Follow @NCRP on Twitter.
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