Epstein: The Real Lesson of the IRS Scandal

The Real Lesson of the IRS Scandal
Richard Epstein
Defining Ideas
May 21, 2013

The news of the past week has rightly been dominated by allegations of abuse in the Exempt Office (EO) of the Internal Revenue Service. The EO is in charge of processing applications for tax-exempt status under Section 501(c)(4) of the Internal Revenue Code, which authorizes these exemptions for “civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare.” Some 3,357 applications for tax-exempt status were filed in 2012, an election year, which was a 50 percent increase from the 2,265 applications filed in w 2011.

The criteria for Section 501(c)(4) organizations are open-ended. Few complex organizations are ever operated “exclusively” for any single purpose, and the many applicants have rather different definitions of what counts as “social welfare.” The deadly combination of loose standards and applications in the thousands empowers the EO to decide which applications sail through, and which are mired in delay.

The May 14 report of the Treasury Inspector General for Tax Administration’s (IG) explicitly stated that the EO’s actions were “not politically biased,” but were attributable solely to the confusions of lower staff members, who somehow for nearly three years never quite understood their jobs assignments. Don’t believe a word of that whitewash. All the nitpicking questions and pointless delays, such as those experienced by the Ohio Tea Party, were calibrated to hold off the approval of these applications until after the November 2012 presidential election.

The dismal performance of the IRS is but a symptom of a much larger disease which has taken root in the charters of many of the major administrative agencies in the United States today: the permit power. Private individuals are not allowed to engage in certain activities or to claim certain benefits without the approval of some major government agency. The standards for approval are nebulous at best, which makes it hard for any outside reviewer to overturn the agency’s decision on a particular application.

That power also gives the agency discretion to drag out its review, since few individuals or groups are foolhardy enough to jump the gun and set up shop without obtaining the necessary approvals first. It takes literally a few minutes for a skilled government administrator to demand information that costs millions of dollars to collect and that can tie up a project for years. That delay becomes even longer for projects that need approval from multiple agencies at the federal or state level, or both.

The beauty of all of this (for the government) is that there is no effective legal remedy.

Faculty: 
Richard A. Epstein