Nick Nichols

President Obama waded deeper into the pool of incredulity that surrounds his administration when he told Fox News host Bill O’Reilly that there was not a “smidgen” of corruption associated with the IRS targeting of conservative groups seeking 501(c)4 tax-exempt status. He must have missed former IRS official Lois Lerner’s assertion of her Fifth Amendment right against self-incrimination. I’d call that a smidgen!

My purpose here isn’t to recite the mounting evidence contributing to the stench of political corruption at the highest levels of the IRS. Instead, my purpose is to offer an approach that may prevent this kind of abuse from ever happening again. In the crisis management business it’s called “cauterization.”

First, consider these facts:

1. There are no less than thirty-seven different categories of tax-exempt organizations within the IRS code, including the 501(c)4 designation that is at the center of the current scandal.

2. Each tax-exempt category is subject to different rules, requirements, and bureaucratic interpretations, and each category receives different tax-exemption goodies. For example, 501(c)3 groups, referred to as “public charities,” are not only exempt from taxation, but also contributions to these groups are tax deductible. According to the National Center for Charitable Statistics (NCCS), by 1969 the IRS had granted 501(c)3 status to 169,285 groups. By 2013, that number had increased to 945,415 organizations.

3. In 2011, the 501(c)3s filing returns with the IRS reported $1.5 trillion in revenues and $325.6 billion in private contributions and government grants. Remember, the 501(c)3s are tax-exempt and contributions to these groups are deductible. Among these so-called “public charities” are 27,485 environmental quality, protection and beautification groups. Yes, Greenpeace is a 501(c)3.

4. The 501(c)4s, often referred to as “social welfare organizations,” are exempt from most taxation but contributions to these groups are generally not deductible. Prior to 1970, the IRS had granted 501(c)4 status to 39,487 groups. By 2013 that number had increased to 82,197.

5. The most recent NCCS data for 501(c)4s indicates that these groups reported total revenue to the IRS of $77.9 billion. The supposedly non-partisan IRS bureaucrats who harassed and targeted conservative groups saw fit to award John Podesta’s Center for American Progress both 501(c)4 and 501(c)3 statuses. President Obama’s campaign organization, Organizing for Action, morphed into a “social welfare organization” and now benefits from 501(c)4 status. Not a smidgen of corruption here?

So, here’s my take-away based on the facts just presented. The process the IRS uses to award tax-exempt status has become a bloated rat’s nest of rules, regulations and loopholes. Talk about fertile ground for corruption. Literally thousands of organizations that may have little to do with “charity” and “social welfare” are being subsidized by the American taxpayer. Trillions of dollars in revenue and contributions have escaped taxation. Every tax dollar that’s not collected has to be taken from someone who actually pays taxes. That’s a massive redistribution of wealth.

To add insult to injury, twenty states automatically accept the IRS determination that a group merits, or doesn’t merit, tax-exempt status, and another twenty states accept the IRS determination when combined with other minor requirements. So, when the IRS in its wisdom awarded Greenpeace 501(c)3 and 501(c)4 statuses, that group became exempt from not only federal taxes, but also the taxes levied by at least 40 states.

Recent media reports have speculated about whether Ways and Means Committee Chairman Dave Camp will introduce tax reform legislation. I hope the House Republican Conference will support something bold and comprehensive. Regardless of the form tax reform might take, I urge Mr. Camp and his colleagues to execute cauterization of Section 501(c) of the tax code. Cut it out. Terminate it with extreme prejudice. The system used to determine who pays taxes and who doesn’t is complicated, contaminated with free-loaders and, yes, politically corrupt!

Beyond the hard cold facts about the targeting of conservative groups by Lois Learner and her merry band, there’s a very recent smidgen of evidence supporting the charge that the system has been corrupted by political influence. On February 13, The Hill published a story about vulnerable Senate Democrats publicly urging the IRS to move ahead with proposed regulations tightening down on the political activities of current and future 501(c)4s. Why would the Democrats be whining now? That’s simple. They are being targeted with negative advertising by conservative groups that smell blood in the water for the 2014 mid-term elections. Notice that the Senate Dems weren’t up in arms when MoveOn.org and a multitude of other leftist groups were awarded 501(c)4 status, while hundreds of conservative groups were being delayed and denied in their efforts to become tax-exempt.

It’s time to rip Section 501(c) from the tax code. It’s time that every group and organization benefiting from taxpayer financed programs and services pay at least a smidgen of federal and state taxes, including labor unions and business groups, liberal organizations and conservative organizations and every group in between. It’s time they had some skin in the game, just like those of us who actually pay taxes today. Let the marketplace determine which groups survive once they are severed from the public dole. It’s time to remove this invitation for corruption from the most feared agency in the federal government!


Nick Nichols

Nick is a retired crisis communications executive. He also developed and taught graduate-level crisis management courses at the Johns Hopkins University. Nick is the author of Rules for Corporate Warriors: How to Fight and Survive Attack Group Shakedowns. He is a Vietnam veteran.