Remarks of Commissioner of Internal Revenue Mark W. Everson at the City Club of Cleveland in Cleveland, Ohio, on Friday, February 24, 2006
Good afternoon, everyone. I am delighted to be at the City Club of Cleveland.
I am pleased to see Pat Korb, the wife of Don Korb, who is doing a great job as chief counsel at the IRS. Don has been with me in Washington for two years, but he and Pat are still trying to sell their house here. If anybody is looking for a house in Cleveland, please see Pat about hers after the speech.
I am also delighted to see my friend, Chace Anderson. Chace and I were at school together over thirty-five years ago. If anybody wants to know what I was like as a teenager, please don’t see Chace after the speech.
Before turning to today’s subject — prohibited political intervention by charities and churches — let me provide an overview of our duties at the IRS.
Our nation’s system of tax administration is characterized by a number of factors: it is large and complex; its regulatory components extend beyond activities subject to taxation; and it includes not just the collection of taxes due but also important means-tested benefit programs where money is paid out. Furthermore, the functioning and integrity of the system is highly reliant on tax practitioners, and there are direct linkages to other important Governmental activities such as Social Security, Medicare and state revenue programs. Statutory changes in one area frequently impact another piece of the overall mosaic.
Concerning the size of our system, each year the IRS takes in over $2.2 trillion. In 2004, 183 million people filed individual tax returns. To put that number in perspective, it is fully half again the number of people who voted in the Presidential election. In that sense, paying taxes is a unifying experience fundamental to our democracy and respect for the rule of the law. Taxes are what President Kennedy called “the annual price of citizenship.”
The mechanics of our system are themselves complex: each year the IRS receives and processes vast amounts of information. For example, we receive over 220 million tax returns and over 1.3 billion information items, such as W-2s and 1099s, related to tax returns. Many of them shed light on different activities or functions of the same entity. A complete picture, for example, of a large corporation’s compliance with the tax code can require analysis of employment tax filings, pension plans, partnerships and joint venture interests, international transactions and affiliates, as well as associated charitable foundations and audits of its executive officers.
The regulatory responsibilities of the IRS extend beyond activities subject to taxation. Included are the nation’s over 1½ million tax-exempt organizations, a role in the oversight of state and private retirement plans, and tax-exempt bonds, to mention several significant areas. In terms of monies paid out as opposed to collected, the IRS administers the Earned Income Tax Credit, which is the country’s largest means-tested benefits program. Each year, through EITC the IRS pays out about $40 billion to over 20 million taxpayers. The Health Coverage Tax Credit is another example of a benefits program embedded in the tax code.
Linkage to other Government activities is another dimension of Federal tax administration. Many states model their own tax systems on the Federal system. I would note that, on average, states collect almost $0.20 for every $1 the IRS brings in through examination activities. Social insurance and retirement receipts constitute 38% of the monies we expect to take in this year. The IRS is responsible for making sure that the nation’s millions of employers properly withhold and remit both their own share of employment taxes as well as that of their employees.
What President Kennedy called our system of “individual self-assessment” relies heavily on tax practitioners to function smoothly and maintain its integrity. Altogether there are approximately 1.2 million tax practitioners, including attorneys, accountants, enrolled agents and other preparers. Beyond paid tax professionals there is an important element of volunteerism. Each year, the IRS works with 80,000 volunteers at nearly 14,000 sites in cities and towns around the country helping over 2 million people file their returns. I visited a volunteer site in Maple Heights just last night.
At the IRS we administer this system by providing service to taxpayers — helping them understand their obligations and facilitating their participation in the system — and enforcing the laws so that Americans are confident that when they pay their fair share, neighbors and competitors are doing the same.
As we approach our responsibilities, the IRS strives to do so with a balanced program providing both service to taxpayers and enforcement of the law. Our working equation at the IRS is service plus enforcement equals compliance. Not service or enforcement; we need to do both. And I would stress that when we enforce the law, it is imperative we do so with full respect for taxpayer rights.
One additional point: complexity in the tax code compromises both our service and enforcement missions. That is because complexity obscures understanding. Those who seek to comply but cannot understand their tax obligations may make inadvertent errors or ultimately throw up their hands and say “why bother.” In the enforcement context, complexity in the code facilitates behaviors at variance with those intended by Congress. A more complex and steadily more global business and financial environment further increases challenges to tax administration.
The IRS has set out four objectives designed to enhance tax law enforcement from the years 2005 to 2009. One of these objectives directly addresses the tax exempt sector. It is to deter abuse within tax-exempt and governmental entities and misuse of such entities by third parties for tax avoidance and other unintended purposes.
While the vast majority of tax exempt entities play by the rules, we see increasing indications that the scourges of technical manipulation and outright abuse that developed some years ago in the profit-making sector of the economy are now spreading to parts of the tax-exempt sector.
Why is this important? There are two reasons. First, if individuals and organizations that should be taxed masquerade as charities, over time there will be an erosion of our nation’s revenue base. And, equally important, if Americans lose faith in charities because of abuses, they will stop giving and those in need will suffer.
At the IRS we have stepped up our efforts and are vigorously enforcing the law. There is growing congressional scrutiny of the sector. Fortunately, the tax exempt community itself is addressing the issues at hand. Recently, an important report on the problem areas — and potential remedies — was issued by the Panel on the Nonprofit Sector, convened by Independent Sector and supported by the Council on Foundations. We commend those in the tax exempt sector for their responsible leadership.
Now to charities and churches, and political intervention.
Americans have always held our charities and churches in high esteem. We recognize the vital role they play in our national life. For many decades, the Internal Revenue Code has provided an exemption from tax for organizations with “charitable, religious or educational purposes.” That is to say, those that operate exclusively for the public good.
In 1954, Congress saw the need to separate charities and churches from politics. An amendment was offered on the floor of the Senate by then-Senator Lyndon Johnson.
The Johnson amendment is found within the well-known section 501(c)(3) of the Internal Revenue Code. In its present form, the law states that charities, including churches, are not allowed to “participate in, or intervene in (including the publishing or distributing of statements) any political campaign on behalf of (or in opposition to) any candidate for public office.”
Freedom of speech and religious liberty are essential elements of our democracy. But the Supreme Court has in essence held that tax exemption is a privilege, not a right, stating, “Congress has not violated [an organization’s] First Amendment rights by declining to subsidize its First Amendment activities.”
The rule against intervention by charities and churches in political campaigns has been entrenched in the law for over a half-century. Congress enacted the law. The Courts upheld it. Our job at the IRS is to educate the public and charities about the law and to enforce it in a fair and evenhanded manner.
We have seen a dramatic increase in the amount of money financing politics. The level of funds going into the campaign area from organizations regulated by the Federal Election Commission has shown staggering growth. For the 2003-2004 election cycle, the FEC reported that over $10 billion was spent, more than double the $4 billion spent during the 1999-2000 election cycle, the last election cycle that included a presidential contest.
Similar, sharp increases were reported in the receipts and expenditures by section 527 political organizations reporting to the IRS. In the last six months of the 2004 election cycle, these organizations, which typically are involved in election related issue advocacy not regulated under the stricter FEC rules, reported over $300 million in expenditures, more than double the $150 million in expenditures reported in the comparable period in the 2000 cycle.
Are we going to let these political activities spread to our charities and churches? Now is the time to act, before it is too late.
While the vast majority of charities, including churches, do not engage in politicking, to address what we saw as increasing political intervention in the 2004 cycle, the IRS adopted a two-pronged approach. First, we expanded our educational efforts to remind section 501(c)(3) organizations — charities and churches — about the prohibition on political activities and the consequences of violating it. We spread this message every way we could: by press releases, speeches, workshops, IRS Nationwide Tax Forums, and even in a letter to seven national political parties.
Second, we created a dedicated enforcement program. Under this initiative, we moved quickly on specific, credible allegations of wrongdoing.
We did all this in a balanced and even-handed manner. We examined organizations that appeared to be violating the rules against political intervention. We wanted to stop improper activity during — not after — the election cycle.
We opened reviews of 132 charities and churches. These resulted from specific referrals and covered, obviously, only a very small portion of the tax-exempt community. Twenty two of these cases were closed without contacting the taxpayer.
Nearly three-quarters of the 82 examinations completed to date have substantiated that the charities or churches engaged in prohibited political activity. Most of these exams concerned one-time, isolated occurrences of prohibited campaign activity, which the IRS addressed through written advisories to the organizations. In three cases — involving charities but not churches — the prohibited activity was egregious enough to warrant the IRS proposing the revocation of the organizations’ tax-exempt status.
Some of the specific instances of political intervention alleged and examined include the following:
• Charities, including churches, distributing diverse printed materials that encouraged their members to vote for a particular candidate (24 alleged; 9 determined),
Religious leaders using the pulpit to endorse or oppose a particular candidate (19 alleged; 12 determined),
Charities, including churches, endorsing or opposing a candidate on their website or through links to another website (15 alleged; 7 determined),
Charities, including churches, disseminating improper voter guides or candidate ratings that encourage readers to vote for particular candidates (14 alleged; 4 determined),
Charities, including churches, placing signs on their property that show they support a particular candidate (12 alleged; 9 determined),
Charities, including churches, giving improperly preferential treatment to certain candidates by permitting them to speak at functions (11 alleged; 9 determined), and
Charities, including churches, making cash contributions to a candidate’s political campaign (7 alleged; 5 determined).
So what are we going to do next? As we head into the 2006 campaign season, the IRS will:
Distribute expanded educational materials based on findings in the 2004 cycle, making them widely available early in the coming election cycle,
Start our enforcement efforts earlier in the election year to ensure consistent and timely referral selections and examinations,
Publicize our efforts in advance so there is no surprise to organizations, and
Augment the dedicated and trained team working on political intervention to assure prompt handling of project cases.
Clearly political intervention by charities and churches is an area where the IRS must tread carefully. There are few bright lines for evaluating political intervention; our work requires a careful balancing of all the facts and circumstances. But I am convinced that we must act. We can’t afford to have our charitable and religious institutions undermined by politics.
IR-2006-36, IRS Releases New Guidance and Results of Political Intervention Examinations
FS-2006-17, Election Year Activities and the Prohibition on Political Campaign Intervention for Section 501(c)(3) Organizations