Strict Firewall Exists Between IRS And White House

Audie Cornish talks to Marcus Owens, former director of the Exempt Organizations Division of the Internal Revenue Service. The division is the same one under scrutiny for targeting conservative groups. He talks about the IRS's vetting process in determining tax exempt status and where they may have gone wrong.

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AUDIE CORNISH, HOST:

We wanted to know more about how the IRS normally vets applications for tax-exempt status; how groups qualify and what the red flags might be.

Through the 1990s, Marcus Owens was the director of the Exempt Organizations Division of the IRS, overseeing these very issues. As he explained, 501(c)(4) groups must prove to the IRS that their primary purpose is not politics but social welfare - the betterment of community over private interest.

MARCUS OWENS: The applications, which incidentally are all filed with the Cincinnati office for processing, contain a series of questions that require narrative answers; things like describe your activities, describe the financial relationships your organization might have with other organizations - that sort of thing.

And what the IRS looks for are going to be indicators of what that organization's principal activities are. In the case of 501(c)(4)s, whether there is that public versus private benefit, and whether there are going to be significant activities that are beyond the scope of section 501(c)(4). And one of the significant activities in that regard is going to be political campaign activity.

CORNISH: Now, I understand that after the Supreme Court decided the Citizens United case, a lot more applications for tax-exempt status started coming in. But given your experience, and given what you've heard about what the allegations are in this case, what would be the best practices for handling an influx of applications? I mean, did the IRS need to hire more people rather than basically using quick code words, like Tea Party, in order to do vetting?

OWENS: Well, I mean, first of all, as a general matter, the IRS is facing financial constraints that impact the workflow. There's no question about that. But I think that doesn't excuse using improper, or probably ineffective is a better word here, screening criteria. That is criteria to decide whether organizations are basically rubberstamped as exempt. And I would say anyone who spends time reading a Little League's application is wasting their time. But there are those that do require careful consideration.

And that process should be done using objective criteria that relate to the activities. And, for example, with regard to these politically active c4s, appropriate criteria would be, for example, whether the organization was formed within a year of an election. Another appropriate criteria would be whether it is staffed with people whose experience is as political operatives.

Then you would capture that basket of organizations that probably are trying to get as close to the political line as possible, if not willing to step over if it looks like a tight race.

CORNISH: How much damage has been done here? For people who already may be suspicious of the IRS, or suspicious of the motives of the government, what kind of impact do you see this having?

OWENS: I think this could be a very big problem for the agency, because any time there is a perception of bias on the part of any government agency, it tends to color the view that everyone has of every action of the agency. I think we're going to see, unfortunately, a huge delay in tax administration in the nonprofit area for sure.

I think they're going to start losing employees. You know, those that are eligible to retire are probably going to wake up tomorrow morning and decide this would be a nice day to just stay home and read the paper and, you know, email their resignation in. Morale will be hurt. I think there will be a huge resource strain just dealing with the investigations themselves. And I think those have to occur to help clear the air.

But I think it's having a dramatic effect of undermining overall enforcement, both with applications and with audits. I think that's inevitable.

CORNISH: Marcus Owens, thank you for coming in to speak with us.

OWENS: You're welcome.

CORNISH: Marcus Owens used to oversee the Exempt Organizations Division of the IRS. He's now a partner with the firm Caplin and Drysdale.

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