POLITICS - In the Dark

"What Newly Released Docs Tell Us About the IRS and How It Handles Dark Money Groups" by Kim Barker and Theodoric Meyer, ProPublica 4/9/2014

A GOP-led House committee voted Wednesday to seek criminal charges against former IRS official Lois Lerner, who used to run the IRS division in charge of tax-exempt groups.  In a party-line vote, the committee accused Lerner of unfairly targeting the applications of conservative groups and misleading the Treasury inspector general, which was auditing the IRS based on allegations of bias against conservative groups.

Though the committee referred Lerner to the Justice Department for prosecution, it will likely have little practical effect, as the Justice Department is already investigating the Internal Revenue Service and Lerner.  But the documents released by the committee do shed some light on the inner workings of the IRS's Exempt Organizations division and how it approached applications of social welfare nonprofits, also known as dark money groups because they spend money on elections without reporting their donors.  The influence of such groups has skyrocketed since the Supreme Court's 2010 Citizens United decision.

Here are the top five takeaways ProPublica found from the documents:

• The IRS planned to deny the application of Crossroads GPS.

Crossroads GPS spent more than $90 million from unknown donors to elect conservatives in the 2010 and 2012 elections, far more than any other dark money group.  By the beginning of 2013, the IRS was planning to deny the group's application, the documents show.

After applying to the IRS in September 2010, Crossroads started spending, and campaign-finance watchdogs started complaining.  An IRS panel considered taking a deeper look at Crossroads twice — in November 2010 and June 2011 — but rejected the idea both times.  One reviewer in November 2010 said that Crossroads was a "for-profit entity," a mistake Lerner later wrote that she found "most disturbing."

By June 2012, the IRS created a spreadsheet on Crossroads to analyze the group's TV ad costs and track whether the ads were political or issue advocacy.  A description of the group's website in an IRS spreadsheet said it "appears to be an anti-Obama Administration website; however there are educational materials on site."

In late 2012, Crossroads' application was released to ProPublica in response to a public-records request — even though it wasn't supposed to be made public.  The application showed that Crossroads told the IRS that its political spending "will be limited in amount."

The IRS received 25 referrals on Crossroads GPS between 2010 and 2012, the documents show — a referral is a complaint about a nonprofit, and can include a formal request for investigation or simply a news article.

On Jan. 2, 2013, an IRS spokeswoman, Michelle Eldridge, emailed Lerner and other IRS officials about questions from ProPublica over Crossroads' application.  "I recommend that we just let this one sit and wait out the deadline," she wrote.

In an email two days later, Lerner wrote that she had read through allegations from campaign finance watchdogs about Crossroads, adding that they "were really damning."

By Jan. 9, 2013, the IRS was drafting a denial letter to Crossroads, the documents show.  There was no more significant action until May 2, 2013, when a call was made to discuss the "draft denial letter."

Then on May 8, 2013, documents indicate that the IRS was also looking at "the draft denial of a similar case."

From May 13 until May 17, 2013, the IRS continued "working on draft of letter."  By May 30, 2013, the first working draft of the denial was finished and sent for review.

But by that point, the IRS had come under scrutiny for revelations that it had targeted Tea Party groups for extra review.  There's no proof that the letter to Crossroads was ever sent.

In an emailed statement Wednesday, Crossroads GPS President Steven Law said the group was still waiting to hear final action from the IRS on its application.  Like the House Ways and Means Committee, Law accused Lerner of improperly singling out Crossroads for extra review.

"Crossroads GPS submitted its application to the IRS for formal recognition of its non-profit status when the group was formed in 2010," Law said.  "It is now apparent that Ms. Lerner was directly and improperly involved in targeting our application, which may explain why we are still awaiting final action."

Meanwhile, Lerner's lawyer, William Taylor, said that Lerner had done nothing wrong.  "She did not interfere with the rights of any organization to a tax exemption," he said in a statement.

• The IRS also planned to deny the applications of other conservative groups that had spent on elections after telling the IRS they wouldn't do so.

Crossroads GPS wasn't the only dark money group facing denial before the IRS controversy blew up.

In response to a public-records request in late 2012, the IRS had also sent ProPublica the pending applications for five other conservative social welfare nonprofits that had told the IRS that they wouldn't spend money on politics but then did so.  The groups were Americans for Responsible Leadership, Freedom Path, Rightchange.com II, America Is Not Stupid and A Better America Now.

ProPublica wrote about the groups on Jan. 2, 2013. Nikole Flax, the chief of staff to the acting IRS commissioner at the time, forwarded the story to Lerner and two other IRS officials on the afternoon it was published in an email with the subject line, "latest article."

The same day, Lerner asked to set up a meeting to talk about the groups' applications.

The Ways and Means Committee found that four of the five groups had been subjected to heightened scrutiny, and three were audited, though it's not clear which ones.  The IRS recognized both America Is Not Stupid and A Better America Now last year.  Americans for Responsible Leadership was also recognized in October 2013 — despite spending almost $10 million on elections in 2012 and paying a record-breaking fine in California for violations of election laws.

In January 2013, Lerner also indicated more social welfare nonprofits would be denied.  On Jan. 31, she emailed the chief of the IRS office of appeals, saying that in the next few months her office believed appeals would "get a lot of business" regarding denials of social welfare applications.

"I told them (the appeals group) this is a place where we have worked very hard to be consistent and have all our cases worked by one group, and suggested they (sic) might want to do something similar," Lerner wrote, adding that her office was being audited because of allegations of political bias in these cases.  "If I were you, this is definitely something I'd want to be aware of and have a high level person overseeing and reporting regularly (sic) to me.  You were in TEGE (the Tax Exempt/Government Entities division) long enough to understand how dangerous what we do can be."

The documents included spreadsheets of the application status of various groups, including one providing aid in Pakistan and another trying to set up a medical marijuana dispensary as a charity.  One spreadsheet indicated that a Tea Party group could be approved as a social welfare nonprofit but not as a charity.

But of all the groups listed in a 2011 spreadsheet as being flagged for review, only Emerge America and its affiliates ended up being denied.  Those groups trained Democratic women to run for office.

• The IRS really is not equipped to police elections — and knows it.

In the documents Wednesday, Lerner acknowledges how poorly the IRS monitors these groups, which are allowed to spend money on elections as long as they can justify they primarily work to benefit the community at large.

At one point, on Jan. 7, 2013, she wrote an email complaining that the IRS was not following up with groups that hadn't filed their tax returns, or Form 990s.  She wrote that if the IRS only opened audits on groups that filed tax returns, "that's a big hole in the system."

"Then you have newspapers telling us what the orgs (sic) are doing, but we never look," she wrote.  "If the org has been around log (sic) enough to owe us a 990 and they aren't filing to hide what they are alleged to have done, it should be our job to go out and get the 990 and then determine whether the allegations — that are very strong — are true."

"My level of confidence that we are equipped to do this work continues to be shaken," she wrote in another email.  "I don't even know what to recommend to make this better."

Officials from two campaign-finance watchdog groups, Democracy 21 and the Campaign Legal Center, said Wednesday that they had met with Lerner and other IRS officials in early January 2013 over their allegations that several social welfare nonprofits, including a liberal group and a nonpartisan one, were overly political.  They said Lerner refused to talk about individual taxpayers.

"We left the meeting extremely frustrated because neither Ms. Lerner nor her colleagues revealed anything," said Paul S. Ryan, senior counsel for the Campaign Legal Center.  "I would use the word 'frustrated' in general in our attitude toward the IRS."  He later added, "The IRS hasn't done anything" to enforce restrictions on political spending with these groups.

• Most new liberal groups don't apply to the IRS.

Social welfare nonprofits don't have to be recognized by the IRS, because donations to them are not tax-deductible.  They just have to incorporate as social welfare nonprofits in their state of choice.

Conservative groups typically have applied for recognition anyway, possibly because their donors want the IRS seal of approval.

One of the most active liberal dark money groups, Patriot Majority USA, has been recognized by the IRS.  But other liberal groups have taken advantage of the loophole.  Often, they incorporate, never apply to the IRS, spend money on elections and then fold after filing a tax return or two.

The newly released documents show that one of the most prominent liberal dark money groups, Priorities USA, never applied to the IRS for recognition.

Liberal dark money groups have been much less active in elections than conservative ones since the Citizens United decision.  About 85 percent of the anonymous money spent in 2010 and 2012 came from conservative groups.  Priorities USA, despite being run by top liberal operatives, reported spending nothing on federal elections in 2012.

• Lerner may have considered applying to work at a leading liberal social welfare nonprofit.

On Jan. 24, 2013, she emailed two senior IRS officials, asking if Organizing for Action — the nonprofit formed from the leftovers of President Barack Obama's campaign organization — had applied for IRS recognition.

One of the officials, Holly Paz, told Lerner she wasn't sure.

Another IRS official, Sharon Light, said she thought it likely that OFA would follow Priorities USA's path and not apply.  "But maybe not," she added.  She noted that while OFA would be run from Chicago, it would also have a Washington office.

"Oh — maybe I can get the DC office job!"  Lerner emailed back.

It is unclear whether she was joking.