Once again, the IRS finds itself in hot water. That's nothing new: The agency is never more than one irritated congressman away from a full-blown PR disaster. But after a while, the "scandals" start to blend together. Most seem to involve jackbooted revenue agents dragging helpless small business owners through excruciating audits before saddling them with debilitating tax bills that threaten the cherished American values of freedom, private enterprise, and tax minimization.
To be fair, this week's scandal is more scandalous than most. It's too early to know exactly what went on, but whether it was evil or merely stupid, it was definitely not right.
But it's still familiar. This is not the first time the IRS has stood accused of political bias involving exempt (and nonexempt) political organizations. In fact, it's happened at least twice in the last 50 years, first during the Kennedy administration and later under President Nixon.
In 1961 the IRS established an Ideological Organizations Project (IOP), charged with examining the activities of various political groups. According to a 1973 report from the Joint Committee on Taxation, the project had White House origins. "This program was stimulated by a public statement by President John F. Kennedy and also a suggestion by Attorney General Robert F. Kennedy," the JCT concluded. In his official oral history, former IRS Commissioner Mortimer Caplin confirmed the White House role:
I remember that the President made a speech and I got a call from the White House again. The President may have called on one of those occasions, but usually it would have been [Ted] Sorensen or Mike Feldman, who was the second in line in the Counsel's office. The right-wing organizations were believed to be over-stepping their tax-exemption bounds.
But if the IOP had partisan origins, it was more evenhanded in its operations. In its first phase, the project examined 22 political organizations, according to the JCT -- 12 on the political right and 10 on the left. The National Office instructed field offices to audit those groups, but did not participate actively in the resulting audits.
By the time it concluded in mid-1963, the first phase of the IOP had recommended that two organizations have their exempt status revoked, while a third was notified of its pending revocation. All three of the organizations were conservative, and the IOP did not recommend status revocation for any left-leaning organizations.
A second phase of the IOP followed quick on the heels of the first. "The second program apparently was stimulated by White House communications to the Internal Revenue Service," according to the JCT, "including a telephone call from President Kennedy to Commissioner Mortimer M. Caplin." The second phase involved 24 organizations, later expanded to 25. The list was ideologically balanced, but ultimately, 19 groups were described by the IRS as right-leaning.
As a group, all the organizations were targeted because they were thought to be, in the JCT's words, "engaged in activities that could raise questions about their exempt status (e.g. whether they properly could be treated as tax exempt 'educational' organizations)."
In the second phase, field offices were asked to collect information for the National Office, which then used that information to assess the exempt status of the target organizations. The second phase of the IOP ended in 1966 and resulted in exempt status revocation for four groups, including three from the right and one from the left.
The IOP's political origins naturally raised questions about the fairness of its resulting investigations. But in many respects, the project seemed to operate in a relatively evenhanded fashion. In its 1973 assessment, the JCT said it found "no evidence" that the White House or the U.S. attorney general had told the agency which organizations to target. White House staff did, however, review the list of target organizations for the project's second phase, and made suggestions that two be deleted (both were, although one was later added back).
Ultimately, the IOP's tainted origins are hard to overcome. But the IRS seems to have tried. As Caplin later recalled:
We in the IRS were very careful to try to make a balance. . . . We saw the problem in terms of: if we went running all over right-wing organizations only, we'd be in treacherous administrative waters and would be all over the newspapers the next day. So we prepared an offsetting list of organizations on the left that might well be examined.
IRS Assistant Commissioner (Compliance) Donald Bacon made a similar point in a memo to IRS employees that was written at the time of the investigations. (This document is quoted in John A. Andrew III's Power to Destroy, a useful if somewhat angry history of the IRS and its political activities in the 1960s and 1970s). "In undertaking this difficult project," Bacon wrote, "we are mindful of the competing political philosophies expressed by many of these organizations. Nevertheless our program has but one standard -- an evenhanded administration of the tax law. We must make it clear that any personal preference or bias by any Service employee has no place in tax examinations."
Whether such admonitions were genuine or merely a form of political cover is impossible to ascertain. But on balance, the IOP looks like a bad idea executed in less-bad fashion.
But it was still a bad idea, and ultimately a bad precedent. As Kip Dellinger later remarked (Tax Notes, Feb. 24, 1997, p. 1078 ):
The fact that the IRS may not have been provided the list of organizations for examination by either the Justice Department or the White House does not mean that political considerations did not enter into the "selection" process. And the fact that this activity -- however well-intended or whatever the motivation -- led to more extensive abuses during the Nixon years is not dependent on whether there was a political motive behind it. Sometimes appearances count, and Nixon zealots may have reacted reflexively.
Indeed, the Nixon-era IRS took the ball from the IOP and ran with it. The IOP was a relatively small project, involving roughly 50 organizations. By contrast, the political investigations of the Nixon IRS eventually targeted more than 11,000 individuals and organizations.
Known by its ominous name and sinister acronym, the Special Services Staff (SSS) appeared in 1969 and operated through 1973. The new group was expected to gather information about "extremist" organizations, variously defined. The JCT later remarked that both Congress and the White House had shown "substantial interest" in using the IRS to conduct those investigations. But the decision to create the new body seems to have been made within the IRS, and the JCT found no clear request from the White House or Congress to establish it.
Nonetheless, the SSS had clearly political origins. "The fact of White House and congressional interest (which occurred at essentially the same time) cannot be ignored," the JCT concluded. "Because of this interest, it seems clear that some action by the Service with respect to militant groups was inevitable."
The SSS was expected to "coordinate activities in all Compliance divisions involving ideological, militant, subversive, radical, and similar type organizations," the JCT said. The new group collected data, with an eye toward ensuring that target organizations were meeting their legal obligations. There was also some general expectation, the JCT noted, that the SSS would help battle "an insidious threat to the internal security of this country."
Specific targets for SSS scrutiny came primarily from the FBI and other divisions of the Justice Department. A few also emerged from Congress and internal IRS sources. The SSS supported audit and collection efforts involving these target organizations, and it also contributed to tax exemption decisions regarding the organizations.
The SSS started out with a list of 77 target organizations, but over the next four years it compiled 1,458 files on 8,585 individuals and 2,873 organizations. "The subjects of these files included organizations and individuals with widely varying points of view," the JCT reported, "from all parts of the country and from many vocational and economic groups."
Of the organizations, 41 percent were focused on issues concerning African Americans and other minority groups, 15 percent were right-wing, 18 percent were antiwar, and 11 percent were part of the New Left political movement. Targets also included a smattering of mainstream liberal groups, including churches. Ultimately, the SSS referred 2,225 individuals and organizations to the field for audit and collection.
The SSS differed from the IOP by focusing heavily on individuals. But the Nixon-era project also played a role in decisions about exempt status for many target organizations. The EO branch referred 153 cases to the SSS for its input, choosing cases that involved an identified "activist organization." The SSS responded to 80 of the referrals, returning to the EO branch information on the target organizations and their officers. In several cases, the SSS also recommended a particular disposition of the referred case.
The SSS was granted no formal role in considering applications for exempt status, but SSS information received consideration in the cases. "Confidential information submitted by the SSS was used by the E-O Branch in several cases as a basis for requesting additional information from the organization seeking exemption," the JCT found. "In addition, this information was considered in determining whether the organization's operations should be audited in the near future."
Ultimately, the SSS seemed to play "little, if any" role in the actual disposition of EO cases, the JCT concluded. But SSS intervention slowed things down, delaying the processing of EO cases by several months.
The SSS didn't survive for long once Donald Alexander became commissioner in 1973. Upon taking office, he immediately narrowed the SSS focus to tax resisters. After a few more months, he disbanded the group entirely.