About Emily Peterson-Cassin

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johnsonamendment1d

Exposing the Tax Scam, One Year In: Johnson Amendment repeal, the bullet we have to keep dodging

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It’s been one year since the passage of the Tax Cuts and Jobs Act, legislation that was in essence a scam—it served as a massive transfer of wealth from working people to the already-rich and corporations while being sold as paying for itself.  Public Citizen is exposing the truth behind the bill by publishing a series of blogs this week examining the serious consequences of the law. But, as we examine last year’s tax cut bill, it’s also worth remembering what, thanks to hard work from organizations and people across the country, including Public Citizen’s members, didn’t make it into the bill that would have made it even worse.

The initial draft of the tax giveaway package contained a very pernicious proposal that would have gutted the Johnson Amendment, the law that keeps 501(c)(3)s from doing partisan political activity like endorsing candidates for office. Without that prohibition, wealthy donors would be able to go to their local church pastor and say “You want my donation to help with a new parish hall? Then I want to hear you give an endorsement of my choice for mayor from the pulpit on Sunday.” Even under the Johnson Amendment repeal language that was in the initial drafts of the tax package, which was billed as being “limited” in scope, the head of a large university would be able to tweet endorsements to thousands of followers who trust the university’s opinion.

As bad as that partisan manipulation would be, the impacts of repealing the Johnson Amendment could even be worse than that– many new nonprofit groups would immediately form specifically to take advantage of the new rules in order to do electioneering work. And to top it all off, the wealthy donor would end up getting a tax break for boosting the candidate of their choice, and their name would not be disclosed to voters. Our Lady of the Perpetual Tax Break could become the next big dark money engine.

Those consequences and many others are why nonprofit and religious groups a year ago were so united in opposition to weakening or repealing the Johnson Amendment as part of the tax package. Through the activism of these groups and their members, and assisted by an arcane procedural rule, the Johnson Amendment repeal language thankfully didn’t make it into the final Tax Cuts and Jobs Act bill.

But that doesn’t mean Republicans have stopped trying to repeal the block on political endorsements by (c)(3) nonprofits. In fact, only last week the Chairman of the House Ways and Means committee, Representative Kevin Brady, put out a last-gasp tax bill he hopes to pass in the lame duck session that contained this same Johnson Amendment-destroying language that we successfully kept out of the Tax Cuts and Jobs Act bill one year ago. The House could vote on the bill this week. 109 groups, including Public Citizen, just signed a letter making it clear that these kinds of changes are unacceptable.

Though we fought to keep it out of the law that was passed one year ago, we must remain vigilant. The introduction of Johnson Amendment repeal in Brady’s bill is another indication of how much influence a very few people seeking more power have and how much they want this change. However, with YOUR help, we can block changes to the Johnson Amendment’s vital protections! Call (202) 224-3121 to be connected to your U.S. Representative and tell her or him to oppose any bill that contains harmful changes to the Johnson Amendment.

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Congress Continues to Handicap Bright Line Rules

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Last week, the U.S. Department of the Treasury Inspector General for Tax Administration (TIGTA) published a report that once again criticized the Internal Revenue Service for failing to adequately enforce the rules on nonprofit political activity. The report comes as no surprise; Public Citizen’s Bright Lines Project has been calling out the problems with the IRS’s subjective standards in this area for years.

As the TIGTA report says, “There should be limits on the use of discretion in this area given the potential that bias could enter into decisions of whether or not to refer these types of cases for examination.” We could not agree more!

These sorts of objective standards would allow the agency to judge what is and isn’t political activity would make compliance and enforcement easier and help the IRS avoid repeatedly being called out by its own Inspector General watchdog. Without objective standards, nonprofits willing to flout the rules essentially get a free pass to engage in electioneering, while the vast majority of nonprofits that want to follow the law are left in the dark as to what is and isn’t permissible under their tax status.

The scandal here, unfortunately is not the inaction by the IRS, it’s the degree to which Congress has taken an active role to attempt to block the type of objective standards we need from ever being put into place—rules that are essential to objectively determine when a nonprofit is engaging in political activity. In the nonprofit space, this recent TIGTA report provides evidence of the degree to which Congress and the administration have been handicapping the IRS’s ability to enforce political activity tax laws. The report states that of more than 6,500 reports of impermissible electioneering activity between 2015 and 2016, not a single nonprofit received a negative consequence (some cases are still pending).

To make it worse, this report comes in the face of blatant signals from the Trump administration that it plans to make even further reductions in enforcement of the limits on partisan activity for nonprofits. In June, Vice President Mike Pence promised to repeal the Johnson Amendment – the law that keeps 501(c)(3)s from partisan election spending. And in July, the Treasury Department stopped requiring 501(c)(4)s to disclose major donors to the IRS, removing one of the only ways the IRS can see whether groups are illegally spending foreign money in our elections.

Several years ago, the IRS tried to put objective standards in place to solve these problems, but Congress stopped these efforts. A poison pill rider inserted into the 2015 government funding package – that has been carried through to today on subsequent appropriations bills – blocked IRS and Treasury Department rulemakings that might have put in place objective standards. As Congress negotiates the Treasury Department’s funding (ahead of the Dec. 7 deadline), lawmakers need to remove this old rider and reject any new riders that would limit enforcement of the Johnson Amendment.

Even in the broader sense, Congress’s refusal to fully fund the IRS has hamstrung its enforcement divisions, costing taxpayers billions by letting the wealthiest and sneakiest among us get away with stealing money from the government. According to a ProPublica article published earlier this month, prosecution of tax fraud as a primary crime has declined dramatically since 2010– a decline that tracks nearly exactly with Congress’s decisions to defund the agency. Due to this lack of enforcement, business owners have been able to swindle $125 billion per year from taxpayers, during a period when Americans were struggling to regain their financial footing after the 2008 stock market crash.

One of the most important things to remember about the tax code, whether talking about nonprofits or individuals: the vast majority of us want to pay our taxes correctly and follow the law. The US has an extremely high tax compliance rate compared to the rest of the world, and that’s something we should be very proud of as individuals and as a nation.

However this recent report from the IRS’s Inspector General should make Congress ashamed. A lack of enforcement by government agencies enables a rigged system. Reports that rich people or nonprofits willing to flout the rules and are treated differently than the rest of us threaten  a critical part of our democracy and weaken the fabric of our American values.

This issue doesn’t have nearly enough traction on the Hill. You can help by raising the issue with your Senators and Member of Congress.  Tell them to remove the poison pill rider blocking the IRS from doing its job, and to put bright line rules in place to make the tax rules for nonprofits fair.

Koskinen Hearing a Missed Opportunity

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IRS Commissioner John Koskinen’s appearance in front of the House Judiciary Committee on Wednesday was a missed opportunity to advance an important discussion about nonprofit governance. Members of the committee from both parties chose to create a political spectacle rather than talk about real solutions for problems with the definition of political activity for tax-exempt organizations.

Republicans proceeded as though the hearing was a genuine impeachment hearing, while denying Commissioner Koskinen any kind of due process –including the rights to have counsel present and to call and cross-examine witnesses.

John Koskinen
IRS Commissioner John Koskinen, courtesy of Brookings Institution/Flickr

On the other side of the aisle, many Democrats chose to question the Commissioner about Donald Trump’s unreleased tax returns and the Donald J. Trump Foundation’s alleged self-dealing. Some Democrats did defend the Commissioner and labeled the proceeding a “sham” and a “farce.”  Even though Koskinen made it evident early in the hearing that he could not comment on particular taxpayer situations, a number of Democrats asked again and again about thinly veiled hypotheticals relating to Trump’s tax situation.

It is understandable that Democrats would not ask Koskinen questions related to the impeachment attempt by the House Freedom Caucus, given that the impeachment is doomed to fail and is merely designed to make headlines. Democrats could have used the opportunity to show the American public that they are serious about creating clearer rules for tax-exempt organizations rather than respond to a political attack with a political attack of their own.

In fact, members of both parties could have used this as a chance to confront the dysfunction and disunity that has plagued Congress. Instead of asking the Commissioner questions he has already answered and accusing the Commissioner of nefarious acts of which the Treasury Department’s independent Inspector General and the Department of Justice have cleared him, members should have asked substantive questions on topics that can move the government forward.

For example, members of the committee could have used the opportunity to ask Koskinen about the negative effects that the current vague rules have on nonprofits – especially 501(c)(3) organizations. They could have asked about the effects of the Congressional prohibition on the IRS’s ability to engage in rulemaking activities for 501(c)(4)s. Or, they could have asked about how to improve the current tax regime for non-profit organizations moving forward.

Without clearer rules to define political activity, risk averse 501(c)(3)s will be forced to refrain from civic activities that should be permissible because they do not want to jeopardize their tax-exempt status. In addition, bad rules cloud the waters when it comes to responding to an attack on an organization’s core mission. When someone close to a political candidate compares refugees to skittles, how can a refugee-focused 501(c)(3) respond without violating the (c)(3) ban on political activity? There are nonpartisan ways to respond, but because the rules are so unclear, most would choose to remain silent rather than take any risk they could accidentally stray over the line.

The time has come to stop using the IRS to further partisan political goals and instead acknowledge the important nonpartisan role it plays in governing tax-exempt organizations and the critical responsibility it has in maintaining American democracy.

Bad Rules Hurt Small Business Too

Our nation’s tax authority, the Internal Revenue Service (IRS) and its Commissioner , seem to be under constant attack from some members of Congress. That’s why it’s more important than ever for us to remember the agency’s role is simply to enforce the tax code that Congress enacted in the first place. Lawmakers appear happy to leave the IRS on the hook to interpret vague legislative language while concurrently trying to stop it from doing that very thing.

It’s obvious that the IRS should do its part to make sure the tax code is clear but it’s equally clear that Congress should not get in the agency’s way when it attempts to do just that. Yet, that’s exactly what happened when Congress stopped the agency from working to clarify the all-too-confusing rules regarding political activity of nonprofits. This is a shame because clearer, better tax rules help everybody, not just nonprofits.

That’s why I was pleased to have recently been given the opportunity to testify before the House Small Business Committee Subcommittee on Economic Growth, Tax, and Capital Access. I was able to make the case for clearer rules—to benefit everyone. Below are some snippets from my testimony; I hope you find it interesting!

I do not need to tell this committee how important small business is to our economy and our society. Protecting small business owners and employees is a paramount goal of our government. Congress can and should protect small businesses by ensuring a clear, predictable framework of rules and regulations. Easy to follow and enforce rules allow small businesses to thrive while minimizing opportunities to abuse the tax system. And the IRS should be doing more to ensure that small businesses can easily comply with the regulations already in existence, and work to improve its ability to provide accurate and timely guidance.

At the same time, it is important to recognize that rules intended to protect small businesses can have unintended effects.  Laws that are intended to help small businesses, such as the RFA [Regulatory Flexibility Act] and SBREFA [Small Business Regulatory Enforcement Fairness Act], in practice can allow large corporations to delay important regulations and thus harm small businesses rather than help them.

Finally, while fair enforcement of regulations is critical for small business success, it is also important that we ensure that the tax code itself provides a level playing field for small business. Currently, loopholes in the tax code allow large entities advantages that smaller players do not have, and prevent small businesses from being fully competitive in the marketplace. These loopholes allow tax-avoidance by large corporations, and small entities that would rather spend their resources on building their business than on elaborate avoidance schemes cannot take advantage of them. For example, reforming the code to disallow complex corporate tax-avoidance schemes like inversions would help small businesses by leveling the playing field, so that small businesses can compete more fairly with big businesses.

In the full version of the testimony, I go into more detail on how regulations help small businesses and our society. I also discuss how certain specific laws operate to delay regulations and make them harder for regulated entities to follow and predict. I discuss how Congress’s failure to fully fund the IRS hurts small business, and I talk about how the tax code is stacked against small business.

The testimony concludes:

It is in our nation’s interest that small businesses are able to grow and thrive in a society that protects health and safety and ensures that the market operates fairly to businesses of all sizes. Small changes to SBREFA, fully funding the IRS, and closing unfair loopholes will ensure that the playing field is level for small businesses.

My full testimony can be read or watched on the Committee’s website.

This article was originally posted on Public Citizen’s Bright Lines Project blog.

Our Letter to the Treasury Dep’t.: Make Better (c)(3) Rules

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Because civic participation is vital and should be protected, we’ve asked the Treasury Department to issue new guidance on the political activity of nonprofit groups organized under section 501(c)(3) of the tax code and put an end to the confusion stemming from the current confusing rules.

In a letter submitted Monday as a comment to the Treasury’s self-imposed to-do list, called the Priority Guidance Plan, we point out that 501(c)(3) organizations are uniquely vulnerable to unclear rules, since doing any political activity, defined by the murky “facts and circumstances” standard, puts their tax-exempt status at risk.

501(c)(3) groups, like churches and charities, end up being prevented from doing political activity because the current vague definition of political activity acts like a speed limit sign that says “don’t go too fast.” Some bad actors will push the boundary, but most careful organizations won’t do things they otherwise could because they’re too afraid of “going too fast.”

“Offering 501(c)(3)s guidance on the rules that apply to them will create a more workable regulatory regime, deter bad actors, and empower well-meaning organizations to engage in the political system in the permissible ways that Congress intended,” says the letter.

The letter points out that while a provision in the 2016 Consolidated Appropriations Act prevents Treasury and the Internal Revenue Service (IRS) from improving the definition as it relates to 501(c)(4) groups, the path for a new definition for (c)(3)s is clear.

The current rules are so unworkable that risk-averse (c)(3)s don’t engage in the kinds of nonpartisan activities they are allowed to do, says the letter. Particularly in an election year, having unclear rules chills the speech of law-abiding organizations while encouraging abuses from those willing to flout the rules.

Charities should be encouraging civic participation; it’s one of their most vital roles. Nonpartisan engagement with our democracy should be easy for nonprofits, but the rules as they stand make it hard. Treasury can take a small step toward clearer rules by putting a fix for (c)(3)s on their to-do list NOW!

This article was originally posted on Public Citizen’s Bright Lines Project blog.

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