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Who's to blame for murky regulation in IRS scandal: Agency or lawmakers? (+video)

In a Senate hearing, the two most recent IRS chiefs were grilled over why the agency failed for years to fix the law at the root of the political targeting scandal. The same could be asked of Congress, one said.

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Why didn’t the agency take on the issue previously? IRS officials argued that the agency was caught flat-footed with a wave of applications for 501(c)(4) status, which doubled between 2011 and 2012 in the aftermath of the Citizens United Supreme Court decision that allowed corporations and labor unions to participate more aggressively in the political process.

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And the bureaucracy is notoriously hesitant to take on such large political issues on its own, says Melanie Sloan, CREW’s executive director.

“They’re afraid to take a position,” Ms. Sloan says. “All that happens is they get beat up no matter what they do.”

Case in point: In 2010, Democrats led by Sen. Max Baucus of Montana asked the IRS to look into such groups because of concerns groups fully committed to politics were hiding behind the social welfare exemption to shield their donors from public scrutiny.

The problem? The IRS wasn't doing enough, allowing too many groups to get the status. 

But Republicans lead by Sen. Orrin Hatch (R) of Utah rapped the IRS in 2011 when the IRS sent letters to donors to 501(c)(4) groups reminding them that gifts to those groups over $13,000 are subject to the federal gift tax. Senator Hatch argued that those letters were designed to intimidate conservative donors.

The problem? After 30 years of failing to enforce the gift tax law, the IRS was suddenly doing too much. 

Mr. Shulman said that the IRS did not act because Congress has asked the service to do too much with too little funding.

“Treasury ought to look at the regulations, and all I can say is that this is a very hard task given to the IRS,” said Shulman, who left the agency after his term expired in November of 2012.

Given all the agency’s other responsibilities, “to also have this piece of the operation that by the law has to be asking questions about political activities is very difficult,” Shulman said.

Moreover, Shulman turned the question back around on Congress: If this was such a big problem, he wondered, why had Congress done nothing to address it for half a century?

“This was a regulation, a Treasury regulation, that’s been in effect for many years,” Shulman said. “This is a place that Congress should look. Because where I sit the IRS is given a very, very, very difficult task,... You can do some political activity, but you can’t do too much.”

San Jose State’s Professor Nellen points out that congressional inaction on the regulation over such a long time is tantamount to Congress indirectly endorsing the IRS’s interpretation.

“Congress knew they were interpreting these rules in a certain way,” she says.

Senator Hatch agreed that the onus falls on Capitol Hill.

“It’s Congress’s obligation” to fix the statute, said Hatch, the committee’s ranking Republican, “we ought to do it the right way.”

Tax reformers like Senator Baucus and House Ways and Means Chairman Dave Camp (R) of Michigan have vowed to include a rewrite of these laws in their push for comprehensive tax reform. 

But can Congress muster the will to confront an issue that’s been lingering for years?

“Congress doesn’t seem to be in any rush to tell them what to do,” says Sloan. “Congress hasn’t been in a rush in the last 50 years to tell them what to do.”

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