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updated 5/14/2013 2:51:09 PM ET 2013-05-14T18:51:09

Are we gonna spend the next few months beating-up-on the IRS and the Bush-appointed former head of the IRS who was in charge when all of this happened? Or are we also gonna take the opportunity to try to figure out what exactly we should be doing to sort out this completely intractable mess in tax law created by Citizens United?

There are two IRS scandals that are boiling over Washington—one that is positively roiling the beltway and the country, and another that has received so little attention is might as well be a secret.

The president Monday responded to the scandal everyone’s heard about—the one that broke open on Friday when an IRS official admitted that the agency had specifically targeted for extra scrutiny, conservative and tea party groups seeking nonprofit status.

“This is pretty straightforward. If in fact IRS personnel engaged in the kind of practices that have been reported on, and were intentionally targeting conservative groups, then that’s outrageous. And there’s no place for it. And they have to be held fully accountable,” Obama said during a press conference.

“I’ve got not patience with it. I will not tolerate it, and we will make sure that we find out exactly what happened on this,” he added.

The president, taking the position that pretty much all reasonable people are taking on this scandal—which is that it’s outrageous that a government agency would be targeting political groups based on ideology. It’s unacceptable and the sort of thing that cannot be allowed to happen in this country. But that scandal does not exist in a vacuum. In order to fully understand the IRS targeting conservatives scandal, you really need to know about the other, hidden, untold IRS scandal because that virtually unknown, secondary scandal is actually the fertile soil in which the seed for this new scandal was planted.

So, here’s what you need to know about the scandal-behind-the-scandal: It starts with groups applying to the IRS for 501(c)4 status. That’s a classification given to groups dedicated to social welfare—because they are dedicated to social welfare, they don’t have to pay taxes. Makes sense. But, and here’s where the scandal part starts, what exactly counts as “social welfare”? How does the IRS decide if your group, applying for this special no-tax-paying status, qualifies?

The IRS’s own documentation on this question, flagged in recent days by Ezra Klein, shows such examples of social welfare organizations: a group aimed at helping unemployed people over a certain age find work, a group working to build a stadium for a school district, a group dedicated to counseling for people in financial trouble, a group that subsidizes kids’ tickets to sporting events to get them interested, a neighborhood beautification group and on, and on.

Now, those all sound like the sorts of groups that should be counted as tax exempt and most people are probably more or less fine with groups like that not paying taxes. Now, there has been a very bright line for a very long time between organizations like those and organizations that were engaged directly in political campaigning. And anyone who has worked in politics, on the left or the right, or in nonprofits, knows that there has been a genuinely important separation in tax law based on that distinction—are you doing campaigning? Or are you on this other side, the social welfare side?

And then the Supreme Court’s decision in Citizens United came along and blew up that distinction. Citizens United said, essentially, that any organization of any kind can spend money out of its general treasury to run political ads. And that decision brought about a pivotal moment for politics and taxes and campaign spending in this country. Karl Rove looked at this ruling and said hey wait a second, maybe I wanna make a “social welfare” organization. A social welfare organization that also happens to lots of ads during campaign season. Ya know, as part of bettering the community and stuff. Ads like these from Crossroads GPS.

Now, here’s why the Karl Rove move was so brilliant. Those 501(c)4′s, the social welfare organizations—the ones that are helping the unemployed or building stadiums—not only do they not have to pay taxes, they also don’t  have to disclose their donors. So Karl Rove figured out how he could have his cake and eat it, too. And so Karl Rove subsequently went around the country looking us all straight in the face, telling us he’s started up a social welfare organization. Nevermind that it was dumping $70 million into partisan campaign ads.

But it’s not just Karl Rove. It’s also Bill Burton on the progressive end with Priorities USA. They also have a 501(c)4, which is supposed to be a social welfare organization. In fact, pretty much every super PAC worth its salt has its own non-profit, tax-exempt 501(C)4 group fueled by secret donors. And this is the context for the untold IRS scandal. Suddenly, this distinction, between political campaign groups and social welfare groups, which the IRS is tasked with patrolling and maintaining, is effectively obliterated by the Citizens United decision.

People are running around the country making an obvious mockery of the social welfare nonprofit rule. And the folks at the IRS are not idiots—they can turn on the television and see Karl Rove. They know that what he is doing is political campaigning, plain and simple. But then it turns out Rove’s great success is a great inspiration and suddenly the IRS starts getting a flood of new applications from other  political groups and strategists saying, oh, you know what, it turns out I, too want to set up a social welfare organization that just so happens to be focused on, say, taking the country back from Barack Hussein Obama.

Now, here’s the thing the IRS appears to have done unequivocally wrong, that we all agree was absolutely inexcusable: they reacted to all of this by targeting one part of the ideological spectrum in looking at whether this flood of new applicants passed the smell test. But being skeptical about a new wave of wolves in sheeps’ clothing, invading the social welfare nonprofit game was entirely appropriate.

And the question Monday is how is this scandal going to unfold? Are we gonna spend the next few months beating-up-on the IRS and the Bush-appointed former head of the IRS who was in charge when all of this happened? Or are we  also gonna take the opportunity to try to figure out what exactly we should be doing to sort out this completely intractable mess in tax law created by Citizens United?

Video: There are two IRS scandals: one you've heard of and one you haven't

  1. Closed captioning of: There are two IRS scandals: one you've heard of and one you haven't

    >>> good evening from new york, i'm chris hayes , and thank you for joining us. tonight, president obama comes out swinging after a weekend of benghazi outrage by republicans.

    >> the whole issue of this -- of talking points , frankly throughout this process has been a side show .

    >> one of the people who emphatically agrees with that is house minority leader nancy pelosi . today she gave me her reaction to the latest scandal mongering from the right as well as a frank assessment of house speaker john boehner .

    >> if he were a woman, they'd be calling him the weakest speaker in history.

    >> how about that? all of that and in "click 3," there's a man in space making awesome music videos about space you need to see. but we begin tonight with two irs scandals. one that is positively roiling the beltway and the country and another that has received so little attention it might as well be a secret. the president today responded to the scandal everyone's heard about, the one that broke open. when the irs admitted the agency targeted for extra scrutiny conservative and tea party groups seeking nonprofit status.

    >> this is pretty straightforward. if, in fact, irs personnel engaged in the kind of practices that had been reported on and were intentionally targeting conservative groups, then that's outrageous. and there's no place for it. and, they have to be held fully accountable. i've got no patience with it, i'll not tolerate it and we'll make sure that we find out exactly what happened on this.

    >> the president taking the position pretty much all reasonable people are taking on this scandal, which is that it's outrageous that a government agency would be targeting political groups based on ideolo ideology. it's unacceptable and the sort of thing that cannot be allowed to happen in this country. but that scandal does not exist in a vacuum. in order to fully understand the irs targeting conservative scandal, you really need to know about the other hidden untold irs scandal because that virtually unknown secondary scandal is actually the fertile soil in which the seed for this new scandal was planted. so, here's what you need to know about the scandal behind the scandal. it starts with groups applying to the irs for what's called 501c4 status. thatst a classification given to groups dedicated to social welfare because they are dedicated to social welfare , they don't have to pay taxes, which makes sense. and here's where the scandal part starts, exactly. what exactly counts as social welfare . how does the irs decide if your group applying for the special nontax paying status qualifies? well, here's the irs 's own documentation on this classification. the irs lists as examples of social welfare organizations a group aimed at helping unemployed people over a certain age find work. a group working to build a stadium for a school district , a group dedicated to counseling for people in financial trouble, a group that subsidizes kids' tickets to sporting events to get them interested. a neighborhood beautification group and on and on. you basically get the idea, i think. now, those all sounds like the sorts of groups that should be counted as tax exempt and most people are probably more or less fine with that group not paying taxes. now, there has been a very bright line for a very long time between organizations like those and organizations that were engaged directly in political campaigning . one side of that line was regulated by the irs , the other side by the sec and electoral rules. anyone on the left or right or nonprofit knows there has been a genuinely important separation in tax law based on that distinction. are you doing campaigning? are you on this other side, the social welfare side? and then something happened. something happened to destroy that distinction. the supreme court 's decision in citizen's united came along and blew it out of the water. citizen's united said essentially any organization of any kind can spend money out of its general treasury to run political ads. and that decision brought about a pivotal moment for politics and taxes and campaign spending in this country and we're still dealing with the fallout because carl rove looked at this ruling and said, wait a second, maybe i want to make a social welfare organization . a social welfare organization that also happens to run lots of ads during campaign season, you know, as part of bettering the community and stuff. yeah, ads like these.

    >> obama 's $830 billion stimulus failed.

    >> barack obama 's got lots of excuses for the bad economy.

    >> obama personally lobbied to kill a pipeline bringing oil from canada.

    >> claire mccaskill voted for billions in waste and spending projects.

    >> the $44 trillion budget tammy baldwin voted for was too extreme.

    >> john tester votes to raise taxes on montana families and small businesses.

    >> elizabeth warren sides with extreme left protests.

    >> tim kaine loves taxes.

    >> we are a long way from neighborhood beautification. all of that, that social welfare . and here's why the carl rove move was so brilliant. those 501c4s, the welfare organizations, helping the unemployed or building stadiums, not only do they not have to pay taxes, they don't have to disclose their donors. carl rove figured out how he could have his cake and eat it too. went around the country looking all of us straight in the face telling us he had started up a social welfare organization . never mind it was dumping $70 million into partisan campaign ads . it's not just carl rove , it's also bill burton on the progressive end, they also have a 501c4 , which is supposed to be a social welfare organization . pretty much every super pac has its own exempt 501c4 group fueled by secret donors. and this, my friends, is the context for the untold irs scandal. suddenly this distinction between political campaign groups and social welfare groups which the irs is tasked with patrolling and maintaining is effectively obliterated by the citizens united decision. people are running around the country making an obvious mockery of the social welfare nonprofit rule. and the folks at the irs can turn on the television and see karl rove , they know what he is doing is political campaigning plain and simple. but then it tushrns out rove's great success is inspiration and the irs gets a flood of new applications from other political groups and strategists and says turns out i too want to set up a social welfare organization that happens to be focused on taking the country back from barack hussein obama . here's the thing the irs has done unequivocally wrong, which we all agree was inexcusable. they reacted to all of this by targeting one part of the ideological spectrum. being skeptical about a new wave of wolves in sheep's clothing invading the nonprofit game was entirely appropriate. and the question today which is something i'll discuss later in the show with my interview with nancy pelosi is how is this scandal going to unfold? are we going to spend the next few months beating up on the irs and the bush appointed former head of the irs in charge of this when all of this happened. or are we also going to take the opportunity to try to figure out what exactly we should be doing to sort out this completely intractable mess now finds itself created by citizens united . joining me tonight, columnist for taxanalyst.com and keith ellison , democrat from minnesota. great to have you both here. david , can i begin ywith you? you're the man i want to turn to. what is your reaction to what we have learned about this office in cincinnati, the division that did this in dealing with this and the president's reaction to it today?

    >> well, first of all, chris , your explanation of this is so much better than anything else i have seen by anyone. thank you. really, really superb. i thought you were going to be saying something different and i was ready to start a tussle with you.

    >> throw me under the bus live on national television.

    >> the irs has an absolute duty under the law as passed by congress and court rulings since 1913 to investigate anyone who wants this tax exempt status to make sure they aren't partisan, they aren't primarily political and they are not to benefit an individual. well, they suddenly get flooded with a doubling of requests and many of them come from groups who have now put out the letters they were sent asking for more information and those letters revealed that they said, well, we want to influence legislation. we are holding candidate forums. those are things that require the irs to investigate. so the mistake was not to investigate. they were required to do this by congress . the mistake was to in shorthand say, oh, tea party , all the tea party groups saying i want to influence. we'll flag those. that's relatively minor because they should have investigated every one of those. and they appear to have approved all of them as best as we can tell, by the way.

    >> yeah, that's an interesting end to this, which is they were approved. of course, they had to go through additional scrutiny and additional scrutiny has a kind of force when it's the irs doing the scrutiny, right? we don't -- there's something about that --

    >> but they should have gone --

    >> -- very careful about.

    >> they should have gone through that scrutiny. they are required, the irs is required to do this. now, congress should be talking about exactly as you make the point, what are the rules going to be for what is a social welfare organization ? do we really want political organizations posing as this? and one of the organizations that got approved and has raised the biggest scream about it is glenn beck 's 912 project. well, therest a requirement that you cannot have a group that benefits an individual. now, chris , if you start tomorrow, the chris hayes 1112 project, do you think it might benefit you?

    >> yes, i'm hoping. that's the hustle i'm trying to run. i've got to keep my options open. congressman keith ellison , what is your reaction to this? what is your reaction to the president's approach to talking about this today?

    >> well, the president's reaction was appropriate. but i think the irs has apologized. now i think the thing to do is to take the right lesson, which is that we need congress to act to say we're going to scrutinize all groups that have -- that are electioneering when they should be doing social welfare . i fear that the irs will be backed off.

    >> yes.

    >> and that's the thing i don't want. i think the irs should get more engaged, not less.

    >> we have new reports that they had planned subcommittee hearings in the senate, they're now saying they're not -- they're going to delay those. and this is -- this is what the fallout's going to be. things like the disclose act, a piece of legislation that would've regulated these groups to make sure they disclose their donors. don't you think that's not going to be harder to pass on capitol hill ?

    >> it may be harder to pass, but it would be the wrong reaction. i think we need to re-double our efforts to bring real campaign finance reform forward. you know, here's the reality. as wealth has been more concentrated in this society, political power has gone in fewer and fewer hands and it's been manifested in some of these organizations we talked about. there are clearly flagrant misuses of the term social welfare . this needs to be reined in, congress should move forward to do it on a fair basis not back off.

    >> let me ask you this question, david , why was it that karl rove 's 501c4 was allowed to operate. i think the thing most galling is big/little. bill burton and karl rove are running around the country obviously flouting the intent of the social welfare classification in front of all of us sitting at the table of my show, right?

    >> right.

    >> and they're not the ones getting investigated.

    >> both democrats and republicans are doing this because congress has now and the supreme court changed the rules with citizens united . and one little point. you know how many corporations there were at the time of the revolution in this country?

    >> i'm going to get this wrong.

    >> six.

    >> six.

    >> six. and they were basically what we would today either call charities or public utilities . our congress was very skeptical of corporations and it wasn't until the 1800s that corporations took off and even then william rehnquist said don't give corporations political power . they're not natural persons .

    >> so i want to talk about another breaking -- bit of breaking news today that looks like at first blush an abuse of power. and i find deeply troubling. the a.p. has reported that the department of justice notified them on friday that the doj had secretly obtained phone records from more than 20 separate phone lines assigned to "a.p." journalists. this was pursuant to a story the "a.p." ran in may of last year about a foil eed plot on the part of al qaeda in yemen to blow up a more high-tech version of the underwear bomb that unsuccessfully sent. after that reporting, there was a leak investigation that was initiated by the attorney general. this is really, david , you're someone who -- i think you're president of the investigative reporters organization . this is really --

    >> investigative reporters and editors .

    >> this is really deeply troubling.

    >> this is what police states do. you know, congress , we created the government for the benefit of the people. and this is what police states do. these are the same "a.p." reporters who worked on the stories about the nypd spying on muslims because of their religious beliefs as best we can tell. certainly engaging in broad spread spying. and what's very troubling here is this is not raiding a newsroom after the fact. this is ahead of time secretly recording and we should be very concerned about the attitude of the obama administration about this. people are not going to talk to journalists. and government leaks classified information every day of the week. every day, whenever they want to leak something, they do. it's the secrets they want to keep.

    >> congressman, i want to get your reaction to this.

    >> my reaction is that this is one of those moments as a member of congress , do you standby your oath and stand next to the constitution? or do you yield to the moment, the issue of the moment? and i'm deeply troubled by it because i believe in our first amendment, congress shall make no law bridging the freedom of the press. to me, this is deeply disturbing.

    >> keith ellison of minnesota and david johnston , thank you both for your time.

    >> thank you, chris .

    >> good job.

    >>> you would think there is no way that more than 400 school students could be tossed aside like yesterday's trash by an entire state government . and you would be wrong. more on this mind-boggling story

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