Following complaints that the IRS is unfairly singling out for audits conservative groups and politically active churches, a congressional committee has launched a special inquiry into the tax agency's policies and practices.
The Congressional Joint Committee on Taxation is expected, by mid-September, to issue a report on whether politics is playing a role in determining whom the IRS audits.
"There is absolutely no doubt that the Internal Revenue Service has targeted conservative churches and conservative organizations for special treatment," says attorney Jay Sekulow of the American Center for Law and Justice (ACLJ) in Virginia Beach. The ACLJ is defending the Church at Pierce Creek in Conklin, New York, which is appealing its loss of tax exemption after its 1992 newspaper ads declared that voting for Clinton would be a sin.
Intense controversy has developed in connection with the IRS practice of initiating tax audits on the basis of third-party allegations—from media reports, watchdog groups, or whistleblowers. IRS commissioner Margaret Milner Richardson rebutted, in a letter to Congress, the allegations against the agency, calling them "inaccurate and misleading."
CONDUIT GIVING? Meanwhile, among religious groups, fresh concerns about IRS practices have surfaced within the past year.
In 1996, the IRS initially denied tax-exempt status to Great Commission Ministries (GCM), setting off alarm bells throughout the Christian parachurch community. Based in the Columbus, Ohio, area, GCM has about 120 staff ministering in 34 college communities.
At issue was the common practice known as deputation, by which missionaries raise support. During deputation, individuals solicit financial pledges, which are paid to a nonprofit corporation, such as a mission agency. Then the nonprofit uses those funds to pay ministry costs, benefits, and a salary to the individual engaged in ministry activity. Deputation is a principal means for mission agencies and ministry organizations, such as Campus Crusade for Christ, to raise tens of millions of dollars annually.
However, a 1995 IRS handbook warned field agents to be on the alert for conduit giving, a fraudulent activity. For example, conduit giving would occur if a parent gave a scholarship donation to a tax-exempt school, and the school in turn channeled that donation to the donor's child for payment of school expenses.
In the GCM case, the IRS initially considered deputation as a form of conduit giving. The Washington, D.C., law firm Gammon & Grange helped coordinate the effort among Christian ministries to assist in GCM's appeal of the IRS decision. More than 50 organizations signed on to the effort.
Gammon & Grange attorney Stephen H. King says, "We argued that so long as an organization can demonstrate that it—and not the donors or individuals being supported—effectively controlled its funds, this practice of raising support could not be considered conduit giving."
GCM learned in April that its tax-exempt status had been granted.
Yet the process of receiving its exemption cost more than $50,000, compared to the typical $2,500. The coalition that formed around the GCM cause is now following up its efforts by working with the IRS to codify the principles that formed the basis of the decision. "We don't want any organization to have to go through what GCM had to go through," King says. "We want some guidelines that specify that this form of raising support will not endanger an organization's tax-exempt status as long as the organization controls the money."
PARTISAN POLITICS: Some Christian activists charge that the GCM case is symptomatic of an overall IRS campaign to single out for investigation politically partisan churches, certain conservative organizations, and parachurch agencies.
Organizations, including churches, that are classified under section 501(c)(3) of the tax code are prohibited by the terms of their exemption from participating or intervening in any political campaign on behalf of, or in opposition to, a candidate for office. There are more than 540,000 organizations with 501(c)(3) tax exemptions.
The IRS is getting plenty of help in its watchdog efforts from the Washington, D.C.-based Americans United for Separation of Church and State, which maintains that illegal, partisan political activity by tax-exempt organizations has been ignored for too long. Through a program called Project Fair Play, Americans United (AU) has reported potential violations to the IRS, including controversial ads sponsored by the Church at Pierce Creek (CT, June 19, 1995, p. 47).
AU was started by a Protestant pastor 50 years ago to oppose lobbying by the Roman Catholic church on behalf of government aid to parochial schools. Under the leadership of current executive director Barry Lynn, however, AU has become a bane to conservative Protestant churches and organizations because of its hard-line views on the separation of church and state.
Project Fair Play has resulted in AU's submission of 11 formal complaints, including one that alerted the IRS to a letter distributed at Second Baptist Church in Lake Jackson, Texas, stating that people who vote for President Clinton are "guilty before God" (CT, May 20, 1996, p. 75).
Overall, the targets include seven churches, a Catholic archdiocese, a Buddhist temple, and the predominantly Catholic pro-life organization American Life League. Lynn says seven of the complaints related to support for Republican candidates, three for Democrats, and one independent.
"Clearly, the IRS has not been active enough in looking at nonprofits, including churches, who cross the line into politically partisan endorsements," Lynn says. How seriously the IRS is taking AU's complaints is not known outside the federal agency.
AU warned churches around the country last year that distributing voter guides produced by the Christian Coalition could put them at risk of "having their tax-exempt status challenged and possibly revoked." In order to meet federal nonprofit regulations, voter guides must be educational and informational in nature, not politically partisan.
Voter guides, for example, with color photos of one slate of candidates and unflattering black-and-white shots of the other would be suspect. Other considerations include fair representation of candidates' views, balanced selection of issues, and timing of the distribution of the guides. Nonprofit tax counsel Milt Cerny advises that churches "carefully evaluate [voter guide] content and format, with legal counsel, to ensure that it complies with IRS requirements."
To abide by the tax code, political involvement must not show a candidate preference. "I tell pastors that if they preach the gospel and the truth, people can figure out who to vote for," says a certified public accountant, James E. Guinn of Irving, Texas.
Other allegations suggest that the IRS is singling out conservative political organizations, including the Heritage Foundation, Citizens Against Government Waste, and Fortress America, for audits. In the case of the Heritage Foundation, the IRS apparently initiated its audit after Democrats complained that Heritage, a leading tax-exempt conservative think tank, crossed the line into politics by using gop leader Bob Dole in a highly successful fundraising campaign in 1995.
IRS Commissioner Richardson has offered to share confidential information with appropriate members of Congress, claiming it would "demonstrate the IRS's fair, impartial, and nonpartisan enforcement of the internal revenue laws in the exempt organization arena."
The official denial means little to some conservatives, including Joseph Farah, executive director of the Fair Oaks, California-based Western Journalism Center (WJC), which is being audited by the IRS. WJC's mission is to expose government waste, fraud, and corruption. According to Farah, the documents originally requested by the IRS focused on WJC's journalistic challenge to the Clinton administration's version of events surrounding the death of White House Deputy Counsel Vincent Foster.
LIMITING CHURCH FREEDOM? An additional cause for concern in the nonprofit community has developed concerning the Taxpayer Protection Act, signed by Clinton last summer. This law empowers the IRS to impose financial penalties on individuals who receive what the IRS considers excessive salaries or benefits from nonprofit organizations. Sanctions also may be imposed on board members who knowingly approve excessive compensation (CT, Nov. 11, 1996, p. 110).
Prior to this legislation, the only punitive option available to the IRS was to revoke tax-exempt status. Opponents of the legislation fear that enhancing the agency's sanctioning options may lead to unwarranted intrusion into the affairs of nonprofit organizations.
According to Guinn, the legislation's proponents "point to the extreme excesses of a few ministers and ministries as proof that this law is necessary." Guinn adds that, no matter how well intended, the law "demonstrates an increased willingness on the part of the federal government to meddle in the affairs of the church."
A 1995 report by a House Ways and Means subcommittee reports that the IRS revoked 60 tax exemptions during 1991-92. Of those 60 revocations, 20 were for "unreasonable compensation" and 5 were for political activities.
CONSPIRACY REJECTED: While not wishing to defend all IRS actions, Richard Hammar, editor of Church Law and Tax Report and legal counsel to the Assemblies of God in Springfield, Missouri, maintains that "the idea of an IRS crusade against churches is ludicrous to anybody who's been a federal employee." Hammar, formerly employed by the U.S. Department of Defense, points out that the number of IRS agents assigned to tax-exempt groups has declined since 1990, as has funding for IRS oversight of exempt organizations.
Cerny, who serves as tax counsel for Campus Crusade and worked for the IRS from 1960 to 1988, predicts the agency will be vindicated by Congress. "The people who work for the IRS are high caliber professionals who adhere to their constitutionally sworn duty to uphold the law," Cerny says.
This is not the first time that the IRS, churches, and nonprofits have tangled over tax exemptions. In 1975, the IRS revoked the tax exemption of Bob Jones University in South Carolina because the school banned interracial dating.
Also in the mid-1970s, independent Christian schools mounted a massive public protest over moves by the IRS to revoke the tax exemptions of those schools for "de facto segregation." Paul Weyrich, a leader in the early days of the Christian Right movement, admits in William Martin's With God on Our Side (Broadway Books, 1996) that the campaign against the IRS was a watershed event, galvanizing Christian conservatives to act in concert against what they considered government interference.
MORE THOROUGH AUDITS? Public criticism of the IRS comes at a time when the agency is shrinking.
The IRS expects in 1997 to trim its work force by 2,700 positions and lower its overall audit rate to 1.18 percent from 1.63 percent in 1996. Considering that the IRS handles 200 million individual and business returns annually, the rate reduction is significant.
In addition, the IRS reports that fewer nonprofits are being audited. Recent IRS reports show that exempt-organization audits peaked in 1990 at 16,205, declining annually to 1995 at 10,497.
The IRS says the decline is due in large part to the agency's Coordinated Examination Program. With this program, agents conduct an extensive audit project on an entire system of economically related organizations, such as health-care systems or colleges. The result is fewer, but more thorough, audits.
According to a Wall Street Journal report, audits of exempt organizations in 1995 resulted in $126 million in assessments and penalties. The IRS reports that few penalties are based on outright scams. Most commonly, organizations are cited for failing to comply with employment tax laws and income from unrelated business activity. For example, the IRS and an organization may disagree on whether someone is considered an independent contractor or an employee.
While relatively few audited organizations are penalized, some of the groups are large, and the average penalty is $1.5 million.
In an in-depth interview with Christianity Today, a top IRS official, who asked not to be named, defended the agency's track record as well as the new Taxpayer Protection Act. He says the new law "enables us to go directly to the bad transaction, undo it, and penalize the individual who engineered it, rather than the organization."
The IRS official says the agency is not interested in usurping the autonomy of nonprofits but rather intervening only in cases of blatant abuse. "We won't catch anybody by surprise," the official says. "We're probably going to be dealing with the same kinds of excessive payments that have always been front-page news when they've been made public, because they shock the populace. We're not talking about the IRS setting precise salary levels."
One of the conditions for nonprofit organizations to retain their special status has always been to make financial information public. Citizens may obtain such information, contained in Form 990, either from the IRS or now via a mail request directly from the nonprofit.
According to the official, this approach "recognizes the fact that the IRS never would—and frankly never should—have the resources to audit every organization every year. In order to keep organizations operating appropriately, the best way to encourage voluntary cooperation is to have books and records out in the sunshine." The official adds that such entities as the IRS, state attorneys general, and charity regulators all depend on the public to report instances of possible illegality.
The IRS official says the fact that the congressional investigation is being conducted by the Joint Committee on Taxation indicates that lawmakers want "a fair but rigorous review. The citizens of the country deserve that, and I'm confident that it will happen and confident it will show that the IRS carries out its mission the best it can with its resources."
QUESTIONING THE BOUNDARIES: As the IRS controversy has unfolded, more Christian leaders are asking basic questions about whether the agency has stepped over the constitutional boundaries protecting free expression of religion and freedom of speech.
In the Pierce Creek case, ACLJ attorney Sekulow maintains that the church did not violate the IRS code, in part because no political campaign benefited financially. Sekulow points out that the ads did not tell people whom to vote for, only that voting for Clinton would be a sin.
"I don't think any church should be regulated by the IRS with regard to what pastors say from the pulpit or in their writings," says Sekulow. "The IRS has gone way overboard and way outside its authority in this whole area, and they need to get out of it."
Beyond the facts of any particular case is a debate over whether the IRS code is constitutional. Sekulow believes it is not, and he is not alone.
"The practice of churches and clergy engaging in political rhetoric and activity is something that predates the Constitution," Hammar says. "The Church at Pierce Creek may have crossed over the line, but it's a highly questionable line to begin with from a legal perspective."
While some consider church-state separation the pinnacle of a free society, others hold that unfettered speech is paramount.
"The church should not be muzzled," Sekulow says. "If a black pastor in Louisiana wants to say, 'Don't vote for David Duke,' I think he has the right to say that and not to worry about tax-exempt status being revoked."
AU's Lynn, however, maintains that a ban on partisan politics adopted by Congress in 1954 is both wise and consistent with what the Constitution conveys about the separation of church and state. "It needs to be enforced with greater vigor," Lynn says. "It's unfair to have most churches abiding by the law and a few say they're above the law."
But how long that 1954 legislation will remain valid is another question. "Congress is looking at this [Pierce Creek] case very carefully," says Sekulow, adding that if ACLJ's appeal fails, the case "will go right from the courts of the United States to the halls of Congress."
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