The U.S. Senate Permanent Subcommittee on Investigations released earlier in September the Subcommittee's bipartisan report that investigated how the IRS processed applications for tax-exempt status under Section 501(c)(4) of the tax code. Under Section 501(c)(4), organizations such as civic leagues, that are not organized for profit but are operated exclusively for the promotion of social welfare are exempt from income taxation if, among other requirements, no part of their earnings inures to the benefit of any private entity or individual. These organizations are permitted to engage in political campaign activities on behalf of, or in opposition to, candidates for public office. However, to retain their tax-exempt status, such organizations must ensure that the political activities they undertake do not become their "primary" activity.

The Subcommittee Majority staff, after a thorough review, found, among others things, that the IRS inappropriate selection criteria, asked burdensome questions, and caused lengthy delays in processing applications for Section 501(c)(4) status submitted by both conservative and liberal groups, and observed no evidence of political bias by the IRS against conservative groups. The Subcommittee Minority staff, on the other hand, disagreed. The Minority Staff instead concluded that the IRS inappropriately targeted conservative groups by applying standards that were not applied to more liberal groups, which further delayed the application process.

In addition, the Majority staff found that the IRS had provided insufficient guidance and training to IRS personnel on how to process Section 501(c)(4) applications. Most importantly, the Majority staff found that the "facts and circumstances" test used by the IRS to evaluate Section 501(c)(4) applications was difficult to administer, and as a result, required IRS agents to ask a wide range of intrusive questions which slowed the application process and caused inconsistent decisions. The Majority staff recommended that the "facts and circumstances" test be replaced with objective standards and bright line rules to produce more predictable results.

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