This post was originally published on Forbes Jul 13, 2015
The perennial never-ending IRS scandal now on Day 795 by TaxProf count , in part, is a search for smoking guns. Sometimes it turns out that all that can be found is unloaded, never fired guns. The response of those promoting the scandal narrative is that, you have to look harder. Enough is never enough. Sometimes the courts agree that the IRS must search its records more assiduously. Earlier this month, though the DC District issued an enough is enough ruling on one of Judicial Watch's Freedom of Information Requests.
Not Easy To Figure Audit Odds
The FOIA request concerned Lois Lerner's Cincinnati gang that couldn't sort straight causing individuals connected in one way or another to the exempt applications to have their individual returns audited. There is anecdotal evidence that this sort of thing was going on. Various Tea Party people came forward and indicated that they were audited for the first time after they became involved. The problem with that type of anecdotal evidence is that every year some number of people are going to be audited for the first time. You would expect that some number of those audited in say 2011 were active in the Tea Party or similar groups.
You are never going to convince most of those people that it was just luck of the draw. It would be very hard to make a statistical inference about whether Tea Party affiliation or something like that affected individual audit probability, since it is hard to define the group that the sample is being drawn from and it is possible, even likely, that the people who became involved in the conservative causes were people who already had a higher than average probability of being audited.
So Judicial Watch's FOIA request was for
Any and all records and communications concerning, regarding, or related to the selection of individuals for audit based on information contained in 501(c)(4) tax exempt applications.
The decision gives us a guided tour of IRS operations as we learn about the search that was conducted to find responsive documents.
These divisions are: (1) the Wage and Investment Division, which “serves individual taxpayers ... with wage and investment income only”; (2) the Small Business/Self-Employed Division, which focuses on taxpayers that are either small businesses or self-employed; (3) the Large & Mid-Size Business Division, which works with “corporations with assets greater than $10 million” as well as business and individuals with certain international focuses; and (4) the Tax Exempt and Government Entities Division, which “serves three distinct taxpayer segments: Employee Plans, Exempt Organizations, and Government Entities.”
“All applications for tax exempt status” under Section 501(c)(4), “are processed by the Rulings and Agreements Office within the Exempt Organizations Unit of [the Tax Exempt and Government Entities Division]. The Tax Exempt and Government Entities Division does not conduct any audits of individuals, however.. Individual audits are conducted by one of the three other divisions.. Naturally, then, if information on a 501(c)(4) application caused the Tax Exempt and Government Entities Division to think that an individual audit was warranted, the Division would need to refer the individual to another division for such an audit.
Looking For Needles In The Haystack
The IRS retrieved from this recordkeeping system “a list of all referrals arising out of applications for tax-exempt status,” reviewed that list manually “to identify all taxpayer names that were not clearly organizations (creating a list of potential individuals),” and finally obtained and reviewed the referral documentation for these individuals “to determine if any referral arose from information contained in an application ... under [Section 501(c)(4)].”
Having found that the Tax Exempt and Government Entities Division had no record of ever referring an individual for audit based upon information contained in a 501(c)(4) application, the IRS then conducted searches of records within the other three divisions. These searches confirmed the lack of records regarding any such referral during the relevant time period.
There's more, but that gives you a pretty good idea.
Does The IRS Need To Look Harder?
Certainly Judicial Watch thinks so. They brought up indications that IRS had communicated with DOJ about prosecuting people for lying on 501(c)(4) exemption applications. That particular assertion has created some media excitement. I haven't figured out what is scandalous about it, particularly since it appears nobody was ever prosecuted. Those applications are signed under penalties of perjury and there is some indication that on some of them people were kind of shading the truth just a bit. The Court noted, though, that the communication to DOJ had nothing to do with audit referrals.
There are always the emails, of course.
The IRS argues that its findings that there are neither official directives nor guidance regarding the use of information in a Section 501(c)(4) application and that no individual audit referrals took place based upon information gleaned from a Section 501(c)(4) application make it unnecessary to search for further documents, including communications, on the subject. The IRS has also indicated that any search of the email accounts of its employees for communications that might pertain to a decision to select or not to select an individual for an audit based upon information in a 501(c)(4) application would require the search of approximately 16,000 employee email accounts (of individuals in 442 different cities), between individuals who worked in offices that process 501(c)(4) applications, those who conduct individual audits, and those who have policy-making authority over audit decisions.
The judge agreed with the IRS that searching all those emails would have been above and beyond.
The IRS argues that this incredible burden is especially undue because of the unlikelihood that anything responsive would be uncovered. The IRS's other searches establish—and Judicial Watch's evidence has not controverted—that no individuals were referred for audit based upon information gleaned from a Section 501(c)(4) application. Therefore, it is speculation at best to say that there exist communications discussing decisions to audit an individual based upon 501(c)(4) applications.
Will This Ever End?
I suspect that the IRS scandal will keep going at least through the upcoming Presidential election, since it allows Republicans to run against Lois Lerner. It is apparently also pretty good for fundraising. According to its 2013 Form 990, Judicial Watch raised over $20 million just shy of $6 million of that was spent on fundraising. I didn't see any mention of this DC District decision on their website in the weekly updates.
I have not been able to find any coverage of the decision. Hopefully some of my commenters will embarrass me with what I missed.