Well, the IRS fiasco just keeps on getting more and more interesting. The Wall Street Journal reported on May 31 that a group called Freedom’s Watch, which was formed in 2007 to support President Bush’s escalation in Iraq, was targeted by the IRS in February of 2010. That probe leeched into “executive compensation,” which led to five donors being audited for “their contributions that sought to impose gift taxes on their donations to the group, according the Journal’s Dionne Searcy and John D. McKinnon. The group, which only lasted two years, was a 501(c)(4), which meant it was allowed to engage in some political activity. The gift tax, which prompted the audits, was designed to keep wealthy individual from avoiding death taxes by “giving away their assets.” Yet, it seemed the agency again overreached in their enforcement.
Tax experts say that effort was highly unusual. The IRS generally hadn’t sought to impose the gift tax on donations to tax-exempt groups such as Freedom’s Watch in at least 20 years, perhaps longer, following an unfavorable court ruling and changes in the law by Congress, according to lawyers and IRS documents.
The IRS action “was kind of like a nuclear bomb going off,” said Rob Kelner, who heads the election-law practice at Covington & Burling LLP. “Although we always knew this was a possibility, it disrupted that long-standing understanding among election lawyers that this was an area where the IRS wasn’t likely to go.”
The IRS efforts were made public after a lawyer brought up the audits at a tax conference in mid-2011. Republican lawmakers complained to the agency, saying the abrupt action was unfair and would chill constitutionally protected free speech.
That was in 2011, and as a result, the probe was suspended. Nevertheless:
[The gift tax] is broadly worded and could be applied to many types of transfers. Legislation in the 1970s clarified that campaign contributions to parties, candidates and political action committees aren’t subject to the gift tax.
“It’s perfectly plain to see that Freedom’s Watch’s donors were singled out…in a complete break with decades of precedent and IRS procedure,” said Ari Fleischer, a board member of the group and former White House press secretary for Mr. Bush, in an interview.
In response to questions in 2011, the IRS confirmed it had sent the gift-tax audit letters to five taxpayers. The five letters resulted from “a single matter,” then-IRS commissioner Douglas Shulman said in May 2011. In July, in response to the outcry on Capitol Hill, the IRS announced it was ending the audits and wouldn’t conduct any more until after a review.
Mr. Shulman and Ms. Lerner didn’t respond to requests for comment.
For good reason, especially for Lerner since her unit within the agency conducted the audit, and had access to the names in question.
The audit of Freedom’s Watch was conducted by Ms. Lerner’s exempt-organizations unit. The gift-tax audits were conducted by workers in the estate and gift-tax unit, housed in a separate division of the sprawling IRS.
In a 2011 letter, GOP lawmakers asked whether the exempt-organizations unit played a role in the gift-tax audits. In a written response, a top IRS official implied the exempt-organizations unit referred the matter to the estate-and-gift tax unit.
The official, Steven Miller, who was recently ousted as acting commissioner, said the gift tax unit didn’t have access to the names of donors to 501(c)(4) groups. Instead, those names are directly available only to Ms. Lerner’s unit.