NOVEMBER 3, 2016
The Earle Cabell Federal Building in downtown Dallas is an all purpose office complex, a bastion of federal bureaucracy located at 1100 Commerce St. Most people come for a passport or to get business done in front of a federal judge. But inside, a quiet review is underway that has direct ties to the raging presidential election: The local branch of the IRS' Tax Exempt and Government Entities Division is reviewing the tax status of the Bill, Hillary and Chelsea Clinton Foundation.
This IRS review has not generated similar waves as Department of Justice probes into the foundation, and has largely been forgotten in the campaign's melee. It's just not as sexy as private email servers, FBI infighting and charges of political pressure applied to law enforcement.
But even though this examination is less scrutinized and is harder to conceptualize, it's impact may be important. The report won't likely be done in time to influence the presidential campaign — even though the review started more than four months ago — but it could certainly influence the first term of a Hillary Clinton presidency.
As with anything tax related, the status of the foundation may be determined using rules few understand. And that makes understanding the work at 1100 Commerce St. in Dallas that much more important.
In Washington, D.C., many things start with words printed on congressional letterhead. Earlier this year, 64 GOP members of Congress asked the IRS to investigate why the foundation can keep its nonprofit status. The letter includes “media reports” claiming pay-to-play relationships between former President Bill Clinton, who received large speaking fees, and decisions made by Hillary Clinton to approve choices that benefited foundation donors. The sources of these reports range from The New York Times to hit-piece investigative books.
In July, the IRS sent letters back to the Congress informing members the review had begun. The letter also noted that the Tax Exempt and Government Entities Division (TE/GE) office in Dallas would be conducting the review.
IRS spokespeople in Dallas and Washington won’t say why the review is being conducted in Dallas. Spokespeople claim even this information would violate rules — Code 6103, staff make sure to cite — that stop them from discussing ongoing examinations. IRS officials declined to provide details about the Dallas office, including its size, or comment on the TE/GE work in general.
On its website, the Tax Exempt and Government Entities Division refers the operators of nonprofits as “customers.” Their mission statement is: “To provide our customers top quality service by helping them understand and comply with applicable tax laws and to protect the public interest by applying the tax law with integrity and fairness to all.”
But the office does have a mandate to review claims of exemption, including conducting “examinations to identify and address non-compliance” like the one underway with the Clinton Foundation. One IRS document called the "Tax Exempt and Government Entities Fiscal Year 2017 Work Plan" gives a more complete picture. “Filing, organizational and operational and employment tax numbered among the top issues the Exempt Organizations Examinations group uncovered in its 4,984 examinations in 2016," it says. "The filing issues primarily involved verifying exempt activities and securing delinquent returns.”
The TE/GE focuses on nonprofit groups, which is specialty work that requires experience. “They are pretty much career people,” says Ben Stoltz, an attorney with Perliski Law Group, a Dallas boutique firm with half of its business representing nonprofit groups. “It’s a different side of the IRS than people are used to seeing. ... They're generally very cooperative, but they're also the watchdogs."
The mix of awareness and enforcement dovetails with cases that get publicity. "They have a limited budget, which is a problem, so they have to pick their targets wisely," Stoltz says. "Because this is a high profile case, they can make an example and show that no one is above the law.”
Indeed, according to the division's 2017 Work Plan, the year "will build upon efforts to increase audit efficiency and to invest our limited resources in areas that provide the greatest impact."
The strategy is focused on big money charities: "Our examinations will cover all gross wage categories but with an emphasis on entities with gross wages of $10 million or more; approximately 75 percent of examination closures will be of these returns."
In 2014, the Clinton Foundation tallied its salaries at more than $26 million, according to IRS filings. So that puts the Clinton Fpundarion square in the middle of the Work Plan's enforcement strategy.
Stoltz says the complexity of the Clinton Foundation’s work means such an examination would take months. The IRS said it began the review in July.
Staff with Texas Congressman Pete Sessions, who signed the letter, tell the Observer that they have not heard back from the IRS with any updates or an estimate of when their examination will be complete. No one expects a decision before Nov. 8.
The case against the Clinton Foundation is multifaceted. One common attack is that the foundation has overextended its original mandate. “The Foundation’s original application to the IRS in 1997 advised that it was formed to construct a library, maintain a historical site with records, and engage in study and research,” said Tennessee Republican Rep. Marsha Blackburn in an email to the Observer. “It did not indicate an intent to conduct activities outside of the United States, which was on one of the codes included in the IRS ‘Application for Recognition for Exemption’ in effect at the time. This would appear to prohibit much of the overseas work the Foundation has performed.”
This overseas growth is true, but maybe not as damning as it sounds. Many charities shift focus over time, although most nonprofit groups will reach out to make sure the IRS has no problem with new international work. This is smart because the TE/GE folks have a slate of specific questions for the people handing over U.S. charity money to recipients in other countries, something tax wonks call “expenditure responsibility.” Any charity would be wise to know the rules before diving in.
The Clinton Foundation didn’t reapply for its status as a nonprofit group, but they haven’t run afoul of IRS laws governing distribution of charity money. “It’s not like they filed their application and then never told the IRS anything after that,” Stoltz says. “The division reads the tax returns, it’s sort of like filling out a new application each year.”
So the failure to update an application to include international work is not a smoking gun of nonprofit malfeasance, but there are other places the foundation is more at risk.
Most IRS reviews aim to discover if nonprofit officials and members are enriching themselves with the money raised for charity. Spending money on staff salaries and lavish events are common nonprofit pitfalls. If the board of directors knew of the abuses, they too could be violating the law.
Using a nonprofit group for personal enrichment — called inurement — is one sure-fire way to gain IRS scrutiny.
In the case of the Clinton Foundation, it’s not exactly a matter of stealing from the cookie jar. The bookkeeping — with documents available for public as well as IRS scrutiny — appears sound since the IRS has not raised any red flags. The foundation spends a solid 88 percent of its money on actual programs, according to the group Charity Tracker. That's pretty good ratio of overhead to actual charity work.
But the Clinton Foundation problem is more nebulous. The central question is not exactly one the IRS can easily track: Did the founding members trade influence for donations, especially while Hillary Clinton was secretary of State?
Clinton and her staff have consistently denied any conflicts of interest or improper enrichment and cite reporting holes in the media stories and books claiming pay-to-play relationships. But since July, more information has been revealed, via hacked email correspondences of Clinton adviser John Podesta released by Wikileaks.
The emails reveal that Chelsea Clinton ordered an audit of the foundation and “some interviewees reported conflicts of those raising funds or donors, some of whom may have an expectation of quid pro quo benefits in return for gifts.”
That’s an eye-catcher for the TE/GE folks looking for specific examples of inurement. Instead of money changing hands, the IRS is looking to see if the Clintons traded money for preferential treatment. The IRS rules lay out what qualifies as inurement:
“Any transaction between an organization and a private individual in which the individual appears to receive a disproportionate share of the benefits of the exchange relative to the charity served presents an inurement issue. Such transactions may include assignments of income, compensation arrangements, sales or exchanges of property, commissions, rental arrangements, gifts with retained interests, and contracts to provide goods or services to the organization.”
Given this language, citing “gifts” and “quid pro quo benefits” in emails is a pretty bad move for anyone involved in a nonprofit group. Another bad move: When senior Clinton advisers like Doug Bland call the intersection of the foundation fundraising and the former president’s personal activities “Bill Clinton Inc.”
If there’s a silver lining, Stoltz says, it’s that whatever the Clinton Foundation was or was not doing to raise funds, it will be hard to prove that there was damage done to the organization. That 88 percent statistic is helpful.
This is where the conversation veers back to the letter from Congress. GOP members have been sending letters to more than just the IRS. Demands to investigate the Clinton Foundation have led to a debate within the FBI, according to a story broken by The Wall Street Journal and confirmed by The Washington Post:
FBI agents argued — based at least in part on news accounts — earlier this year that the Clinton Foundation should be investigated for potentially giving donors special political access and favors. The Justice Department’s public integrity unit said they did not have enough evidence to move forward.
Still, other Clinton-connected foundation board members are under investigation, including one-time director and now Virginia Governor Terry McAuliffe. The organization is not a target, officials say, but the inquiry definitely does include his time on the board.
This all leaves the IRS investigation in Dallas as a sideshow to the main Clinton Foundation events playing out in the offices of other federal agencies. However, if other investigations expose pay-to-play schemes, the IRS could take that into consideration, strip the foundation of its nonprofit status and seek payment of back taxes.
Looking forward, there’s one last wrinkle: If the IRS gives the foundation a clean bill of health, it will likely resurrect charges that the tax exemption office operates with a political bias. In 2011 Lois Lerner, the IRS’ head of TE/GE, pleaded the 5th and left her position after a scandal broke surrounding the denial of nonprofit exemptions to right-wing groups.
A Department of Justice probe found "substantial evidence of mismanagement, poor judgment and institutional inertia leading to the belief by many tax-exempt applicants that the IRS targeted them based on their political viewpoints.” A Government Accountability Office report in 2015 found "there are several areas where EO’s controls were not well designed or implemented. The control deficiencies GAO found increase the risk that EO could select organizations for examination in an unfair manner — for example, based on an organization’s religious, educational, political, or other views."
The GAO said the expertise of the TE/GE staff could be a problem, if there are too few "gatekeepers" to pass along referrals for closer looks:
The specialization of the classifiers allows for in-depth knowledge of complex issues and for the opportunity to apply experience; however, internal control risks accompany this approach. First, for political activity, church, and high profile referrals, the classifier appears to serve as an initial gatekeeper for determining whether a referral is reviewed by a committee. Although committee reviews are intended as a safeguard against unfairness in the examination selection process, referrals that do not make it past the classifier do not undergo committee review.
The GAO recommended a host of changes, much of it focused on better documentation, more training and an increase in staff rotations. The IRS agreed to them — without admitting any guilt. In a response letter by deputy commissioner John Dalrymple, he says the IRS agrees that "internal controls are necessary to ensure we are applying the tax law with integrity and fairness. Although the report says that a hypothetical risk exists that returns could be selected unfairly, the draft report did not find any evidence that this has happened. Nevertheless, Exemptions Organization is committed to further strengthen our internal controls to ensure we continue to select organizations for examination in a fair and consistent manner. "
The DOJ determined that no crimes had been committed but the damage had been done — for many, the TE/GE will forever be partisan. The ruling on the Clinton Foundation's status, either way, will lead some to see continued partisanship inside the IRS or overreaching in a high profile case to prove they are not partisan.
But there is actually a bigger issue at stake as politics batters the nonprofit tax world. After all, the whole point of the IRS' involvement is to ensure that donations are actually used for charitable work.
“It boils down to the public trust,” Stoltz says. “This division is responsible for the integrity of the system. Americans donate more money to charity than anywhere else in the world. But for the public to donate, people have to believe that it’s legit.”
