Wednesday, July 2, 2014

IRS Confusion

Maybe the IRS is not confused (though it is out of control) but the public certainly is.  THC has become aware that many people are confused about the tax status of the non-profit organizations, referred to as 501(c)(4) groups, which the IRS targeted for political reasons if they believed them to be conservative (or if they taught people about the Constitution - I am not joking about that), and believe that those who contribute to them can deduct those contributions when they file tax returns.

In reality, 501(c)(4) social welfare organizations are different from 501(c)(3) charitable organizations.  Taxpayers contributing to (c)(4) groups must do so with after-tax dollars; their contributions ARE NOT tax deductible unlike (c)(3) contributions which are tax deductible.

For the (c)(4) organization itself, the contributions it receives are not treated as taxable income so for those purposes they are tax-exempt.  As a practical matter it means they do not pay taxes on funds left unspent at the end of a year.

This confusion about the applicable tax rules extends even to the House Oversight Committee charged with oversight of the IRS!  From a recent hearing, listen to Chairman Issa (R-CA) correct Rep Maloney (D-NY) when it becomes clear she does not understand the applicable law.  It is worth a listen to hear your government at work.A couple of other things to keep in mind as you read and think about about the IRS scandal.  First, when a taxpayer undergoes an IRS audit, they are presumptively considered to be in noncompliance with the tax laws except to the extent they can proved otherwise by documentation.

Second, in cases before the U.S. Tax Court between the IRS and a taxpayer, the Court presumes that the IRS's determination is correct and places the burden of proof upon the taxpayer to prove that the determination is in error. The taxpayer can only shift the burden of proof by introducing credible evidence with respect to the issue.

So, based upon what we already know THC thinks it appropriate for the public to presume the IRS is at fault until such time as it can shift the presumption by coming forth with documented evidence.

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