Report: IRS Illegally Targets American Legion for Scrutiny
In the latest of a series of revelations that have racked the Internal Revenue Service, the American Legion is reporting that it has been singled out by the IRS for unusually strict reporting requirements. Specifically, the IRS has told the American Legion that it must maintain dates of service and eligibility records for all their members. Failure to do so, and to make this information available to IRS auditors, will result in a fine of $1,000 per day, according to reporting from the Daily Caller.
The IRS has been under fire for several months after information surfaced that showed that the IRS department specializing in tax-exempt organizations – a Cincinnati office under the direction of Lois Lerner, had been illegally singling out conservative and Tea Party organizations by holding up their applications for tax-exempt status, and by ordering them to comply with extensive questionnaires and unusual documentation requests. In at least one case, the IRS ordered one conservative organization to describe the content of the organization’s prayers.
Meanwhile, applications from liberal organizations likely to be supportive of the Obama Administration were fast-tracked, with relatively little or no scrutiny.
The Daily Caller story provoked outrage among conservatives, including this op-ed in the Investors Business Daily excoriating the Obama Administration and the IRS for targeting veterans.
It turns out that this is not the first time the American Legion has found itself in hot water with the IRS. A number of posts in the Central Atlantic area came under scrutiny in 1995, as a result of a number of issues, among them:
- Illegal gambling operations
- Failure to pay taxes on revenues from the sale of alcohol and gambling revenues, which the IRS held was not part of the public mission of the organization.
- Failure to pay taxes on revenues from Bingo games, which were not restricted to members but were open to the public.
- Granting ‘social memberships’ to individuals who were not armed services veterans.
- Not reporting revenues from unrelated business activities such as renting Legion halls to outside groups.
The IRS audited at least 29 separate VFW and American Legion posts at that time, looking to uncover irregularities like these.
While the IRS itself is not commenting on any specific cases, the question of ‘social memberships’ appears to be in play. These are memberships the organization grants to non-veterans, for whatever reason. While IRS rules do allow for the participation of spousal auxiliary organizations in VFW and American Legion activities, the excess granting of social memberships to non-qualified members appears to have become an issue – hence the new requirement for posts to keep records of members and their proof of service.
Specifically, in order to qualify for tax-exempt status allowed to veterans’ organizations, the American Legion, VFW and other similar organizations have to show that at least 75 percent of their members are past or present members of the Armed Forces of the United States, and that 97.5 percent must be:
a. Present or former members of the U.S. Armed Forces;
b. Cadets (including only students in college or university ROTC programs or at Armed Services academies) or
c. Spouses, widows, widowers, ancestors or lineal descendants of individuals referred to in (a) or (b).
More broadly, the IRS appears to be cracking down on something called unrelated business income. In a nutshell, if a tax-exempt organization operates a trade or business that is not directly related to its mission, that is considered unrelated business income and is subject to income tax. For example, if an American Legion post operates a military museum, and charges admission to the museum to raise money, this is directly related to the organization’s educational and community service charter. But if it operates a bingo game, or a restaurant – especially if the bingo game or restaurant is open to the public – then the income generated from that activity is generally taxable.
The IRS does this so that business enterprises run by tax-exempt organizations – whether operated by churches, veterans’ organizations or the Rotary Club – do not get an unfair advantage over taxable private enterprises.
However, the IRS has specifically issued guidance to veterans groups that gambling operations can be considered appropriate activities for Section 501(c)19 organizations, provided the gambling is limited to members of the post and their guests – and provided the member pays all of the guests’ expenses. (More information is available in IRS Publication 3079 – Gaming Publication for Tax-Exempt Organizations.
The IRS has had its credibility severely damaged in recent months, however, thanks to the corruption in the Cincinnati office overseeing applications for tax-exempt status. Furthermore, veterans broke strongly against Obama in the last two elections. Is this latest dust-up with the American Legion part of that same effort? It’s difficult to say for certain. Just because the American Legion has had tax issues in the past does not mean they weren’t improperly targeted for special scrutiny by Lois Lerner and her staff at the IRS office in Cincinnati. However, it is also true that just because the IRS may have improperly targeted veterans’ groups, that doesn’t mean that the American Legion and other veterans groups don’t have some sticky tax issues, either.