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U.S. Senate Democrat to examine tax-exempt group rules

A woman walks out of the Internal Revenue Service building in New York in this May 13, 2013 photo. REUTERS/Shannon Stapleton
A woman walks out of the Internal Revenue Service building in New York in this May 13, 2013 photo. REUTERS/Shannon Stapleton

WASHINGTON (Reuters) - The Democratic chairman of the U.S. Senate Finance Committee said his tax code revamp will examine rules for nonprofit groups' political activities in hopes of preventing a repeat of the botched Internal Revenue Service review that has landed the tax collector in hot water.

Senator Max Baucus defended Democrats' call for more scrutiny of so-called 501(c)4 groups, a type of tax-exempt status that allows the entities to engage in a limited, but vaguely defined, amount of political activity.

The IRS admitted last week it inappropriately targeted conservatives groups for extra scrutiny when sorting through a flood of applications for the status over the past several years. The admission set off a furor over the tax-collecting agency's power, a series of congressional hearings and an FBI probe.

Republicans and Democrats alike expressed outrage at an inspector general report issued on Tuesday that found gross mismanagement and staff inexperience amid the targeting.

"Clearly something is amiss for the IRS to behave the way it did," Baucus said on the Senate floor.

Baucus and his counterpart in the U.S. House of Representatives are working to write legislation to revamp the entire tax code, and the Montana Democrat will explore the 501(c)4 issue in a hearing on Tuesday.

"What part of the tax code has to change for us to guarantee this overreach never happens again? ... This will be an issue we delve into in tax reform," Baucus said.

Some Democrats and campaign finance reform advocates have for several years called for the IRS to more actively police applications for tax-exempt status, amid an explosion of well-funded groups, including some run by well-known political operatives. That explosion followed a 2010 Supreme Court decision freeing groups to spend unlimited amounts on political causes.

In the 2012 elections outside spending by conservative groups, including 501(c)4 groups, was $860 million, more than double liberal groups' $407 million outlay, according to the Center for Responsive Politics, a nonpartisan watchdog group.

"It is completely unacceptable to be targeting groups based on their political orientation, but we do worry that this one instance of egregious over-enforcement is going to justify under-enforcement by the IRS," said Tara Malloy, an attorney with the non-profit Campaign Legal Center.

The IRS on Wednesday said its tax-exempt office receives about 70,000 applications for tax-exempt status each year, handled by a staff of fewer than 200 people.

(Reporting By Kim Dixon; Editing by Mohammad Zargham)

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