U.S. IRS Used Faulty Criteria to Flag Groups, Report Says

Photographer: Andrew Harrer/Bloomberg

The Internal Revenue Service (IRS) has been under pressure to regulate political spending by nonprofit groups, in particular those falling under Section 501(c)(4) of the U.S. tax code. Close

The Internal Revenue Service (IRS) has been under pressure to regulate political... Read More

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Photographer: Andrew Harrer/Bloomberg

The Internal Revenue Service (IRS) has been under pressure to regulate political spending by nonprofit groups, in particular those falling under Section 501(c)(4) of the U.S. tax code.

The Internal Revenue Service used inappropriate criteria to select nonprofit groups for scrutiny and “ineffective” management didn’t correct it, according to an inspector general’s report.

The report, released today, cites no evidence of partisan intent by IRS employees or involvement from outside the agency.

The practices at the IRS, which the agency first acknowledged May 10, are the subject of four separate congressional investigations and a Department of Justice criminal probe.

The IRS apologized for singling out groups seeking tax-exempt status for extra scrutiny based on whether their names included words such as “tea party” and “patriot.” The report said that only “first-line management” approved references to the Tea Party in criteria for flagging the groups.

The tax agency said in a statement tonight that it didn’t disclose targeting of nonprofit groups based on ideology because officials didn’t want to interfere with an inspector general’s investigation.

“There was no intent to hide this issue,” the IRS said.

The inspector general also criticized the IRS for delays in processing applications and for asking questions that the agency later deemed unnecessary.

The criteria as designed were ineffective in helping the IRS determine which groups applying for tax-exempt status should receive extra scrutiny because they might be primarily political. The report estimates that the tax agency missed 141 applications that should have been flagged.

Changed Criteria

The corrective actions taken by the IRS haven’t resolved all issues, the report said.

The report found that the team of specialists reviewing applications at one point changed the criteria to focus on the groups’ policy positions, without receiving approval from managers, because they thought the rules were too broad. Supervisors didn’t find out about the change for three months, and then revised the criteria again.

The inspector general “continues to believe that the IRS should better document the reasons why applications potentially involving political campaign intervention are chosen for review and develop and publish guidance,” the report said.

The inspector general, Russell George, and the acting IRS commissioner, Steven Miller, are scheduled to testify at a Ways and Means Committee hearing May 17.

The White House said it had no involvement in the matter.

“I am certainly not aware and am confident that no one here was involved in this,” White House spokesman Jay Carney said in Washington today before the report’s release. “We have to find out exactly what happened.”

Extra Scrutiny

The IRS told congressional staff during a briefing yesterday that 471 groups have received additional scrutiny, according to a letter sent by the House Oversight and Government Reform Committee to the IRS. The letter didn’t say how many of the groups were Tea Party-related.

IRS officials told oversight panel staff that applications from organizations seeking tax-exempt status were “essentially placed in a state of purgatory where they often languished without action” for as long as two years, panel Chairman Darrell Issa, a California Republican, said in a letter to the agency.

No IRS employee has been disciplined, the letter said, while one employee who reviewed applications in the IRS’s Cincinnati office has “received a promotion or a ‘career enhancement.’”

The acting IRS commissioner said the agency’s errors in targeting small-government groups stemmed from the lack of a “sufficient process” and weren’t the result of partisanship.

Applications Doubled

In an opinion piece in USA Today, Miller wrote that the IRS sought to centralize its handling of applications for tax-exempt status following a “sharp increase” in the number of applications, which more than doubled between 2010 and 2012.

“While centralizing cases for consistency made sense, the way we initially centralized them did not,” he wrote. “The mistakes we made were due to the absence of a sufficient process for working the increase in cases and a lack of sensitivity to the implications of some of the decisions that were made.”

The House Ways and Means Committee today requested documents from the IRS that explain who knew about the targeting inside and outside the agency and why the IRS didn’t tell lawmakers about what the inspector general had found. The letter also asked whether groups whose missions involved Israel received special attention.

Miller and then-commissioner Douglas Shulman were briefed on the investigation in May 2012.

‘Purposely Misled’

“I think they purposely misled me,” said Senator Orrin Hatch of Utah, the top Republican on the Finance Committee. “This is really, really, very disconcerting to me.”

Attorney General Eric Holder said at a news conference today that he ordered a criminal investigation May 10.

“Those were, I think as everyone can agree, if not criminal, they were certainly outrageous and unacceptable,” Holder said. “We are examining the facts to see if there were criminal violations.”

Several lawmakers including Republican Senators Marco Rubio of Florida, Roy Blunt of Missouri, and John Cornyn of Texas, have called on Miller to resign.

Anti-tax Tea Party groups, some of which include the word “patriot” in their names, formed after Obama took office in January 2009 and helped fuel gains by Republicans in the 2010 midterm election that gave the party control of the U.S. House.

In addition to groups with “tea party” and “patriot” in their names, other organizations selected for the additional IRS review included those in which “statements in the case file criticize how the country is being run,” according to a June 29, 2011, briefing given to Lerner, the timetable says.

The IRS has been under pressure to regulate political spending by nonprofit groups, in particular those falling under Section 501(c)(4) of the U.S. tax code. Organizations qualifying for that status don’t have to disclose donors even when engaging in political activity.

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

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