IRS Scandal’s Origins Become Clearer Amid Other Questions

Photographer: Andrew Harrer/Bloomberg

The Internal Revenue Service headquarters stands in Washington, D.C. Close

The Internal Revenue Service headquarters stands in Washington, D.C.

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Photographer: Andrew Harrer/Bloomberg

The Internal Revenue Service headquarters stands in Washington, D.C.

Internal Revenue Service employees flagged a Tea Party case to their bosses in 2010 because they thought it might receive media attention. They couldn’t have known just how right they would be.

The IRS didn’t turn that concern in its Cincinnati office into an efficient process for handling the applications by politically oriented nonprofit groups for tax-exempt status, agency officials say. Instead, the case ballooned into a controversy that has led to resignations, congressional inquiries and a criminal probe.

The origin of the U.S. tax agency’s scrutiny of small-government groups is becoming clearer as lawmakers release transcribed interviews with IRS workers. The latest came yesterday, when Democrats posted the text of congressional investigators’ meeting with John Shafer, a screening manager based in Cincinnati.

What’s less clear is exactly why the groups’ applications were delayed for so long, why the IRS couldn’t come up with clear rules and why senior executives didn’t tell interested lawmakers about concerns earlier.

“We’re still early in that process,” said Representative Charles Boustany, a Louisiana Republican.

FBI Director Robert Mueller said the federal criminal investigation into the IRS is a “high priority” and that he has more than a dozen agents working on the case.

‘Pushed Aggressively’

“It’s a high-priority investigation and it needs to be handled with care, but it also needs to be pushed aggressively because it’s an important case,” Mueller told lawmakers on the Senate Judiciary Committee today.

Amid concerns from Republican senators about the pace of the investigation, Mueller said his agents have moved “expeditiously” and that the FBI is taking the investigation “very seriously.”

“I can tell you it’s not languishing,” Mueller said.

According to Shafer, the case that started it all was reviewed by an employee who looks at 20 to 25 nonprofit applications a day.

That particular case -- the name of which isn’t known because of privacy rules -- indicated “potential political activity” and lacked information that would have enabled the IRS to immediately decide whether to grant tax-exempt status, Shafer said.

More Attention

“Because of media attention that he had seen, he had concerns about this being a high-profile case” that deserved more attention than a typical application, Shafer said of his employee.

Shafer’s interview -- like the others released so far -- show no evidence of political motivation or involvement from government officials outside the IRS exempt organizations division. Shafer is a self-described “conservative Republican.”

The lack of information on that application presented a challenge for the IRS as it tried to decide whether to grant nonprofit status under section 501(c)(4) of the tax code.

Such groups must be operated “exclusively” for social welfare. IRS rules interpret that to mean they can’t have politics as their primary purpose.

Shafer decided to flag that case to his bosses and IRS lawyers in Washington, who then decided to look at similar cases together.

Tea Party

Shafer’s statement fits with what Elizabeth Hofacre, another IRS employee in Cincinnati, told investigators. She said that employees initially focused so much on whether anti-tax Tea Party groups should qualify for tax-exempt status that she sent groups that self-identified as conservative and liberal back to the general pile.

“We had a Tea Party case come in, so we used the word Tea Party” in flagging groups requiring special attention, said Gary Muthert, who also worked in the Cincinnati office that processed applications for tax-exempt status. He said he conducted some of the first searches for the groups in the agency’s database.

Muthert said he broadened his search to include terms such as “patriots” and “9/12” because he noticed those words used on Tea Party websites. He also said he had been told that someone in Washington wanted such cases reviewed.

According to Shafer, Holly Paz, a lawyer in the tax-exempt division in Washington, was involved in 2010 in deciding to collect these cases together. IRS officials have described this effort as an attempt to collect similar cases so they could apply consistent rules. Paz was replaced June 7.

Releasing Transcripts

Representative Elijah Cummings of Maryland, the top Democrat on the House Oversight and Government Reform Committee, released the transcript yesterday. He continued a feud with Republicans over when transcripts should be made public.

“It debunks conspiracy theories about how the IRS first started reviewing these cases,” Cummings said in a letter to committee Chairman Darrell Issa, a California Republican. “These facts are a far cry from accusations of a conspiracy orchestrated by the White House to target the president’s political enemies.”

Issa, who has released some partial transcripts, said in a statement that he was “deeply disappointed” by Cummings’s decision and that it will hurt the investigation.

‘Wrongly Argued’

“Cummings has wrongly argued that questions about IRS conduct are somehow not legitimate,” Issa said. “His own previous release of excerpts from this very same transcript undermines his claims that the committee is somehow trying to keep some specific revelation from public view.”

Shafer, who has worked for the IRS since 1992, said repeatedly that cases were decided on their merits without outside influence or politics.

In the interview, Shafer said he supported his employee’s decision to label the Tea Party application as a case that potentially merited extra attention.

Shafer’s decision on the first case didn’t necessarily mean subsequent Tea Party cases were singled out due to applications that lacked information. He said he was looking for cases that might set precedents.

His statement that the scrutiny started with one case undercuts the IRS’s argument that it encountered a flood of applications from politically oriented nonprofits. Later on, employees saw more Tea Party cases come in and tried to find a consistent approach to handling them.

Review Exceptions

Shafer said he didn’t direct his employees to select all cases with “Tea Party” in the name for further scrutiny. In the interview, he said he looked at one case from 2010 that had Tea Party in the name that didn’t go into the pile of cases awaiting additional review.

He also referred to a document from March 16, 2010, showing that three cases were approved before others were held.

Shafer wasn’t involved in the later stages of the IRS effort, when the agency’s responses slowed as employees awaited guidance from Washington lawyers and the IRS sent what it later said were inappropriate questions to the groups.

“So many of these things are beyond what the scope of my job is,” he said. “The first three days of life, you might say, of an application is what I dealt with.”

James Sallah, one of Shafer’s attorneys, said in a statement that the interview speaks for itself.

“It is clear that Mr. Shafer was carrying out his job without any political motivation,” he said.

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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