May 21 (Bloomberg) -- The U.S. Senate’s first hearing on the Internal Revenue Service controversy looks more like two: Republicans pressed the tax agency for details of what happened and what they knew, while Democrats sought tougher rules for nonprofit political groups.
Senator Orrin Hatch of Utah, the top Republican on the Finance Committee, accused IRS officials of lying by omission about what they knew about the agency’s use of terms such as “Tea Party” and “patriot” in applying more intense scrutiny to small-government advocacy groups.
“It seems to me that it’s almost unbelievable to look at what’s happening and say there’s no political motivation here,” said Senator Mike Crapo, an Idaho Republican.
While expressing outrage at what the IRS had done, Democrats sought to broaden the discussion. They focused on the discrepancy between the laws governing the 501(c)(4) tax-exempt groups at issue in this case.
Under the law, such groups -- which don’t have to disclose their donors -- must be operated “exclusively” for the purpose of social welfare. The Treasury regulations say such groups can’t have politics as their primary purpose.
“A Mack truck is being driven through the 501(c)(4) loophole,” said Senator Max Baucus, a Montana Democrat and chairman of the committee.
Douglas Shulman, the former commissioner of the Internal Revenue Service, said the IRS has been handed a difficult task in determining which groups engage in political activity.
“If Congress could help clarify the law, that would be very helpful,” he said.
Shulman, making his first public statements on the IRS controversy, said he was “dismayed” and “saddened” to learn that IRS employees had singled out small-government groups for tougher scrutiny and called it a “blemish” on the agency.
Pressed by Republican Senator John Cornyn of Texas to apologize, Shulman stopped short of that.
“This happened on my watch,” he said. “And I very much regret that it happened on my watch.”
The IRS has apologized for its actions.
Shulman said he didn’t have the full facts until an inspector general’s report came out May 14, though he did know last year that Tea Party groups received more attention. He also said mid-level officials who learned what was going on in 2011 should have “run it up the chain” and didn’t.
“The IRS must administer, and it must be perceived to administer, our tax laws fairly and impartially,” said Shulman, who was appointed by President George W. Bush and left the IRS in November 2012. He is testifying today before the Senate Finance Committee.
The IRS acknowledged on May 10 that the agency had applied tougher scrutiny to groups with “Tea Party” and “patriot” in their names that were applying for tax-exempt status. Those groups received extensive and inappropriate questionnaires, according to the inspector general.
IRS employees continued using the criteria even after their managers told them to stop. Still, variations on the practice went on for months and it isn’t clear who reversed the decision from Washington, said Russell George, the inspector general.
Baucus said a formal investigation by his panel will get to the bottom of who at the IRS selectively screened groups based in part on their ideology.
“We know that IRS officials in Washington tried to stop this behavior,” the Montana Democrat said as he opened the Senate’s first hearing on the work by the tax-exempt unit in Cincinnati. “But who in Cincinnati perpetuated this behavior?”
Shulman learned that small-government groups had been singled out last year. He never told Congress.
“Were they simply holding out until after the election?” said Hatch.
Also testifying today are acting IRS commissioner Steven Miller, who is being forced out of his job, and George, the inspector general who oversees the tax agency. They had both testified on May 17 before the House Ways and Means Committee.
Four separate congressional committees are investigating the IRS, and the Justice Department has started a criminal probe that could ensnare senior officials for lying to Congress and lower-level workers for other potential offenses.
George, the inspector general, said he hasn’t uncovered any evidence of illegal activity or political motivation. He can still conduct a further investigation that might raise those issues.
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