June 8 (Bloomberg) -- The Internal Revenue Service’s tougher scrutiny of small-government groups began with a tight focus on Tea Party groups in early 2010, according to IRS employees’ interviews with congressional investigators.
The effort was so concentrated on Tea Party groups that in addition to putting Democratic-leaning organizations’ applications back in the general pile, the IRS didn’t even give extra scrutiny to groups identified as conservative.
“It was more narrow than that,” said Elizabeth Hofacre, who handled the first batch of cases. “It was Tea Party.”
The interview transcripts reviewed by Bloomberg News and other media organizations, and cited June 2 by House Oversight and Government Reform Chairman Darrell Issa, present the clearest picture so far of what took place in the IRS exempt organizations division as it considered applications for tax-exempt status.
The transcripts don’t show why IRS employees focused on Tea Party groups in 2010 and who made that decision. Employees said some IRS lawyers in Washington were involved in processing and managing the cases.
The effort eventually became a wider search for politically oriented nonprofits that caused significant delays for the groups and became a national scandal last month. IRS employees struggled to get guidance from their supervisors on which cases to analyze and how to assess them.
The criteria became broader in 2011 and 2012 when the IRS looked at groups based on other criteria, such as whether they focused on government spending and debt.
In 2010, “we had a Tea Party case come in, so we used the word Tea Party,” said Gary Muthert, an employee 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 then broadened his search to include terms such as “patriots” and “9/12” because had noticed those words used on Tea Party websites. He said he had been told that someone in Washington wanted such cases.
The scandal has led to inquiries from six congressional committees and a Department of Justice criminal probe. Steven Miller, the acting IRS commissioner, was forced out. Lois Lerner, who headed the oversight of tax-exempt organizations, was placed on administrative leave. Yesterday the IRS announced a replacement for Holly Paz, who worked for Lerner.
The Tea Party’s model of grass-roots, locally based organizing presented a challenge for the IRS, which processes each application individually. Muthert said his 2010 Internet searches revealed the scope of the potential issue.
“There wasn’t 5 or 10 tea parties,” he said, according to the transcript. “I noticed that there were hundreds of these things.”
Not all of the groups applied for tax-exempt status. Those that did were placed in a separate pile to ensure consistent treatment, Muthert said, offering an explanation that matched the one given by Miller at a congressional hearing.
“Over the years we learned that if you have 20 cases come in that go to 20 different people, there’s no telling what the result would be,” he said.
Initially those cases went to Hofacre, the other employee interviewed by congressional staff members. She referred to herself as a “dumping ground for cases.”
Hofacre said Muthert told her “it was a new topic and the precedent wasn’t real clear on them.”
Groups applying for tax-exempt status under section 501(c)(4) of the U.S. tax code must be exclusively operated for social welfare. The IRS interprets that to mean that groups can’t have politics -- defined as involvement in elections -- as their primary purpose.
The Tea Party cases were handled in an unusual fashion, Hofacre said, because she was given so much direction from a Washington-based IRS lawyer, Carter Hull, on the wording of questions to groups that she found it “demeaning.” At one point, Hull’s supervisor, Steve Grodnitzky, was involved in editing questions, Hofacre said.
During 2010, she said, she was unable to get answers from Hull in response to draft letters to groups she had prepared. She said she had no authority to act without their input.
Some Tea Party cases, she said, should have received full reviews. Others should have gotten quicker answers.
“You are getting calls from irate taxpayers,” said Hofacre, who has worked for the IRS since 1999. “And I see their point. Even if a decision isn’t favorable, they deserve some kind of treatment and they deserve, you know, timeliness.”
Hofacre told investigators that she doesn’t have a party affiliation and that she hadn’t contributed to or worked for a political candidate.
Hofacre described the efforts as focused on Tea Party groups, especially when they started during 2010. In response to a question about “progressive or liberal causes,” she said she was sometimes assigned cases like that and sent them to other employees or to the general case pile.
“I was tasked with Tea Parties and overwhelmed with those,” she said.
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