IRS Couldn’t Handle Political Cases Quickly, Manager Says

Internal Revenue Service employees tried to treat politically oriented groups the same way as other clusters of non-profits seeking tax-exempt status. That didn’t work, an IRS manager told congressional investigators.

According to the transcript of her interview last month, Holly Paz said the IRS identified a pattern of groups’ tax-exempt applications and then transferred some cases to Washington so agency lawyers could set consistent rules. That’s what the IRS had done with credit counselors and foreclosure-assistance groups, for example.

“I was a little frustrated with our progress,” she said of the political cases. We had “not been able to develop a template because we were finding that the cases, you know, had a good deal of variety.”

The delays -- and what Paz, a senior IRS lawyer in the tax-exempt office, acknowledged were “overly burdensome” letters to groups -- are part of a controversy that has led to six congressional inquiries, a Justice Department criminal probe and the replacement of IRS executives including Paz.

The IRS said June 7 that another person had been placed in Paz’s job. The agency hasn’t provided information on Paz’s status, and her attorney, Roel Campos, didn’t return a call for comment yesterday. Paz is a registered Democrat who donated $4,000 to President Barack Obama’s 2008 campaign and an associated fund.

No Evidence

In the interview transcript, reviewed yesterday by Bloomberg News, Paz said she saw no evidence of political motivation to target anti-tax Tea Party groups. She was interviewed by staff members for both parties on the House Oversight and Government Reform Committee.

Panel Chairman Darrell Issa, a California Republican, asked her questions, too.

Congressional investigators have interviewed seven IRS employees and are seeking to talk to more. Bloomberg News has reviewed two transcripts of the interviews in full and portions of two others, some of which have been released publicly.

Issa and Elijah Cummings of Maryland, the top Democrat on the committee, have been sparring over the release of the transcripts. Each has released partial transcripts and each has called for the release of all the transcripts -- though on different timetables.

Treasury Secretary Jacob J. Lew told the Spanish-language television network Univision that based on interview transcripts released so far, there’s no sign of political influence in the management of the IRS tax-exempt program. The tax agency is part of the Treasury Department.

‘Political Involvement’

“There’s no evidence that there was any political involvement,” Lew said. “It was actions that were taken within the management of this program. Anyone whose actions in this area were inappropriate will be held accountable.”

So far, the employees’ comments to congressional investigators have supported many of the statements from IRS managers and the audit released May 14 by the agency’s inspector general.

The interview transcripts show no evidence of influence from outside the IRS and no knowledge by IRS officials above Paz’s then-boss, Lois Lerner, before questions about possible targeting began receiving some public attention in early 2012. The controversy flared when Lerner disclosed in early May that the targeting had occurred, and she apologized for it. She has since been placed on administrative leave.

The transcripts emphasize repeated management failures and miscommunication as agency officials tried to craft a plan for reviewing the nonprofits that could satisfy their own lawyers, be executed by workers and be acceptable to lawmakers.

Legal Definition

The challenge for IRS workers was to fit the cases into a legal definition. The rules for groups applying for tax-exempt status under section 501(c)(4) of the U.S. tax code say that they must be operated primarily for non-political purposes.

One issue, Paz said, is that the groups’ materials would often contradict their assertions that they wouldn’t be involved in politics.

“Certain activities,” she said, “could be entirely permissible but if you tweak the facts a little bit, suddenly you’ve stepped over the line and you have got campaign intervention.”

An employee in the Cincinnati office that handles tax-exempt applications flagged a Tea Party case to managers in 2010, starting a process that led to such scrutiny of all Tea Party applications and hundreds more for tougher review.

At one point, Paz said, a Cincinnati employee had the “misimpression” that he was supposed to stop processing cases while he awaited guidance from Washington, contributing to the delays.

Like Coke

Paz said she didn’t learn until mid-2011 that employees were using Tea Party as a screening term. The internal descriptions of “Tea Party cases” were benign and she took them to be references to political activity of all kinds, much like Coke is used to describe other brands of soda, she said.

“Because they are so apolitical, they are not as sensitive as we would like them to be as to how things might appear,” she said of these agency workers. “Many of these employees have been with the IRS for decades and were used to a world where how they talked about things internally was not something that would be public or that anyone would be interested in.”

Her interview offered some new details about what happened after that. IRS officials including Lerner, Paz’s boss at the time, ordered the criteria changed in 2011.

Constitution Education

Employees shifted those criteria to include whether a group had as its goals education on the Constitution. The employees did that, Paz said, because the criteria suggested by their superiors were causing too many lobbying groups to pop up that didn’t deserve extra attention.

One employee, who had worked on credit counseling cases as well, was moved out of handling political advocacy cases, Paz said.

“He didn’t adapt it to this different context as we would have liked him to,” Paz said. “And so we felt like he couldn’t handle these types of cases.”

A committee aide who requested anonymity in discussing the testimony from IRS employees said there is conflicting information about what happened during this period.