IRS Offers Faster Tax-Exemption Route to Delayed Groups

Groups stuck in the U.S. Internal Revenue Service’s backlog of applications for tax-exempt status will have a chance for speedy approval of their applications if they promise to limit political spending.

Advocacy groups that have been delayed for more than 120 days can receive tax exemptions if they agree to spend less than 40 percent of resources and volunteer hours on politics and more than 60 percent on activities promoting social welfare, said Danny Werfel, the tax agency’s interim leader.

The IRS said it would send letters to about 80 groups offering a faster option, which would allow them to get their tax-exempt status within two weeks. They must make their time and spending calculations based on political activity, including public communications identifying a candidate within 60 days of a general election or 30 days of a primary.

Werfel’s decision to speed up those applications is part of his attempt to respond to the controversy surrounding the IRS. Starting in 2010, the IRS delayed applications for tax-exempt status and gave Tea Party groups extra scrutiny.

“We need to earn and maintain the trust of the American people in order to accomplish our mission,” Werfel, who took over the IRS on May 22, told reporters on a conference call today.

The IRS today released a report outlining his plan, and Werfel said he briefed Treasury Secretary Jacob J. Lew and President Barack Obama.

The controversy has spurred six congressional inquiries and a Justice Department criminal probe. Since taking over the IRS, Werfel has replaced at least three IRS managers who oversaw applications for tax exemption -- Lois Lerner, Holly Paz and Joseph Grant.

Managers ‘Replaced’

“We believe that these individuals should no longer hold a position of public trust within the IRS and therefore we’ve replaced” them, he said.

Citing privacy laws, Werfel wouldn’t say whether Lerner and Paz had been fired or whether he was seeking to fire them. Grant retired.

Werfel announced the formation of an accountability review board at the IRS to recommend additional personnel changes.

In response to criticism that donors to small-government groups may have been singled out for audits of their personal taxes, Werfel said he would begin an agency-wide review of the criteria used to select taxpayers for further scrutiny.

Werfel also said he had suspended the use of all “Be on the Lookout” lists, or BOLOs, which employees used to decide which cases should merit more attention. Such lists from 2010 included the words “Tea Party” and “patriot.”

IRS Title

Werfel is in charge of the IRS. His title, principal deputy commissioner, reflects a federal law that limits how long an agency can have an acting leader without someone being nominated for the permanent job.

Obama hasn’t nominated an IRS commissioner. Douglas Shulman, the last Senate-confirmed commissioner, announced his intention to leave in April 2012 and left in November 2012.

Werfel said his review of the agency’s actions hasn’t found evidence of intentional wrongdoing or involvement from outside the IRS. That’s consistent with the findings so far of congressional investigators who have been interviewing IRS employees.

Werfel wouldn’t provide additional information as to who at the IRS knew about the selective scrutiny and when.

Potential Audits

An inspector general’s report released last month found that Lerner knew as early as June 2011 or July 2011 about Tea Party groups receiving extra scrutiny. The top layer of IRS executives, including Shulman and former acting commissioner Steven Miller, didn’t know the details until 2012, after lawmakers started complaining, the report showed.

“There will be answers to all those questions,” Werfel said.

Groups that receive fast-track approval of their applications still would be subject to potential audits for political activity beyond what they promised. The IRS said May 15 that about 470 groups had their applications “centralized,” or subject to additional attention. Of those, more than 175 already have been approved.

Organizations operating under section 501(c)(4) of the tax code must operate “exclusively” for the purpose of promoting social welfare.

Statute Interpretation

The IRS has interpreted that statute to mean that the groups can’t have politics as their primary purpose. Groups expecting to spend between 40 percent and 50 percent of their resources and time on politics should go through the regular application process, Werfel said.

Social welfare groups don’t have to disclose their donors, making them an attractive structure for anonymous political involvement.

The IRS in the past has denied that it had a 49 percent standard. Elizabeth Hofacre, an employee who reviewed applications, told congressional investigators that the IRS did exactly that.

The IRS may issue further regulations.

“We’re working closely with Treasury on a road map toward better clarity in this area,” Werfel said.