The IRS Abuse Scandal Keeps Growing

An audit of the agency's behavior unearths disturbing new information.

Reading the highly critical report by the Internal Revenue Service's auditor, you get the sense that rogue, lower-level agents ran amok, writing up watch lists, targeting conservative agencies, and stalling their applications for tax-exempt status.

At least IRS management has painted a picture of misguided underlings who acted "inappropriately," finally offering a mea culpa a couple years after claims that Tea Party groups being hung up, even harassed, by tax agents began filtering in.

Lois Lerner, director of the IRS' exempt organizations unit, apologized a week ago for front-line employees who inappropriately flagged for further review organizations with the descriptors, "tea party" or "patriot."

"We had a shortcut in the process. It wasn't appropriate.  We learned about it and we fixed it," Lerner said, emphatically denying that the segregation of applications and the lengthy delays in processing them merely based on conservative-sounding names had absolutely nothing to do with partisan politics.

But a report released late Tuesday by the Treasury Inspector General for Tax Administration, the independent overseer of the IRS, points to lax management and at least ignorance of federal code governing tax-exemption review. And while TIGTA may not employ the term "targeted" in its scathing review, the auditor blasts the IRS for singling out conservative groups, asking them a host of unnecessary questions and, in many cases, grinding the application process to a halt.

More than anything, the IRS' "inappropriate" measures threaten public confidence, the report notes.

"The mission of the IRS is to provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.  According to IRS Policy Statement 1-1, IRS employees accomplish this mission by being impartial and handling tax matters in a manner that will promote public confidence," the audit states.

"However, the criteria developed by the (IRS) Determinations Unit gives the appearance that the IRS is not impartial in conducting its mission.  The criteria focused narrowly on the names and policy positions of organizations instead of tax-exempt laws and Treasury Regulations."

BOLO List

The audit depicts agents in 2010, earlier than IRS brass previously had stated, pulling out 501(c)(4) applications with "Tea Party, Patriots, or 9/12 in the organizations name," as well as "political-sounding names." In May 2010, the Determinations Unit began developing a spreadsheet that would become known as the "Be On the Look Out" list, according to the audit. By August, the unit began distributing the first formal BOLO list.

A 501(c)(4) is designated for the promotion of social welfare and cannot include direct or indirect participation or intervention in political campaigns on behalf of, or in opposition to, any candidate for public office.

"However, a section 501(c)(4) social welfare organization may engage in some political activities, so long as that is not its primary activity. However, any expenditure it makes for political activities may be subject to tax under section 527(f)," according to the IRS.

It is the IRS' tax-exempt division's job to sort all of that out.

The "look out" criteria were expanded over time, including:

• Issues include government spending, government debt or taxes.

• Education of the public by advocacy and lobbying to "make America a better place to live".

• Statement in the case file critical of how the country is being run.

"By June 2011, the expanded criteria included additional names (Patriots and 9/12 Project) as well as policy positions espoused by organizations in their applications," the audit states.

The 9/12 Project refers to a group created by radio personality Glenn Beck.

Top IRS officials told auditors the BOLO lists were not influenced by an individual or organization outside the agency. They said only first-line management approved references to the Tea Party and the BOLO listing criteria before it was rolled out.

But it was "insufficient oversight" that allowed the "inappropriate" signaling out of certain groups to go on for so long, the audit notes.

"As a result, inappropriate criteria remained in place for more than 18 months," according to the TIGTA report, which also notes IRS employees did not consider the "public perception of using politically sensitive criteria when identifying these cases."

Beyond that, the audit found the employees lacked knowledge of allowed activities under code.

The IRS' director of Rulings and Agreements, defending the agency's employees and management, told auditors the fact that the team of tax-exempt specialists worked applications that did not involve the Tea Party, patriots, or 9/12 groups "demonstrated that the IRS was not politically biased in its identification of applications for processing by the team of specialists."

The inspector general's response: Sure, but all cases with Tea Party, patriots, or 9/12 in the statistical review were flagged and the applications were forwarded to tax-exempt specialists.

Waiting Game

Some applications were delayed more than three years, crossing two election cycles, the report notes. Of 296 total applications screened for further intervention, 160 had been open from 206 to 1,338 calendar days.

The IRS Strategic Plan 2009–2013 has several goals and objectives involving timely interaction with taxpayers, including enforcement of the tax law in a timely manner while minimizing taxpayer burden.

Applications were delayed in part by questions the inspector general deemed "unnecessary." The audit lists seven questions IRS agents had no business asking applicants

1. The names of donors.
2. A list of all issues that are important to the organization and asks that the organization indicate its position regarding such issues.
3. a) The roles and activities of the audience and participants other than members in the activity and b) the type of conversations and discussions members and participants had during the activity.
4. Whether the officer, director, etc., has run or will run for public office.
5. The political affiliation of the officer, director, speakers, candidates supported, etc., or otherwise refers to the relationship with identified political party–related organizations.
6. Information regarding employment, other than for the organization, including hours worked.
Information regarding activities of another organization -- not just the relationship of the other organization to the applicant

The audit notes overt double standards by an agency that demanded prompt information from applicants.

"These letters requested that the information be provided in two or three weeks (as is customary in these letters) despite the fact that the IRS had done nothing with some of the applications for more than one year," the TIGTA report states.

When the agency did in 2011 correct the criteria used in signaling out the conservative groups, IRS specialists "subsequently changed the criteria in January 2012 without executive approval because they believed the July 2011 criteria were too broad," the audit notes.

"The January 2012 criteria again focused on the policy positions of organizations instead of tax-exempt laws and Treasury Regulations.  After three months, the Director, Rulings and Agreements, learned the criteria had been changed by the team of specialists and subsequently revised the criteria again in May 2012," the report adds.

TIGTA has made nine recommendations to fix its problems, including "better documenting the reasons why applications potentially involving political campaign intervention are chosen for review." The inspector general also wants to the see the IRS develop and publish tax-exempt guidance, and "before each election cycle, expeditiously resolve remaining political intervention cases."

The IRS' response: Yeah, we see your point on seven of the nine recommendations, but we've got our own corrective action plans for the other two, thanks.

"TIGTA does not agree that the alternative corrective actions will accomplish the intent of the recommendations and continues to believe that the IRS should better document the reasons why applications potentially involving political campaign intervention are chosen for review and develop and publish guidance," the audit notes.

The IRS did not return a request for comment.

A version of this article originally appeared at Watchdog.org.