Interim IRS chief issues initial report on Sec. 501(c)(4) controversy

On Monday, acting IRS commissioner Daniel Werfel issued his report, Charting a Path Forward at the IRS: Initial Assessment and Plan of Action, on the plans to reform the IRS to avoid inappropriate targeting of taxpayers applying for Sec. 501(c)(4) social welfare organization status.

In the first section of the report, the IRS explained that its actions were two-pronged: first, it was identifying the individuals in the IRS responsible for the mismanagement outlined in the TIGTA report (“Inappropriate Criteria Were Used to Identify Tax-Exempt Applications for Review,” TIGTA Rep’t No. 2013-10-053), and second, it was reexamining the evidence in the TIGTA report to determine if there was more wrongdoing or inappropriate conduct beyond that which TIGTA identified.  One of the actions taken in response to the problems identified in the TIGTA report was removing five individuals from their leadership positions within the IRS. 

As for fixing the problems with the review of tax-exemption applications, the IRS has:

• Suspended the use of be on the lookout (BOLO) lists that were used to identify organizations with names like “tea party”;
• Overhauled the business processes for reviewing tax-exempt status;
• Started to develop new guidance to enable IRS staff to operate without BOLO lists;
• Added technical and programmatic experts to assist with reviewing applications for tax-exempt status;
• Initiated a new process whereby certain taxpayers whose applications for Sec. 501(c)(4) tax-exempt status had been identified for potentially inappropriate campaign intervention and have been in the IRS’s backlog for more than 120 days have the option of obtaining an approval if they self-certify that they will meet certain guidelines;
• Created a new “Advocacy Application Review Committee” to provide expertise from other IRS divisions to review screening and determination decisions;
• Began creating a new check-and-balance mechanism to review IRS criteria and screening procedures systematically—any material risks of the use of inappropriate criteria found will be reported to the IRS commissioner, the IRS Oversight Board, and the relevant congressional tax committees;
• Engaged with the Treasury Department on the need for greater clarity for certain terms that are relevant for Sec. 501(c)(4) tax-exempt organizations, and recommended the guidance request be included in the next Treasury Priority Guidance Plan. 

The report also noted that, although the confusion about the requirements to be a Sec. 501(c)(4) organization did not in itself cause the inappropriate targeting, it did play a role in some of the lengthy delays in issuing tax-exempt status determinations. It also reviewed the nine recommendations in the TIGTA report and detailed its progress in responding to each one.   

The final section of the report reiterated the IRS’s commitment to fixing the problems identified in the TIGTA report, and explained that similar problems may exist in other IRS areas. To that end, the report stated that it would conduct a thorough review and vetting of the organizational failures that resulted in the problems identified in the TIGTA report, assess whether similar issues exist in other IRS business units, and then issue a series of reforms to address each finding.

Werfel, whose formal IRS title is principal deputy commissioner, was appointed acting head of the Service on May 16, following the resignation of acting commissioner Steven Miller, who stepped down in the wake of the TIGTA report.

—Sally P. Schreiber (sschreiber@aicpa.or ) is a JofA senior editor.