Acting IRS commissioner out in tea party scandal

Speaking from the East Room of the White House on Wednesday evening, President Barack Obama announced the departure of Acting IRS Commissioner Steven Miller as a result of the ongoing scandal surrounding the IRS’s controversial methods for determining which organizations applying for Sec. 501(c)(4) status warranted further review.

“We’re going to hold the responsible parties accountable,” the president said. “Today [Treasury] Secretary [Jacob] Lew took the first step by requesting and accepting the resignation of the acting commissioner of the IRS.”

It was a step that had been called for earlier in the day by Sandy Levin, D-Mich., the ranking member of the House Ways and Means Committee, in an interview with MSNBC when he called on Miller  to “be released of his responsibilities.” Levin suggested that Lois Lerner, director of the IRS Exempt Organizations Division, should also be fired.

Earlier in the day, all 45 Republican senators sent a letter to Obama, expressing “grave concerns and deep disappointment” about the revelations in the TIGTA report and asking “what actions will be taken to ensure those who made these policy decisions at the IRS are being held fully accountable.”

While announcing Miller’s resignation, the president also expressed his anger at the IRS misconduct, which was documented in a Treasury Inspector General for Tax Administration (TIGTA) report issued on Wednesday. “The misconduct it uncovered is inexcusable . . . and I am angry about it,” the president said. The IRS, he noted, “has to operate with absolute integrity.”

TIGTA’s report

TIGTA’s highly anticipated report revealed the IRS’s methods for determining which organizations applying for Sec. 501(c)(4) status (usually called social welfare organizations) warranted further review to ensure they were not engaging in prohibited political activities (“Inappropriate Criteria Were Used to Identify Tax-Exempt Applications for Review,” TIGTA Rep’t No. 2013-10-053). According to TIGTA, it initiated the audit discussed in this report in response to complaints from Congress and news reports of the IRS’s inappropriate treatment of applicants for tax exemptions.

TIGTA confirmed what has been in the news since last week, namely, that employees in the IRS Exempt Organizations Determination unit in Cincinnati were told to “search for applications with Tea Party, Patriots, or 9/12 in the organization’s name as well as other ‘political-sounding’ names.” A spreadsheet of issues to look for in applications, called “Be on the lookout,” was also developed, which also flagged organizations with specific policy concerns, such as government debt and taxes. This practice began in May 2010, possibly in response to media reports of Sec. 501(c)(4) social welfare organizations operating as political organizations, and continued for more than 18 months.

On Wednesday, CNN reported that the IRS had identified two “rogue” employees in the Cincinnati Service Center who were responsible for the inappropriate handling of the tax-exemption applications, but that the problem was not limited to those two employees. 

According to TIGTA, these inappropriate criteria not only resulted in the IRS’s failure to catch the organizations that may have been actually engaging in prohibited political activities, but they also unnecessarily delayed the approval of many organizations’ tax exemptions. None of the organizations that TIGTA looked at that were asked to provide additional information were denied Sec. 501(c)(4) status. Of the 296 potentially political cases TIGTA reviewed, by Dec. 17, 2012, 108 applications were approved; in 28 cases the applicant withdrew the application; no applications had been denied; and 160 cases had been open from 206 to 1,138 calendar days (some applications were pending for two election cycles).

TIGTA emphasized that in the future, “Criteria for selecting applications for the team of specialists should focus on the activities of the organizations and whether they fulfill the requirements of the law.” It made nine recommendations to the IRS to improve the process going forward.

The first recommendation is that the director of Exempt Organizations should ensure that the IRS memorandum that requires the director of Rulings and Agreements to approve all original entries and changes to criteria included on the “Be on the lookout” list before the list is implemented be formalized in the appropriate Internal Revenue Manual. The IRS agreed with this recommendation.

TIGTA’s second recommendation is that the IRS should develop better procedures to document why applications are chosen for review (e.g., the file contains evidence of specific campaign intervention). In response to this recommendation, the IRS proposed an alternative corrective action of reviewing its screening procedures to determine whether this additional documentation can be done without unduly delaying case processing. TIGTA’s response was to cite the average delay in application processing as 574 days as of Dec. 17, 2012, and to express its doubts that taking the time to document these procedures could further delay processing.

TIGTA third recommendation was developing training or workshops for IRS employees to be held before each election cycle including, but not limited to, the proper ways to identify applications that require review of political campaign intervention activities. The IRS agreed with this recommendation. The fourth recommendation was to develop a process for the Exempt Organizations Determinations unit to formally request assistance from the technical and guidance units, including actions to initiate, track, and monitor requests to ensure that requests are responded to timely. The IRS also agreed with this.

The IRS, however, disagreed with the fifth recommendation, that the IRS develop guidance for IRS specialists on how to process requests for tax-exempt status involving potentially significant political campaign intervention and post it on the internet to provide transparency to applicants. The IRS proposed, alternatively, that it could meet this need through training alone. TIGTA did not agree with this. It believes that specific guidance should be developed and made available to specialists processing potential political cases and that putting it on the internet could also address the IRS’s concern that many applications for tax-exemption appear to contain incomplete and inconsistent information.

The IRS agreed with the last four recommendations, which were:

• Develop training or workshops for IRS employees to be held before each election cycle including, but not limited to, identifying what is intervention in a political campaign versus what is general advocacy on issues (including case examples), and having employees be able to refer for follow-up those organizations that may conduct activities in a future year that may cause them to lose their tax-exempt status.
• Ensure that potential political cases, some of which have been in process for three years, are approved or denied expeditiously.
• IRS guidance on how to measure the “primary activity” of Sec. 501(c)(4) social welfare organizations should be included for consideration in the Department of the Treasury Priority Guidance Plan.
• The director of Exempt Organizations should develop training or workshops before each election cycle including, but not limited to, how to word questions in additional information request letters and what additional information should be requested.

In his White House address, Obama announced that he has directed Lew “to make sure the IRS begins implementing [TIGTA’s] recommendations right away.”

On Tuesday, Attorney General Eric Holder announced that the Justice Department has started a criminal investigation into the matter (see “Justice Department opens criminal probe of IRS treatment of tea party groups”). He told a House Judiciary Committee hearing on Wednesday that the investigation will not be confined to Cincinnati, but “we will go wherever the facts lead us.”

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