“Be on the lookout” lists gone from IRS reviews of Sec. 501(c)(4) applications

Two years after finding the IRS used inappropriate criteria when reviewing applications for tax-exempt status under Sec. 501(c)(4) and delayed the processing of some applications—a report that led to congressional investigations and the resignation of IRS Exempt Organizations Director Lois Lerner—the Treasury Inspector General for Tax Administration (TIGTA) on Thursday issued a follow-up report to check on the IRS’s progress in eliminating the controversial practices (TIGTA Rep’t No. 2015-10-025).

In the earlier audit, TIGTA said it had found that ineffective management resulted in (1) the use of inappropriate criteria to identify for review organizations applying for tax-exempt status based on names and policy positions (so-called be on the lookout lists) instead of indications of political campaign intervention; (2) substantial delays in the processing of certain applications; and (3) the issuance of “unnecessary information requests.”

In its new report, TIGTA found that the IRS has eliminated its use of the “be on the lookout” lists and similarly inappropriate criteria for identifying political activity when reviewing applications for exempt status. It interviewed a random sample of IRS Exempt Organization (EO) employees who confirmed the lists are no longer used.

The second issue in the earlier report was the length of time it took the IRS to process applications for 501(c)(4) exemptions. According to the earlier audit, as of Dec. 17, 2012, 160 applications had been pending for inordinate lengths of time. To deal with these delays, the IRS introduced an optional expedited process where the organizations certify that they meet the criteria to be a Sec. 501(c)(4) social welfare organization. This process is not available for other organizations, such as labor unions and business leagues. TIGTA said that as of Dec. 4, 2014, 149 of those 160 cases had been closed.    

In response to the third complaint, the IRS has developed preapproved questions to be used and has a review process to be sure unnecessary requests for information are not sent to applicants.

TIGTA made two new recommendations in its latest report, both of which the IRS agreed with. The first recommendation was to improve the timing and execution of further training of EO staff members, and the second was to expand the expedited review process to other organizations (labor unions and business leagues) if the IRS makes it a permanent program.

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