Political Pressures Harden as IRS Management Issues Grow Clearer

The scandal enveloping the Internal Revenue Service widened on Wednesday as the House oversight panel announced a witness list of top Obama administration officials for a coming hearing, and as tax policy experts parsed an inspector general’s account of the agency’s “inappropriate” focus on conservative nonprofits applying for tax-exempt status.

At one in an expected series of hearings set for May 22, the House Oversight and Government Reform Committee said it will hear testimony from Deputy Treasury Secretary Neal Wolin, former IRS Commissioner Douglas Shulman (now at the Brookings Institution),Treasury Inspector General for Tax Administration J. Russell George and IRS Director of Exempt Organizations Lois Lerner.

It was Lerner who brought the scandal to light on Friday when she casually answered a question at an American Bar Association seminar on the rumored IG report on complaints that the IRS office in Cincinnati beginning early in 2010 had used politically charged key words such as “Tea Party” and “Patriot” to prioritize applications for tax-exempt status.

House Speaker John Boehner, R-Ohio, on Wednesday, said, "My question isn't about who is going to resign. My question is who's going to jail over this scandal?”

Treasury Secretary Jack Lew said he was “deeply troubled” by the IG report. “While the inspector general found no evidence that any individual or organization outside the IRS influenced the decision to use these criteria, these actions were inappropriate and did not reflect the high standards which I expect and the public deserves. Like the American people, I have zero tolerance for any action that could undermine public confidence in the impartial and non-partisan administration of the tax code.”

Released by lawmakers Tuesday night, the IG report faulted the Exempt Organizations office for targeting specific groups, delaying processing before election cycles and requesting unnecessary information. It found that of 296 relevant applications reviewed as of Dec. 17, 2012, 108 had been approved, 28 were withdrawn by the applicant, none had been denied and 160 remained open.

The IG made nine recommendations to improve management of the office, and IRS officials on reading a draft, accepted seven.

On the House Ways and Means Committee, both Chairman Rep. Dave Camp, R-Mich., and ranking member Rep. Sander Levin, D-Mich., condemned the IRS behavior and demanded a series of documents for the panel’s own hearing set for May 17. That hearing will include testimony from Steven T. Miller, acting IRS commissioner. “I am astounded and appalled that the IRS targeted organizations based on their political beliefs,” Camp said. “No American, regardless of political affiliation, should have their right to free speech threatened by the IRS. The IRS’ repeated failure to be truthful is completely unethical and an embarrassment to this government.”

Added Levin, “The American people must have the fullest confidence that organizations requesting tax exemption receive completely unbiased treatment from the Internal Revenue Service and are never singled out by name or political views. They must also be assured that the IRS will be nothing less than completely forthcoming in the information it provides to Congress.”

Some lawmakers were more supportive. “Yes, it’s wrong that the IRS selectively picked certain groups out,” said Rep. Chris Van Hollen, D-Md., ranking member of the House Budget Committee. “What’s also important, though, is that the IRS enforce this law uniformly. Because otherwise there will be groups, whether on the right or the left, that exploit and abuse this tax law for political purposes and in order to hide their donors. And so the IRS needs to apply the law uniformly, but it should apply it.”

A Rasmussen poll released on Wednesday found that 57 percent of respondents believe the IRS’ actions were politically motivated, and the same number want the offenders jailed or fired.

“Charitable nonprofits are justifiably outraged by reports that the Internal Revenue Service targeted applicants for tax-exempt status based on their apparent political beliefs,” Tim Delaney, president and CEO of the National Council of Nonprofits, said in a statement. ”As more facts emerge on the developing story, the National Council of Nonprofits calls on policymakers and the news media to strengthen public respect for, and not exacerbate ignorance of, the laws governing and distinguishing the nonpartisan work of charitable nonprofits in communities across the country. We are concerned that the IRS scandal is causing collateral damage to the work of innocent charitable nonprofits.”

Chris Vest, director of public policy at the American Society of Association Executives, said it was good that Lois Lerner stepped forward and apologized for the episode. “The tax-exempt division has always been responsive to associations’ and nonprofits’ concerns, and we have felt like it is an office the sector can rely upon,” Vest said.

Jeffery Trinca, a tax policy specialist who is a vice president at Van Scoyoc Associates, said the IRS made some management mistakes and mishandled the politics of the situation, but speculated that the agency in the end may achieve some vindication from the IG report.

If instead of seeking efficiency by basing criteria on words such as “patriot,” the IRS office had suggested “sorting by the word ‘Catholic’ or ‘African American,’ they wouldn’t have been comfortable because society knows that’s problematic,” Trinca said. But the report makes clear that no one from the outside told them to use the words, and “they selected some applications for review that they knew would require tough questions, and they got cold feet.”

The fact that Lerner told them to stop but the practice resumed “is a management issue—who’s in control of these employees?” Trinca said. The revelations, however, showed that the IRS has a difficult time establishing criteria for determining whether the spate of new advocacy groups that have sprung up in the past three years are “primarily” or “exclusively” social welfare groups deserving of tax exemption. “These little-guy, not legally sophisticated groups aren’t required to apply for 501(c)4 status,” he added, “but they want to get a letter showing they’re doing everything right.” The incident could well prompt a policy review.

One under-explored issue, Trinca said, is what the IRS Cincinnati office did with the two-thirds of the applications reviewed by IG for which no determination has been reported. Perhaps “words such as ‘green’ and ‘progressive’ were used” to characterize the liberal groups, he said. “IRS executives -- including Shulman, who was on the way out when the first questions were being raised -- could have done a better job, Trinca said, of getting the issues to Congress in advance and “letting the chips fall where they may.”