Report blames IRS scandal on lax oversight, confused staff

WASHINGTON -- The growing scandal at the IRS stemmed from a confused staff and lax oversight, according to an eagerly awaited inspector general's report released Tuesday shortly after federal authorities began a criminal investigation into overzealous scrutiny of conservative groups that had applied for tax exemptions.

The improper activities "were not influenced by any individual or organization outside the IRS," auditors said they were told by IRS officials.


Instead, the report painted a picture of an IRS unit based in Cincinnati, the main office for handling tax-exempt organizations, that adopted "inappropriate criteria" for deciding which applications to examine, without any review by senior managers. The improper targeting continued for more than 18 months. The screening techniques and management delays caused some applications for nonprofit status to languish for more than three years, the report found.

The statement that no one outside the Internal Revenue Service was involved, if it holds up, would undermine efforts by Republican leaders to pin the IRS problems on the White House. Faced with a barrage of questions on Tuesday, White House Press Secretary Jay Carney insisted that no one in the White House had known of the matter until April, when White House lawyers were briefed about the report.

But the controversy showed no signs of abating, as both the House and Senate prepared to hold hearings. At the top of the agenda will be questions about why IRS officials continued to assure Congress that no improper targeting had occurred.

"Unfortunately, the report raises more questions than it answers," said House Oversight Committee Chairman Darrell Issa (R-Vista), whose committee requested the report. "What we do know for sure is that the IRS personnel responsible for granting tax exemptions systematically targeted conservative groups for extra scrutiny, and that officials in Washington, D.C., were aware of this practice, even while publicly claiming that it never happened."

Indeed, the pace of investigations picked up as Atty. Gen. Eric H. Holder Jr. said that he had ordered an investigation into whether anyone at the IRS broke laws.

The IRS actions "were, I think, as everyone can agree, if not criminal, they were certainly outrageous and unacceptable," Holder said at a news conference. "But we are examining the facts to see if there were criminal violations," he added.

In a statement released late Tuesday, the IRS agreed that the reviews had been "inappropriate," but said that all the organizations that were singled out for extra review ultimately received similar treatment.

"It is also important to understand that the group of centralized cases included organizations of all political views," the statement said, referring to cases that received heightened scrutiny.

The agency also said that "there was no intent to hide" what was going on. Instead, officials kept quiet until the audit was released, the statement said.

The problems at the IRS started in 2010, as staff in a Cincinnati field office struggled to cope with a flood of applications for tax exemptions from politically oriented "social welfare" organizations that sprang up in the wake of the Supreme Court's Citizens United decision loosening the rules for political donations. Between 2010 and 2012, the number of applications for tax exemption almost doubled.

Unlike charities, social welfare groups, governed by section 501(c)4 of the tax code, can participate in "limited" political activities, the IRS has ruled. But the IRS has never clearly defined the limits of how much political activity they can engage in. Their tax status also allows them to keep secret the names of their donors.

With many groups spending millions of dollars on elections, the IRS was under pressure to tighten up enforcement of the limits on political activity. Workers at the exempt organizations division, tasked with screening the flood of new applications, selected for additional review groups whose applications included references to the tea party -- a decision that wasn't reviewed by superiors at the agency in time, according to the report from the Treasury inspector general for tax administration.


In June 2011, a top IRS official ordered the staff to change its approach, but after a period of time using new, more appropriate, rules, the Cincinnati staff adopted another approach in January 2012 that was also inappropriate, according to the report. Officials in Washington did not intervene to fix those criteria until May 2012.

The report concludes that IRS workers who developed the criteria had not considered the "public perception" of using politically oriented criteria in evaluating cases. Another problem: The staff drawing up the questions had a "lack of knowledge" about what activities nonprofits may legally engage in.

The inspector general's report looked at records for 298 organizations that the IRS specialists scrutinized for level of political activity, determining that 96 were pulled out because they had the words "tea party," "patriots," or "9/12" in their names, while the remaining 202 did not. The employees, who began the screening in March 2010, told the investigators that they were using "tea party" as a catch-all phrase for all potential cases involving groups engaging in politics.

The audit found that two-thirds of the groups selected for additional review did not have those conservative keywords in their applications. According to one IRS official, that showed the agency was "not politically biased in its identification of applications." But the other groups are not identified.

Not only was the method misguided, the report says, it also didn't work very well. The audit found that 14 groups weren't flagged for extra scrutiny even though their files contained evidence of "significant" involvement in political campaigns.

Many of the organizations received a long, detailed list of questions for further information, including requests for the names of all donors. They were asked whether the officers or directors intended to run for public office, where they worked, and what conversations they had with people at their functions.

The request for donors was unprecedented in IRS history, according to Nikole Flax, chief of staff for the office of the IRS commissioner. She made that statement to Issa's committee staff, according to a letter Issa sent to Lois Lerner, the IRS official in Washington who supervises the agency's tax-exempt division.

The letter accused Lerner of lying or hiding information from Congress on four separate occasions, saying that she had failed to inform the committee of the screening or of the internal concerns, even after repeated questioning.


"Providing false or misleading information to Congress is a serious matter, with potential criminal liability," the letter said.

Staff writers Melanie Mason and Kathleen Hennessey contributed to this report.