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Attorney general orders criminal review of IRS

The Cincinnati federal building that houses the city's main IRS offices, where low-level employees have been blamed for improper scrutiny of conservative groups seeking tax-exempt status.
(Al Behrman / Associated Press)
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WASHINGTON — The Justice Department began a criminal investigation Tuesday into overzealous scrutiny by the IRS of applications for tax exemptions by conservative groups, an improper targeting that an inspector general’s report blamed on a confused staff and lax oversight.

The improper activities “were not influenced by any individual or organization outside the IRS,” the auditors said they were told by Internal Revenue Service officials.

Instead, the report painted a picture of an IRS unit based in Cincinnati that used “inappropriate criteria” for deciding which applications to examine, without any review by senior managers. The targeting, including that of groups that used “tea party” in their names, continued for more than 18 months, while some applications for nonprofit status languished for more than three years, the report found.

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The statement that no one outside the IRS was involved, if it holds up, would counter efforts by Republican leaders to depict the IRS actions as a politically motivated scandal linked to President Obama. Faced with a barrage of questions on Tuesday, White House Press Secretary Jay Carney said that no one there had known of the matter until April, when the White House counsel’s office was 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 who were aware of the problems 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 was among those requesting 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.”

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 “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.

The president, in a statement released late Tuesday, said the activities described in the report from the Treasury inspector general for tax administration were “intolerable and inexcusable.”

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“The IRS must apply the law in a fair and impartial way, and its employees must act with utmost integrity,” Obama said. “This report shows that some of its employees failed that test.”

Treasury Secretary Jacob J. Lew, whose agency includes the IRS, said inspector general recommendations for better training for IRS personnel and clearer guidelines would be implemented “without delay.”

In its own statement, the IRS agreed that the reviews had been “inappropriate,” but said all the organizations that were singled out for extra review ultimately received similar treatment, regardless of ideology.

“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 report looked at records for 298 organizations that IRS specialists scrutinized for their level of political activity. Of those, 96 applications were pulled out because they mentioned “tea party,” “patriots” or “9/12”; the remaining 202 applications did not have such phrases.

According to one IRS official cited in the report, the fact that two-thirds of the targeted groups were not flagged because of conservative-sounding words proved that the agency was “not politically biased in its identification of applications.” The other groups selected are not identified, however, so their political views, if any, remain unknown.

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The agency also said that “there was no intent to hide” what was going on. Top career officials sent letters to members of Congress in 2012 that reassured them the IRS was not targeting any groups.

The inspector general’s office began its inquiry after receiving complaints from Congress that conservative groups were being harassed by the IRS. J. Russell George, inspector general for tax administration, was appointed to that position by Republican President George W. Bush and confirmed by the Senate in 2004. He’s a former Republican Capitol Hill staff member.

The problems at the IRS started in March 2010, as staff in a Cincinnati field office — the main office handling tax-exempt organizations — struggled to cope with a flood of applications for “social welfare” exemptions. Many came from politically oriented organizations that sprang up after the Supreme Court’s Citizens United decision loosening the rules for political donations. Between 2010 and 2012, the number of applications for tax exemption as social welfare groups almost doubled.

Unlike charities, social welfare groups, governed by Section 501(c)4 of the tax code, are allowed to participate in politics so long as that is not their primary purpose. But the IRS has never clearly defined the limits. The groups also can keep their donors’ names secret.

With many groups spending millions of dollars on elections, campaign reform advocates were pressuring the IRS to tighten enforcement of limits on politically active tax-exempt groups. Workers at the exempt organizations division, assigned the task of screening the applications, selected organizations for additional review whose paperwork included references to the “tea party” or similar words — a decision that wasn’t reviewed by top officials at the agency until more than a year after the screenings began, according to the report.

In June 2011, Lois Lerner, the IRS official in Washington who supervises the agency’s tax-exempt division, ordered the staff to change its approach. After a period of time using new, more appropriate, rules, however, the Cincinnati staff in January 2012 once again changed the criteria. This time they began screening for groups that were focused on the Constitution or on limiting or expanding government, according to the report. Officials in Washington did not intervene to fix that until May 2012.

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Not only was the method misguided, the report said, 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.

The report concludes that the IRS workers had not considered the “public perception” of using politically oriented criteria in evaluating cases. Another problem: The staff doing the reviews had a “lack of knowledge” about what activities tax-exempt groups may legally engage in.

Many of the organizations received a long, detailed list of questions for further information, including requests for the names of all donors. The IRS 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.

Nikole Flax, chief of staff for the office of IRS commissioner, told Issa’s committee staff that the request for donors’ names was unprecedented in IRS history, Issa said in a letter to Lerner.

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.

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joseph.tanfani@latimes.com

richard.simon@latimes.com

richard.serrano@latimes.com

Melanie Mason and Kathleen Hennessey in the Washington bureau contributed to this report.

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