The Taxman

What's in the IRS Inspector General's Report


Internal Revenue Service headquarters in Washington, D.C.

Photograph by Andrew Harrer/Bloomberg

Internal Revenue Service headquarters in Washington, D.C.

The much-anticipated agency watchdog report on the IRS’s profiling of Tea Party groups was leaked last night. Despite conservative outcries, the report found no evidence of a political vendetta by Internal Revenue Service officials or of meddling from the White House. That doesn’t mean this is the end of the scandal. The watchdog’s investigation merely took officials at their word. There’s also a separate criminal investigation, whose results could taint President Obama’s second term.

The Inspector General’s report portrays a bungling agency with limited resources facing a flood of applications from groups seeking tax-exempt status. For that, the group must be considered a social welfare organization, known as a 501(c)(4): Its primary purpose must be to educate the public about issues, but it can also engage in “limited” political activity.

It’s the IRS’s job to weed out and deny applications from groups that appear to be too involved in politics to meet the definition. From the perspective of the wider public, and now the IRS’s own watchdog, the agency botched that mission altogether. It targeted small conservative groups of no influence and for no other reason than the fact that they had the words Tea Party and Patriot in their names, but the agency completely missed red flags from groups that appeared to be heavily engaged in political campaigns.

The report doesn’t say which groups the IRS failed to identify—or which telltale signs the agency overlooked—but officials did give the kiss of approval to Karl Rove’s Crossroads GPS, a group that spent more than $70 million to oust Obama, and to Organizing for Action, the social welfare group founded by former Obama campaign staff. Indeed, most applications are approved: Pro Publia reported that the IRS rejected only 56 of more than 14,000 501(c)(4) applications in the decade that ended in 2011. The inspector-general report says about 2 percent of IRS applications showed evidence of not being organizations appropriate for tax-exempt status.

Besides punishing wrongdoing where it’s deserved, the best outcome now would be for the IRS to find ways to catch the red flags next time. Unfortunately, the report suggests that the IRS is far from that point. From 2010, when the IRS first starting profiling Tea Party groups, to the presidential election, the IRS received 7,357 501(c)(4) applications. That’s a lot to sift through, and so higher-ups at the agency gave employees a shortcut. The criteria for their so-called Be on the Lookout list fell into four categories: 1) groups with Tea Party, Patriots, or 9/12 in their names; 2) groups that addressed government spending and taxes; 3) groups that lobby “to make America a better place to live;” and 4) groups that criticize the government.

No two ways about it: Directing half of the criteria toward groups with a conservative agenda looks horrible. In reality, there may be politically neutral logic behind it. According to ProPublica, more conservative groups apply for social welfare status than liberal ones, so if IRS bureaucrats had gone straight down the middle, targeting liberal and conservatives in equal measure, they may have oversampled liberal groups and wasted even more time.

Still, it’s hard to make pinpointing conservative groups by name appear anything other than overtly political. When supervisors found out about the targeting in July 2011, they changed the criteria on the lookout list to “organizations involved with political, lobbying, or advocacy.” IRS line agents complained that was way too generic—after all, thousands of organizations fit that bill—and didn’t help them much. Thus, in January 2012, the higher-ups changed the criteria again.

The new criteria, “political action type organizations involved in limiting/expanding government, educating on the constitution and bill of rights, social economic reform/movement,” removed the words Tea Party, but clearly referenced Tea Party groups. After the issue blew up in conservative media outlets, the IRS changed the criteria a third time, to “organizations with indicators of significant amounts of political campaign intervention.” The criteria pinballed from too specific to too broad, leaving line agents to fend for themselves. They made inappropriate political judgments as a result.

Now the IG says the latest criteria is still confusing and the IRS should formulate something in between. The watchdog says whatever comes next must be in line with the law, but that isn’t terribly helpful either, as what’s legal and what’s clear are often two different things. Supervisors need to spell out what “indicators of significant campaign intervention” look like so bureaucrats know what to ask for as they wade through dizzying mounds of paperwork. If they don’t, the next election cycle is likely to confound them just as much as the last one.

Dwoskin is a staff writer for Bloomberg Businessweek in Washington. Follow her on Twitter: @lizzadwoskin.

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