IRS's integrity at stake in scandal over screening of conservative groups

The Internal Revenue Service is feeling the sort of heat that targeted taxpayers feel from the U.S. tax agency. It's the sense that a powerful someone is breathing down your neck.

Republicans in Congress are livid with the IRS over its systematic scrutiny of conservative groups during the 2010 and 2012 elections. Democrats agree that something must be done. U.S. President Barack Obama also isn't at all happy with the tax collectors.

That kind of commonality in Washington is about as rare as a budget surplus. So, expect a bumpy ride for the IRS, unloved in the best of times, as a Justice Department criminal investigation and multiple congressional inquiries try to get to the bottom of it all.

The central issue is whether IRS agents who determine whether non-profit organizations must pay federal income taxes played political favourites or even broke the law when they subjected groups affiliated with the Tea Party movement, which favours small government and low taxes, and other conservative organizations to special scrutiny.

Also foremost in the concerns of Congress: Why senior IRS officials, for many months, did not disclose what they had learned about the actions of lower-level employees despite persistent questions from Republican lawmakers and howls from aggrieved organizations.

Why it matters

The IRS is expected to be pesky, even intimidating, to miscreants, but at all times politically neutral. Nonpartisanship is the coin of its realm, perhaps more so than in any other part of government.

"I will not tolerate this kind of behaviour in any agency but especially in the IRS, given the power that it has and the reach that it has into all of our lives," Obama said in ousting the agency's acting chief, Steven T. Miller.

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On Thursday, on the eve of House hearings at which Miller has been called to testify, Obama named Daniel Werfel, a senior White House budget official, to take charge of the agency temporarily.

IRS actions in the period covering the 2010 congressional elections and the early going of the 2012 presidential campaign have tattered the perception that the agency is clean of political leanings. Whether that was also the reality remains to be discovered.

A report by the Treasury Department's top investigator for tax matters found no evidence that sheer partisanship drove the targeting. But the watchdog disclosed Friday that he is still investigating. His report faulted lax management for not stopping it sooner.

It's a sensitive time for the agency's professionalism to be in doubt because the IRS soon will loom even larger in people's lives. It's to be the enforcer of the individual mandate to carry insurance under Obama's health care law, itself an object of suspicion for many conservatives. To the right, that's insult upon injury from the left.

No political ties found

Any effort from top levels of the administration or political operatives to manipulate the IRS for campaign purposes would put the scandal in the realm of Nixonian skullduggery.

The public record as it is known does not show interference.

No ties to anyone outside the IRS have been discovered. At the same time, early IRS assurances that high-level people inside the agency did not know what was going on have been contradicted by evidence that the head of the agency's tax-exemption operation and later its deputy commissioner were briefed about it, and did not tell Congress.

To qualify for exemption from federal income taxes, organizations must show they are not too political in nature to meet the standard. In the cases in question, applications that raised eyebrows were referred to a team of specialists who took a much closer look at a group's operations. That's normal.

But in early 2010, IRS agents in the Determinations Unit began paying special attention to tax-exempt applications from groups associated with the Tea Party or with certain words or phrases in their materials, according to the IRS inspector general's report. That's not normal.

Keywords flagged for closer inspection

The red-flag keywords and phrases came to include "Patriots," "Take Back the Country" and "We the People."

That August, agents were given an explicit "be on the lookout" directive for "various local organizations in the Tea Party movement" that are seeking tax-exempt status. Such organizations saw their applications languish except when they were hit with lots of questions, some of which the IRS was not entitled to ask, such as the names of donors.

In June 2011, after the congressional elections, Lois G. Lerner, in charge of overseeing tax-exempt organizations, learned of the flagging and ordered the criteria to be changed right away, the inspector general said. The new guidance was more generic and stripped of any explicit partisan freight. But it did not last.

In January 2012, the screening was modified again, this time to watch for references to the Constitution or Bill of Rights, and for "political action type organizations involved in limiting/expanding government."

The Constitution and Bill of Rights are touchstones for liberals, too. But in modern politics, they've been appropriated as rallying cries of conservatives and libertarians. Finally, that May, such flagging ended.

Altogether, specialists reviewed a variety of potentially too-political applications, presumably covering the liberal-conservative spectrum. But fully one-third of the cases were of the Tea Party-patriot variety. During the height of the flagging, the inspector general says, all applications fitting the conservative-focused criteria went to the specialists while others that should have stirred concern did not.

In short, if you were with the Tea Party, you were guaranteed a close second look and almost certainly months more of delay. If you were leading a liberal activist group, maybe yes, maybe no.

'Like your worst audit nightmare'

"Dealing with this was like dealing with tax day every day for 2 1/2 years," says Laurence Nordvig, executive director of the Richmond Tea Party in Virginia. "Like your worst audit nightmare."

His group applied for tax-exempt status in December 2009 and finally got it in July 2012.

Tom Zawistowski applied for the tax exemption for his group, the Ohio Liberty Coalition, in June 2010 when the flagging was gathering steam. He got it in December 2012, after the presidential election.

The IRS asked him for the identity of the group's members, times and location of group activities, printouts of its website and Facebook pages, contents of speeches and the names and credentials of speakers at forums. He said the IRS also audited his personal finances and those of his wife.

"The intent of this was to hurt the ability of Tea Party groups to function in an election year," he said.

An Associated Press analysis of 93 "Tea Party" or "patriot" groups found that most were shoestring operations, with only two dozen raising more than $20,000 a year.

Political organizations can masquerade as 'social welfare' groups

If the IRS merely rolled over and played dead when it got an application for a tax exemption, the government would be even more broke than it is, and big money would have an even more pernicious grip on campaigns.

The IRS knows better than most that politically driven organizations, out to elect and defeat candidates, can masquerade as "social welfare" or other charitable entities under the tax-exempting articles of Section 501 (c) of the tax code.

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Or they can align themselves with one, allowing unlimited donations to be raised and the identities of the contributors to stay secret as long as the non-profit entities don't go too far in overt politicking.

In recent years, advocacy groups have paired their non-profit arms with "super" political action committees, moves that took hold after a series of court rulings including the Supreme Court's 2010 Citizens United decision loosened the rules on money in politics.

The rulings gave rise to such pairings as the American Crossroads super-PAC with its Crossroads GPS non-profit on behalf of Republicans in the 2012 campaign, and the Priorities USA Action super-PAC with its own non-profit arm, for Obama's benefit.

Section 501 (c) (3) can be the most lucrative financially for organizations because in addition to conferring tax-exempt status, it allows donations to qualifying groups to be tax deductible.

Section 501 (c) (4) doesn't permit tax-deductible donations but gives groups more latitude to lobby and to dabble more directly in political campaigns as long as "social welfare" remains their primary mission. They can also keep their donors secret, a big benefit over more blatantly political super-PACs.

Suspicion began in mid-2011

It's all complex, squishy and in some ways subjective, so it might not come as a shock that the IRS would look for shortcuts such as political buzzwords and slogans when deciding what a group is really up to. But the record as yet known does not show that the scrutiny cut both ways.

In congressional testimony about the discredited IRS actions, U.S. Attorney General Eric Holder said there is good reason to take a skeptical look at some Section 501 applications but "it has to be done in a way that does not depend on the political persuasion of the group."

• Top IRS official didn't reveal Tea Party targeting

The inspector general's office reviewed 296 tax-exempt applications that had been flagged as potentially too political. Of them, 108 were ultimately approved, 28 were withdrawn by the applicant, none had been rejected and 160 were still open in December 2012, some languishing for more than three years.

Hearing complaints of IRS harassment from constituents, lawmakers began asking a lot of questions of the agency starting in mid-2011. They got a lot of answers just not answers revealing what was going on.

In multiple letters, some as long as 45 pages, as well as in meetings and congressional hearings, senior IRS officials laid out in painstaking detail the process of checking tax-exempt applications but did not disclose what they had come to learn of the flagging.

Miller, for example, was told by staff in May 2012 about the inappropriate screening but did not pass that on in communications with inquiring members of Congress or in his appearance two months later with the House panel most concerned about the reports.

Lois G. Lerner, in charge of overseeing tax-exempt organizations at the IRS, was briefed about the screening a year earlier and ordered an end to explicit Tea Party-type flagging. But she did not tell lawmakers about that when asked about the constituent complaints.

Historical precedent

A number of U.S. presidents or their operatives have tried to twist the IRS against "dissidents" or political opponents. Presidents Franklin Roosevelt, Dwight Eisenhower and John Kennedy are among them.

President Richard Nixon, though, surely takes the cake here.

The Senate Judiciary Committee cited his IRS manipulations, including his pursuit of those on his "enemies list," in the articles of impeachment accusing the president of high crimes and misdemeanours in the Watergate scandal and of actions "subversive of constitutional government."

Article 2, Abuse of Power, said: "He has, acting personally and through his subordinates and agents, endeavoured to obtain from the Internal Revenue Service, in violation of the constitutional rights of citizens, confidential information contained in income tax returns for purposes not authorized by law, and to cause, in violation of the constitutional rights of citizens, income tax audits or other income tax investigations to be initiated or conducted in a discriminatory manner."

Nixon resigned after it became clear that a Senate impeachment trial would drive him from office.