IRS Tax-Exempt Scandal Never Ends

The Treasury Inspector General for Tax Administration released a report last week showing that the Internal Revenue Service has made significant progress in processing applications for tax-exempt status from organizations, but it’s not enough to satisfy critics of the agency.

An earlier TIGTA report precipitated a scandal two years ago, revealing that the IRS was using terms such as “Tea Party” and “Patriot” to identify groups for special scrutiny before processing their applications. When Lois Lerner, who was then director of the IRS’s Exempt Organizations function, tried to explain the findings ahead of the release of the potentially embarrassing report by answering a planted question from an audience member at an event, she instead ignited a furor. That led to a series of congressional hearings and investigations that continue to this day.

Lerner declined to answer questions from lawmakers at two congressional hearings after delivering a short statement defending her actions at the first of the hearings. That prompted Congress to cite her for contempt. The high-profile scandal, and several other brouhahas involving IRS conference spending and bonuses, cost Lerner her job, and led to the ousters of other top IRS officials.

Two years later, with a new IRS commissioner in place and a streamlined procedure allowing organizations to self-certify themselves for tax-exempt status before they are officially granted it, TIGTA has released a follow-up report (see Inspector General Finds IRS Has Improved Processing of Tax-Exempt Applications). It found that the IRS has eliminated the selection of potential political cases based on names and policy positions, expedited the processing of applications under Section 501(c)(4) of the tax code, which is supposed to apply to social welfare organizations but has also been used by political groups, and eliminated unnecessary information requests.

The IRS also got rid of the so-called “BOLO” lists, short for Be On the Look Out, which TIGTA determined had contained inappropriate criteria regarding political advocacy cases. TIGTA found that the IRS's Exempt Organizations function completed processing of 149 of the 160 applications for tax-exempt status that, as of December 2012, had been open for long periods of time.

Separately, TIGTA also managed to recover another 6,400 of the emails that were missing from Lerner’s laptop hard drive after her computer crashed back in 2011. Investigators are sure to pore over those messages looking for signs of political motivation on her part, or any coordination with the White House.

So, despite the release of the latest report, it’s only one of a stack of findings on the still-simmering scandal that have been accumulating for two years, the product of investigations by an array of congressional committees and politically minded groups.

Following the release of the report, House Ways and Means Committee chairman Paul Ryan, R-Wis., whose committee has jurisdiction over the IRS, released a statement promising that the probes are not finished.

“This report shows that only effective oversight can prevent abusive behavior like we saw in the IRS targeting scandal,” Ryan said in a statement last Thursday. “We would not have known about this scandal without the work our committees have done. But our investigation is ongoing, and we still have a lot of work to do to hold the IRS accountable. That is why the Ways and Means Committee will continue to investigate troubling behavior of the IRS, including its selective use of audits. We must do all we can to make sure this kind of abuse never happens again.”

Not long ago, Ryan and Senate Finance Committee chairman Orrin Hatch, R-Utah, whose committee oversees the IRS in the Senate, sent a letter on Tax Day to the IRS commissioner asking him to give extra scrutiny to tax-exempt organizations operating on behalf of labor unions under another part of the tax code, Section 501(c)3.

“Organizations with the purpose of advocating on behalf of employees for better working conditions and increased wages do not qualify for tax-exemption under §501(c)(3) because their benefits accrue to specific employees instead of the general public,” Ryan and Hatch wrote. “Some worker centers engage in similar conduct, such as advocating for discrete groups of workers. This activity seems directed at pursuing a private benefit rather than providing a public service, and, thus, does not satisfy the requirements for § 501(c)(3) status.”

Republican lawmakers have complained that the IRS was targeting Tea Party and other conservative groups for extra scrutiny on behalf of Democratic lawmakers who asked the IRS to eye those tax-exempt applications more carefully. Now the IRS is coming under pressure from Republicans to give that same extra vigilance to labor-backed groups.

As the campaign season heats up ahead of the 2016 elections, we can expect the charges and counter-charges to continue flying, with lawmakers prodding the IRS to do more investigations of tax-exempt groups, while cutting its budget every year for actually helping the tax-paying public.

Do you think the IRS should be giving extra scrutiny to tax-exempt applications from groups on either side of the political spectrum?

Michael Cohn is editor-in-chief of AccountingToday.com.