Vernoia, Enterline + Brewer, CPA LLC

The IRS’s improper handling of applications for tax-exempt status from conservative groups has led to the removal of top officials, the appointment of a new Acting Commissioner, a 30-day top-down review of the agency’s operations, Congressional hearings, and a criminal investigation. The outcome of all these activities may reshape how the IRS operates and how it interacts with taxpayers. In coming weeks and months, more details are expected to be uncovered about how the IRS treated conservative groups seeking tax-exempt status, who knew of a problem, and what can be done to prevent any reoccurrence in the future.

Applications for tax-exemption

In 2012, a House Committee asked the Treasury Inspector General for Tax Administration (TIGTA) to investigate reports of the IRS improperly handling applications for tax-exempt status from conservative groups. TIGTA launched a lengthy investigation that included interviewing IRS employees in Cincinnati, who process applications for tax-exempt status. On May 10, a few days before TIGTA was scheduled to release its findings, an IRS official apologized for the agency’s inappropriate treatment of applications for tax-exemption from conservative groups.

TIGTA confirmed what the IRS official had said. TIGTA found that the IRS personnel in Cincinnati had used inappropriate criteria that identified for review Tea Party and other organizations applying for tax-exempt status based upon their names or policy positions. These included names such as Tea Party, Patriots and 9/12.

TIGTA further discovered that the IRS had sent requests for unnecessary information to these organizations. According to TIGTA, examples of this unnecessary information included the names of past and future donors, listings of all issues important to the organization and what the organization’s positions were regarding the issues, and whether officers or directors have run for public office or would be running for public office in the future. TIGTA told Congress that all of the IRS’s actions were inappropriate because they went beyond what was authorized by federal law and regulations. The IRS’s inappropriate criteria may have led to inconsistent treatment of organizations applying for tax-exempt status, TIGTA concluded.

New leader, 30-day review

On May 15, President Obama announced that the Acting Commissioner of the IRS had resigned at his request. President Obama appointed Daniel Werfel, a career government employee, as the new Acting Commissioner.  “The American people deserve to have the utmost confidence and trust in their government as we work to get to the bottom of what happened in the IRS,” the President said.

Werfel has been ordered by the White House to undertake a 30-day review of the agency’s operations, processes and practices. Werfel is to report his findings and recommendations for improvements to President Obama before the end of June. Since Werfel’s appointment, the head of the IRS Tax-Exempt Division has retired and the official who oversaw the Cincinnati office was placed on administrative leave, after reportedly being asked to resign by Werfel. White House officials have indicated that more personnel changes may take place after the results of the 30-day review are announced.

Congressional investigations

Three Congressional Committees – the Senate Finance Committee, the House Oversight and Government Reform Committee and the House Ways and Means Committee – held hearings in May. The former Commissioner of the IRS, Douglas Shulman, and the ex-Acting Commissioner, Steven Miller, both told lawmakers that they were dismayed at TIGTA’s report. “As a general principle, as the IRS commissioner, I didn’t touch individual cases and I certainly didn’t touch cases that involved political activity.” Shulman said. Shulman added that he was “saddened” that these activities occurred on his watch.  Miller acknowledged that the IRS had acted improperly but denied any partisan motivation for the conduct of employees.

For many lawmakers, the key question is whether IRS officials mislead them in previous hearings. “We are concerned about the extent to which senior officials became aware of these practices, when they found out, and what they did or did not do to put a stop to them. And, perhaps most important, we want to know why the IRS purposefully misled Congress when they led us to believe that no groups were being targeted,” Sen. Orrin Hatch, R-Utah, said.

More Congressional hearings are scheduled. “We need to understand how and why this targeting occurred,” Senate Finance Committee Chair Max Baucus, D-Montana, said. “We need to know who was involved and who was responsible, and we need to install new safeguards to ensure this targeting never happens again.”

Criminal investigation

The U.S. Department of Justice has opened a criminal investigation into the IRS’s scrutiny of applications from conservative groups.  “The FBI is coordinating with the Justice Department to see if any laws were broken in connection with those matters related to the IRS,” Attorney General Eric Holder said on May 14. Holder has not said when the results of the investigation will be released.

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