The IRS report: Insubordination and incompetence, but not much of a conspiracy

May 14, 2013

"Inappropriate Criteria Were Used to Identify Tax-Exempt Applications for Review."

That's the title of the Inspector General's report on the IRS's treatment of tea-party related groups. It's not a very good title. A better one might be "How a group of I.R.S. employees created a politically biased test for 501(c)(4) applicants, got smacked down, quietly created another politically biased test, and then got smacked down even harder -- but in the process, created a lot of delays and trouble for the groups caught in their net."

Okay, so that's not such a good title, either.

The key story of the report seems to be this: In the summer of 2010, in response to a huge surge in 501(c)(4) applications and media stories that some of these groups were illegally acting like political organizations, a group of IRS officials developed inappropriate criteria for identifying overly politicized 501(c)(4)s applicants. Those criteria included looking for the words "tea party" or related terms. In July 2011, the director of the IRS told them to knock it off and use more politically neutral criteria that focused on the activities of the group rather than the name or ideology of the group.

Here's where things get interesting: In January 2012, that same group of IRS officials goes rogue and changes the test back without getting management approval. According to the IG report, "they believed the July 2011 criteria were too broad." They're found out three months later and, in May 2012, a new IRS director again demands the test is revised to "more clearly focus on activities permitted under the Treasury Regulations." That's the test the IRS is using now, and the IG seems comfortable with it.

Management, however, isn't happy with what's been going on. They issue "a memorandum requiring all original entries and changes to criteria...be approved at the executive level prior to implementation."

So that's the core of the story. But it's not the whole story. Much of the report is about confusion, incompetence, and unacceptable delays in the IRS unit that manages questionable 501(c)(4) applications. There's no allegation here of politicization. But it's nevertheless unacceptable:

Many organizations waited much longer than 13 months for a decision, while others have yet to receive a decision from the IRS. For example, as of December 17, 2012, the IRS had been processing several potential political cases for more than 1,000 calendar days. Some of these organizations received requests for additional information in Calendar Year 2010 and then did not hear from the IRS again for more than a year while the Determinations Unit waited for assistance from the Technical Unit. For the 296 potential political cases we reviewed, 33 as of December 17, 2012, 108 applications had been approved, 28 were withdrawn by the applicant, none had been denied, and 160 cases were open from 206 to 1,138 calendar days (some crossing two election cycles).

Those aren't reasonable delays. Then there's this charming tidbit: Some of the "letters requested that the information be provided in two or three weeks (as is customary in these letters) despite the fact that the IRS had done nothing with some of the applications for more than one year." Imagine you're the director of a hopeful 501(c)(4) that applied to the IRS a year ago, got no response, and then all of a sudden you receive a letter demanding tons of information within two or three weeks. It's absurd.

These delays impose a real cost, too. It's been noted that none of the groups caught in this net were rejected for 501(c)(4) status. That's true. But many of them are still waiting for a ruling, and others saw their activities held up for over two years.

Some of the information the IRA requested was also inappropriate, and could've revealed donor information that the 501(c)(4) designation is designed to keep secret. Again, quoting the IG report: "The Determinations Unit requested donor information from 27 organizations that it would be required to make public if the application was approved, even though this information could not be disclosed by the IRS when provided by organizations whose tax-exempt status had been approved."

The key question related to the political test remains: Why hasn't anyone been fired? It's not definitive whether there's any evidence that the IRS employees who created the tea-party-focused test and then recreated it after the director objected did so for political reasons. It certainly seems possible. And even if their actions were entirely non-political there was a lot of incompetence and a bit of insubordination. What were the consequences?

The key procedural questions related to uncertainty and delays in the 501(c)(4) designation process are laid out in the report. Of the IG's nine recommendations, the IRS has agreed to implement seven of them, and has proposed alternatives for the remaining two (the disagreements are over how to document the reasons that applications are chosen for review and how to train IRS specialists on the issue).

Unless significant further evidence comes out, however, this doesn't look like the rot went particularly deep. The most cynical interpretation of the facts of the case laid out by the IG are that a group of mid-level IRS employees created a politically motivated screening process for 501(c)(4) applications. They were stopped, twice, by IRS management, and procedures were put in place to ensure they couldn't do anything like it again. The employees failed, but the system seems to have worked, though not before a lot of groups received some pretty shabby treatment.

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Sarah Kliff · May 14, 2013