The Washington PostDemocracy Dies in Darkness

Two years after scandal, the IRS still struggling

The Justice Department recently decided not to bring criminal contempt charges against Lois Lerner, the former head of the IRS division overseeing nonprofits, for refusing to testify before a House committee. The FBI is still probing her and other IRS officials over the targeting of conservative groups. (J. Scott Applewhite/AP )

The Senate Finance Committee on Wednesday released a bipartisan report on the 2013 scandal involving the Internal Revenue Service targeting conservative groups.

Much was made about what led to the controversy, but more than two years later, the agency appears no better at handling the growing crush of political nonprofits raising millions of dollars this election season.

The agency has shuffled its staffing, including the high-profile retirement of Lois Lerner, and taken steps to better manage the division that oversees nonprofit applications. Those moves have decreased the chances that the specific targeting leading to the scandal could be repeated. But the IRS is now frozen by a hobbled budget and hostile relationship with the committees that oversee it.

“If you went back to when Lois Lerner stood up and admitted [that political groups were being targeted], no one would say the IRS is better now than it was right before that moment,” said Jeremy Scott, a tax expert and editor of commentary at Tax Analysts. “Things have gotten worse, and it’s hard to see a way out of it.”

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Republicans argued in their portion of the report that the investigation of the IRS’s actions tainted the agency’s credibility and that political bias there is pervasive. They called for legislative action to prevent the Treasury Department from finalizing regulations and guidance that would restrict the actions of political nonprofits. But not much is expected to change for the massive agency tasked with overseeing the entire federal revenue system.

The scandal came to light in May 2013 when Lerner, then the head of the IRS unit on tax-exempt organizations, told the American Bar Association that employees were singling out and scrutinizing groups with words such as “tea party” and “patriots” in their names. Agents were supposed to be weeding out groups that violated rules limiting permitted  political work by non­profits. Lerner said the shortcuts were wrong, but her admission snowballed and led to several congressional investigations as well as an IRS internal inquiry.

The conflict mainly involved one class of nonprofits known as 501(c)(4) social welfare groups, which IRS law allows to “engage in some political activities, so long as that is not its primary activity.” But in practice, that definition is subjective and often difficult to enforce.

The Finance Committee report is a big step toward closure, but it may not be the end of the investigating. Some lawmakers said the IRS still has not produced all the e-mails and documents that Congress has requested.

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The committee did not find a smoking gun that points to specific malicious behavior. Democrats and Republicans still disagree over whether the evidence proves that there was an organized conspiracy to prevent conservative groups from obtaining nonprofit status. But the largest bipartisan investigation is now closed, and the rules remain vague.

For its part, the IRS believes it is on the path to making valuable changes and feels it has fully complied with the investigations.

“The agency has produced more than 1.3 million pages of documents in support of the investigations, provided 52 current and former employees for interviews and participated in more than 30 Congressional hearings on these issues,” the agency said in a statement Wednesday.

The most significant change by Congress was to drastically cut the IRS budget, a move that led to decreased service across the agency.

Senators are not expected to hone the vague policies that make it difficult to determine exactly what qualifies as acceptable political activity by nonprofits. Democrats proposed statutory changes, including a sharp limit on how much a group can spend on political activity. But Sen. Ron Wyden (Ore.), the committee’s top Democrat, told reporters that it would be faster and more effective for the IRS to adopt changes through regulations.

The IRS’s attempt to write new regulations that better defined the rules for nonprofits engaged in political activity were withdrawn earlier this year under heavy criticism from Congress. That has left the agency with only vague guidance that some say has led to essentially no oversight of such nonprofits.

“It is the Wild West out there, and it has been for a while,” said Miriam Galston, an expert on tax-exempt organizations and a professor at George Washington University Law School.

Congressional inertia is not surprising. Republicans want the IRS to be completely removed from the process of deciding what political activity is acceptable, and Democrats want clear guidance for enforcing the existing rules.

Republicans argue that the IRS proved itself incapable of handling the task without political bias, and they remain unconvinced that ousting those involved in the scandal is enough to prevent it from recurring.

“There were protocols in place to prevent this from happening and those protocols were ignored,” said Sage Eastman, a former senior counselor to Republicans on the House Ways and Means Committee who currently works as a Republican strategist at Mehlman Castagnetti Rosen Bingel & Thomas.

Eastman, who advised the committee at the time the scandal broke, said the slow drip of information from the IRS and the agency’s general unwillingness to cooperate “looks like sheer incompetence.”

Nonetheless, the IRS is still expected to release new draft rules in the coming months.

TThe IRS is still expected to release new draft rules in the coming months. But experts do not expect those rules to apply to the 2016 election. Millions of dollars are already pouring into the affiliated nonprofits of presidential candidates, and the IRS has only the old regulations to guide them.

But even Galston, who supports refining the regulations, said it would be a mistake to try to intervene in fundraising for the 2016 election now.

“They would have to get up to speed on how to enforce them,” she said. “It would be a free-for-all of criticism or worse of the IRS.”