'Ineffective Management' Blamed For IRS Tax-Exempt Scandal

A Treasury Department Inspector General's report criticizes the IRS for inappropriately flagging some conservative groups for additional scrutiny on their applications for tax-exempt status. President Obama says those responsible must be held accountable.

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An investigation of the Internal Revenue Service moves blame up the hierarchy. The examination asked how the IRS came to flag conservative political groups for scrutiny.

GREENE: Earlier this week, our colleague Brian Naylor had some details of that report by the Treasury Department Inspector General. Now the full report is out.

INSKEEP: It finds fault not only with low-level auditors, but with, quote, "ineffective management" that could have stopped the targeting sooner. The report arrives at a time when President Obama is calling these actions - which took place on his watch - intolerable.

NPR's Scott Horsley reports.

SCOTT HORSLEY, BYLINE: IRS officials initially blamed the missteps on low-level workers in the agency's Cincinnati office, where applications for tax-exempt status are reviewed. That didn't wash with congressional Republicans, who complained conservative advocates were being singled out for special scrutiny. Even before the inspector general's report was released last night, lawmakers like Orrin Hatch - the ranking Republican on the Senate Finance Committee - were demanding accountability from higher-ups.

SENATOR ORRIN HATCH: It wasn't just some lowly staffers in the Cincinnati office. In fact, that's a pretty important office in the IRS. Very senior management at the IRS here in Washington knew what was going on for over a year, and they didn't even say a word.

HORSLEY: According to the Inspector General, the trouble began in 2010, when staffers in the IRS's Determinations Unit in Cincinnati began looking out for applications from groups with Tea Party, Patriots, or other political-sounding names. These and other potentially political cases were assigned to a team of specialists for review. That's because a group with politics as its primary activity doesn't qualify for tax-exempt status, as a so-called social welfare organization under section 501c4 of the tax code.

When officials in Washington were notified of the Tea Party criteria in 2011, they immediately ordered it changed. But the corrective action didn't stick. In 2012, IRS staffers adopted another suspect measure of political activity, this time focusing on organizations' policy provisions. No one at the IRS says there was any political influence from the White House or anyone else outside the agency in targeting the Tea Party groups.

But Senate Republican leader Mitch McConnell suggests the Obama administration is trying to silence its critics.

SENATOR MITCH MCCONNELL: The American people get it, because everyone understands what the IRS is, many people think the most powerful agency in the federal government, with the ability to literally put people out of business.

HORSLEY: While no one was officially denied tax-exempt status, some of the applications languished for more than three years. And during that time, many groups were asked for unnecessary information, including the names of their donors, the political affiliation of their officers, and whether any of their leaders had run or planned to run for public office.

By now, the targeting of Tea Party groups has been roundly criticized by leaders from across the political spectrum, and the acting commissioner of the IRS will no doubt face a grilling when he goes before a congressional committee on Friday.

Notre Dame law Professor Lloyd Mayer says the IRS was in a tough spot, though, trying to apply a vague standard of how much political activity is permissible for tax-exempt groups. Mayer worries the fallout from the scandal will be less scrutiny for everyone.

LLOYD MAYER: I'm sure a lot of IRS employees are going to have sleepless nights as a result of this report and the news coverage. And they're going to be a little gun-shy going after groups which they think are problematic, asking hard questions, because they'll be worried that they'll overstep, they'll make a mistake, and it'll come back to haunt them.

HORSLEY: The Inspector General recommends the Treasury Department develop clear rules for social welfare organizations, so groups of all stripes know how much politicking they can do and still qualify for a tax exemption.

Scott Horsley, NPR News, Washington.

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