IRS scandal – TIGTA audit finds no high-level political Shenanigans

All the media and Congressional speculation regarding possible involvement by the current administration in the recent IRS scandal has been significantly alleviated by the May 14, 2013 report issued by the Treasury Inspector General for Tax Administration (TIGTA). Their report concluded that inappropriate criteria were used to identify tax-exempt applications for review due to ineffective management and lack of training of lower-level IRS staff members in the Exempt Organization office.

Here is how it began. During the 2012 election cycle, some members of Congress raised concerns to the IRS about selective enforcement and the duty to treat similarly situated organizations consistently. In addition, several organizations applying for I.R.C. § 501(c)(4) tax-exempt status made allegations that the IRS 1) targeted specific groups applying for tax-exempt status, 2) delayed the processing of targeted groups’ applications for tax-exempt status, and 3) requested unnecessary information from targeted organizations. As a result of the concerns expressed by Congress, TIGTA was asked to investigate the IRS handling of these issues.

Organizations, such as charities, seeking Federal tax exemption are required to file an application with the Internal Revenue Service (IRS). Other organizations, such as social welfare organizations, may file an application but are not required to do so. The IRS’s Exempt Organizations (EO) function, Rulings and Agreements office, which is headquartered in Washington, D.C., is responsible for processing applications for tax exemption. Within the Rulings and Agreements office, the Determinations Unit in Cincinnati, Ohio, is responsible for reviewing applications as they are received to determine whether the organization qualifies for tax-exempt status.

Most organizations requesting tax-exempt status must submit either a Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, or Form 1024, Application for Recognition of Exemption Under Section 501(a), depending on the type of tax-exempt organization it desires to be. For example, a charitable organization would request exemption under Internal Revenue Code (I.R.C.) Section (§) 501(c)(3), whereas a social welfare organization would request exemption under I.R.C. § 501(c)(4).

The I.R.C. section and subsection an organization is granted tax exemption under affects the activities it may undertake. For example, I.R.C. § 501(c)(3) charitable organizations are prohibited from directly or indirectly participating in or intervening in any political campaign on behalf of or in opposition to any candidate for public office (hereafter referred to as political campaign intervention).  However, I.R.C. § 501(c)(4) social welfare organizations, I.R.C. § 501(c)(5) agricultural and labor organizations, and I.R.C. § 501(c)(6) business leagues may engage in limited political campaign intervention.

An organization engages in general advocacy when it attempts to 1) influence public opinion on issues germane to the organization’s tax-exempt purposes, 2) influence nonlegislative governing bodies (e.g., the executive branch or regulatory agencies), or 3) encourage voter participation through “get out the vote” drives, voter guides, and candidate debates in a nonpartisan, neutral manner. General advocacy basically includes all types of advocacy other than political campaign intervention and lobbying.

TIGTA found that:

1.   IRS developed and began using criteria to identify potential political cases for review that inappropriately identified specific groups applying for tax-exempt status based on their names (Tea Party, Patriots, or 9/12 in the organization’s name as well as other “political-sounding” names), or policy positions instead of developing criteria based on tax-exempt laws and Treasury Regulations. However, after being briefed on the expanded criteria in June 2011, the Director of EO immediately directed that the criteria be changed. In July 2011, the criteria were changed to focus on the potential “political, lobbying, or [general] advocacy” activities of the organization. These criteria were an improvement over using organization names and policy positions. However, the team of specialists subsequently changed the criteria in January 2012 without executive approval because they believed the July 2011 criteria were too broad. The January 2012 criteria again focused on the policy positions of organizations instead of tax-exempt laws and Treasury Regulations. After three months, the Director, Rulings and Agreements, learned the criteria had been changed by the team of specialists and subsequently revised the criteria again in May 2012. The May 2012 criteria more clearly focus on activities permitted under the Treasury Regulations.

2.   Potential political cases took significantly longer than average to process due to ineffective management oversight. Once cases were initially identified for processing by the team of specialists, the Determinations Unit Program Manager requested assistance via e-mail from the Technical Unit to ensure consistency in processing the cases. However, EO function management did not ensure that there was a formal process in place for initiating, tracking, or monitoring requests for assistance. In addition, there were several changes in Rulings and Agreements management responsible for overseeing the fulfillment of requests for assistance from the Determinations Unit during this time period. This contributed to the lengthy delays in processing potential political cases. As a result, the Determinations Unit waited more than 20 months (February 2010 to November 2011) to receive draft written guidance from the Technical Unit for processing potential political cases.

3.   The IRS sent requests for information that TIGTA (in whole or in part) determined to be unnecessary for 98 (58 percent) of 170 organizations that received additional information request letters.  According to the Internal Revenue Manual, these requests should be thorough, complete, and relevant. However, the Determinations Unit requested irrelevant (unnecessary) information because of a lack of managerial review, at all levels, of questions before they were sent to organizations seeking tax-exempt status. We also believe that Determinations Unit specialists lacked knowledge of what activities are allowed by I.R.C. § 501(c)(3) and I.R.C. § 501(c)(4) tax-exempt organizations. This created burden on the organizations that were required to gather and forward information that was not needed by the Determinations Unit and led to delays in processing the applications. These delays could result in potential donors and grantors being reluctant to provide donations or grants to organizations applying for I.R.C. § 501(c)(3) tax-exempt status. In addition, some organizations may not have begun conducting planned charitable or social welfare work.

TIGTA asked the Acting Commissioner, Tax Exempt and Government Entities Division; the Director, EO; and Determinations Unit personnel if the criteria were influenced by any individual or organization outside the IRS. All of these officials stated that the criteria were not influenced by any individual or organization outside the IRS. Instead, the Determinations Unit developed and implemented inappropriate criteria in part due to insufficient oversight provided by management. Specifically, only first-line management approved references to the Tea Party in the criteria listing before it was implemented. As a result, inappropriate criteria remained in place for more than 18 months. Determinations Unit employees also did not consider the public perception of using politically sensitive criteria when identifying these cases. Lastly, the criteria developed showed a lack of knowledge in the Determinations Unit of what activities are allowed by I.R.C. § 501(c)(3) and I.R.C. § 501(c)(4) organizations.

As Lynn Nichols, CPA points out in the Ohio Society of CPAs Tax Section LinkedIn site, more evidence of IRS abuse of power and institutional arrogance continues to come to light, and abuses are not limited to the Exempt Organization division.  In Anonymous 1 et al. v. Commissioner; US Tax Court order; No. 12472-11W 5/10/2013, the IRS was found to have lied to the Court about whether it used information from whistleblowers to initiate an audit that produced tax liability of hundreds of millions. In another, less widely publicized incident, IRS agents serving a search warrant for information about a one of a corporation’s employees improperly demanded the full contents of the company’s servers. Those records included medical records of over 10 million individuals that are protected from disclosure by HIPPA rules. The IRS agents threatened to “pull the servers out of the wall” in spite of being warned that the records they contained were protected by statute and NOT COVERED BY THE WARRANT. (John Doe Co. et al. v. John Does 1-15; No. 37-2013-00038750; SUPERIOR COURT OF THE STATE OF CALIFORNIA FOR SAN DIEGO (3/11/2013))

You can find the complete TIGTA report at:

By Don James, CPA/PFS, CFP


About Don James, CPA/PFS, CFP
Don is the Tax & Financial Planning partner with Kiplinger & Co., CPAs headquartered in sunny Cleveland, Ohio since 1982. He partners with business owners and families and specializes in goal achievement solutions, tax minimization strategies and serves in the role of gatekeeper of sound financial advice.

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