New TIGTA Report on “Inappropriate” Criteria for Evaluating Exemption Applications

New TIGTA Report on “Inappropriate” Criteria for Evaluating Exemption Applications

The IRS auditors filed into the conference room, led by the computer expert clutching his explanation of how he would “image” the organization’s hard drives (this was many years ago, long before this became routine), followed by several agents who would manage and conduct the audit. I sat on the other side of the table, flanked by my lawyer colleagues, several accountants from a national firm and one very nervous organization official. It was really awkward, with the IRS people looking down and everywhere but at us. This wasn’t my first rodeo; previous audit defenses had been professional encounters,  intense but not personal. This, on the other hand, was downright weird.

After a round of introductions, the first words out of the lead IRS agent were “I want to assure you that the selection of this organization for audit was purely random, just by chance.”

OK, then. Except … we knew for a fact that this wasn’t true. This was an enormous, powerful organization, household name, which the then-sitting President routinely excoriated by name. And, we had several knowledgeable contacts who had confirmed that, while there was no direct Nixonian order to investigate, the White House staff had gotten the word to the right people and the audit began quickly thereafter. It was one of several such audits around that time.

Selective enforcement of the tax laws are not new, including in the area of tax-exempt organizations. News coverage of such enforcement blows up when they become public, then quickly subsides with the “other side” claiming similar past outrages. Earnest law professors and commentators opine that it really isn’t that bad because the IRS has to do its job of finding and punishing miscreants. Indeed, the process was so irksome to IRS staff that after one such incident in which I was mentioned, then-IRS EO Director Marcus Owens called me out of the blue one morning to berate me: “So Barnaby, did someone cut you off in traffic this morning? Do you want us to audit them?” (Rest easy, friends; I didn’t recommend anyone, in part because I took the Metro that morning, and knew he was just venting.)

A later, fruitless congressional investigation was notable for the single question that organizations complaining about unfair IRS audit selection were asked: “Please send the Committee all the information that indicates the IRS improperly selected your organization for audit.” Um, shouldn’t you ask the IRS that question?

So the Lois Lerner-driven investigation of the 2010-13 “Be On the Lookout” IRS scandal landed with explosive force. By planting a question with Celia Roady, a respected EO lawyer, at the May 2013 American Bar Association Exempt Organizations Committee meeting, Lerner tried to get out in front of the Treasury Inspector General for Tax Administration (TIGTA), which was about to issue a report damning her and her staff for using “inappropriate criteria” to evaluate applications for recognition of tax exemption.

Prof. Paul Caron has long cataloged the massive output involved in charges and countercharges in l’affaire Lerner. Litigation is still on-going for that disaster, but courts and Congress have long recognized the management and staff failures that torpedoed what had been a relatively swift and understandable process.

As the U.S. Court of Appeals for the Sixth Circuit recently said:

Among the most serious allegations a federal court can address are that an Executive agency has targeted citizens for mistreatment based on their political views. No citizen—Republican or Democrat, socialist or libertarian—should be targeted or even have to fear being targeted on those grounds. Yet those are the grounds on which the plaintiffs allege they were mistreated by the IRS here. The allegations are substantial: most are drawn from findings made by the Treasury Department’s own Inspector General for Tax Administration. Those findings include that the IRS used political criteria to round up applications for tax-exempt status filed by so-called tea-party groups; that the IRS often took four times as long to process tea-party applications as other applications; and that the IRS served tea-party applicants with crushing demands for what the Inspector General called “unnecessary information.”

Predictably, some believe that it’s not really a “scandal” because (take your pick) the President didn’t order it, liberal/progressive groups were also “targeted,” and most of the groups eventually got their approvals/recognition. And others believe the scandal was intentionally suppressed by White House and Dept. of Justice pressure.

Now a new TIGTA report has been issued. This is a very limited report, issued almost entirely in response to claims that the scandal wasn’t just targeted against conservative organizations. Major publications issued headlines: the Washington Post said:  “Liberal groups got IRS scrutiny, too, inspector general suggests.”

And the new report found exactly that. Some of the organizations the IRS scrutinized using “inappropriate” criteria included organizations with “Progressive” in their names, some affiliated with the organization formerly known as the Association of Community Organizations for Reform Now (ACORN), and other liberal-sounding names.

Note, however, that this is not news. The 2015 Senate Committee report noted that:

While most of the potentially political applications that the IRS set aside for
heightened scrutiny were Tea Party and conservative groups, the IRS also flagged
some left-leaning tax-exempt applicants for processing. In order to centralize
these cases for review and processing, names and descriptions of several
left-leaning groups were placed on the BOLO spreadsheet. Some left-leaning
applicants experienced lengthy processing delays and inappropriate and
burdensome requests for information.

In fact, the IRS itself knew this even before the scandal broke. Judy Kindell, a legend in the IRS’s EO office for her expertise on political campaign intervention (IRS-speak for political campaigning), wrote an e-mail to Lerner on July 18, 2012, saying that:

Of the 84 (c)(3) cases, slightly over half appear to be conservative-leaning groups based solely on the name. The remainder do not obviously lean to either side of the political spectrum.

Of the 199 (c)(4) cases,9 approximately ¾ appear to be conservative leaning, while fewer than 10 appear to be liberal/progressive leaning groups based solely on the name.

The Kindell e-mail is reprinted as Appendix IV to the new TIGTA report, on Page 102.

And the new report actually makes things worse for the hard-working media in crucial ways. For example, by expanding, without a full explanation, the scope of its inquiry beyond the specific period of the out-of-control Lerner office scandal, the TIGTA report conflates two very different types of IRS scrutiny.

Warning: technical language ahead.

Although the new report mentions both the IRS’s “Touch-and-Go” (TAG) and “Be On the Look Out” (BOLO) programs, it doesn’t explain the differences between the programs and how one shows the scandal while the other may not. What’s really sad is that the Washington Post’s former “fact-checker” Glenn Kessler sussed this out and published an easy-to-read “Explainer” only a few weeks after Lerner’s planted question sparked the first storm of analysis, but his work was quickly forgotten, including by TIGTA.

There is a difference between a BOLO list and a TAG list (“Touch and Go”). Touch and Go was a standard processing term in many highly-problematic areas. http://www.irs.gov/irm/part7/irm_07-020-006.html. (Note: the Internal Revenue Manual is the internal description of standard procedures and can be relied on in certain tax or legal proceedings.) Real TAG analyses are generally reserved for abusive transactions (many of which involve exempt organizations) and have a very specific chain of command and authority, plus review. Potential terrorism issues, for example, are on TAG reviews. You can imagine the reviews those generate. “Compliance” project reviews are generally not worthy of the full TAG panoply. IRM 7.20.6.1.2.1.

To the extent we even know what they are/were, BOLOs, on the other hand, were a new and unreported (and apparently badly supervised) version of TAG lists that raised many of these issues. Like TAGs, BOLOs use key words in the database to identify possible transactions, but the differences are in the structure, supervision, and probably the choice of terms as being recognized for a particular definition of what the problem is.

Here’s an example of the difference: One of the “conservative” groups mentioned in the new report is for “Border Patrol.” See, pp. 28-31 of the report. Only appeared on the TAG list, not the BOLOs. The reason why organizations dedicated to “Stopping illegal immigrant entry into the U.S.” were listed in 2005 for special scrutiny? Potential “abusive transaction” issues, involving claims by the organization’s current Board members that the former Director had submitted erroneous information to the IRS. Not the name or philosophy or positions at all.

Similarly, the next organization portrayed in the new TIGTA report is “CA Politics.” This is another listing from the TAG, of an organization involved with the 2004 inauguration of the California Lieutenant Governor. Most telling, the organization was reported by the California Franchise Tax Board, a government agency telling the IRS there was a problem with this organization. Not because of “Politics” in its name or its partisan character. Not on the BOLOs.

In other words, TAG reviews are what we expected the IRS to do if there had really been a problem; BOLOs are not. BOLOs are, for want of a better description, rogue TAGs, and no one wanted to grab that leash to bring them under control. THAT is the scandal; not that groups’ applications were scrutinized, but that the process was overwhelmingly one-sided and unrestrained.

There is no IRM entry for BOLO lists, nor will there be, since they were stopped years ago. The liberal groups were mostly on TAGs; the conservatives (and a few unlucky progressive exceptions) were on BOLOs.

So it’s a false equivalence to include them both without an explanation of the differences. It’s even worse to discuss them as though the TAGs were as bad as the BOLOs, as the new TIGTA report seems to do.

This has been a long explanation, but it still doesn’t cover most of what went wrong (and what was wrong) in the Lerner era. This was not a question of whether only conservative organizations were targeted; there’s really never been a question that liberal/progressive organizations were also investigated.

But the fact remains that a far larger number of conservative organizations were targeted under the lawless BOLO process. And the BOLOs were different from the TAGs. The media should not be conflating the two, nor should TIGTA.

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