The Internal Revenue Service has issued a report describing the changes it plans to address the problems with its approval process for reviewing applications for tax-exempt status.

The three-part report covers a wide range of areas that IRS principal deputy commissioner Daniel Werfel and his leadership team examined during the past month. The report cites actions to hold management accountable and identifies immediate steps to help put the process for approving tax-exempt applications back on track. Werfel also outlined actions needed to protect and improve wider IRS operations, ranging from compliance areas to taxpayer service.

In addition, the report revealed that the IRS not only filtered out "Tea Party" and "Patriot" conservative groups in its "Be on the Lookout," or BOLO, lists that it used to screen applications for tax-exempt status, but also groups with the words "Progressive" and "Occupy" in their names. Other groups on the BOLO lists included those advocating for medical marijuana, promoting the health care reform law, and those that dealt with disputed territories in the Middle East. The IRS also said it would establish an Accountability Review Board to recommend any needed personnel changes within 60 days.

It also gave groups that are applying for 501(c)(4) tax-exempt status a streamlined way to self-certify themselves if they agree to operate within certain limits for political and social welfare activity.

“It is critical that the IRS takes steps to ensure accountability, address the problems uncovered in recent weeks and improve the operations of the IRS to continue to carry out our critical mission on behalf of the public,” Werfel said in a statement. “We have made a number of changes already, more are in the works and even more will develop as we move forward.”

The IRS said its initial review shows no signs of intentional wrongdoing by IRS personnel or involvement by parties outside the IRS in the activities described in the recent report from the Treasury Inspector General for Tax Administration (see TIGTA: 'Ineffective Management Led to Targeting Tea Party Groups). However, the report notes that investigations are ongoing, and the IRS said it is committed to a full fact-finding effort to provide the public with answers to these and other important questions.

“The IRS is committed to correcting its mistakes, holding people accountable, and establishing control elements that will help us mitigate the risks we face,” Werfel added. “This report is a critical first step in the process of restoring trust in this critical institution. We have more work in front of us, but we believe we are on the right track to move forward.”

Werfel’s report, titled “Charting a Path Forward at the IRS: Initial Assessment and Plan of Action,” covers three primary areas:

Accountability: This covers the steps being taken to ensure accountability for the mismanagement described in last month’s TIGTA report:

• The report finds that significant management and judgment failures occurred, as outlined in the TIGTA report. These contributed to the inappropriate treatment of taxpayers applying for tax- exempt status. 

• To address this, new leadership has been installed across all five executive management levels involved in the chain of command connected to these matters. In addition, the IRS has empaneled an Accountability Review Board to provide recommendations within 60 days (and later as needed) on any additional personnel actions that should be taken.

Fixing the Problems with the Review of Applications for Tax-Exempt Status: This part covers several process improvements underway to ensure that taxpayers are treated appropriately and effectively in the review of applications for tax-exempt status:

• The report outlines a new voluntary process to help certain applicants gain fast-track approval to operate as a 501(c)(4) tax-exempt entity if they are being reviewed for advocacy questions and  have been in our application backlog for more than 120 days. This self-certification process allows them a streamlined path to tax-exempt status if they certify they will operate within specified limits and thresholds of political and social welfare activities. In addition, the IRS has added new technical and program staff to assist with reviewing 501(c)(4) applications.

• The IRS also suspended the use of any “be-on-the-lookout,” or BOLO, lists in the application process for tax-exempt status.

Review of IRS Operations and Risks: The report identifies a series of actions to ensure taxpayers that selection criteria across the IRS are appropriate and that taxpayers are aware of how they can seek assistance if they have concerns about the IRS. The report further outlines steps underway to ensure that critical program or operational risks within the IRS are identified early, raised to the right decision-makers and shared timely with key stakeholders:

• The report calls for establishing an Enterprise Risk Management Program to provide a common framework for capturing, reporting and addressing risk areas across the IRS.  This will improve timeliness in bringing information to the attention of the IRS Commissioner and other IRS leaders as well as key stakeholders to help prevent future instances of inappropriate treatment or mismanagement.

• While the report found that there is no current evidence that selection criteria in other IRS organizations is inappropriate, the nature of the problems identified in the tax-exempt application process warrants a review of certain process controls within the IRS.  The IRS will initiate a comprehensive, agency-wide review of compliance selection criteria.  Results will be shared with the Department of the Treasury, the IRS Oversight Board, and the Chairpersons of the House Ways and Means Committee and the Senate Finance Committee.

• The IRS will initiate additional internal and external education and outreach about the role of the National Taxpayer Advocate in assisting taxpayers in resolving problems they encounter with the IRS.

In addition to posting the report on IRS.gov, the IRS said it plans to regularly update the progress made on the TIGTA report’s recommendations and provide other developments related to this effort.

Treasury Secretary Jacob Lew said the IRS has made progress in responding to the concerns. “Our tax code has to be administered with the highest of standards and without bias,” Lew said in a statement. “Earlier today, I met with the President and Daniel Werfel to review his 30 day report and the progress that has been made to restore the public’s trust in the IRS. Last month, the President appointed Mr. Werfel, a dedicated public servant who has served presidents of both political parties, as acting head of the IRS. On his first day on the job, I asked him to take three immediate actions, as appropriate, within his first 30 days: 1) ensure staff that acted inappropriately are held accountable 2) examine and correct any failures in the system that allowed this behavior to happen and 3) take a forward-looking systemic view at the agency’s organization.”

Lew noted that since Werfel’s appointment, the IRS has new leadership in place at all five levels of management responsible for tax exempt applications. Werfel has also created a new Accountability Review Board, he added, and has taken action to address the backlog of applicants who were waiting for tax exemption status.”

Lew indicated that more work remains to be done by the IRS and the Treasury Department. “I am committed to taking action to make sure we get this job done,” he said. “An essential element of restoring the public trust is improving service to taxpayers. To that end, I have asked Mr. Werfel to spend some time outside Washington in the coming weeks to meet with taxpayers, business leaders, and community officials and to uncover new ways to make the IRS more efficient and consumer friendly. The assessments and actions outlined in Mr. Werfel’s report have charted a path that will improve performance and accountability, and will help ensure that we appropriately address the actions identified by the IRS Inspector General.”

Congressional Reaction

Republican leaders on Congress’s tax-writing House Ways and Means Committee said the IRS still needs to do more to address the problems and answer more questions from the committee. Werfel is scheduled to appear at a hearing on Thursday before the committee members.

“Though the IRS report details some immediate first steps that have been taken to correct management flaws at the agency, the IRS still needs to provide clear answers to the most significant questions – who started this practice, why was it allowed to continue for so long, and how widespread was it?” said Ways and Means chairman Dave Camp, R-Mich. “This culture of political discrimination and intimidation goes far beyond basic management failure and personnel changes alone won’t fix a broken IRS. Instead, real reforms must be implemented so that the American people know their government and their tax code are working for them, not targeting them for their beliefs.  Congress will continue the investigation into the IRS’s actions and hold the agency accountable so we can ensure no American is targeted again.”

Rep. Charles Boustany, R-La., who chairs the Ways and Means Oversight Subcommittee, added, “The IRS’s recent actions, from the targeting of taxpayers, doling out $70 million in bonuses to employees, and wasting taxpayer dollars on frivolous conferences and parody videos, are outrageous. It is particularly galling that the report concludes that part of the solution to the IRS’s problems is that it receive $1 billion more in taxpayer dollars. These actions cannot be tolerated and I expect the IRS to undertake fundamental reforms to ensure the agency’s inexcusable behavior does not continue.”

The leaders of the Senate Finance Committee, chairman Max Baucus, D-Mont., and ranking Republican member Orrin Hatch, R-Utah, also issued a joint statement in response to Werfel’s report.

“Principal Deputy Commissioner Danny Werfel has clearly hit the ground running,” Baucus and Hatch said. “We are glad to see the much-needed change of leadership Mr. Werfel is delivering at the IRS and his focus on accountability. He is fixing problems that have rightly undermined the agency’s credibility with the American people. That being said, we remain committed to our own full, independent, bipartisan investigation in the Senate Finance Committee to get to the bottom of what happened. As today’s report shows, our investigation is essential since the IRS’ use of inappropriate criteria for reviewing applications for tax-exempt status was broader than first disclosed. We look forward to working with Mr. Werfel on future steps to ensure that targeting based on political beliefs is not allowed to take place again.”

Both Baucus and Hatch met with Werfel on Monday afternoon in separate one-on-one meetings.  Like the House Ways and Means Committee, the Senate Finance Committee is conducting a bipartisan investigation into the IRS improper targeting of groups when they applied for tax-exempt 501(c)(3) or 501(c)(4) status.

Today’s report confirmed the IRS used several lists of inappropriate criteria to screen organizations seeking tax-exempt status and outlined ways to improve operational failures, such as the creation of an Enterprise Risk Management Program, to bring problems to the Commissioner in an expedited manner.

Democrats on the House Ways and Means Committee pointed out that the IRS report provided congressional investigators with new information showing that the term “progressives” was also included on the IRS’s “Be On the Look Out,” or BOLO, lists used to screen tax-exemption applications. The so-called BOLO lists were previously known to have included criteria singling out conservative organizations. This is the first evidence, however, that the lists included "progressives" as an identifier, they noted. Separately, Ways and Means Committee Democratic staff has now verified that the list of 298 organizations reviewed by TIGTA included liberal organizations, they added. They posted a November 2010 BOLO list and said they would be releasing additional BOLOs as they are received from the IRS.

In response to the new information, which is based on a Ways and Means Committee investigation of the Internal Revenue Service's handling of tax-exemption applications, Ways and Means Committee ranking Democratic member Sander Levin, D-Mich., said Monday he is taking the following actions:

• Writing a letter to Treasury Inspector General J. Russell George requesting that he explain why he released an audit report on May 14 that omits vital information regarding the processing of tax-exemption applications by the IRS and why he subsequently failed to disclose this information in congressional hearings.

• Requesting that Ways and Means Chairman Dave Camp hold a hearing where the Inspector General can explain the glaring omission in his audit report.

• Requesting that the interviews conducted to date be re-evaluated and possibly supplemented in light of the information learned today.

“The audit served as the basis and impetus for a wide range of Congressional investigations and this new information shows that the foundation of those investigations is flawed in a fundamental way,” Levin said in a statement.

The November 2010 BOLO makes clear the following, they stressed:

• The “Be On the Look Out” lists contained the word “Progressives.”  In May 2013, the Treasury Inspector General for Tax Administration released an audit report stating that the IRS used “inappropriate criteria” to process tax-exemption applications.  The Inspector General only disclosed in the audit report that the “Be On the Look Out” lists used by the IRS to screen tax-exemption applications for processing contained the name “Tea Party.” Based on the congressional investigation, Democrats on the committee said it has become clear that the Inspector General failed to inform Congress that the progressive category also appears on the same BOLOs that contain the “Tea Party” criteria and even appears on the BOLOs after the “Tea Party” criteria had been removed.

A spokesperson for Republicans on the Ways and Means Committee countered that being on  a BOLO list is different from being targeted, the way the Tea Party groups say they were. “It is one thing to flag a group, it is quite another to repeatedly target and abuse conservative groups," 

wrote spokesperson Sarah Swinehart. "Tea Party groups were not just on a BOLO they were (1) sent intrusive and inappropriate questions, (2) had their donors threatened with gift taxes and (3) had their confidential information leaked. The Committee has welcomed all groups, regardless of affiliation, that feel they may have been targeted for extra scrutiny to come forward.  The Ways and Means Committee will continue to investigate the IRS’s inexcusable actions when the IRS comes to testify on the report this Thursday.”