Senate Probes IRS Changes on Tax-Exempt Application Review

The Senate Finance Committee held a hearing Tuesday to find out from Internal Revenue Service commissioner John Koskinen how his agency has responded to the committee’s recommendations in an August report on the scandal involving how the IRS reviewed applications for tax-exempt status by political groups.

Koskinen reported that the IRS has speeded up its review of applications for tax exemption under both Sections 501(c)4 and 501(c)3 of the Tax Code in the aftermath of the scandal, but is still moving cautiously on revising its rules for which groups qualify as tax-exempt social welfare organizations. The original proposed regulations had provoked opposition from both Democrats and Republicans, and the IRS withdrew them soon after Koskinen began helming the agency.

Koskinen pointed out that the IRS had begun making many changes to its review of tax-exempt applications in response to a May 2013 report by the Treasury Inspector General for Tax Administration. The TIGTA report helped uncover the use of so-called BOLO (short for “be on the lookout”) lists with terms such as “Tea Party” and “Patriot” for screening applications from political groups. The former director of the Exempt Organizations unit, Lois Lerner, lost her job after admitting the IRS had used such terms in advance of the release of the report.

“The situation described in the Inspector General’s 2013 report should never have happened, and the IRS is doing everything possible to ensure that the mistakes referenced in the Inspector General’s report do not happen again,” Koskinen said in his opening statement at the hearing. “Every taxpayer, whether an individual or an organization, needs to be confident that they will be treated fairly by the IRS, no matter what their political affiliation, their position on contentious political issues, or whom they supported in the last election.”

In response to the TIGTA report, the IRS made a number of changes, according to Koskinen.

“The changes we made in response to those recommendations include eliminating the use of inappropriate criteria; expediting the processing of Section 501(c)(4) applications; establishing a new process for documenting the reasons why applications are chosen for further review; developing guidelines for specialists in the IRS’s Exempt Organizations division on how to process requests for tax-exempt status involving organizations engaging in potentially significant political campaign intervention; and creating a formal, documented process for EO determinations personnel to request assistance from technical experts,” he said. “EO is committed to providing annual training for employees on political campaign intervention.”

The IRS has also been making changes in response to the committee’s report, including streamlining the Exempt Organizations determination process to reduce the waiting time to under 270 days for groups applying for tax-exempt status. Koskinen said that only a handful of organizations whose applications had been delayed were still awaiting a determination, and in some cases those applications were tied up in litigation.

“While I want to commend the IRS for the efforts they have made thus far, it my understanding that, up to now, most of the changes they’ve made have been procedural in nature and very little has been done to begin work on the needed structural changes at the agency,” said Senate Finance Committee chairman Orrin Hatch, R-Utah.

Hatch quizzed Koskinen about the IRS’s treatment of labor unions and also questioned why so few employees had been fired. “Our report clearly shows that political targeting at the IRS resulted from a number of bad decisions made by a number of different officials,” he said. “However, as of yet, very few of these individuals have been held accountable, while others have since received bonuses and even promotions. While I am concerned about this apparent lack of individual accountability, I am more concerned that the IRS lacks the necessary structural and procedural mechanisms to ensure that, as an agency, it remains accountable.”

Sen. Ron Wyden, D-Ore., the ranking Democrat on the committee, pointed out that the report found “alarming bureaucratic dysfunction.”

“Many applicants for tax-exempt status were treated badly and deserved much better service from their government,” he said. “For example, between 2010 and late 2011, a total of 290 applications for tax-exempt status had been set aside for review. Only two applications had been resolved successfully. Not 200—two. That was unacceptable mismanagement. The investigation, however, did not find any evidence of criminal wrongdoing.”

However, Wyden noted that some restrictions on political spending by tax-exempt groups is necessary. “The vast majority of Americans want disclosure in political spending,” he said. “They want all sides to be more open and more straightforward on these issues. Americans overwhelmingly disapprove of the Citizens United decision that knocked down some of the key limits on political campaign spending. If there’s no oversight of who receives 501(c)4 status—meaning anybody can get it and hide their donor lists—then political spending will be hidden even deeper in the shadows. So my request to you, Mr. Commissioner, is that the IRS work with this committee in a bipartisan fashion to get this right.”

Koskinen told the committee that revising the regulations for 501(c)4 organizations is not a “slam dunk.” Hatch noted the regulations proposed by the IRS in 2013 were criticized by people and organizations across the political spectrum and were subsequently withdrawn.

“That poorly drafted proposal would have created nonsensical rules and constitutionally dubious speech restrictions,” said Hatch. “Oddly enough, it would have created stricter standards for 501(c)(4) organizations than exist for public charities, which would be a perverse reversal of roles for these types of organizations.”

Koskinen was also asked by Wyden and committee member Sen. Sherrod Brown, D-Ohio, about tax preparer regulation. Koskinen committed to using the Circular 230 framework for regulating tax preparers if Congress grants the IRS the authority to regulate all tax preparers. Koskinen noted the IRS had used Circular 230 when it tried to institute a regulatory regime for preparers a few years ago before the federal courts stuck down the program.

Koskinen was also asked about recent news reports that the IRS was using cell site simulators to trace the location of mobile phones, as a number of other law enforcement agencies do. He confirmed the IRS’s Criminal Investigation unit is using the cell phone tracking technology, but said it was only being used in criminal cases such as those tied to money laundering and terrorism.

For reprint and licensing requests for this article, click here.