The breakdown in IRS management that led the agency into a scandal over the improper targeting of conservative groups began with long-standing problems at the division that oversees tax-exempt organizations, according to interviews with former IRS officials.
Tasked with regulating hundreds of thousands of nonprofit groups with a staff of about 900 people, roughly 100 of them in Washington, officials at the IRS’ Exempt Organizations Division have complained frequently about a lack of resources and their seemingly awkward position within an agency chiefly concerned with collecting revenue.
The EO Division has devised strategies over several years to cope with the workload and tough questions the agency faces. As far back as the 1980s, the division began consolidating field offices, creating a central office for processing applications for tax-exempt status in Cincinnati.
In 2003 and 2004, leaders of the division made another important — and possibly fateful — decision. In the name of efficiency, fewer applications would be sent to lawyers in Washington and more authority for handling sensitive cases would be provided to the lower-level employees in Cincinnati.
The idea, said Marvin Friedlander, a former senior IRS official who retired in January 2010, was to let the different offices focus on what they did best. Cincinnati would deal with the day-to-day problems while Washington would remain focused on the big picture, identifying trends, tackling special projects and issuing guidance to field offices when needed.
Before the reorganization, field officers would “be able to send an application to Washington at will,” Friedlander said. Now, “if Cincinnati needs assistance they can reach out and ask for it from the lawyers in Washington, but they won’t send the cases. They will just say, ‘Here’s an issue that we have,’ and talk to Washington informally.”
According to Friedlander and several other people who used to work at the EO Division, there is a direct connection between the decision to turn the Washington office into something of a think tank and the controversy the IRS now faces. Not only are employees in Washington better paid and have a better grasp of tax law than those in Cincinnati, they also are more sensitive about political issues, these former officials say.
“What was eliminated in 2003 were a series of quality checks in the application processing,” said Marcus Owens, a lawyer at Caplin & Drysdale who left the IRS in 2000 after serving as the director of the EO Division for 10 years. “With that act, there was a time bomb that started ticking.”
Even after Tuesday’s release of an inspector general’s report, much remains unclear about exactly what happened at the IRS beginning in early 2010.
That includes the question of how involved senior IRS officials were in establishing screening guidelines that made it more likely that conservative groups applying for tax-exempt status would be scrutinized for having an overly political mission.
In March 2010, managers at the Cincinnati office took initial steps to screen groups with “tea party,” “patriots” or “9/12” in their names, but they also communicated their actions to technical advisors in Washington, according to the IG report.
That August, the Cincinnati office formalized its search criteria, but it wasn’t until June 2011 that Washington officials with direct supervision of the Cincinnati office asked for that information.
A few weeks later, Lois Lerner, the director of the EO Division, participated in a briefing in which the search criteria was discussed and she instructed that the language be changed to include all groups involved in political activities.
Still, it wasn’t until May 2012, shortly after officials from Washington visited Cincinnati to conduct training, that the two offices came to a final agreement about what the search criteria should be.
In its response to the IG report, the IRS defended its decision to place a team of specialists on political cases but agreed that it was wrong to take shortcuts that singled out conservative groups. It also agreed that “decisions with respect to the centralized collection of cases must be made at a much higher level of the organization.”
In the aftermath of the IG report, congressional leaders have vowed further investigations into the IRS.
“The American people deserve to know what actions will be taken to ensure those who made these policy decisions at the IRS are being held fully accountable and more importantly what is being done to ensure that this kind of raw partisanship is fully eliminated from these critically important non-partisan government functions,” all 45 Republican senators wrote to President Barack Obama on Wednesday.
Still, those familiar with the IRS are concerned that deeper problems with the agency and tax law may go unfixed. They note that current restrictions on the political activity of nonprofit groups are vague.
That grew more significant, former officials said, as the number of politically active nonprofits exploded in recent years and the IRS did not address the issue either through regulations or clear instructions to employees who handle applications.
“To me it’s personally embarrassing that EO didn’t seem to get ahead of the curve and realize that this was going to happen,” Friedlander said.
There are also questions about the lack of coordination between the Washington and Cincinnati offices and how a relatively small group of people can handle so many applications.
“If you only have 300, 350 people in Cincinnati and 60,000 applications to deal with, they’re basically always overwhelmed,” said Paul Streckfus, a former IRS employee who now edits the EO Tax Journal.
Bill Brockner, who retired from the EO Division in 2006, said managers and frontline workers at the division face an exceedingly difficult task.
“It’s not given the resources to do what they should do,” he said. “And the laws aren’t good enough, so you don’t know what’s going on, and the only time people get interested is when someone does something bad or something perceived to be bad like what’s going on now. And then there’s 15 minutes of uproar and then it’s forgotten.”