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For Troubled IRS Division, Scandal Was Years in the Making

Screening guidelines were finalized more than two years after tax-exempt searches began

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.

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