The IRS official in charge of the division accused of improperly targeting conservative groups will invoke her Fifth Amendment rights against compelled self-incrimination at a committee hearing Wednesday, a sign of concern that the political controversy is heading into the criminal arena.

Lois Lerner, the director of the IRS Exempt Organization Division, is still expected to appear at a House Oversight and Government Reform Committee hearing but will refuse to answer questions, citing the criminal investigation into IRS actions.

Ali Ahmed, a spokesman for Oversight and Government Reform Chairman Darrell Issa, R-Calif., said Lerner’s attorney had sent the panel a letter but he said Issa “remains hopeful that she will ultimately decide to testify tomorrow about her knowledge of outrageous IRS targeting of Americans for their political beliefs.”

The announcement signaled a potentially dramatic turn in a controversy that has embroiled Capitol Hill and the IRS since the release last week of an inspector general’s reporting describing actions by IRS workers over several years to single out conservative groups seeking tax-exempt status and subject them to intrusive questioning.

Lerner is the third current or former IRS official scheduled to appear before Congress. Former IRS Commissioner Douglas Shulman said Tuesday he was “dismayed” and “saddened” that the IRS had scrutinized conservative groups in a way that hurt its reputation as a nonpartisan agency.

Making his first public appearance since the release of the inspector general’s report, Shulman expressed his regret at a Senate Finance Committee hearing but said he did not know why IRS employees had singled out groups with words such as “tea party” in their names.

Shulman, who led the IRS from 2008 through the fall of 2012, said recent revelations have “been bad for the agency and bad for the American taxpayer.” But he said the IRS does its “job in an admirable way a great majority of the time.”

While senators sharply criticized Shulman and his successor as acting commissioner, Steven Miller, for allowing the screening of conservative groups to occur, Democrats on the panel repeatedly raised questions about the laws and regulations that the IRS employees handling applications from nonprofit groups were trying to enforce.

In recent years, more organizations involved in political causes have applied for tax exempt status under section 501(c)(4) of the tax code, which allows them to keep the names of their donors secret.

“Once the smoke of the current controversy clears, we need to examine the root of this issue and reform the nation’s vague 501(c)(4) tax laws,” Finance Chairman Max Baucus, D-Mont., said. “Neither the tax code nor the complex regulations that govern nonprofits provide clear standards for how much political activity a 501(c)(4) can undertake. The code does not even provide a clear definition of what qualifies as political activity.”

Democrats were divided about whether the ambiguity surrounding 501(c)(4) organizations required a legislative fix or could be improved through new regulations. Some argue there is no problem with the current law, which says that the groups must “exclusively” promote the public welfare, and say the fault lies with regulations that allow 501(c)(4) organization to only be “primarily” engaged in social welfare activities. But Baucus and others say the law is too vague, in part because of the grey area between social welfare and political activity.

But Republicans say the attention on the regulation is a distraction from what they call a major political scandal.

“What everyone thinks of how the Treasury rule implementing the (c)(4) standards has been developed over the decades, how it is written, has absolutely nothing to do with the IRS decision to use ideology as a basis for imposing unnecessary, inappropriate, and extra screening on people seeking 501(c)(4) status,” Sen. Patrick J. Toomey, R-Pa., said.

Despite two rounds of questions directed at Shulman, Miller and Treasury Inspector General for Tax Administration J. Russell George, Tuesday’s testimony shed little new light on who was responsible for targeting conservative groups and what their motivations were.

Shulman said Miller told him in May 2012 that IRS employees in a Cincinnati office had been screening tea party groups. But he said that he took no further action because he had been told that the practice had stopped and that the IG had begun its audit.

“I don’t recall telling anyone about it because, I think this is not the kind of information, once TIGTA starts looking at it, that should leave the IRS,” Shulman said.

Miller, repeating what he said at a May 17 Ways and Means hearing, said IRS officials had tried to punish someone in the Cincinnati office thought to be responsible for the screening criteria, but that it was subsequently determined that the person was probably not to blame for the list in question.

Miller, Shulman and George all said they did not know who developed the screening criteria, although Miller acknowledged that “bad management” was partly to blame and Shulman said he did not know why, once mid-level officials learned of what was happening at the Cincinnati office, they did not tell senior managers about it sooner.

While Shulman and Miller were testifying, Treasury Secretary Jacob J. Lew addressed the controversy at a Senate Banking Committee hearing on the Financial Stability Oversight Council.

Lew said he had taken swift action at President Barack Obama’s request to carry out a thorough review. He said he intends to make sure that those who acted “inappropriately” are held accountable.

He will also examine failures within the IRS system. Lew said that Daniel Werfel, who will take over as acting IRS commissioner on Wednesday, will report back to him within 30 days with his assessment.

“We are going to make sure that nothing like this ever happens again,” Lew told the Banking panel.

Sen. Bob Corker, R-Tenn., said at that hearing that he holds the highest levels of the Obama administration responsible, including the president, for creating what he called a culture in which conservative groups were vilified.

“The indignation you showed on the front end is kind of laughable,” he told Lew. With top members of the administration “using the type of language to describe the folks that were targeted, demonizing, villainizing … you would expect that bureaucrats at lower levels are going to act in a way that they acted.”