The IRS’s targeting of tax-exempt applications from conservative social welfare groups is worse than initially believed, a new government report shows.

Moreover, the IRS broke its own rules with a deep dive into the names of the groups’ donors, among other things, says the new report from the Treasury Inspector General for Tax Administration (TIGTA).

That included whether the groups’ donors or officials have run or will run for public office; details about the conversations and discussions the groups’ members had about the issues; and other jobs the members held outside the group, including hours worked.

By law, applicants for 501(c)(3) and 501(c)(4) tax-exempt status do not have to disclose this information, tax pros note. To date, there is no indication yet the IRS did the same deep dive for liberal, progressive groups.

The new report says that by May 2010, the IRS unit responsible for reviewing tax-exempt groups had also launched “a spreadsheet that would become known inside the IRS as the ‘Be On the Look Out’ computer listing, which included “the emerging issue of Tea Party applications.”

OFFICIALS APOLOGIZE

Lois Lerner, a senior IRS official, has apologized for the IRS’s targeting of tax-exempt applications by using key words such as "Tea Party" and "Patriots,” triggering a controversy that has embarrassed the agency and roped in the White House, with President Barack Obama calling the targeting “outrageous.”

Specifically, the IRS “developed and used inappropriate criteria to identify applications” with the words “Tea Party,” “Patriots” and “9/12,” or had a focus on “government spending,” “debt” or “taxes,” or said they wanted “to “make America a better place to live,” or had any statements that “criticize how the country is being run,” the report says, instead of focusing on all applications with indications of potential political campaign activities.

A nonprofit’s focus on “government spending,” “debt” or “taxes,” or wanting “to “make America a better place to live” or “criticizing how the country is being run,” fall within the education mission of tax-exempt groups under the law.

The IG report says about a third of the 298 applications targeted as of May 31, 2012 had the words “Tea Party” (72 of the 298 total identified), “Patriots” (13), or “9/12” (11) in their names.

“In the majority of cases, we agreed that the applications submitted included indications of significant political campaign intervention,” which is against the tax laws, the IG report says.

“However, we did not identify any indications of significant political campaign intervention for 91 (31%) of the 296 applications that had complete documentation,” meaning, it appears they were unfairly targeted (the IG says it could not complete its review of two cases due to inadequate documentation in the case files).

IRS BREAKS THE RULES 

The IG report also says the IRS broke the rules when it demanded these groups fork over lists of names of past and future donors.

Specifically, the IG report says the IRS wrongfully asked for the dollar amount of donations and grant income for each year; the dates the groups received them; as well as the political affiliations of their speakers and candidates supported.

Moreover, the IG report says the IRS asked how the applicants used donations and grants, in violation of the rules. It also asked for a list of issues important to the applicant, its position about the issues.

IRS DISAGREES WITH FINDINGS

The IG says that IRS officials explained the targeting by saying the applications “may not literally include statements indicating significant political campaign” activity, therefore necessitating a deeper dive, apparently, because the applicant “may not understand what constitutes political campaign intervention.”

The IRS disagreed with the IG’s findings, according to the report, because of its duty by law to restrict political campaigning at nonprofits.

But the IG report says that, even so, the IRS case files “did not include the specific reason(s)” why the applications were targeted “for further review,” violating the IRS’s own rules ensuring officials are “impartial” and handle “tax matters in a manner that will promote public confidence.”

Instead, the “inappropriate” criteria developed by the “Determinations Unit” in Cincinnati used to review these groups for tax-exempt status “gives the appearance that the IRS is not impartial in conducting its mission,” the IG report says, which also blames “in part insufficient oversight” from agency headquarters.

The IRS unit in Cincinnati is responsible for reviewing applications to determine whether the organization qualifies for tax-exempt status.

Tax-exempt 501(c)(3) nonprofits are prohibited from directly or indirectly participating in or intervening in any political campaign on behalf of or in opposition to any candidate for public office. They may receive tax deductible charitable contributions. They cannot engage in political campaigns, but they can do limited lobbying and educate about the issues. Donors can deduct donations on their tax returns.

Tax-exempt 501(c)(4) social welfare organizations, 501(c)(5)6 agricultural and labor organizations, and 501(c)(6)7 business leagues may engage in limited political campaign activities. They can engage in unlimited lobbying and advocacy on the issues. Donors cannot deduct donations on their tax returns.

BEHIND THE IRS TARGETING

Here’s what unfolded: The IG report says the Cincinnati “Determinations Unit” employees stated that they considered the Tea Party criterion as “a shorthand term for all potential political cases,” even though it appears so far the IRS did not use key words such as, say, the word “progressive” to target liberal groups.

But “whether the inappropriate criterion was shorthand for all potential political cases or not, developing and using criteria that focuses on organization names and policy positions instead of the activities permitted under the Treasury regulations does not promote public confidence that tax-exempt laws are being adhered to impartially,” the IG report says.

In June 2011, the IRS director of exempt organizations “immediately directed that the criteria” used to review tax-exempt applicants “be changed,” the IG report says.

Next month, in July 2011, the criteria were changed to focus on the “potential political, lobbying”, or “advocacy activities” of the groups applying for tax-exempt status.

A year earlier, in May 2010, the Cincinnati unit had already begun “developing a spreadsheet that would become known as the ‘Be On the Look Out’ listing, which included “the emerging issue of Tea Party applications,” the IG report says.

In June 2010, this unit” began training its specialists on issues to be aware of, including Tea Party cases, the IG says. “By July 2010, Determinations Unit management stated that it had requested its specialists to be on the lookout for Tea Party applications,” the IG says. Again, no indication the IRS was focusing on liberal applicants.

The IRS workers then “used inappropriate criteria” that stayed “in place for more than 18 months, the IG report says.

Moreover, as this criteria stayed in place for a year and a half, these applications were delayed. “No work was completed on the majority of these applications for 13 months due to delays in receiving assistance from the Exempt Organizations” in the DC “headquarters office,” the IG report says.

The report says that for the 296 total cases the IG reviewed as of December 17, 2012, 108 had been approved, 28 were withdrawn by the applicant, and 160 were open from 206 days to 1,138 calendar days (some for more than three years and crossing two election cycles).” It says as of that date in December, “none had been denied.”

TREASURY IG FEARS PROBLEMS NOT FIXED

IRS officials told the IG that any donor information received “in response to a request” from its “Determinations Unit” was later destroyed.

The IG also says the IRS told it that “issues discussed in the report have been resolved,” but it disagrees the problems have been fixed, and gave nine recommendations to correct concerns it raised in the report, noting “corrective actions have not been fully implemented” at the IRS.

The IG reports cites data from the Center for Responsive Politics, which estimates that tax-exempt groups spent $133 million in 2010 on federal campaign. By 2012, that spending rose to $315 million.

In addition, the number of applications for tax-exempt status has increased 16% over the past four fiscal years, from 63,148 to 73319, according to IRS data.

Elizabeth MacDonald joined FOX Business Network (FBN) as stocks editor in September 2007 and is the author of Skirting Heresy: The Life and Times of Margery Kempe (Franciscan Media, June 2014).
Follow Elizabeth MacDonald on Twitter @LizMacDonaldFOX.