GAO: Too much bias risk in IRS audit system

Greg Nash

The IRS could easily be auditing tax-exempt groups for biased reasons because of flawed procedures and staff work, according to a new report from the top federal watchdog.

The Government Accountability Office found that the IRS kept shoddy records detailing how it chooses groups for audits, allows staffers essentially to freelance audit decisions and keeps officials in key positions much longer than its own internal rules allow.

Those deficiencies, GAO said, magnified the risk that the IRS division overseeing tax-exempt groups “could select organizations for examination in an unfair manner — for example, based on an organization’s religious, educational, political or other views.”

The report is sure to add new scrutiny to the IRS, which has faced heavy criticism from Republicans for more than two years for singling out Tea Party groups seeking tax-exempt status.

John Koskinen, the IRS commissioner, is scheduled to testify Thursday about the report before the House Ways and Means oversight subcommittee. Two leaders of conservative groups that believe the IRS unfairly audited them will also appear before the subcommittee, headed by Rep. Peter Roskam (R-Ill.).

Koskinen will face questions about a report that GOP aides to the panel said were rather scathing by GAO standards.

The GAO report builds on the case that made former IRS official Lois Lerner a household name, in which a Treasury inspector general found that the agency gave improper scrutiny to Tea Party groups. Now, the GAO says that groups could suffer unfair treatment once that status has been approved.

Tax-exempt organizations send filings each year to the IRS that detail their finances, which can spark audit proceedings from the agency. Still, fewer than 1 percent of tax-exempt groups get audited from year to year.

According to the report, IRS staffers examining whether 501(c)(4) groups and other tax-exempt organizations were guilty of sloppy records keeping.

For instance, IRS brass didn’t sign off on up to one of every three cases in which the agency backed off a decision to audit an organization. At least 12 percent of those cases didn’t have the sign-offs by an internal manual, the GAO said.

On top of that, roughly a quarter of the audit cases sparked by an outside complaint had no record of that original complaint, the report said.

The GAO also essentially found that staffers would change policies for choosing organizations for auditing, without updating the internal manual. That, the watchdog said, “increases the risk of unfair selection of organizations’ return for examination.”

And the report found that IRS workers aren’t cycling through a referral committee overseeing the audit process on a regular basis. Committee members are supposed to rotate every 12 months, but the average tenure in recent years has been almost three times as long.

But while the report found that the exempt organization division’s actions increased the risk of bias playing a role in audit selection, the GAO didn’t offer any examples of organizations who were wrongly singled out for examinations.

As a GOP aide to Ways and Means put it: “They don’t identify any smoking gun — an ‘aha, we found something.’”

The IRS said as much in its response to the report, even as the agency said it generally agreed with GAO’s recommendations.

“Although the report states that a hypothetical risk that returns could be selected unfairly, the draft report did not find any evidence that this has happened,” wrote John Dalrymple, a deputy IRS commissioner.

The GOP aide called that response “pretty audacious” — noting, for instance, that there’s email traffic showing that Lerner pressed her subordinates for an audit of Crossroads GPS, the Karl Rove-linked group that supports Republican candidates.

The aide added that the bureaucratic slip-ups described in the report would have given an opportunity to IRS staffers who wanted to single out particular groups.

But those sorts of statements — and the lack of examples from the GAO, especially that conservative groups received unfair audits — suggest that the report could spark the same sort of partisan divisions caused by the broader IRS controversy. Democrats have said there’s no proof that the IRS’s improper scrutiny of Tea Party groups was politically motivated.

Another Republican aide on the committee said the response showed that Koskinen, known as a turnaround artist before taking over the controversy-plagued IRS, hasn’t shown the urgency in cleaning house at the agency that his reputation suggested.

“They’re still acting as if this is just some hypothetical, when we know that it happened on the approval side,” the aide said. “And we know that it could happen on the exam side, too.”

Koskinen has said repeatedly that he wants to put the issues with the tax-exempt groups behind the IRS and has urged the congressional committees to wrap up their investigations of the agency’s treatment of Tea Party groups.