IRS watchdog finds 'insufficient oversight' allowed targeting

IRS staffers used "inappropriate criteria" to single out Tea Party groups, while senior agency officials ineffectively managed the situation, according to a federal watchdog report.

The agency, the report found, asked for a range of “unnecessary information” from groups seeking tax-exempt status – including donors, all of the issues important to that organization and the political affiliations and aspirations of group leaders.

The highly-anticipated report from Treasury’s inspector general for tax administration adds that the agency identified groups for further scrutiny based on their names and policy positions – like “Tea Party” or “9/12” – instead of based on the tax law and regulations.

A leaked version of the Treasury Inspector General for Tax Administration (TIGTA) audit shines a light on the scandal that has dominated Capitol Hill, ensnared top IRS officials and put President Obama and the White House on their heels.

But while the agency has said it moved to correct its mistake, the report, a copy of which was obtained by The Hill, says that the agency “will need to do more” to reassure the public. IRS employees responsible for determining which tax-exempt applications merited further scrutiny, the report found, failed to consider "the public perception of using politically sensitive criteria."

According to the audit, "insufficient oversight" by IRS management led to the improper criteria for examining applications to remain in place for over 18 months, even as some groups waited years for a verdict from the agency on their application.

Meanwhile, some applicants with significant political activity were not given further screening, while groups with seemingly little political interest did receive a closer look.

“The inappropriate and changing criteria may have led to inconsistent treatment of organizations applying for tax-exempt status,” said the report.

Staffers in the Cincinnati-based office overseeing the process also said that they considered “Tea Party” to be shorthand for any political group, and had little grasp over the sort of work that tax-exempt groups could and could not do, the report found.

Russell George, the tax administration inspector general, is scheduled to discuss his findings at a House Ways and Means hearing on Friday. Steven Miller, the acting IRS commissioner and a former deputy commissioner at the agency, is also expected to testify, and remains under fire for not telling lawmakers about the additional IRS scrutiny for more than a year.

Senior IRS officials did stress to the inspector general that the agency alone crafted the criteria, and received no assistance from outside groups or people. Top Republicans, like Senate Minority Leader Mitch McConnellAddison (Mitch) Mitchell McConnellSenate passes 0B defense bill Overnight Health Care: New GOP ObamaCare repeal bill gains momentum Overnight Finance: CBO to release limited analysis of ObamaCare repeal bill | DOJ investigates Equifax stock sales | House weighs tougher rules for banks dealing with North Korea MORE (R-Ky.), have increasingly tried to link the IRS scandal to a White House they say has no issue targeting its enemies.

Joseph Grant, the acting IRS commissioner for tax-exempt and government entities, wrote in a response to the report that "errors occurred" as the IRS faced an "influx of advocacy cases," but added it was important to consider the situation in context.

He emphasized that just because Tea Party groups were selected for further review, it did not mean their applications would be denied, and pointed out that most cases selected for further review were not done based on their name.

Many of the groups that received further scrutiny did so because they failed to supply enough information in their initial applications, Grant added, noting that decisions like those discussed in the inspector general’s report would now be made by higher-level officials.

"We believe the front line career employees that made the decisions acted out of a desire for efficiency and not out of any political or partisan viewpoint," Grant wrote in response to the report.

The hullabaloo centers on organizations seeking tax-exempt statuses like 501(c)(4), the designation enjoyed by groups on both the right (Crossroads GPS) and the left (Priorities USA) that played pivotal roles in the 2012 election.

The 501(c)(4) designation, meant for social welfare group, is attractive to groups with political interest because they are not forced to disclose their donors. Critics of the IRS’s oversight of those organizations say the agency is far too lenient in allowing clearly political groups to gain tax-exempt status.

An IRS staffer also told TIGTA that groups with the key conservative phrases in their titles amount to roughly one-third of the 300 applications that were reviewed, which demonstrated the agency "was not politically biased" in choosing applications for further review.

But the inspector general determined that in the statistical samples it pulled of tax-exempt applications, all applications that included the phrases "Tea Party," "Patriots," or "9/12" were pulled for further scrutiny by specialists.

Lois Lerner, who heads an IRS section on tax-exempt groups and first disclosed the extra scrutiny last week, directed the criteria be changed in June, 2011, after being briefed on it.

But six months later, employees changed the criteria again without her knowledge, because they believed the new criteria were "too broad.” IRS officials discovered the change and altered criteria yet again in May, 2012.

IRS officials began searching for applications based on Tea Party terms in March, 2010. In all, roughly four in five potentially political cases remained open for more than a year, while the inspector general says close to 60 percent of the groups that were singled out were pressed for unnecessary information.

--This report was originally published at 5:39 p.m. and last updated at 7:50 p.m.