[Senate Hearing 113-232]
[From the U.S. Government Publishing Office]





                                                        S. Hrg. 113-232

                  A REVIEW OF CRITERIA USED BY THE IRS
                   TO IDENTIFY 501(c)(4) APPLICATIONS
                          FOR GREATER SCRUTINY

=======================================================================

                                HEARING

                               before the

                          COMMITTEE ON FINANCE
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 21, 2013

                               __________



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                          COMMITTEE ON FINANCE

                     MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West         ORRIN G. HATCH, Utah
Virginia                             CHUCK GRASSLEY, Iowa
RON WYDEN, Oregon                    MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York         PAT ROBERTS, Kansas
DEBBIE STABENOW, Michigan            MICHAEL B. ENZI, Wyoming
MARIA CANTWELL, Washington           JOHN CORNYN, Texas
BILL NELSON, Florida                 JOHN THUNE, South Dakota
ROBERT MENENDEZ, New Jersey          RICHARD BURR, North Carolina
THOMAS R. CARPER, Delaware           JOHNNY ISAKSON, Georgia
BENJAMIN L. CARDIN, Maryland         ROB PORTMAN, Ohio
SHERROD BROWN, Ohio                  PATRICK J. TOOMEY, Pennsylvania
MICHAEL F. BENNET, Colorado
ROBERT P. CASEY, Jr., Pennsylvania

                      Amber Cottle, Staff Director

               Chris Campbell, Republican Staff Director

                                  (ii)





















                            C O N T E N T S

                               __________

                           OPENING STATEMENTS

                                                                   Page
Baucus, Hon. Max, a U.S. Senator from Montana, chairman, 
  Committee on Finance...........................................     1
Hatch, Hon. Orrin G., a U.S. Senator from Utah...................     3

                               WITNESSES

George, Hon. J. Russell, Treasury Inspector General for Tax 
  Administration, Department of the Treasury, Washington, DC.....     6
Miller, Steven, Acting Commissioner, Internal Revenue Service, 
  Washington, DC.................................................     8
Shulman, Hon. Douglas, former IRS Commissioner, and guest 
  scholar, Brookings Institution, Washington, DC.................     8

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:
    Opening statement............................................     1
    Prepared statement...........................................    67
George, Hon. J. Russell:
    Testimony....................................................     6
    Prepared statement...........................................    70
    Responses to questions from committee members, with 
      attachments................................................    79
Hatch, Hon. Orrin G.:
    Opening statement............................................     3
    Prepared statement...........................................   188
    Letter from Senator Hatch et al. to IRS Commissioner Shulman, 
      dated March 14, 2012.......................................   192
    Letter from Deputy IRS Commissioner Miller to Senator Hatch, 
      dated April 26, 2012.......................................   196
    Letter from Senator Hatch et al. to IRS Commissioner Shulman, 
      dated June 18, 2012........................................   206
    Letter from Deputy IRS Commissioner Miller to Senator Hatch, 
      dated September 11, 2012...................................   210
Menendez, Hon. Robert:
    ``The Obama Ad Blitz Isn't Working,'' by Karl Rove, The Wall 
      Street Journal, August 2, 2012.............................   215
Miller, Steven:
    Testimony....................................................     8
Shulman, Hon. Douglas:
    Testimony....................................................     8
    Responses to questions from committee members................   217

                             Communications

American Civil Liberties Union (ACLU)............................   237
American Civil Liberties Union et al.............................   244

                                 (iii)

 
                  A REVIEW OF CRITERIA USED BY THE IRS
                   TO IDENTIFY 501(c)(4) APPLICATIONS
                          FOR GREATER SCRUTINY

                              ----------                              


                         TUESDAY, MAY 21, 2013

                                       U.S. Senate,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 10:04 
a.m., in room SD-215, Dirksen Senate Office Building, Hon. Max 
Baucus (chairman of the committee) presiding.
    Present: Senators Wyden, Stabenow, Cantwell, Nelson, 
Menendez, Cardin, Brown, Bennet, Casey, Hatch, Grassley, Crapo, 
Roberts, Enzi, Cornyn, Thune, Burr, Isakson, Portman, and 
Toomey.
    Also present: Democratic Staff: Amber Cottle, Staff 
Director; Mac Campbell, General Counsel; John Angell, Senior 
Advisor; Lily Batchelder, Chief Tax Counsel; and Chris Law, 
Investigator. Republican Staff: Chris Campbell, Staff Director; 
and Jim Lyons, Tax Counsel.

   OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR FROM 
            MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

    The Chairman. The hearing will come to order.
    Before we begin, I am confident I can speak for every 
member of this committee in saying our thoughts and prayers are 
with the people of Oklahoma. We will stand with the courageous 
community of Moore, with the people of Oklahoma, as they come 
together to face this tragedy. May we stand together as 
citizens of the United States of America with the people of 
Moore and with the people of Oklahoma. We are all together, and 
we all share their grief.
    The statesman Adlai Stevenson once said, ``The government 
by consent of the governed is the most difficult of all because 
it depends for its success and viability on the good judgments 
of so many of us.'' These words are etched in granite at the 
IRS headquarters, just outside Washington, DC. They speak to 
the need for government at all levels to exercise sound 
judgment in order to earn and keep the confidence of the 
American people.
    That confidence was broken recently by the news that the 
IRS targeted conservative groups seeking tax-exempt status. In 
doing so, the IRS abandoned good judgment and lost the public's 
trust. The American people have every right to be outraged. 
Targeting groups based on their political views is not only 
inappropriate, it is intolerable. We need to understand how and 
why this targeting occurred. We need to know who was involved 
and who was responsible. We need to install new safeguards to 
ensure this targeting never happens again.
    The IRS has one of the most direct relationships with 
Americans of any agency in our government. The IRS employees 
know where we live, where we work, how many children we have, 
and what investments we make. Because of this, IRS employees 
are placed in a position of great trust, and they must exercise 
this trust in a fair and even-handed manner.
    Employees in the Tax Exempt Unit of the IRS Office in 
Cincinnati abused this trust. The Treasury Inspector General's 
report found that employees in this unit targeted groups with 
names containing Tea Party, Patriot, and other terms associated 
with conservatives.
    The Inspector General's report also found that the Tax 
Exempt Unit was a bureaucratic mess. Employees were ignorant 
about tax laws, defiant of their supervisors, and blind to the 
appearance of impropriety. This is unacceptable.
    But the Inspector General's report also raises many 
unanswered questions. For example, the report examined 298 
applications, and the Cincinnati IRS office reportedly 
identified 96 of those 298 applications using ``political'' 
screening terms.
    But what was the nature of the other 202 applications? Were 
they filed by liberal groups, moderate groups, or groups that 
had no political affiliation? We cannot measure the full impact 
of this case without knowing the nature of these additional 
applications.
    Who is responsible? We know the IRS officials in Washington 
tried to stop this behavior, but who in Cincinnati perpetuated 
this behavior? One person? Two people? The whole office? Who? 
We do not know, not yet.
    I intend to get to the bottom of what happened. As part of 
our oversight of the IRS, this committee has launched a formal 
bipartisan investigation. We have requested additional 
documents from the IRS as part of our independent inquiry. We 
will follow the facts and see where they take us.
    The Inspector General's report also demonstrates the need 
for Congress and this committee to review and reform the 
Nation's tax laws when it comes to 501(c)(4) organizations. We 
have come a long way from the Tariff Act of 1894 when Congress 
first created exemptions for charitable, religious, and 
educational organizations.
    Today there are countless political organizations at both 
ends of the spectrum masquerading as social welfare groups in 
order to skirt the tax code. These groups seek 501(c)(4) 
status. Why? Because it allows them to engage in political 
activity while keeping the identity of their donors secret.
    According to data collected by the website OpenSecrets.org, 
501(c)(4)s spent $254 million in the 2012 election. That is 
about equal to the combined spending of the 2012 Democratic and 
Republican political parties.
    None of the donors behind these multi-million dollar 
campaigns was disclosed. This was all secret money. In 2010, I 
wrote a letter to the IRS asking them to look at all major tax-
exempt organizations, 501(c)(4)s, (c)(5)s, and (c)(6)s. I asked 
this question: is the tax code being used to eliminate 
transparency in the funding of our elections, elections that 
are a constitutional bedrock of our democracy?
    This letter was part of a long line of investigations that 
the Senate Finance Committee has conducted into nonprofit, tax-
exempt organizations. In 2006 we investigated the efforts of 
Jack Abramoff to use nonprofits to lobby Congress, and, in 2005 
when Senator Grassley was chairman of this committee, we 
investigated religious organizations, nonprofit hospitals, and 
the Nature Conservancy.
    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. Neither the tax code nor the complex 
regulations that govern nonprofits provide clear standards for 
how much political activity a 501(c)(4) group can undertake.
    The code does not even provide a clear definition of what 
qualifies as political activity. The statute provides one 
definition of a 501(c)(4), while IRS regulations say something 
different. The statute says its contributions or earnings must 
be ``devoted exclusively to charitable, educational, or 
recreational purposes,'' the key word being ``exclusively.'' 
IRS regulations, on the other hand, define a 501(c)(4) as an 
organization ``primarily''--not ``exclusively''--``engaged in 
promoting in some way the common good and general welfare of 
the people of the community.''
    How does the IRS justify regulations that weaken the 
standard from ``exclusively'' to ``primarily''? These 
ambiguities may have contributed to the IRS taking the 
unacceptable steps we are examining here today. Americans 
expect the IRS to do its job without passion or prejudice. IRS 
cannot pick one group for closer examination and give others a 
free pass, but that is apparently what they did.
    As Adlai Stevenson said: ``The success of our government 
depends on the good judgments of so many.'' It is clear that 
many in the IRS exercised poor judgment in this case. Today, 
they will have to answer for it.
    [The prepared statement of Chairman Baucus appears in the 
appendix.]
    The Chairman. Senator Hatch?

           OPENING STATEMENT OF HON. ORRIN G. HATCH, 
                    A U.S. SENATOR FROM UTAH

    Senator Hatch. Well, thank you, Mr. Chairman. Before I 
begin, I would like to just take a moment to say that my 
thoughts and prayers are with the good people of Oklahoma who 
have been impacted by yesterday's devastating tornadoes. In 
particular, my prayers go out to those who have lost loved ones 
in the really catastrophic storms, and I hope they are going to 
be able to deal with this tragedy in every good way.
    Thank you, Mr. Chairman, for convening this important 
hearing. You and I do not always agree on all of the issues, 
but on this point we agree. Despite some claims to the 
contrary, the IRS targeting of citizens for their political 
views is in fact a scandal.
    It undermines Americans' trust that the government will 
enforce the law without regard to political beliefs or party 
affiliation. Make no mistake, this hearing and the 
investigation that will follow are absolutely critical to this 
country.
    Over the weekend, a senior White House official said 
Republicans are on a ``partisan fishing expedition'' and that 
we are conducting ``trumped-up hearings.'' I hope they are not 
referring to what this committee is doing or to this hearing 
that we are having today. This would be very disconcerting, 
particularly after last week when the President said he was 
committed to working with Congress to find out the truth.
    These hearings are not some sideshow designed to distract 
from the President's agenda. I hope that the President and his 
administration are not attempting to distract us from getting 
to the bottom of this. This committee is going to pursue this 
matter wherever it leads.
    The Internal Revenue Service is one of the most powerful 
agencies in our government. Everybody knows that. It has a 
broader reach than almost every other government agency or 
entity. Indeed, many law-abiding Americans are already afraid 
of the IRS.
    That being the case, the American people have a right to 
expect that the IRS will exercise its authority in a neutral, 
non-biased way. We need to work together to make sure that this 
is precisely what it does, without any hint of political bias 
or partisanship, and that the IRS takes this responsibility 
seriously.
    Sadly, as we will discuss during today's hearing, there 
appears to have been more than a hint of political bias in the 
IRS's processing of applications of groups applying for tax-
exempt status. We have a report from the Treasury Inspector 
General for Tax Administration, or TIGTA, indicating that the 
use of inappropriate political criteria was all too common in 
the evaluation of these applications.
    So far, here is what we know. We know that between 2010 and 
2012, conservative groups applying for tax-exempt status were 
targeted by the IRS and subjected to increased levels of 
scrutiny. We know that these groups were targeted because they 
had the words ``Tea Party'' or ``Patriots,'' et cetera, in 
their name or because they said in their applications that they 
wanted to do things like ``make America a better place to 
live.''
    We know that these conservative groups were asked invasive 
and inappropriate questions about their donors, their positions 
on various issues, and the political affiliations of their 
officers and directors.
    We know that some of these groups' applications were 
delayed for more than 3 years, even as applications for groups 
friendly to the President and liberal causes were promptly 
approved. We know that, despite some early claims to the 
contrary, knowledge of this operation extended beyond the 
processing center in Cincinnati and that IRS officials in 
Washington, DC were aware of the program at an early stage.
    We have also seen evidence that employees at other IRS 
offices besides Cincinnati scrutinized conservative 
organizations to an unreasonable degree. In spite of what the 
IRS has said publicly, it has become clear that this problem 
was not limited to a few employees in Cincinnati. We know that 
by June 2012 at the latest, the 
number-two official at the Department of the Treasury, Deputy 
Secretary Neal Wolin, was aware that there was an ongoing TIGTA 
inquiry into these issues.
    Here is what we do not know. We do not know why the 
targeting began. We are concerned about the extent to which 
senior officials at the IRS and the Department of the Treasury 
became aware of these practices, when they found out, and what 
they did or did not do to put a stop to them.
    Perhaps most importantly, we want to know why the IRS 
purposefully misled Congress when they led us to believe that 
no groups were being targeted when we repeatedly raised this 
issue with the agency last year. This, to me, is one of the 
most disturbing elements of this story.
    On multiple occasions in 2012, I spearheaded letters from 
Republican Senators to then-IRS Commissioner Shulman, asking 
questions about the IRS's processing of applications for tax-
exempt status and the reports that the process had become 
politicized.
    I received two separate responses from Acting Commissioner 
Steven Miller, who was at that time serving as the Deputy 
Commissioner for Services and Enforcement. Neither of these 
responses even hinted at the possibility that the targeting was 
going on, even though these officials in Washington were 
certainly aware that a number of conservative groups had in 
fact been targeted.
    Indeed, despite multiple efforts during the 2012 election 
campaign to find out the facts about this targeting program, 
the IRS did not decide to come clean until the release of the 
TIGTA report was imminent and their hand was forced.
    Even then, one of the top IRS officials, in consultation 
with the Department of the Treasury, chose to disclose that it 
had targeted innocent organizations by responding to a planted 
question at a press conference. A planted question! The 
American people deserve to know the truth about what went on 
here, and they deserve to know why the truth was kept from them 
for so long.
    Were the top IRS officials willfully blind to what was 
going on, or were they simply holding out until after the 
election? While the targeting of conservative groups and the 
review process has received most of the attention thus far, it 
is not the only problem that needs to be addressed.
    I am, of course, referring to the fact that in 2012 one of 
the IRS offices that was targeting conservative groups' 
applications also improperly disclosed confidential information 
about some of the same groups to a left-leaning media 
organization called ProPublica.
    This revelation comes on the heels of other allegations 
that the IRS disclosed to activist groups and media outlets, 
confidential information including donor information, submitted 
by conservative nonprofits. We need to look closely at all 
these allegations as well. So, as you can see, Mr. Chairman, 
there are a lot of problems at the IRS. I am glad that, thus 
far, members of both parties have recognized the need to 
address these issues.
    Mr. Chairman, I am pleased to be working with you on this 
investigation, and I hope that we will continue to work 
together on a bipartisan basis to get to the bottom of all 
this. I want to assure our colleagues and the American people 
that we are going to find out exactly what happened here, and 
we are going to do everything we can to make sure it does not 
happen again.
    The only way to fully address these issues and to restore 
the credibility of the IRS is to have a full accounting of the 
facts. One way or another, we are going to learn the facts 
about what went on here. I hope that we can do so with the full 
and complete cooperation of the Obama administration. Today's 
hearing is just the first step in this process.
    I want to thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Hatch.
    [The prepared statement of Senator Hatch appears in the 
appendix.]
    The Chairman. I would now like to welcome our panel of 
witnesses. First is the Honorable Russell George, Treasury 
Inspector General for Tax Administration at the U.S. Department 
of the Treasury; second, Mr. Steven Miller, Acting Commissioner 
of the Internal Revenue Service here in Washington, DC; and 
third, former Commissioner of the IRS, the Honorable Douglas 
Shulman. Thank you all for coming.
    Before we begin, I would like you all to stand so I can 
swear you in, please.
    Raise your right hands, please.
    Do you swear that the testimony you are about to give is 
the truth, the whole truth, and nothing but the truth, so help 
you God?
    The Witnesses. I do.
    The Chairman. Thank you. You may be seated.
    As is our regular practice, we will include your prepared 
statements for the record and ask each of you to summarize in 
about 5 minutes. We will start with you, Mr. George. Then after 
that, obviously, the committee will have a lot of questions.
    Mr. George?

STATEMENT OF HON. J. RUSSELL GEORGE, TREASURY INSPECTOR GENERAL 
FOR TAX ADMINISTRATION, DEPARTMENT OF THE TREASURY, WASHINGTON, 
                               DC

    Mr. George. Thank you, Chairman Baucus. Chairman Baucus, 
Ranking Member Hatch, members of the committee, thank you for 
the opportunity to discuss our report concerning the Internal 
Revenue Service's treatment of groups that applied for tax-
exempt status.
    Our audit was initiated based on concerns expressed that 
certain groups were being subjected to unfair treatment by the 
IRS. The report issued last week addresses three allegations: 
(1) that the IRS targeted specific groups applying for tax-
exempt status; 
(2) that the IRS delayed the processing of these groups' 
applications; and (3) that the IRS requested unnecessary 
information from the groups it subjected to special scrutiny. 
Our review confirmed all of the allegations.
    Inappropriate criteria were used by the IRS to target for 
review ``Tea Party'' and other organizations based on their 
names and policy positions. The practice started in 2010 and 
continued to evolve until June 2011. The criteria, which we 
obtained from a briefing held by the IRS's Exempt Organizations 
function in June of 2011, were: the organizations' names, 
including ``Tea Party,'' ``Patriots,'' or ``9/12 Project''; 
whether the organizations had policy positions involving 
government spending, government debt, or taxes; third, the 
organizations intended to provide education to the public by 
advocacy or lobbying to ``make America a better place to 
live''; and lastly, there were statements in the case file 
criticizing how the country is being run.
    These criteria were inappropriate in that they did not 
focus on tax-exempt laws and Treasury regulations. For example, 
501(c)(3) organizations may not engage in political campaign 
intervention, which is defined as action taken on behalf of or 
against a particular candidate running for office. 501(c)(4) 
organizations may engage in such activity so long as it is not 
their primary activity.
    IRS employees began selecting ``Tea Party'' and other 
organizations for review in early 2010. From May 2010 through 
May of 2012, a team of IRS specialists in Cincinnati, OH, 
referred to as the Determinations Unit, selected 298 cases for 
additional scrutiny.
    We found that the first time executives from Washington, DC 
became aware of the use of these criteria was June 2011, with 
some executives not becoming aware of the criteria until April 
or May 2012.
    These inappropriate criteria remained in effect for 
approximately 18 months. After learning of the criteria, the 
Director of Exempt Organizations changed them in July of 2011 
to remove references to organization names and policy 
positions, only to have staff in Cincinnati change the criteria 
back again to target organizations with specific policy 
positions. The difference this time is that they did not 
include ``Tea Party'' or other named organizations. It took 
until May 2012 before the criteria were finally changed to be 
consistent with laws and regulations.
    The organizations selected for review for significant 
political campaign intervention experienced substantial delays 
in the processing of their applications. As of December 2012, 
the status for the 296 cases that we were able to review was 
108 cases had been approved, 28 cases were withdrawn, and 160 
cases were still open. It is noteworthy that zero cases had 
been denied.
    Of the cases still open, some have been in process for over 
3 years and crossed 2 election cycles without resolution. Of 
the 108 cases approved, 31 were ``Tea Party,'' ``9/12,'' or 
``Patriot'' organizations.
    Another troubling aspect we uncovered was the fact that the 
IRS requested unnecessary information for many political cases. 
Ninety-eight of 170 cases that received follow-up requests for 
information from the IRS had unnecessary questions. We found 
that staff at the Determinations Unit sent letters requesting 
this information with little or no supervisory review.
    The IRS later determined these questions were unneeded, but 
not until after media accounts and questions by members of 
Congress arose in March of 2012. An example of unnecessary 
information requested was the names of past and future donors. 
The IRS informed us that they subsequently destroyed the donor 
information received from applications.
    In closing, the IRS demonstrated gross mismanagement in its 
operation of this program. The allegations were substantiated 
and raised troubling questions about whether the IRS has 
effective management, oversight, and control, at least in the 
Exempt Organizations function.\1\
---------------------------------------------------------------------------
    \1\ For more information, see also, ``Inappropriate Criteria Were 
Used to Identify Tax-Exempt Applications for Review,'' Treasury 
Inspector General for Tax Administration report, May 14, 2013 (Ref. no. 
2013-10-053), http://www.treasury.gov/tigta/auditreports/2013reports/
201310053fr.pdf.
---------------------------------------------------------------------------
    Chairman Baucus, Ranking Member Hatch, members of the 
committee, thank you for the opportunity to present the 
findings of our audit.
    The Chairman. Thank you, Mr. George.
    [The prepared statement of Mr. George appears in the 
appendix.]
    The Chairman. Mr. Miller, you are next.

   STATEMENT OF STEVEN MILLER, ACTING COMMISSIONER, INTERNAL 
                REVENUE SERVICE, WASHINGTON, DC

    Mr. Miller. Thank you for the opportunity to be here today. 
Unfortunately, given time considerations, the IRS was unable to 
prepare written testimony. I would note that I have a very 
brief statement before I take questions.
    First and foremost, as Acting Commissioner, I want to 
apologize on behalf of the Internal Revenue Service for the 
mistakes that we made and the poor service we provided. The 
affected organizations and the American public deserve better.
    Partisanship, or even the perception of partisanship, has 
no place at the IRS. It cannot even appear to be a 
consideration in determining the tax exemption of an 
organization. I do not believe that partisanship motivated the 
people who engaged in the practices described in the Treasury 
Inspector General's report.
    I have reviewed the Treasury Inspector General's report, 
and I believe its conclusions are consistent with that. I think 
that what happened here was that foolish mistakes were made by 
people trying to be more efficient in their workload selection. 
The listing described in the report, while intolerable, was a 
mistake and not an act of partisanship.
    The agency is moving forward. It has learned its lesson. We 
have previously worked to correct issues in the processing of 
the cases described in the report and have implemented changes 
to make sure that this type of thing never happens again. Now 
that TIGTA has completed its fact-finding and issued its 
report, management will take appropriate action with respect to 
those responsible.
    I would be happy to answer any questions that you may have.
    The Chairman. Thank you, Mr. Miller.
    Mr. Shulman?

STATEMENT OF HON. DOUGLAS SHULMAN, FORMER IRS COMMISSIONER, AND 
      GUEST SCHOLAR, BROOKINGS INSTITUTION, WASHINGTON, DC

    Mr. Shulman. Chairman Baucus, Ranking Member Hatch, members 
of the committee, thank you for the opportunity to appear 
before the committee to talk about the Inspector General's 
report.
    I was Commissioner of the Internal Revenue Service from 
March 2008 till November 2012. During that time, the agency was 
called upon to tackle a number of challenges. The agency played 
a key role in stimulus and recovery efforts during the economic 
downturn, aggressively addressed offshore tax evasion, and 
completed a major modernization of its core technology 
database.
    The agency also continued to deliver on its core mission of 
collecting the revenue to fund the government. The IRS is a 
major operation, with more than 90,000 employees who work on 
issues ranging from processing individual tax returns, to 
building complex technology, to ensuring compliance with 
businesses, to educating the public about tax law changes, to 
administering a very complex set of rules governing tax-exempt 
organizations.
    I have recently read the Treasury Inspector General's 
report. I was dismayed and I was saddened to read the Inspector 
General's conclusions that actions had been taken creating the 
appearance that the Service was not acting as it should have, 
that is, as a non-political, nonpartisan agency.
    The IRS serves a critical function for our Nation. It 
collects the taxes necessary to run the government. Because of 
this important responsibility, the IRS must administer, and it 
must be perceived to administer, our tax laws fairly and 
impartially. Given the challenges that the agency faces, it 
does its job in an admirable way the great majority of the 
time. The men and women of the IRS are hard-working, honest 
public servants.
    While the Inspector General's report did not indicate that 
there was any political motivation involved, the actions 
outlined in the report have justifiably led to questions about 
the fairness of the approach taken here. The effect has been 
bad for the agency and bad for the American taxpayer.
    I am happy to answer any questions.
    The Chairman. Thank you, all three of you. I have a couple 
of questions, first to Mr. Miller and Mr. Shulman. Essentially, 
it is my understanding that the IRS headquarters shut down the 
use of political terms such as Tea Party and the other terms we 
all learned about in June of 2011. That is when headquarters 
shut that down. Why were people not then fired or transferred, 
or more significant action taken than just to be told, do not 
do this, given how outrageous this conduct is? Why was more 
definitive action not taken?
    Mr. Miller. I do not believe that I was aware at the time 
that that had happened. I first became aware of this in May of 
2012.
    The Chairman. Mr. Shulman, you were around during this 
time.
    Mr. Shulman. Yes. In June of 2011, I do not believe I was 
aware of this. Actually----
    The Chairman. Well, who was aware? Somebody at headquarters 
was aware, obviously. But besides Lois Lerner.
    Mr. Miller. Well, the report indicates that Exempt 
Organizations knew. There is no indication, I think, from the 
report--and you would have to ask the Inspector General--that 
others knew at this time.
    The Chairman. Well, you were acting head of the IRS, and 
you were the head of IRS, Mr. Shulman. Who did know? I mean, 
come on. You have read the report. You were Acting 
Commissioner, you were Commissioner. Come on. If you do not 
know, it sounds like somebody is not doing his job.
    So why was more direct action not taken, first when these 
terms were discovered, right away, and then IRS had a second 
chance after the same activity started again in January of 
2012? Incredibly, it started again. IRS stopped for a while and 
then went back again. Old habits. I cannot believe that, 
frankly.
    Why was more firm action not taken by people, either the 
Commissioner himself or by people at the top? This is 
outrageous. Any person can figure out that this is unacceptable 
conduct. Mr. Miller?
    Mr. Miller. Again, sir, all I can say is we were unaware. I 
was unaware, I believe, at the time that it had happened. When 
I found out in May, I took action.
    The Chairman. But what action did you take?
    Mr. Miller. So I was briefed, after sending a group to take 
a look at the cases, in May. They reported back to me in May of 
2012, essentially with much of what had transpired and what is 
shown in the IG report: that the cases were languishing, that a 
list had been utilized, that letters had gone out that were 
much more broad than they should be.
    At that point we had already taken care of the letters 
because those had come up, and this is how we knew something 
was going on, and I asked for a review. We then trained our 
folks; we held workshops to ensure that they were going to do 
the work well. We took a look at the cases.
    I asked for the cases to be looked at and grouped in a 
fashion so that those that looked like they should be approved 
were approved, those that looked like they needed some work got 
that work, and those that needed further development got that 
development. So we took action on that.
    I also--at that time, I was aware that TIGTA was working on 
this, but I took some intermediate action pending TIGTA. We 
transferred and reassigned an individual who had been involved 
in the letters. I asked that the person whom I believed at the 
time was responsible for the listing, that oral counseling 
occur. At that time the listing process had been fixed.
    The Chairman. All right. I appreciate that. This committee 
has sent many questions to you and Mr. Shulman and others to 
try to get the answers to some of these questions, and we are 
not going to get the definitive answers at this moment, that is 
clear.
    A deeper question to me is, what created this culture of 
indifference to the American people and such aggressive 
behavior of improperly targeting certain groups? What caused 
that culture to develop, and what did you do about correcting 
that culture, if you even were aware of it? Either one of you, 
Mr. Miller or Mr. Shulman. I will start with you, Mr. Shulman.
    Mr. Shulman. Sure. During my time at the IRS, I believed 
and I articulated that the IRS needed to be a nonpolitical, 
nonpartisan agency.
    The Chairman. Well, you may have articulated that, but how 
did this happen?
    Mr. Shulman. I think that there is a set of rules built 
into the system, there are laws, there is education of people 
that I think the vast majority of the IRS employees understand 
and abide by.
    The Chairman. What happened in Cincinnati? What conditions 
caused that? Because my time is expiring here. It already has 
expired, frankly. If you could just respond, very quickly, in a 
nutshell, bottom line, how did this happen?
    Mr. Shulman. Mr. Chairman, I cannot say. I cannot say that 
I know that answer.
    The Chairman. Well, you are a Commissioner.
    Mr. Shulman. I am 6 months out of----
    The Chairman. You have some sense of the outfit. You were a 
Commissioner for a good number of years. You have some idea. 
You have thought about this.
    Mr. Shulman. I am 6 months out of office. When I left, the 
IG was looking into this to gather all of the facts. I have now 
had the benefit of reading the report, and that is, you know, 
the full accounting of facts that I have at this point. So I do 
not think I can answer that question, Mr. Chairman.
    The Chairman. Well, I am kind of disappointed, frankly, 
because you have had time to think about this. You certainly 
have more thoughts than that.
    Senator Hatch?
    Senator Hatch. Well, thank you, Mr. Chairman.
    On two different occasions, my colleagues and I wrote 
letters to you, Mr. Shulman. In the first letter on March 14, 
2012, we asked about selective enforcement by the IRS and 
requests for donor information. Then we wrote again on June 18, 
2012 to request more information about the IRS's practice of 
requesting confidential donor information.
    As I wrote in my March 2012 letter, ``It is critical that 
the public have confidence that Federal tax compliance efforts 
are pursued in a fair, evenhanded, and transparent manner 
without regard to politics of any kind.''
    The responses that I received from the IRS were anything 
but transparent. The IRS responded to these two letters on 
April 26, 2012 and September 11, 2012, and both of these 
responses were signed by you, Mr. Miller. These responses did 
not disclose that the IRS had any reason to believe that it had 
improperly targeted Tea Party or other conservative 
organizations or improperly asked for confidential donor lists.
    I ask unanimous consent to put all four letters in the 
record at this point.
    The Chairman. Without objection.
    [The letters appear in the appendix on p. 192.]
    Senator Hatch. Recently we have learned that the IRS was in 
fact aware that the IRS had targeted Tea Party and other 
conservative organizations. We know that by June 2011 at the 
latest, Lois Lerner, the Director of the Exempt Organizations 
group in DC, was aware that IRS examiners had issued a ``be on 
the lookout'' listing regarding Tea Party and other 
organizations.
    We also know that on May 30, 2012, TIGTA briefed you, Mr. 
Shulman, about its ongoing audit of these practices. Yet, when 
you testified before Congress on March 22, 2012, you said, 
``There was absolutely no targeting.'' To this day you have not 
corrected your testimony, even though you know that the IRS was 
inappropriately screening Tea Party organizations.
    Now, Mr. Shulman, why have you not come forward before 
today to correct the record and acknowledge that there was in 
fact inappropriate screening occurring in the IRS, the 
organization that you headed?
    Mr. Shulman. Let me answer a few things. One is, the full 
set of facts around these circumstances came out last week in 
the TIGTA report, which I read. Until that point I did not have 
a full set of facts about----
    Senator Hatch. Yes, but you knew that this was going on. 
Why didn't you let us know? That is what we were inquiring 
about when we sent these letters to you.
    Mr. Shulman. What I knew was not the full set of facts in 
this report. What I knew sometime in the spring of 2012 was 
that there was a list that was being used, knew that the word 
Tea Party was on the list. I did not know what other words were 
on the list, did not know the scope and severity of this, did 
not know if groups that were pulled in were groups that would 
have been pulled in anyway.
    Senator Hatch. But you knew this----
    Mr. Shulman. And I took what I thought at the time, and I 
think now, was the proper step when a concern is brought to the 
Commissioner of Internal Revenue Service, which is to make sure 
that the matter is being looked at by the Inspector General.
    Senator Hatch. But we sent you letters inquiring about this 
with a number of Senators on those letters, and you should have 
corrected the record and you should have done it long before 
today. That is the point I am making.
    Mr. Miller, your signature is on both of the responses that 
I received from the IRS. Nowhere in your responses did you 
indicate that you knew the IRS was improperly selecting Tea 
Party organizations for extra scrutiny. Nowhere in your 
responses did you indicate that you knew the IRS was asking 
improper questions about donor contributions. You just sat on 
that guilty knowledge.
    Mr. George stated that he briefed you on May 3, 2012 about 
TIGTA's audit, so we know you were aware of it at the time that 
you responded to my second letter, if not both letters. But you 
did not mention any of this in your responses to me, to the 
Senate, or to any other congressional body.
    Now, Mr. Miller, that is a lie by omission. There is no 
question about that in my mind, it is a lie by omission. You 
kept it from people who have the obligation to oversee this 
matter. On Friday, you swore under oath that you had told the 
truth in your prior responses. You said that the IRS had been 
guilty of ``horrible customer service.''
    Mr. Miller, what we have learned about the IRS in recent 
days goes far beyond horrible customer service. Why did you 
mislead me and my colleagues, my fellow Senators, and most 
importantly, the American people, by failing to tell us what 
you knew about the exact subject we were asking about? Why 
didn't you tell us?
    Mr. Miller. Mr. Hatch, I did not lie.
    Senator Hatch. You what?
    Mr. Miller. I did not lie, sir.
    Senator Hatch. Well, you lied by omission.
    Mr. Miller. I answered those questions.
    Senator Hatch. You knew what was going on, and you knew 
that we had asked. You should have told us.
    Mr. Miller. I answered the questions; I answered them 
truthfully. Did I know about the list? Yes. Not on the first 
letter, by the way, because the timing--I would not have known 
for that. On the second letter, we answered those questions, 
sir.
    Frankly, the concept of political motivation here, I did 
not agree with that in May, and I do not agree with that now. 
We were not politically motivated in targeting conservative 
groups. That is borne out by Mr. George's report, the facts.
    Senator Hatch. What else can you call it? He just said he 
had not found that up till now. Today's statement was a little 
more definitive than the one he gave to the House. Now, let me 
just say this. You knew this was going on. You knew we were 
concerned. You knew we had written to you. You had our letters. 
Why didn't you correct the record? Why didn't you let us know? 
We would have solved this problem a long time ago.
    Mr. Miller. TIGTA was looking at the cases, sir, and TIGTA 
was doing----
    Senator Hatch. So it was TIGTA's responsibility, or was it 
yours?
    Mr. Miller. I am sorry?
    Senator Hatch. The Commissioner relied on you to answer our 
letters. Why didn't you answer them, and why didn't you tell us 
this information----
    Mr. Miller. I believe I did.
    Senator Hatch [continuing]. At least on the second?
    Mr. Miller. I believe I did answer them, and I did answer 
them truthfully, sir.
    Senator Hatch. My time is up.
    The Chairman. Thank you, Senator Hatch.
    Next, we are going down the list. Senator Stabenow?
    Senator Stabenow. Well, thank you very much, Mr. Chairman. 
This is an incredibly important hearing. Let me just say, as we 
heard, Mr. Miller, you are saying this was a mistake? We would 
suggest an extremely serious mistake. Mr. George says ``gross 
mismanagement.''
    What I do not understand is how, again, something could 
start in 2010, and it was not until June of 2011 that the 
Director of Exempt Organizations learned of the practice. It 
was not until January of 2012, 7 months later, that they set up 
new criteria, which were still inappropriate after they had 
been told to change them. It was not until 4 months after that 
that the Cincinnati office finally started using the right 
criteria.
    So, both for Mr. Shulman and Mr. Miller, it took almost 2 
years--almost 2 years--for the IRS to finally fix the problem, 
including 11 months after it came to the attention of the 
division head. How in the world could it take so long for 
senior people at the IRS to find the problem, fix the problem, 
and was there no ongoing oversight of the employees in 
Cincinnati and what they were doing?
    Mr. Shulman, let me start with you.
    Mr. Shulman. Again, I am not there to go ask a set of 
questions of people, what happened when, who, and how. I 
would----
    Senator Stabenow. With all due respect, you were there, 
though.
    Mr. Shulman. I was there. But since this all came to light 
and the full set of facts became known, I have not been able to 
be back there talking with people doing things. So let me just 
answer, though, your question.
    Senator Stabenow. But why didn't you know when you were 
there?
    Mr. Shulman. I agree that this is an issue that, when 
someone spotted it, they should have run up the chain, and they 
did not. Why they did not, I do not know.
    Senator Stabenow. Mr. Miller?
    Mr. Miller. So, I would agree. I am not going to disagree 
at all with your characterization of bad management here, 
because I think that that did happen. I do not want to 
understate concerns with the list, because we should not have 
done that. We simply should not have done that.
    We should be looking at the file, we should be looking at 
the facts, we should not look at names. We should not look at 
the positions taken on a given topic in terms of how we pull 
people into full development of these cases. But we were not--
it was not elevated. We do not know.
    Senator Stabenow. Mr. George, could you speak more about 
the management, what your review has revealed about the IRS 
management? How was that breakdown possible, given the 
management structure? Has the IRS done anything to make 
unacceptable actions like this less likely in the future?
    Mr. George. While we have not yet completed our analysis of 
their response to our recommendations, we do intend to do so in 
the future. So, Senator, I will be able to respond in full once 
we have completed that review.
    It is worth noting that the Determinations Unit in 
Cincinnati did seek clarification from their headquarters unit 
in Washington, and it took almost a year before a response was 
received by them to their request on how to handle some of 
these issues.
    The bottom line, Senator, it was just, again, a breakdown 
in communications, mismanagement on the part of the Internal 
Revenue Service.
    Senator Stabenow. It does sound, though, that the first 
clarification they received, they took that back and then they 
changed again and did something inappropriately.
    Mr. George. Well, there were two aspects of it. They sought 
clarification initially but did not receive an answer. 
Eventually they did get direction from Ms. Lerner to change the 
way they were acting, and then on their own decided to revert 
to a different--slightly different yet still inappropriate--way 
of handling these matters.
    Senator Stabenow. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Senator Grassley?
    Senator Grassley. I am going to direct my question, or at 
least the first one, to Mr. Shulman and Mr. Miller.
    Now, this comes directly from Iowa. One of my constituents 
attempted to establish a 501(c)(3) charity called Coalition for 
Life of Iowa. She told my staff that an IRS agent told her 
``your application is ready to go; however, it will not be 
approved until you send a letter, signed by your entire board 
under penalty of perjury, saying that you will not protest at 
Planned Parenthood.'' Now, that is outrageous that that 
statement was even made by anybody in government, that somehow 
you have to compromise your First Amendment rights.
    She also received a letter from the IRS asking several 
invasive questions, including the details of the group's prayer 
meeting. Now, stop to think about it: the government getting 
involved in somebody having a prayer meeting. It appears that 
the IRS essentially offered this group a quid pro quo: you can 
become a charity if you do not protest in front of Planned 
Parenthood. Generally speaking, so you do not have to worry 
about 6103, is it appropriate even for an IRS employee to offer 
quid pro quo in an example like this? Mr. Miller, Mr. Shulman, 
either one of you.
    Mr. Miller. The answer is ``no.'' I mean, you know, we 
should not be trading----
    Senator Grassley. Okay. Then let us move on. That is a good 
answer, because that is the answer you ought to give. But how 
on earth could you let something like this happen under your 
leadership, and do either of you feel any responsibility or 
remorse for treating an American citizen this way?
    Mr. Miller. I think I started my public statement with an 
apology, sir, and I would continue that. I do not know what 
happened in your given case. As you well are aware, I cannot 
speak to it under the 6103 rules. But I do apologize for the 
treatment of folks. And look, there are two things that 
happened with these cases. First was that the selection and the 
selection criteria were bad. Second was their treatment once 
they were in that group. That, too, was bad, sir. It was. I do 
not know whether this particular organization was inside or 
outside of that group, but the service that folks got was not 
the service that we should be providing anyone. There is no 
question about that.
    Senator Grassley. Mr. Miller, on May 14th I wrote you a 
letter raising questions about the so-called spontaneous 
apology Lois Lerner made at the American Bar Association May 
10th. Initially, Ms. Lerner said her response was spontaneous 
and denied that the question was planted. However, you admitted 
during your testimony last week that the IRS had in fact 
planted the question to be asked at the ABA conference. You 
said, ``It was a prepared Q&A.'' Whose idea was it to create 
this prepared Q&A, and why?
    Mr. Miller. Well, I will take responsibility for that. The 
thought was to--now that we had the TIGTA report, we had all 
the facts, we had our response, we thought we should begin 
talking about this. We thought we would get out an apology. The 
way we did it--we wanted to reach out to Hill staff about the 
same time--did not work out. Obviously the entire thing was an 
incredibly bad idea.
    Senator Grassley. Has the IRS ever used a prepared Q&A in 
the past, and, if so, give us some examples if it has been done 
before.
    Mr. Miller. I apologize. I would have to think about it, 
sir. I do not know; nothing comes to mind, though.
    Senator Grassley. Okay.
    How is it appropriate for Federal Government employees to 
secretly plant questions to release information in advance of 
an IG report?
    Mr. Miller. I think that what we tried to do was get the 
apology out, sir, and start the story. The report was coming, 
we knew that. The report was done.
    Senator Grassley. Mr. Miller, on May 8th this year, in a 
Ways and Means subcommittee hearing, Representative Crowley 
asked Lois Lerner if she could ``comment briefly on the status 
of the IRS investigations into these nonprofits.''
    Ms. Lerner pointed Congressman Crowley to a questionnaire 
on the IRS website. She said nothing about TIGTA's pending 
report or the disclosure she made just 2 days later about 
political targeting. As a result, I think very understandably, 
Representative Crowley has said that he feels misled and has 
called for Ms. Lerner to resign.
    Do you agree with Representative Crowley that Ms. Lerner 
gave misleading testimony to Congress?
    Mr. Miller. I do not now have any knowledge one way or 
another on that, sir. I was not--I have not watched that.
    Senator Grassley. Has the IRS proposed to discipline Ms. 
Lerner at all for all or any part she played in the underlying 
events or testimony before Congress?
    Mr. Miller. At this point, now that the TIGTA report is 
out, now that all of this is coming to light, those discussions 
are ongoing. And I will not be part of those discussions, 
obviously, but those discussions will occur.
    Senator Grassley. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Senator Nelson, you are next.
    Senator Nelson. Thank you, Mr. Chairman.
    I want to take a different tack. I would like to go back to 
how we got into this mess in the first place. The statute, of 
course, says of these organizations, (c)(4)s, that their net 
earnings are to be devoted exclusively to charitable, 
educational, or recreational purposes.
    Then the rule that came along fleshing out the statute 
talks about promotion of the social welfare, that the 
organization is operated exclusively for the promotion of 
social welfare. Then it further defines that term: ``The 
promotion of social welfare does not include direct or indirect 
participation or intervention in political campaigns.''
    So I want to get back to the original purpose of the 
statute as it was being implemented by the IRS. How could you 
all in the IRS allow the tax breaks, funded basically by the 
taxpayer, on these political campaign expenditures? Can you all 
shed some light, please?
    Mr. Miller. Well, I can start, sir. So there is a--let me 
try to restate some pieces of the questions you may be asking 
and see if I am getting them right, and please correct me if I 
am not. There is a question out there that the statute--and I 
believe the chair referenced it--the statute talks about 
``exclusively for social welfare.'' The regulation, which was 
promulgated 50-some years ago, talks about ``primarily.''
    Senator Nelson. It uses ``primarily.'' But then it goes on 
to say that promotion of social welfare--this is the rule--
``does not include direct or indirect participation or 
intervention in political campaigns on behalf of, or in 
opposition to, any candidate for public office.''
    Yet, what we have seen in the course of the last two 
campaign cycles is enormous money running through the 501(c)(4) 
organizations, which the avowed purpose of is ``on behalf of or 
in opposition to any candidate for public office and the 
intervention in political campaigns.'' So where is the IRS, in 
the regulatory process, enforcing its rule to stop this in the 
first place, which, if it had, would have gotten to the mess 
that we are in right now?
    Mr. Miller. So there are a couple of places where we have 
to act. And again, I mean, as the--let me, if I can, set the 
context a little bit. As a 501(c)(4) organization, you are 
permitted to engage in an amount of political campaign 
activity. You are, as long as it is not, along with the other 
things that are not social welfare, your primary activity.
    We have an obligation to take a look at cases, both in the 
audit stream--we are out there doing this sort of work--or in 
the determination letter process, which is why we began to 
centralize these cases. You asked for the genesis of this. 
Centralization here was warranted. We have to look--we are 
obligated under the law to look at what an organization does in 
order to grant exemption. The way we centralized was wrong, and 
that goes to the listing that we used.
    But we are supposed to look at the amount of political 
campaign activity that is planned and how an organization 
operates as we do our work, and that is what happened in the 
determination letter process here.
    Senator Nelson. Well, I would simply say, Mr. Chairman, 
since we are doing the oversight here, that the rule--I 
understand the King's English, and it says the promotion of 
social welfare does not include direct or indirect 
participation or intervention in political campaigns. Now, how 
you interpret that to say that that does allow some 
intervention in political campaigns is beyond me. If that had 
been cut off at the pass, we would not even be getting to these 
interpretations. Yes, sir?
    Mr. George. Senator, I just would like to note that TIGTA 
will be conducting a review of the IRS's oversight of the level 
of campaign intervention by 501(c)(4)s shortly.
    Senator Nelson. Who will be doing that?
    Mr. George. My organization, sir, TIGTA, the Treasury 
Inspector General for Tax Administration.
    Senator Nelson. Well, Mr. Chairman, in conclusion, I would 
say that, if we could get the IRS to follow the law and the 
regulation that implemented it, we would not have this problem 
in the future.
    The Chairman. Senator, I think I agree with you. But I also 
think this is very complicated. It is unfortunate that this 
issue has not been addressed in the last couple of years with 
any precision, any focus, any straight thinking. We are going 
to have to enact some changes in the statute, and also IRS has 
to, I think, do a better job of following the statute. My 
personal view is this confusion, this ambiguity, has led to 
part of the problem here.
    Senator Nelson. I certainly agree with you.
    The Chairman. And we are going to have to straighten it 
out.
    Next, I have Senator Roberts. You are next.
    Senator Roberts. Thank you.
    Listening to the responses that both of you gentlemen have 
provided my colleagues on this committee, I am reminded of one 
of my granddaughters--age 4--when she knows she has done 
something wrong. She just shuts her eyes and says, ``You can't 
see me.'' Well, we can all see what happened. The problem is, 
no one is taking responsibility, other than ``horrible customer 
service'' and apologies. There is a Kansas saying: never lie 
unless you have to, and if you do not have a damned good lie, 
stick to the truth.
    It seems to me we need some real truth-tellers here. Facts 
are stubborn things. What we have here is targeted harassment 
and abuse of conservative groups. We can talk about the statute 
all day long, but that is what has happened, as we hear daily 
from others, many who simply have contributed to the candidate 
of their choice or stated personal views.
    I think that is very significant. Nobody likes to be 
audited, and nobody likes to say they have been audited, 
especially with what has been going on. So what we have on our 
hands is abuse, harassment, the suppression of First Amendment 
rights, and nobody owning up to it.
    Now, the fact of the matter is that the IRS has been 
operating in a highly politicized manner for at least 3 years. 
Three years ago, a top economic advisor to the White House 
divulged confidential tax information regarding a privately 
held company in order to make a political point. I asked the IG 
for Tax Administration for a response, and we never heard back. 
Never heard back at all. Not late, just did not hear back.
    Last year, members of this committee, as Senator Hatch has 
indicated, hearing a growing number of complaints, asked if 
individuals or groups were being singled out or targeted in the 
application process. Here is the letter that you sent to me and 
other members of the committee. It is the same letter, 
different names. You might want to look up, you will see this. 
It is 10 pages long, single-spaced, about 12-point.
    At any rate, it is completely silent on targeting but full 
of a detailed analysis of the law. But you knew that targeting 
was going on. I just do not think you do that. That really 
befuddles me, why anybody in a position like yours, or 
basically Mr. Shulman's, would ever do that, just not respond.
    You also said that the Determinations Office was simply 
trying to find a more efficient way to process a huge number of 
exemption applications. Here we have Cincinnati IRS officials 
milling about, doing their best, but falling short--foolish 
actions, need more money, need more lawyers.
    This may have been foolish, but, given what I know about 
how the IRS operates, I find it very hard to believe that the 
IRS employees were given free reign to set up a BOLO list, be 
on the lookout list, like law enforcement. There must have been 
a directive from Washington or something. We need full 
disclosure of how this has happened.
    There was a news report quoting an anonymous Cincinnati IRS 
employee. Now, they have been taking a lot of grief there. 
Accordingly, this quote was attributed to this anonymous IRS 
employee: ``Well, we've had all the problems with this, and we 
knew that it was wrong. We knew there would be hell to pay. We 
also knew that when it hit the fan, nobody at the top would 
take the blame; it would come right down the slide right to 
us.'' Well, I would like to at least have somebody--Lois 
Lerner, the lady who does not do math but can, you know, plant 
a question----
    Sarah Hall Ingram, who is now going to be working for the 
Affordable Healthcare Act office--and that is my next question 
if we go to another round, how on earth can we do that with 
15,000 new employees trying to administer the Affordable 
Healthcare Act with a lot of specific questions? Let us move up 
to Joseph Grant, who is the Deputy Tax Commissioner. We are not 
going to hear from him; he retired.
    Mr. Miller, you have apologized, and then you are leaving. 
Mr. Shulman, you are 6 months out, so you cannot remember. Mr. 
Wilkins, the Chief Counsel of IRS, he is not here, but he 
probably should be here. Then the Secretary of Treasury, Jacob 
Lew--it went right up there, then finally to Kathryn Ruemmler, 
who is the White House General Counsel. Do any of these folks, 
yourself included, ever say what was going on and take 
responsibility? I just have not seen that.
    My follow-up question will be in regard to, how on earth 
can the IRS have proper oversight and management to implement 
the Affordable Healthcare Act, given the current situation?
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Senator Crapo, you are next.
    Senator Crapo. Thank you, Mr. Chairman.
    You know, there has been a lot of discussion about who knew 
what and when they knew it. One of the big questions I have--
this is probably for you, Mr. George--is it seems that there is 
an argument being made that there was no political motivation 
in these actions. Is that a conclusion that you have reached?
    Mr. George. In the review that we conducted thus far, 
Senator, that is the conclusion that we have reached.
    Senator Crapo. And how do you reach that kind of a 
conclusion?
    Mr. George. In this instance, it was as a result of the 
interviews that were conducted of the people who were most 
directly involved in the overall matter. So, you take it one 
step after another, and we directly inquired as to whether or 
not there was direction from people in Washington beyond those 
who are directly related to the Determinations Unit. Their 
indications to us--now, I have to note this was not done under 
oath. This was, again, an audit and not an investigation, but 
they did indicate to us that they did not receive direction 
from people beyond the IRS.
    Senator Crapo. When you say ``people beyond the IRS,'' that 
could be anyone up the chain of the IRS?
    Mr. George. It in theory could be, but we have no evidence 
thus far that it was beyond, again, the people in the 
Determinations Unit.
    Senator Crapo. So, in other words, you have simply the 
statements of those who were engaging in the conduct saying 
that they were not politically motivated?
    Mr. George. That is correct, sir.
    Senator Crapo. And based on that, and statements not under 
oath, you have reached the conclusion that there was no 
political motivation.
    Mr. George. Yes.
    Senator Crapo. Now, have you reached the conclusion that 
there was none, or that you have not found it?
    Mr. George. It is the latter, that we have not found any, 
sir.
    Senator Crapo. Because it seems to me that it is almost 
unbelievable to look at what is happening and then say, well, 
there is no political motivation here. How could an agency, 
with the power that the Internal Revenue Service has, engage in 
this kind of conduct and have it not be politically motivated? 
You know, I think that most people in the United States have a 
very quick and intuitive understanding of the reason that these 
revelations are so concerning to the country.
    If you look at the Internal Revenue Service, more than 
perhaps any other agency of government, it has the capacity to 
be the prosecutor, the judge, the jury, and the executioner in 
ways that can devastate individuals, families, and businesses. 
Americans understand that.
    To have the investigation reach the conclusion that these 
kinds of actions were just a statistical anomaly or that they 
all sort of statistically came together at the same time but 
that there was no finding of any kind of political motivation, 
I think is almost beyond belief. Is there any way that you can 
conduct further investigation and, perhaps by putting people 
under oath, identify where the direction came from?
    As my colleague Senator Roberts has just indicated, we have 
continuous denial of responsibility for the policies. Those 
implementing the policies say, apparently, it was not us. We 
are asked as an American people to believe that, just out of 
the ethosphere or something, the notion to target these 
individuals and entities just coalesced and came together?
    Mr. George. Senator, as a result--and this is standard 
practice--as a result of audits that we conduct, many times 
there are subsequent investigations. Suffice it to say that 
this matter is not over as far as we are concerned in terms of 
our next actions in this matter, Senator Crapo.
    Senator Crapo. So you believe there will be further 
information on this issue?
    Mr. George. There will be continued review by us and, if it 
ultimately leads to an investigation, that may be the case.
    Senator Crapo. All right. Thank you.
    The Chairman. Thank you, Senator.
    Senator Enzi?
    Senator Enzi. Thank you, Mr. Chairman.
    Bill from Cheyenne, WY called my office and said the fact 
that the Administrator was fired was not the real problem; he 
was just a fall guy. Now, from the testimony that we heard 
earlier, there was some disciplinary action taken, but the 
Administrator did not know about it. Doesn't disciplinary 
action filter up in these organizations?
    I got a call from Charles of Pine Dale who had concerns 
that the churches were being targeted as well, noting that the 
IRS had requested membership lists of his church. That sounds a 
little bit above and beyond what ought to be done.
    But to follow up on what Senator Grassley was saying about 
Mrs. Lerner's question at the American Bar Association Tax 
Section, doesn't the IRS have a policy of not commenting on 
issues subject to an Inspector General for Tax Administration 
audit prior to the public release of the audit?
    If so, why did the IRS feel that it was so necessary to 
make such statements days before the report was publicly 
released? Why did the IRS not shed light on the issue years ago 
when it became aware of the inappropriate targeting and the 
discipline that I referred to? Mr. Miller?
    Mr. Miller. First, if I could correct part of your 
question, sir, going back to the disciplinary action. I 
actually took that disciplinary action in May of 2012. Going 
forward, we do have a practice of not talking about 
investigations or audits. The audit was done at this point. We 
thought, mistakenly, that we should get out in front and 
apologize and reach out to the Hill in advance of it coming 
out, and that was wrong. We made a mistake.
    Senator Enzi. I will have to look back at the testimony. I 
thought that you were not aware of the disciplinary action. At 
any rate, David of Casper, WY posted on Facebook that he would 
like to know why the IRS shared information from Tea Party 
groups with the liberal media group ProPublica. Does anybody 
have an answer to that?
    Mr. Miller. I would recommend--and I do not know whether 
Mr. George could speak to this--but there were in the media 
discussions of the release of some data to ProPublica. A 
referral was made to TIGTA on that out of our offices. At this 
point I think Mr. George can speak to that better than I.
    Senator Enzi. And to follow up a little on what Senator 
Roberts said, Mr. George, when you commented at the House Ways 
and Means Committee hearing last week that you believed the 
actions were inappropriate but not illegal, would you weigh in 
on whether you still believe that is the case? Are any of the 
actions that were taken by the IRS employees illegal?
    If not, would you please elaborate on why your audit 
findings do not suggest that there was any illegal activity? 
Because your group conducted an audit not an investigation, is 
it true there could in fact have been illegal activity that 
your audit did not uncover?
    Mr. George. Yes, Senator. Two things. One, to address Mr. 
Miller's point about the matter that you mentioned, the release 
of taxpayer information could be a violation of title 26, 
section 6103, which does have criminal penalties associated 
with it. That is something that my organization investigates, 
we take quite seriously, and, if we do find evidence of such 
activity, we would refer it to prosecutors for criminal 
prosecution. But I am otherwise restricted by law from 
revealing any additional information beyond that.
    As it relates to this matter, the Restructuring and Reform 
Act of 1998 certainly provides for action to be taken if IRS 
employees are guilty of, again, abusing, misusing, among a 
number of other things, taxpayer information. We are charged, 
again, with reviewing that. We are doing so. If we determine 
that something has occurred, we will certainly, again, pass it 
on either in an administrative environment, or if--and again, 
it seems very unlikely--a criminal environment pursuant to the 
Act itself, RRA 98.
    The RRA 98 has very few, if any, criminal aspects to it, 
but there are certainly quite a few administrative actions that 
can be taken as a result of its violation. But based on that, 
we thus far have not uncovered any actions that we would deem 
illegal in this matter, sir.
    Senator Enzi. I guess the American public will kind of 
judge that, but it seems like it is very borderline if it is 
not illegal.
    My time has expired.
    The Chairman. Thank you, Senator.
    Senator Wyden?
    Senator Wyden. Thank you, Mr. Chairman.
    I have several questions for you, Mr. Shulman and Mr. 
Miller. And for me, the basic proposition is simple. 
Notwithstanding the troubling and unacceptable conduct of the 
IRS, if political organizations do not want to be scrutinized 
by the government, they should not seek privileges like tax-
free status and anonymity for their donors. To argue otherwise 
is to advantage tax cheats to the detriment of law-abiding 
Americans. That is why my hope is that, out of this debate will 
come clear and enforceable rules that treat all political 
groups equally.
    So, with respect to questions, Mr. Miller and Mr. Shulman, 
the lines have blurred between politically active groups that 
disclose their donors--those are the 527s--and those that do 
not--those are the 501(c)(4)s. It has become apparent that 
organizations that ought to be 527s are applying for 501(c)(4) 
status to avoid disclosure obligations. That means there is an 
incentive for people to choose their tax status based on 
whether they want to hide their donors.
    My view is, that is a loophole that Congress ought to 
close. Given that to be exempt from Federal income tax in 
section 501(c)(4) of the code requires nonprofits to operate 
exclusively--as opposed to substantially or primarily--for the 
promotion of social welfare, my question to the two of you, Mr. 
Shulman and Mr. Miller, is, why was this problem not corrected? 
Mr. Shulman?
    Mr. Shulman. Senator, could you just clarify the problem?
    Senator Wyden. Yes. The line is blurred. The lines have 
blurred between the 527s and the 501(c)(4)s, so there is an 
incentive for people to choose their tax status based on 
whether they want to hide their donors. I think it is really 
straightforward. The line is blurred, and you all do not seem 
to have done anything about it, and I want to know why not.
    Mr. Shulman. Well, look. Let me state that I think the law 
in the tax-exempt area is very complex, like the rest of our--
--
    Senator Wyden. Mr. Shulman, we understand all that. Why 
didn't you do anything on your watch to correct it?
    Mr. Shulman. So let me continue. The Treasury regulations 
that the IRS staff in Cincinnati were wrestling with in this 
case are long-standing regulations. I believe they are 40-plus 
years old.
    The Chairman. Fifty. Fifty.
    Mr. Shulman. And I did see that the Inspector General, in 
his report, recommended that Treasury ought to look at the 
regulations. I heard the chairman say he was going to look at 
this.
    All I can say is that this is a very hard task given to the 
IRS. To have the IRS, which needs to process 140 million tax 
returns and get billions of dollars in refunds out to people 
every year, to also have them have this piece of the operation 
that, by the law, requires asking questions about political 
activities, is very difficult. So, from where I sit as a former 
IRS Commissioner, if Congress could help clarify the law, that 
would be a very helpful thing.
    Senator Wyden. Mr. Miller, same question. What did you do 
to correct this problem on your watch?
    Mr. Miller. So, we have put out some guidance, but not 
enough. I mean, the issues are several-fold. One is, we get 
70,000 applications for exemption a year. The number of those 
that are (c)(4)s is much less, but even those have doubled over 
the last few years.
    There is no doubt that since 2010 when Citizens United sort 
of released this wave of cash, that some of that cash headed 
towards (c)(4) organizations. That is proven out by FEC data 
and IRS data. That does put pressure on us to take a look. As I 
had mentioned earlier, 527 organizations can do all the 
politics they want to do. 501(c)(4) organizations have a 
limited ability to do politics.
    When organizations choose plan B, the 501(c)(4) option, it 
is our obligation to go in and look hard at whether they meet 
those requirements or could be a 527 organization. But in fact 
we would have to talk, and I am sure staff will come up and 
work you through. There are some issues in the law now that 
cannot convert--we cannot convert a 501(c)(4) organization into 
a 527 organization at this point, I do not believe. That is a 
legal issue.
    Senator Wyden. What troubles me is, on your watch, when the 
lines are blurring on this disclosure issue, as far as I can 
tell you all did not do anything to correct the problem in a 
meaningful way. I think that is very regrettable.
    Now, let me ask about one other issue for the future, going 
forward. The IRS and the Inspector General agree on a number of 
reform proposals, but the IRS does not support one of the most 
important, and that is developing and making public clear 
guidance for processing potentially political cases.
    Now, even the best training does not prepare employees to 
fairly apply ambiguous rules. In the absence of clear 
guidelines, the country is in effect left to the whims of the 
bureaucracy. Wouldn't it make sense to have those knowledgeable 
about political campaigns and campaign finance work with the 
IRS to develop clear and enforceable guidelines that are really 
at the intersection of these two areas, campaign finance and 
tax law? Wouldn't it make sense to get two agencies, 
particularly the Federal Election Commission and the IRS, 
working together under congressional and public oversight at 
this point? Either one of you. Let's start with you, Mr. 
Shulman.
    Mr. Shulman. Look, it sounds reasonable to me, but I do not 
direct what the IRS does now, so I cannot speak for what the 
IRS should be doing at this point.
    Senator Wyden. Mr. Miller?
    Mr. Miller. I divide the world into two pieces. Should we 
do guidance? Absolutely. But there is a different sort of issue 
that was involved in the TIGTA report that we ought to take a 
look at again anyway, and that I agree on, which is whether 
there is some sort of guide sheet, some sort of template, that 
we could do to move these cases forward. I believe, there, the 
concern of those involved--and I was not--is that these cases 
are very fact-specific, and that may not be possible. But I do 
think, given all this, we ought to work with TIGTA and see----
    Senator Wyden. My time is up. They are fact-specific, but 
the Inspector General is right: we can get more expertise if we 
start bringing in people who are knowledgeable about election 
law. This was another failure, in my view, in terms of what the 
problems are that we are dealing with now.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    I might say in response to the question asked by Senator 
Wyden about why you did not do something when you were on 
notice, frankly, I am sure Senator Wyden is not comfortable 
with your answer. I certainly am not, because I wrote a letter 
to you, Mr. Shulman, on September 28, 2010, asking you to look 
into this very question that Senator Wyden is raising. Clearly, 
a Mack truck is being driven through the 501(c)(4) loophole for 
the reasons that have been discussed here.
    I must say, the answer we got back from you--what was the 
date, February, many months later--basically said, yes, we 
share your concern, and are kind of looking at it. That is all 
it said. You were on notice and you did acknowledge that you 
were on notice, but nobody did anything about it. I am just 
quite disappointed.
    Next is Senator Menendez.
    Senator Menendez. Well, thank you, Mr. Chairman. I join you 
in your opening statement, in the idea that any government 
agency would use searches of politically charged terms to 
single out groups for selective review is truly offensive to 
our concept of democracy. And I believe it is not only 
unacceptable, but it is pretty appalling. It undermines the 
very nature of a government and its people who consent by 
virtue of believing that its institutions will work in a way 
that is fair and transparent.
    Having said that, I also have real concerns that I want to 
follow up on. I think there are two scandals here. One is the 
management failures and the whole process of singling out 
specific groups. The other is how we take statutory authority 
and then extrapolate it differently than what the Congress 
meant. I read the statute with reference to 501(c)(4)s, and it 
says ``civil leagues or organizations not organized for profit 
but operated exclusively for the promotion of social welfare.''
    The IRS took that statute, the congressional vote, which 
says ``exclusively'' and turned it into ``an organization that 
is operated exclusively for the promotion of social welfare if 
it is primarily engaged in promoting in some way the common 
good and general welfare.'' I did not see a vote for 
``primarily,'' I saw a vote for ``exclusively,'' because we 
wanted to limit the scope of who could avail themselves of the 
benefit of a 501(c)(4) under the tax code.
    So do you believe--I would like to ask the Inspector 
General--do you believe that a more literal reading of the 
statutory language could have taken some of the authority of 
the subjective scrutiny out of the hands of the IRS officials, 
thus avoiding or mitigating some of the problems that we are 
talking about here today?
    Mr. George. Senator, I will respond directly to your 
question, but I just have to acknowledge that the Secretary of 
the Treasury has delegated all tax policy questions exclusively 
to the Assistant Secretary for Tax Policy. With that said, the 
direct issue you raised with me was beyond the scope of this 
audit, but it would seem as if what you are saying would be 
accurate, that they should have not necessarily taken the 
interpretation that they did. But I will have to leave it at 
that.
    Senator Menendez. Mr. Miller, Mr. Shulman, how do you jump 
from ``exclusively'' to ``primarily''? How do you take the 
congressional action and then really subvert it to a different 
view?
    Mr. Shulman. So let me say a couple of things. One is, as I 
mentioned, this was a regulation, a Treasury regulation, that 
had been in effect for many years. And so, at least speaking on 
behalf of myself, and I think I--you know, I know how long Mr. 
Miller was there. This was in place when we got there.
    I do not necessarily disagree with you that this is--as I 
told Senator Wyden--this is a place that Congress should look, 
because, from where I sit, the IRS is given a very, very, very 
difficult task of trying to go in and figure out--you can do 
some political screening, but you cannot do too much. And the 
confusion and breakdown that you saw happen in the Cincinnati 
office is inexcusable, but I would also posit--this is my 
belief--that part of it was because of the very difficult task 
given to these people.
    Senator Menendez. Well, then it is a task that we should 
clearly correct if you cannot do it. I mean, I envision 
``exclusive'' to mean ``exclusively,'' not ``primarily.'' I 
have a copy of an August 2012 op-ed by Karl Rove, which I ask 
unanimous consent to be included in the record.
    The Chairman. Without objection.
    [The op-ed appears in the appendix on p. 215.]
    Senator Menendez. In this, Mr. Rove writes, ``Roughly $111 
million of Mr. Obama's ad blitz was paid for by his campaign. 
Outside groups chipped in just over $2 million. The Romney 
campaign spent only $42 million over the same period in 
response, with $107.4 million more in ads attacking Mr. Obama's 
policies or boosting Mr. Romney coming from outside groups, 
with Crossroads GPS, a group''--meaning him, Mr. Rove--``I 
helped found, providing over half.''
    Now, I do not mean to single him out as the only bad actor 
here, because there are many represented in the entire 
political spectrum. But this is the nature of the abuse. There 
is a reason that you seek a 501(c)(4) status, because you can 
hide your donors and you also have a tax advantage. Otherwise, 
you do not need to seek the 501(c)(4) advantage.
    So the reason that people come forth with this--you know, I 
would like to see what it costs the American taxpayers in the 
granting of all of these 501(c)(4)s when they are not being 
used for social welfare, but they are being used, in essence, 
for political advocacy.
    A final question to the IG. Inspector General, Chairman 
Issa sent a letter on August of 2012 to all of the Inspector 
Generals, reminding them that, under the Inspector Generals 
Act, it requires IGs to report particularly flagrant problems 
to Congress through the agency head within 7 days via what has 
become known as a 7-day letter. Did you receive that letter? If 
so, did you respond to inform Chairman Issa of your 
investigation into the IRS?
    Mr. George. Senator, we did receive the letter. Chairman 
Issa's committee was the first to actually contact us regarding 
this matter. So, through the course of engaging in the review, 
on occasion we have had communications with his staff.
    Senator Menendez. In 2012?
    Mr. George. And since then, yes.
    Senator Menendez. All right. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Senator Cardin?
    Senator Cardin. Thank you, Mr. Chairman. I think we all 
will agree that we cannot allow, permit, tolerate targeting by 
political views, and that we need to make sure that the process 
is clear, to hold those accountable who violated that, but also 
to make sure this does not happen again.
    Having said that, I just want to concur with many of my 
colleagues on the interpretation of the law. The regulation, 
Mr. George, that you were relying on was issued in 1958, if I 
am correct in the year. I know it was issued a long time ago. 
You said ``not their primary activity,'' interpreting what is 
``exclusively engaged in promotion of social welfare 
activities,'' which seems to be hard to understand.
    In 1958, the political parameters were totally different 
than they are today. I understand whose responsibility it is to 
change regulations, but it seems to me that this is an area 
that needs to be dealt with.
    I want to get further clarification on page 8 of your 
report where you have a pie chart that lists the 298 cases that 
were pulled out for additional scrutiny. You identify 72 with 
the name ``Tea Party'' in them, if I am reading the chart 
correctly, 11 with ``9/12,'' and 13 with ``Patriots,'' then 202 
others. Can you give us further clarification on what makes up 
those 202?
    Mr. George. Senator, we were not in a position to do so, 
because we were only reviewing the names of the organizations, 
so certain names were so generic that we were unable to 
determine whether or not they had a particular point of view or 
what have you, or whether or not the IRS was using the policy 
positions that those groups held as a determinant for the 
special handling. But in other instances when the name ``Tea 
Party'' was used, it was quite obvious, or if the name ``The 
Patriot'' was used, or if ``9/12'' was used.
    Senator Cardin. What was the standard for the selection of 
those 202? Were you able to determine that?
    Mr. George. All of the 202 were reviewed to determine 
whether or not significant campaign intervention was engaged 
in.
    Senator Cardin. But if I understand correctly, the 90-some 
were because of the name of the organization.
    Mr. George. Correct.
    Senator Cardin. The other 202, why were they selected?
    Mr. George. According to our review, it was to determine 
whether significant campaign intervention had occurred by those 
organizations.
    Senator Cardin. I understand that. But what basis was used 
to single out those 202?
    Mr. George. I am going to defer to, actually, Mr. Miller.
    Senator Cardin. Mr. Miller, do you know what basis was used 
for those 202?
    Mr. Miller. I do not. What I believe, Senator, is what is 
in the report, which is, when the term ``Tea Party'' was used, 
more cases were being pulled in. Where folks saw evidence of 
political activity, they put those cases in. Those would 
include any case that came across their screening desks.
    Senator Cardin. But you do not know what standard they used 
to make a judgment that they were involved in political 
activities? Could it have been the name of the organization? 
Could it have been--I am trying to figure out how these were 
selected. There has to be some rational, or at least some 
stated reason, unless it is a random selection. Is it a random 
selection?
    Mr. Miller. No, sir. I believe it was there was evidence of 
political activity that the screener believed was there, and 
therefore it was put in. I will say this. It is my hope that 
when you all do your review, some of these things will become 
more clear than they are in the report.
    Senator Cardin. Well, I appreciate that. I would be very 
interested as to how the IRS went about selecting all of the 
groups for review in addition to the ones that were selected 
because of the use of the words ``Tea Party,'' or ``9/12,'' or 
``Patriot,'' which is absolutely wrong.
    Mr. George. But, Senator, excuse me. If I may, sir, that is 
part of the problem, because in many instances there was no 
indication at all in the case file why these particular cases 
were selected. That was something that we identified as a 
problem in the way the IRS handled these matters.
    Senator Cardin. And, Mr. Miller, you do not know the 
standards that were used to determine political activity?
    Mr. Miller. I only know what has been in the report, and I 
believe what was in the report. What is indicated is that the 
screeners were looking for evidence of political activity.
    Senator Cardin. I think we need to have more information as 
to how these were selected. If there was an arbitrary selection 
of 90-some, it could well be that there was arbitrary selection 
of 300. I think we need to know how that was determined.
    One last question, and that deals with your training 
dollars. One of the Inspector General's findings is that the 
staff was not adequately trained in order to meet the 
challenges. This is a complicated area. It involves some tough 
judgments, but it has to be done in some uniform way.
    Can you just share with us whether you have adequate 
resources in order to pursue the training at the IRS? Senator 
Portman and I, a few years back, worked on IRS reform. I think 
both of us hoped that we would never be at a hearing like this 
after the reforms that were passed back then. One of our 
objectives was to make sure that IRS was handled in a 
professional, nonpartisan way and had the resources it needed. 
Do you have the resources you need to have properly trained 
staff?
    Mr. Miller. So, first I will say we did not train, here, 
well enough, there is no question about that. I think that is a 
finding of the IG report, and we believe that is the case as 
well. More generally, we are down $1 billion over the last 
couple of years, the IRS is, and that has caused us to cut 
training fairly drastically.
    We have in this area--we have maybe 140 of our folks who do 
this sort of work, both in Cincinnati and reporting to 
Cincinnati through some other offices, which has been somewhat 
of a confusion I have seen out there. But we have 70,000 
applications that come through. Do we have the resources to get 
the job done? I do not believe that we do at this point.
    The Chairman. Thank you very much.
    Senator Brown, you are next.
    Senator Brown. Thank you, Mr. Chairman.
    Thank you to the witnesses. I agree with everyone here who 
has made the statement, with some tone of anger in many cases, 
that IRS should never go after anyone, should never single out 
anyone, because of their political philosophy or their 
political affiliation, period. That is the most important 
thing.
    It is, however, I believe, not worthy of public trust to 
maintain that current troubles are the result of--the entire 
fault of--freelancing low-level employees or their asleep-at-
the-switch managers. It is pretty clear that it comes from a 
leadership vacuum that has persisted for too long, far too long 
in this particular area of tax law, the failure of the IRS for 
5 decades to define what constitutes political activity. You 
know the statute. It is clear that 501(c)(4) is available to 
organizations that are operated ``exclusively for the promotion 
of social welfare.''
    Back in 1959 and since, we have not seen any change to 
that. It is a gray area that exists today and was created by 
the Treasury when they issued regulations and defined an 
organization operating ``exclusively'' as an organization 
``primarily engaged in promoting social welfare.''
    So, explain that to me. I know you have talked about that 
at this hearing already, but what does the term ``primarily for 
social welfare'' mean? The IRS has not made that clear when the 
statute says ``exclusively,'' and that is really at the root of 
so many of these problems, Mr. Miller.
    Mr. Miller. So I think, Senator, that you know--you have 
mentioned this, and we have talked about this--we have had 50 
years of this regulation in place. Organizations are operating 
within this framework. It is only recently with the flow of 
political dollars that it has been called into question about 
whether this is the appropriate way to regulate these 
organizations.
    We have not done a good job, I think, of putting out 
guidance on even how to figure out what ``primarily'' means. 
Yes, you look at the activities of the organization, yes, you 
look at the dollars of the organizations and the expenses of 
the organizations, but we have not been crisp on that either, 
and that is what our folks were faced with as well.
    Senator Brown. Well, the issue is, how long do we wait? I 
mean, much of that is your predecessors, but we have had 3 
years since Citizens United. We have had two Federal elections, 
tens of millions of dollars, State after State after State, 
have been spent by 501(c)(4)s. How long do we wait until the 
IRS responds, from Washington--not blaming it on Cincinnati, 
but from Washington. How long do we wait?
    Mr. Miller. That is a question that you will have to ask my 
successor, sir.
    Senator Brown. Mr. Shulman, let me ask you what, if any, 
steps were taken to define a test for ``primarily promoting 
social welfare''? Where is that line? Were steps taken to 
establish a clearer definition of political activity?
    Mr. Shulman. I think the Inspector General stated this, 
that the Treasury Assistant Secretary for Tax Policy has 
authority to make tax policy. I actually do not think it is 
fair to blame the IRS for not fixing that. I think the IRS can 
give input, but this is actually something that, if Congress 
decides it should be changed, Congress should either clarify, 
or it should be done in regulation.
    Senator Brown. All right. Thank you.
    Thanks, Mr. Chairman.
    Senator Hatch [presiding]. Senator Thune?
    Senator Thune. Thank you, Mr. Chairman.
    I think it is clear that both--there are liberal groups and 
conservative groups that both follow the law, follow the 
regulations as they exist today. But there is only one group 
that was targeted. You all can sit here and say that there was 
not political targeting, but it just does not comport with the 
facts. Maybe it was not you, but somebody was.
    I think one of the purposes of this hearing is to find out 
who was targeting conservative groups, otherwise you cannot 
explain the fact that you had all these conservative groups, 
whether it was ``Patriot,'' ``Tea Party,'' or ``9/12'' in their 
name, selected for extra scrutiny.
    You had no evidence that there were groups with 
``Progressive'' or names like that that were similarly 
targeted. I mean, I think, let us just put this issue to rest: 
there was political targeting here. I do not think there is any 
way you can deny that.
    I am interested in knowing, Mr. Miller and Mr. Shulman, if 
either of you were aware that Ms. Lerner was going to plant 
that question and try to get ahead of the news cycle by 
disclosing this prior to the release of the IG report.
    Mr. Miller. I think I mentioned that I did know, yes.
    Senator Thune. All right.
    And were there any discussions--the reporting is that the 
White House Counsel's Office was aware on April 24th of this 
information. Were there any discussions with the White House 
about Ms. Lerner's intention to drop this bomb at the ABA 
conference?
    Mr. Miller. I had no conversations with the White House, 
sir.
    Senator Thune. Are you aware of anybody else who did?
    Mr. Miller. I am not aware of that.
    Senator Thune. There has also been reporting that Deputy 
Secretary Neal Wolin and Treasury General Counsel were made 
aware of the IG report looking into the targeting of groups 
last June. Did you have any discussions with Treasury around 
that time?
    Mr. Miller. That is a question to me, sir?
    Senator Thune. You or Mr. Shulman. I guess you would 
probably be the----
    Mr. Miller. I was Deputy at that point. But no, I did not 
have any conversations at that time.
    Senator Thune. Mr. Shulman?
    Mr. Shulman. I do not remember having any conversations 
with the Treasury Department.
    Senator Thune. All right. So there were no discussions. Are 
you aware of anybody who had discussions with the Treasury 
Department? The Treasury Department became aware of this 
information way back last June. None of that was--there were no 
discussions between the IRS and the Treasury that you are aware 
of?
    Mr. Shulman. Let me clarify. I think everybody knew that it 
was very difficult to administer the (c)(4) laws, and so I do 
not have any memory of it, but there very well could have been 
conversations about policy, the policy matters that members of 
this committee have talked about: should the ``primary 
purpose'' test be changed.
    At least stemming from me, there were no conversations that 
I had with the Treasury Department about this, the matters in 
the report relating to inappropriate criteria, you know, all 
the things that were in the news.
    Mr. Miller. And that is the answer that I was giving, sir, 
just to be clear.
    Senator Thune. Now, Mr. Shulman, you testified in front of 
the House in March of last year that there was no targeting. 
You became aware of that in May. Don't you think that you 
should have had an obligation to correct that statement that 
you had made in front of the House Committee?
    Mr. Shulman. In the spring, when I found out about a list 
that was being used to help place these applications into the 
Determinations Unit, what I knew was, there was a list. I did 
know that ``Tea Party'' was on it. I did not know what else was 
on the list.
    I had a partial set of facts, and I knew that the Inspector 
General was going to be looking into it, and I knew that it was 
being stopped. Sitting there then and sitting here today, I 
think I made the right decision, which is to let the Inspector 
General get to the bottom of it, chase down all the facts, and 
then make his findings public.
    Senator Thune. Let me ask, if I could, Mr. George, you 
mentioned earlier that disclosure of confidential information 
would be a violation of law.
    Mr. George. It is, but whether it is administrative or 
criminal is the issue. But yes, it could be a violation of the 
law, specifically title 26, section 6103 and/or the 
Restructuring and Reform Act of 1998.
    Senator Thune. And so the reporting about the giving of 
this information to ProPublica, release of confidential 
information, could very well be a violation of law?
    Mr. George. It could be. It could have been, rather, I 
should say.
    Senator Thune. And let me just ask all of you, because 
there was a statement made over the weekend by somebody from 
the White House that the law would be irrelevant, do you 
believe that the law is irrelevant, or is irrelevant to this?
    Mr. George. I believe the law is always relevant, sir.
    Senator Thune. Right.
    Gentlemen?
    Mr. Shulman. I am not sure I understand the question.
    Senator Thune. Well, there was a statement made over the 
weekend that whether the laws were broken was irrelevant. I am 
just asking, do you believe that the laws are relevant in this 
case?
    Mr. Shulman. I mean, I guess I would agree with the 
Inspector General----
    Senator Thune. I think the answer----
    Mr. Shulman [continuing]. That people should not break the 
law.
    Senator Thune. The answer would be ``yes.''
    Well, Mr. Chairman, I just think there are a couple of 
issues here. One is the targeting issue. Clearly that has, to 
me, a lot of political overtones. The other one is, if there is 
information that was disclosed, then that would be a violation 
of law. It is a very serious matter.
    But I think the American people believe that this is a very 
serious matter for both those reasons. They believe that the 
laws ought to be followed, and I think they also believe that 
they ought to have an IRS that competently conducts its 
business in an objective, fair, and transparent way. Those are 
all things that are missing in the equation, so I hope that we 
continue to get more facts out about this and that corrective 
actions are taken.
    Thank you, Mr. Chairman.
    Senator Hatch. Senator Burr?
    Senator Burr. Mr. Shulman, who briefed you?
    Mr. Shulman. Who briefed me on what, Senator?
    Senator Burr. Who briefed you on the investigation?
    Mr. Shulman. On the investigation?
    Senator Burr. Yes, sir.
    Mr. Shulman. The first I heard, to the best of my 
recollection, of the investigation, was Mr. Miller telling me 
that there was the existence of the BOLO list and it was 
something that the Inspector General was going to look into.
    Senator Burr. Mr. George, did you brief Mr. Miller or did 
any of your investigative team brief Mr. Miller in May of 2012?
    Mr. George. It was on May 30th, Senator, 2012, where, at a 
monthly briefing which we regularly hold with both the 
Commissioner and his Chief Deputies, that we first raised this 
as an issue. Obviously, it was at the outset of the 
investigation.
    Senator Burr. Now, Mr. Miller says he is not aware of the 
practice that was going on in the EO office. Did you brief him 
on the scope of the investigation?
    Mr. George. I do not believe we went into the detail which 
may have laid out the scope, Senator, but we certainly alerted 
him to the fact that we were conducting this audit. And I want 
to make sure I am clear; I may have misused the word 
``investigation.'' It was an audit that we were engaging in.
    Senator Burr. Now, Neal Wolin, as my colleague just pointed 
out, Deputy Secretary of the Treasury, was briefed in June of 
2012. I have just heard two people at the table say they did 
not brief him. Mr. George, did you brief, or did part of your 
investigative team brief Neal Wolin, the Deputy Secretary of 
Treasury?
    Mr. George. Senator, I personally brought to Deputy 
Secretary Wolin's attention the fact that we were engaging in 
this audit and----
    Senator Burr. And did that briefing cover the details of 
the scope of your investigation?
    Mr. George. It did not, sir. It was only to describe the 
nature of the audit and that was the extent of it, because 
there were other matters that we were discussing.
    Senator Burr. Now, Mr. George, your investigation states 
that the counsel was briefed in August of 2011 of the practice 
at the EO. Was that the IRS counsel or was it the Treasury 
General Counsel?
    Mr. George. Actually, sir, it was in June, June 4th of 
2012, again, in terms of a regular meeting that I have with the 
General Counsel of the Department of the Treasury.
    Senator Burr. I know you are talking about your briefing.
    Mr. George. Yes.
    Senator Burr. I am talking about a reference in your report 
that the counsel was briefed by somebody. I take for granted it 
was somebody within the EO. This was an exchange on the 
practice that was going on that the counsel at the IRS was 
knowledgeable about in 2011. Am I correct?
    Mr. George. Sir, it was just pointed out to me that 
attorneys within the Office of Chief Counsel within the IRS 
were briefed on this matter.
    Senator Burr. So the Chief Counsel of the IRS understood 
what the practice was that was going on within the EO with 
these applications, correct?
    Mr. George. I was not at that said briefing, sir, so I do 
not know the extent to which they received information.
    Senator Burr. Well, here again, this was before your 
investigation started. But your investigation concluded that 
the General Counsel of the IRS knew of the practices, they had 
been discussed with the attorneys of the Internal Revenue 
Service?
    Mr. George. It was the Office of Chief Counsel, and they 
were provided a briefing on it.
    Senator Burr. So is it normal for the Chief Counsel's 
Office of an agency not to have any conversations with the 
Commissioner or the Deputy?
    Mr. George. I have no idea of the practices----
    Senator Burr. Now, let me just turn to both of you. Mr. 
Miller, you said--are you testifying that the IRS counsel never 
talked to you about this?
    Mr. Miller. No, sir. I have not been asked that question, 
and I do not--if we could step back for a moment, sir--I do not 
know this for a fact, but I think that the time line that you 
are referring to when it talks about the Chief Counsel is 
talking about the Office of Chief Counsel, not necessarily the 
Chief Counsel. That could have been anyone in that chain.
    Senator Burr. So you have attorneys who are involved in a 
discussion about the practice that the EO is conducting on how 
they process applications, 501(c)(4) applications, and that 
would not have been something that was raised to the level of 
Commissioner?
    Mr. Miller. Well, let me start by saying I did not know 
that until I read the report, and I do not know anything about 
that meeting, sir. That is something that you guys should take 
a look at.
    Senator Burr. Mr. Shulman, are you testifying today that 
the counsel never discussed this matter with you?
    Mr. Shulman. I mean, if you are asking the question, did 
anyone from the Chief Counsel's Office come and tell me about 
meetings they were having with the Exempt Organizations 
function, I have no memory of anyone doing that.
    Senator Burr. Mr. Chairman, let me suggest that we need to 
get the Chief Counsel, William Wilkins, in to testify and see 
if the counsel's office signed off on this practice. I think 
that is absolutely crucial.
    Now, Mr. Miller, let me just ask you, has this practice 
stopped?
    Mr. Miller. What practice, sir?
    Senator Burr. The practice of how they process the 
consideration of these applications, by key words like 
``conservative,'' ``Tea Party,'' ``Patriot''?
    Mr. Miller. I believe that that did happen. The names 
stopped when it last--when Lois Lerner first learned of it. The 
second listing, by the way, if you take a look at that in the 
Treasury Inspector General's report, it is still problematic 
because it talks about policy positions, but it actually is not 
particularly partisan in how it talks about policy positions 
unless----
    Senator Burr. So it was partisan before, though?
    Mr. Miller. Yes, it absolutely was.
    Senator Burr. Let me just point out for the record that the 
target for approval within the IRS of these applications is 120 
days. There are currently some applications that are over 1,200 
days without action. So let me ask you, has this practice 
stopped? If it has, what is the date that it stopped?
    Mr. Miller. So----
    Senator Burr. If it stopped, it seems like these 
applications would have been processed by now.
    Mr. Miller. So, let us break this up a little bit, Senator, 
and let me see if I can answer your question. The process I was 
talking about was the selection process. That has been 
modified. We have also worked on getting people the technical 
knowledge they need to work these cases. Some of these cases 
are difficult cases. They should not have taken as long as they 
have, but they still need some development, and those cases are 
being worked.
    Senator Burr. Is there any case, any application, that you 
do not think could be processed in 1,200 days?
    Mr. Miller. I would hope that they could, but there are 
cases that go into appeals, there are cases that go to court. 
There are all sorts of cases. These are difficult cases. There 
is no doubt that some part of that 1,200 was when they were 
languishing before May of 2012. There is no doubt about that.
    Senator Burr. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Senator Isakson, you are next.
    Senator Isakson. Thank you, Mr. Chairman.
    Last night I did a monthly telephone town hall meeting, 
which I do every month back to my State. During the course of 
an hour, they had up to 2,500 people on the call. During the 
course of the hour, I handled 21 questions, and I always make 
notes when I am answering the phone so the next day I can 
review things I did not know the answer to, or whatever.
    My 10th call last night was from a person named Sid, and 
his statement was very simple: given what has happened, 
apparently, at the IRS, I have lost confidence in the United 
States of America. That was a constituent comment.
    That was not a reactionary comment, but he went on to 
further say, if the agency that collects taxes for me is able 
to target as they did in the qualification for tax-free status, 
what is to keep them from using the tax system to target me for 
other things?
    So the reason this is an important hearing, the reason it 
is an important audit, and the reason we do need to have an 
important investigation is, if for no other reason, to restore 
the confidence of the United States in the Internal Revenue 
Service. So, I want that understood. That is my concern. That 
came to me from a constituent last night who said it far better 
than I could possibly say it.
    Now, Mr. George, I want to make sure I understand what you 
said correctly. I believe that Ms. Lerner was in charge of the 
approval of this department during 2011. Is that correct?
    Mr. George. Yes, sir.
    Senator Isakson. I thought I heard you say that the 
Cincinnati office was ordered to change their criteria by the 
Director, and that, following that order to change it, they 
changed it back.
    Mr. George. That is correct, sir.
    Senator Isakson. Do you know who changed it back? Do you 
know who initiated the change back? Is there anybody, any 
person or trail, or did it just all of a sudden appear to be a 
criteria that was changed back?
    Mr. George. We have not found any evidence as to the 
identity of the person who ordered the revision of the policy.
    Senator Isakson. That is my point. I am following up on 
Senator Burr's question and your statement. You did an audit; 
you did not do an investigation.
    Mr. George. That is correct, sir.
    Senator Isakson. And audits are developed to find if there 
is a possibility of wrongdoing or if there is not. Is that not 
correct?
    Mr. George. Among other things. It also looks at the 
systemic problems that may exist within a program.
    Senator Isakson. To date, there has been no internal 
investigation at IRS. Is that correct?
    Mr. George. That, I am not aware of, sir. I would defer to 
Mr. Miller.
    Mr. Miller. We took a look in the March time frame, to take 
a look at what was happening in the cases. That was when it was 
reported to me in May that there were issues. This sort of 
thing would be done by TIGTA, and we stood and worked with 
TIGTA on this.
    Senator Isakson. All right.
    Then let me ask both you and Mr. Shulman the same question. 
You are now past Commissioners of the IRS, correct? There is 
going to be a new Commissioner, correct? Let us assume that 
Commissioner is going to make a phone call before he or she 
accepts the appointment and asks for your advice as to what to 
do. Regarding this issue, what would your advice be to the next 
Commissioner of the IRS? Mr. Miller?
    Mr. Miller. I would agree with your opening statement, sir. 
We have--and it breaks my heart, because I have spent 25 years 
trying to protect the Service. The Service, right now, the 
perception is that there is an issue.
    That new Commissioner needs to attack it. He needs to, or 
she needs to, take a hard look, make some changes, put in place 
some safeguards that are very obvious in terms of their 
transparency--what the process is, how we are going to do 
things--and regain the belief of the American people that the 
IRS is and remains nonpartisan.
    Senator Isakson. Mr. Shulman?
    Mr. Shulman. So the Commissioner of the Internal Revenue 
Service has multiple things to deal with: filing season, 
technology, last year it was the fiscal cliff, offshore issues. 
I think the challenge for the next Commissioner is, frankly, 
what you talked about, that this whole episode has clearly put 
a blemish on the agency. It has cast a shadow over all of the 
good work that the men and women do every day.
    I think what the next Commissioner needs to do is try to 
rebuild the faith that people have in the impartiality and 
fairness of the agency without losing sight of--you know, this 
is a small sliver, an important one, of what the agency does, 
but it should not overwhelm him so problems emerge elsewhere.
    Senator Isakson. Well, my hope was that the answer would 
have been that whomever the next Commissioner is, he or she 
should immediately request an investigation of the findings of 
the audit to determine if there were violations, if there were, 
who authorized them, and, if they were authorized, who actually 
carried them out.
    Because to me the one thing that we have never gotten to 
the bottom of in this is what the chairman referred to at the 
beginning of the hearing, and that is who, what, where, and 
when. Only when we do that, only when those answers to those 
questions take place, can you begin the process of restoring 
the confidence of the American people in the Internal Revenue 
Service.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    I think Senator Cornyn is next.
    Senator Cornyn. Thank you, Mr. Chairman. Mr. Chairman, I 
want to thank you and Senator Hatch for convening this hearing 
in a strong bipartisan way and in accordance with the finest 
traditions of the Senate. This is a very important issue, as we 
all know, and without regard to party affiliation or stripe or 
ideology.
    If we cannot trust the IRS to perform its functions 
impartially and in accordance with the rule of law, the 
confidence of the American people will be shaken to its very 
core. So, this is very important, and I want to say ``thank 
you'' for that.
    Mr. Miller and Mr. Shulman, as you know, in 2011 and 2012 I 
began to receive complaints from my constituents in Houston, 
TX, Waco, and San Antonio, from organizations like the King 
Street Patriots, True the Vote, the San Antonio Tea Party, and 
the Waco Tea Party, asking me to assist them to inquire why the 
IRS was taking a particularly aggressive posture with regard to 
their applications for tax-exempt status.
    I share Senator Hatch's and others' comments and concerns 
about the denials that have occurred over the course of time 
that any targeting was taking place, when we now know that that 
targeting was in fact taking place.
    Mr. Miller, you started your testimony by apologizing. Mr. 
Shulman, I wonder if you have any words of apology for my 
constituents and others who feel like the public trust has been 
violated by the IRS?
    Mr. Shulman. You know, I am deeply, deeply saddened by this 
whole set of events. I have read the IG's report, and I very 
much regret that it happened and that it happened on my watch.
    Senator Cornyn. Is that an apology?
    Mr. Shulman. To your constituents? I do not know the 
details of your constituents. I do not know what happened to 
them. I did not, you know, look at particular constituent and 
taxpayer matters. I mean, as a general principle as the IRS 
Commissioner, I did not touch individual cases, and I certainly 
did not touch cases that involved political activity. So, if I 
knew the details of it, I could give you an answer.
    Senator Cornyn. So it is not your responsibility.
    Mr. Shulman. I----
    Senator Cornyn. The buck does not stop with you.
    Mr. Shulman. I certainly am not personally responsible for 
creating a list that had inappropriate criteria on it, and what 
I know, with the full facts that are out, is from the Inspector 
General's report, which does not say that I am responsible for 
that. With that said, this happened on my watch, and I very 
much regret that it happened on my watch.
    Senator Cornyn. Well, I do not think that qualifies as an 
apology. It qualifies as an expression of regret, which I think 
is well-
deserved.
    But beyond just the question about the particular 
activities here that the Inspector General has discovered and 
which we are all now becoming acquainted with, I had a 
question, Mr. Shulman, about what you talked about earlier in 
your testimony as the core function of the IRS.
    When I think about the core function of the IRS, it is to 
collect the revenue that the Federal Government needs in order 
to function, but it seems like, over the years, that the 
Congress has given the IRS additional responsibilities, for 
example, to police political activity and speech, and now to 
implement Obamacare.
    I believe you mentioned there are some 90,000 employees in 
the IRS. Would you share my concerns that the IRS has deviated 
from its core function and should be reformed to focus on that 
core function and perhaps not be given these other additional 
responsibilities until it can get its house in order?
    Mr. Shulman. I guess what I would say is, the IRS is tasked 
with the responsibility of administering the Nation's tax laws, 
and over the years the Nation's tax laws have been used for 
more and more things.
    So I think I would defer to Congress to decide what it 
wants to use the tax code for and whether it wants the IRS to 
do all of the functions in the tax code. But as long as the IRS 
is given that responsibility, I think the obligation of the 
agency is to do it to the best of its ability.
    Senator Cornyn. Mr. Chairman, I know my time is almost 
over. But I would just say I agree with your comments that you 
started out with in saying that, if we need a clarion call to 
Congress that we have asked the IRS to do much more than its 
core function, and now to get involved in things like policing 
political activity and speech, and now implementing Obamacare, 
it is not all that surprising that these kind of problems have 
arisen given the discretion that mid- and low-level individuals 
have and the lack of proper management practices.
    So I think this is a great opportunity not only for us to 
get to the bottom of what happened here, but also to address 
tax reform in a way that returns the IRS to their core function 
and gets them out of policing political speech and other 
activities. Thank you.
    The Chairman. Thank you, Senator.
    I think you are next, Senator Thune, from my understanding. 
Oh, I am sorry. I was out when you spoke.
    Senator Portman, you are next.
    Senator Portman. Thank you, Mr. Chairman.
    Let me just say I also had a tele-town hall meeting last 
night. My colleague from Georgia talked about it. We had about 
25,000 people on at any one time. The questions were coming in 
from Republicans, from Democrats, from Independents, all saying 
the same thing, which was outrage. The outrage being expressed 
was that, at the very least, the IRS ought to have an even-
handed and a fair administration of our tax laws, given the 
power of the agency.
    Mr. Miller, in response to concerns expressed by grassroots 
organizations around Ohio, as you know, Senator Hatch and I, 
joined by eight of our colleagues, sent a letter to the IRS on 
March 14, 2012. You responded to that letter.
    I just want to tell you why I joined Senator Hatch on this 
letter. The Portage County Tea Party of Ohio was asked to print 
out every posting it had ever made on its Facebook page and to 
turn over the names of every person who had ever spoken at a 
meeting. I thought that was really odd.
    The Ohio Liberty Township Tea Party was hit with 94 
exhaustive follow-up questions and demands for information in 
March of 2011 in response to their January application. Demands 
included resumes of all past and present employees, all social 
media posts.
    One question actually asked specifically about any 
connection with an individual who does not live in that county, 
actually lives in my home county, and was involved in another 
Tea Party. So they were trying to find out about an individual 
who had no connection with that Tea Party. Kind of scary.
    The Ohio Liberty Coalition was hit with similar questions/
concerns. Its application was delayed by over 2 years. The 
Shelby County Liberty Group sent me this letter they got from 
the IRS. It contains, as Mr. George has talked about earlier, 
inappropriate, irrelevant questions, and they were also given 3 
weeks, 21 days, to respond. These are individuals who were 
asked to come up with tons of information in a short period of 
time, much of which was difficult for them to compile. So they 
contacted me.
    For instance, they wanted to know the names of every person 
in the organization, the amount of time they spent at 
particular events. They wanted to know detailed contents of 
speeches, forums, names of speakers, panels, so on and so 
forth. So that is why we wrote the letter. Our letter asked for 
the IRS to give us ``assurance that this recent string of 
inquiries is consistent with the IRS's treatment of tax-exempt 
organizations across the political spectrum.''
    So the letter was very specific. There was no question what 
we were asking. The letter specifically asked ``when and on 
what basis does the IRS require a 501(c)(4) to make disclosures 
beyond the standard information, and what objective criteria 
are used to identify applications for greater scrutiny?'' These 
questions go to the heart of political allegations that we were 
hearing about.
    So let me ask you, Mr. Miller. Did you receive and read 
that letter on March 14?
    Mr. Miller. I do not know when I--I read it at some point.
    Senator Portman. Did you receive that letter and read it?
    Mr. Miller. At some point, yes, sir.
    Senator Portman. Did you think the allegations described in 
the letter, what we called the ``serious implications of 
discriminatory enforcement'' were alarming?
    Mr. Miller. I was aware already of the problems that were 
occurring in those letters, and I was in agreement that they 
seemed----
    Senator Portman. You were aware before the March 14th 
letter that this was occurring?
    Mr. Miller. In the same time frame, sir.
    Senator Portman. I did not realize that. So you knew before 
the March 14th letter that these serious allegations were out 
there.
    Mr. Miller. Well, sir, I think----
    Senator Portman. And you testified on or about----
    Mr. Miller. I think it----
    Senator Portman [continuing]. March 23rd.
    Mr. Miller. Okay. I am sorry.
    Senator Portman. You have----
    Mr. Miller. I thought there were things in the newspapers 
as well.
    Senator Portman. You have testified that on or about March 
23rd, 9 days after receiving our letter, that you asked Nancy 
Marks, who is the Senior Technical Advisor for Tax-Exempt and 
Government Entities, to ``lead a team and take a look at what 
was going on based on these allegations.'' Is that correct?
    Mr. Miller. I did.
    Senator Portman. And you testified that Nancy Marks 
reported back to you on May 3rd with the revelation that 
political criteria had in fact been used to target certain 
501(c)(4) applicants. In fact, you said today that that 2012 
briefing included much of what is outlined in the IG report by 
Mr. George.
    So for 6 weeks, from March 23rd when you sent your team 
down to Cincinnati to find out what was going on to May 3rd, 
you did not bother to ask for any kind of interim report or 
updates from the team that you had tasked with investigating 
these serious allegations?
    Mr. Miller. No, sir. I do not believe I did.
    Senator Portman. So you sent a team off and, for 6 weeks, 
you did not ask them what was going on, never heard from them?
    Mr. Miller. I do not recollect that I did that one way or 
another, sir. I mean, you are--the implication is that this was 
a pretty short time frame, sir.
    Senator Portman. Six weeks? So you are finding out about 
these very serious allegations, you are sending the team out, 
and for 6 weeks you never hear back from them, never have the 
curiosity to ask them what is going on?
    Mr. Miller. Well, the allegations, sir, we had handled. We 
had looked at those letters. They seemed over-broad to us. We 
gave people more time. We pulled back the donor list requests. 
And by the way, the donor list requests, sir----
    Senator Portman. Well, no. You had not acted yet. This was 
still going on during this period. I am talking about between 
March 23rd and May 3rd.
    Mr. Miller. There are two pieces here, sir. One is what I 
found out on May 3rd. The letters we acted on immediately. We 
tried to get people more time. And I think if you talked to 
your folks, that is going to be what they are going to say. We 
pulled back the----
    Senator Portman. So, you did not even bother to hear back 
from them for 6 weeks--you responded to our letter on April 
26th--and you did not bother to ask them if anything was wrong 
before you chose to respond to our allegations? In other words, 
on March 26th, with assurances that nothing was wrong to us, 
you did not even wait to hear back from this team that was 
investigating these allegations? You chose to respond without 
the information?
    Mr. Miller. No. I responded to the questions that were 
asked, and they were all about the donor list, and they were 
responded to correctly and truthfully.
    Senator Portman. No. Remember, this is the letter I talked 
about earlier, where we asked specifically about whether there 
was political targeting. It was very clear what we were asking 
about. You sent a team out to go investigate it. The team takes 
6 weeks. You respond to us on April 26th, which is a week 
before you apparently heard back from them, and you did not 
bother to get the report from them before you responded to us. 
Is that accurate?
    Mr. Miller. I do not know whether I purposely did that or 
not. I do not think I did, sir. Bottom line is, I answered the 
questions I thought were being asked, and I answered them 
truthfully, sir.
    Senator Portman. So you did not bother to check with the 
team investigating these charges whether issues remained before 
assuring me, Senator Hatch, and others in your April 26th 
letter that the IRS applies greater scrutiny to 501(c)(4) 
applications based on only, you said, individualized 
consideration? In other words, no political criteria 
whatsoever.
    Let me ask you this----
    The Chairman. Senator----
    Senator Portman. We have learned today that the IG report 
says that the Office of Chief Counsel was aware of political 
targeting as early as August 2011. Did you consult the Chief 
Counsel in the course of responding to Mr. Hatch's and my 
letter, the May 14th letter?
    The Chairman. Five-second answer.
    Mr. Miller. I do not know that.
    The Chairman. All right. Thank you. Thank you, Senator.
    Senator Portman. Thank you, Mr. Chairman.
    The Chairman. Next on the list is Senator Toomey. I might 
say that there is a vote going on. Senator Hatch has gone over 
to vote and will come right back. I plan to have another round 
of questions afterwards.
    Senator Toomey. Thank you, Mr. Chairman.
    First, a quick point. A number of my colleagues have seemed 
to be upset about the fact that some Americans choose to 
exercise their First Amendment rights anonymously. I would 
remind us all that perhaps some of the most important and 
influential works of political advocacy ever done in the 
history of the Republic were the Federalist Papers, which were 
written anonymously under pseudonyms.
    I would also point out that, whatever one thinks of how the 
Treasury rule implementing the 501(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 and other matters.
    Let me ask Mr. Miller--I just want to be very clear and 
follow up on the line of questioning from Senator Isakson. So 
we are sitting here in May of 2013. At this point, do you know 
who it is who initiated the policy of establishing these 
ideological criteria for creating this additional level of 
screening for applicants for 501(c)(4) status?
    Mr. Miller. I think--I mean, it happened twice. The second 
time it happened, I do not believe there is clarity on that. 
The first time, I think there is more clarity on that.
    Senator Toomey. So who was it? What is the name of the 
person who did that?
    Mr. Miller. I can give you the name. I would be glad to 
respond to that, but I do not know off the top of my head.
    Senator Toomey. I think that it is important that we 
understand who did that, that we know exactly who did. Who 
ordered that it be stopped, which I believe occurred in July of 
2011?
    Mr. Miller. According to the IG report, Lois Lerner.
    Senator Toomey. According to--so you do not have any 
knowledge of that, other than the IG's report?
    Mr. Miller. I believe that that is the way it happened, 
yes, but I am not--I believe that is the case.
    Senator Toomey. And then who ordered that it be resumed? 
Although using slightly different words, the same idea was 
resumed in May of 2012.
    Mr. Miller. I believe I indicated, and I think the IG 
concurs, that that is less than clear.
    Senator Toomey. So why is that less than clear even now? I 
mean, these are people who reported in a direct chain to you. 
You were the Deputy Commissioner for Services and Enforcement. 
Reporting to you, if I understand correctly, was Sarah Hall 
Ingram, the Acting Commissioner for the Tax Exempt and 
Government Entities Division; the Director of Exempt 
Organizations, Lois Lerner, reported to her. Isn't there 
somebody in this chain of command--well, let me put it this 
way. Who in this chain of command ought to know who was 
initiating this inappropriate activity and reinitiating it?
    Mr. Miller. So, somebody should have known. There is no 
question about that. And now there are processes in place that 
have made it clear exactly who has the ability to either start 
this listing or modify the listing. At the time, those controls 
were not in place.
    Senator Toomey. So, you said somebody should have known, 
but clearly there is a chain of command, there is an 
organizational structure here. There are people who are 
responsible. I mean, should it have been Lois Lerner? Should it 
have been Sarah Hall Ingram? Should it have been yourself? Who 
ought to be responsible for making sure that this important 
function is being carried out properly?
    Mr. Miller. So, I think that, under the current management 
chain, it has been determined that the Director of Rulings and 
Agreements, which is even below Lois, has control of that 
listing.
    Can I clarify one thing, sir? I think, you know, Sarah 
Ingram's name has been used several times here already. She has 
been thrown into this, and I do not know that that is a fair 
thing. We should check the time line. I do not believe she was 
working in TEGE during the time that is being discussed here.
    Senator Toomey. Okay. Well, I have not accused her of 
anything, although I was under the impression that she was the 
Acting Commissioner in this regard during this time period.
    I would just say that if we believe that we still, sitting 
here today, do not even know who was responsible for the 
decision to resume a completely inappropriate activity that had 
been ceased, I do not know how we could come to the conclusion 
that this is not politically motivated. We do not even know who 
made the decision.
    How do we know what motivated that decision? And, on the 
face of it, it certainly appears that it is completely 
politically motivated. To the best of my knowledge, there was 
no criteria identifying left-of-center organizations as 
deserving special scrutiny, like using the words 
``progressive'' or ``99 percent'' or ``Occupy Washington.'' 
None of that was ever part of the criteria.
    So, given the obvious one-sided nature of these criteria 
and the fact that we still do not know--Mr. Chairman, I would 
just suggest that what we need to do is to bring before this 
committee some people who might actually know the answers to 
these questions about who actually decided that this was a good 
idea, who decided that we ought to resume this after the 
initial malfeasance was ended. But it is frustrating to have no 
answers for a hearing like this.
    The Chairman. Thank you.
    Frankly, I apologize. Can you come back, Senator?
    Senator Bennet. I cannot.
    The Chairman. You cannot?
    Senator Bennet. Could I just take 2 minutes?
    The Chairman. All right. Go ahead.
    Senator Bennet. I want to actually begin, in my 2 minutes, 
where Senator Toomey ended. The IG has said he does not know 
who made the decision to resume, the IRS Commissioner does not 
know who made the decision to resume. I mean, did you ask these 
questions? What did the people in Cincinnati say about who made 
the decision, or what did people in Washington say about who 
made the decision? It just seems impossible that we do not know 
that answer.
    Mr. Miller. So, I did ask in May. I was told a name, and it 
turned out that they did not think that was the correct name. 
So----
    Senator Bennet. Was that a name of somebody in Ohio or the 
name of somebody----
    Mr. Miller. It was the name of a group manager in Ohio.
    Senator Bennet. I do not know how we get to the bottom of 
it, but I think somebody needs to be able to answer that. It 
does not seem like it is asking too much.
    Mr. Miller. I did ask, sir.
    Senator Bennet. I think we should ask again. If the IRS 
will not do it, I think we need to do it. This is the last 
thing, and I will close on this, Mr. Chairman, because I know 
time is short and I do not want either of us to miss the vote.
    Mr. Shulman said a few times that the IRS has been given a 
difficult job to do. No doubt that is true. I think in this 
case we did not give the job. I think that the regulation that 
the Treasury wrote or whoever wrote it 50 years ago simply is 
not consistent with the law as it has been written, so I would 
argue that the agency has taken on the task.
    Since you are all three lawyers and you have all worked in 
this area, I would ask you whether you think the regulation as 
written reflects the spirit--not even the spirit, the language 
of the statute as it is written with respect to (c)(4)s. Does 
anybody here want to defend the way the language is written?
    Mr. Miller. So let me start. I am not going to defend it or 
attack it. It is what the regulation is, and, as the 
administrator, that is what we would do.
    Let me note one thing, though. If we were to modify it--and 
we should be open to the conversation, and obviously Treasury's 
policy folks would be key in this. If we were to modify it, we 
might still be in the same place where we have to determine, 
you know, how much political activity needs to be done, even 
under an ``exclusively,'' because it might not be 100-percent 
you cannot do it, it might be X-percent. Even there we would 
have a hard time parsing what is politics, what is not, what is 
an issue ad versus education. These are very difficult tasks.
    Senator Bennet. Does anybody else want to defend it?
    Mr. George. I do not want to defend it, sir, no.
    Senator Bennet. I think with good reason.
    Thank you, Mr. Chairman.
    The Chairman. All right. The committee is in recess for 
about, I am guessing, 10, 15 minutes.
    [Whereupon, at 12:20 p.m., the hearing was recessed, 
reconvening at 12:28 p.m.]
    Senator Hatch [presiding]. We will call on you, Senator 
Casey.
    Senator Casey. I want to thank the ranking member for the 
opportunity, and I want to thank both the ranking member and 
the chairman for calling this hearing. I know we had a brief 
break for the vote.
    I start, in terms of my questions, by setting forth a 
predicate based upon two things. One is the IG's report, which 
is, right now, I would say the only, or the main, body of 
evidence we have about what happened here, number one.
    Number two, beyond what the law requires, beyond what the 
IRS Code or any regulations provide, I think there is a larger 
question that a lot of Americans are angry about or struggling 
with or perplexed by, and that is sometimes the sense that 
people in Washington do not get it, that people in Washington 
do not have a sense that their work is not just important in 
terms of the policy, but that they are appointed or elected to 
office to be servants.
    I would have to say, listening--and I have been here for 
virtually every minute of this hearing--I wish there was more 
of a sense of, frankly, outrage or at least more contrition 
being demonstrated by both you, Mr. Shulman, and you, Mr. 
Miller, in light of what has happened here, because, in my 
experience, whether it is an elected official, an appointed 
official, or a public agency, when something goes wrong, it is 
as if you had something that fell on the ground and shattered.
    The one question that we all have is whether or not 
rebuilding substantial public confidence in the IRS is going to 
be putting back three or four pieces together or whether it has 
been so shattered that it will take many, many years to rebuild 
that confidence. So that is the predicate that I start with.
    I also point to, in the report in Appendix V, an 
organizational chart, which I do not need to hold up. I think 
most Americans have seen these. This is page 29 of the report. 
It starts at the bottom, where you have Program Manager, 
Determinations Unit, and then you have the Program Manager, 
Determinations Specialist, both located in Cincinnati, OH.
    At the next level you have a Director of Rules and 
Agreements in Washington, at the next level Director of Exempt 
Organizations in Washington, at the next level the Acting 
Commissioner for Tax Exempt and Government Entities, and then 
you get to the Deputy Commissioner level, which, Mr. Miller, I 
guess, is where you began in September of 2009, is that 
correct?
    Mr. Miller. Yes, sir.
    Senator Casey. And that was while, Mr. Shulman, you were in 
fact the Commissioner of the IRS, is that correct?
    Mr. Shulman. Yes.
    Senator Casey. And then you turn to--or I turn to page 7 of 
the report. By the way, on page 6, IRS Policy Statement 1-1 
talks about promoting public confidence and being impartial, 
which is obviously part of what the crux of the problem is 
here.
    But I am looking at page 7 of the report. I would just note 
for the record, this is in the first full paragraph, maybe the 
second sentence: ``The Determinations Unit developed and 
implemented inappropriate criteria in part due to insufficient 
oversight provided by management.'' So that is a management 
failure, as clear as can be.
    It says in that same paragraph, ``Inappropriate criteria 
remained in place for more than 18 months. Determinations Unit 
employees also did not consider the public perception of their 
conduct.'' Then finally, ``The criteria developed showed a lack 
of knowledge by the individuals in that unit.''
    Later, on the same page, it talks more about the management 
failures. So, when you consider that evidence of a management 
failure and you look at the organizational chart, which goes 
right up to both of you in your positions at the time, I have 
to ask you a couple of questions.
    It is pretty clear from the report and the record that you 
can almost look at this problem as what happened prior to 
January of 2012 and what happened after, or you can move the 
line back and say, well, why don't you look at July of 2011? 
But we know that in August of 2011 is when the problem started.
    These criteria were issued and used from that point 
forward. July of 2011, 11 months later, the criteria changed. I 
guess at that point management would have thought that the ship 
was on the right course. Then we find out in January of 2012 
the criteria changed back.
    I guess the basic question I have for both of you is, is it 
your testimony that you took no actions to rectify what 
happened after January of 2012 because you did not know about 
it? Is that your testimony, Mr. Miller?
    Mr. Miller. When I knew in May of 2012, I took action. That 
was the first I knew.
    Senator Casey. Mr. Shulman?
    Mr. Shulman. Yes. The first time I remember knowing about 
this was in a conversation with Mr. Miller, and, at or about 
that same time, he told me that he was taking action. The list 
had been corrected, and so, yes.
    Senator Casey. Well, I would assert that the fact that you 
did not know it was a management failure of some kind, and I 
would hope that the IRS at this point, when you have nine 
recommendations that the administration says are going to be 
implemented, that those recommendations be implemented 
expeditiously.
    I realize that you do not have a direct impact on that any 
longer, but I think the American people need to hear, Mr. 
Shulman, more of what you expressed after about 90 minutes here 
in answering Senator Cornyn's question about, at a minimum, a 
sense of disappointment and contrition as opposed to, we did 
not know and, I think, an attitude that only makes the problem 
worse. I know I am limited on time, but I will try on the 
second round, maybe.
    The Chairman. Thank you, Senator.
    Senator Cantwell?
    Senator Cantwell. Thank you, Mr. Chairman. I want to make 
it clear at the outset I really do believe that we need clarity 
in our tax-exempt status on 501(c)(4) organizations, and we 
need that clarity, Mr. Chairman, as soon as possible. I think 
that is a major issue.
    But I have a larger issue, which is just understanding at 
the IRS, Mr. Miller, what exactly exists today as a prohibition 
against investigating people, investigating organizations, 
targeting organizations based on political or religious or any 
other social issues.
    Mr. Miller. So we would have two different areas. One is 
the determinations letter area, where we had issues this time. 
We have elevated to an executive level either the creation of a 
list or the modification of a list, and the list will not have 
names on it. The list will have what it has today.
    Senator Cantwell. No, no, no. I am asking a larger 
question----
    Mr. Miller. I am sorry.
    Senator Cantwell [continuing]. Which is, what rule, what 
regulation, what statute is in place that prohibits an employee 
of the IRS from targeting people for either political, social, 
or any kind of personal reasons, and what are the safeguards?
    Mr. George, in response to my colleague from South Dakota, 
mentioned the criminal code section that applies to revealing 
or disclosing personal information, but I am asking, where is 
there a bright line at the IRS?
    Because what I think happened here is that somebody saw a 
gray area, and, instead of addressing the gray area--because it 
is clear Director Lois Lerner made an attempt to go back and 
give guidance when it was not there and then did not take 
action, and then more problems ensued.
    So my question is, I do not think that gray areas, whether 
they are in our national security and this media shield issue, 
or in this issue with the IRS, can be seen as a green light. 
Gray does not mean there is a green light to go ahead and use 
these powers of information to go on fishing expeditions.
    So what I want to know is, does the IRS, either by law, by 
internal process, have something on the books right now that 
says you cannot target people for political or religious or 
other social issues--within the IRS?
    Mr. Miller. So I have to--forgive me, Senator. I have to go 
back and check on whether there is something specific on that. 
There are general rules of conduct that would indicate that you 
should not do anything that even gives the appearance of that 
type of activity, but I am unsure, and we would have to come 
back and let you know whether there is something specific, 
statutory or regulatory, in that area.
    Senator Cantwell. Mr. George, do you have any idea?
    Mr. George. The Restructuring and Reform Act delineates a 
number of, they call them the Deadly Sins, the 10 Deadly Sins. 
One of them is the revealing of tax information willfully to 
harm a taxpayer. So it is my understanding that that is one, 
while administrative in nature, that does not have any criminal 
penalties associated with it, but could result in the removal 
from the position of the IRS employee.
    Senator Cantwell. But that is revealing that information to 
some outside organization?
    Mr. George. It is the misuse of that information, actually. 
And so, how that is----
    Senator Cantwell. In this case, could this be seen as 
misuse of information?
    Mr. George. In theory, it could be interpreted that way, 
Senator.
    Senator Cantwell. Well, I think it is clear that we need a 
very clear statute here. If it was not the intent that these 
things happened, certainly the perception is that this could 
have been the intent. I agree with my colleagues that we have 
to have a very clear system here, that the American people need 
to know that this kind of targeting for political purposes does 
not happen and will not be tolerated, and that people would 
lose their jobs over that.
    Mr. Miller, the fact that you do not know whether this 
existed, it says to me that the bright line was not bright 
enough. The minute there was a gray area, the counterbalance 
should have been someone saying this could be perceived as 
targeting an organization for political purposes, it is wrong, 
this is a violation of our organization, and they should have 
gone back and should have created a different--a very, very 
different process. I worry, in an information age with too much 
information in large organizations, that people have to get 
this point.
    So, Mr. Chairman, thank you. But I also do believe that the 
501(c)(4) status issue needs to be resolved as quickly as 
possible as well.
    Thank you.
    The Chairman. Thank you, Senator.
    Senator Carper?
    Senator Carper. Thank you. Gentlemen, thank you for joining 
us today. Listening to this testimony today, Mr. Chairman, I am 
reminded of something I learned a long time ago as a Navy ROTC 
midshipman, when they tried us in leadership training. They 
told us about the responsibilities and expectations of the 
commanding officers, whether it is a ship or an aircraft 
carrier--a ship, submarine, aircraft carrier, or a squadron.
    If a ship ran aground in the middle of the night, if it is 
2 in the morning and someone else was the officer of the deck, 
we hold the commanding officer of the ship responsible. The 
captain of the ship is responsible.
    The captain of the ship is expected to stand up and take 
responsibility and say, ``This happened on my watch. I may not 
have been on the deck, I may have been sound asleep, but I am 
responsible.'' I think one of the things that is so frustrating 
here is that--just a reluctance to assume responsibility.
    Mr. Shulman, my understanding is you were not nominated to 
serve in this role by President Obama, but you were nominated 
by former President Bush. Is that correct?
    Mr. Shulman. Correct.
    Senator Carper. And when were you nominated?
    Mr. Shulman. I was nominated in either--I think the end of 
November, maybe the beginning of December of 2007.
    Senator Carper. 2007.
    Mr. Shulman. Right.
    Senator Carper. When I was elected Governor, we went off to 
new Governors school. Actually, one of the people who was one 
of my mentors there was your dad, Senator, then Governor Casey. 
One of the lessons I learned at new Governors school in 1992 as 
a new Governor was, when you make a mistake, do not drag it out 
for a day or a week or a month. Admit it, take responsibility, 
and say, ``We are going to fix this problem'' and move on.
    I think one of the frustrations for us is your reluctance, 
maybe unwillingness, to say, ``This happened on my watch.'' I 
think with the reporting of the chain of command, as I 
understand it, from Cincinnati, it flowed up through Mr. Miller 
then directly to you. So I would just leave that at your feet.
    That is a disappointment to me. I think it is one of the 
things that is going down hard with my colleagues, and I think 
the American people. We want somebody to take responsibility, 
to apologize, to say, ``This happened on my watch,'' and then 
to move forward.
    I would note, we do not make the job of the IRS easy, the 
people who serve on this committee, the people I serve with in 
the Senate. We make it hard, where we have a hugely complex tax 
code, voluminous. We make changes. We delay passing legislation 
right up until it is time to file for taxes. We do not make the 
job easy, we make it difficult.
    One of the areas where I think we actually made it pretty 
straightforward is with respect to 501(c)(4)s, these tax-exempt 
organizations. As I understand it, in the actual code we say 
that these 501(c)(4) nonprofit organizations, their activity 
must be, I think, ``exclusively''--exclusively--``for social 
welfare.'' ``Exclusively'' is a quote out of the code, and I 
think ``for social welfare'' is a quote out of the code.
    It does not say anything about giving tax-exempt status for 
any political activity; it says ``exclusively for social 
welfare.'' Now, how we ended up in this situation, where we are 
extending tax-exempt coverage to these entities that are 
clearly not exclusively for social welfare--and actually to me 
it looks like a lot of what they are about is affecting 
elections and weighing in on elections. It would be a lot 
easier for the IRS if we just go back to the code, and where 
its says they have to be exclusively for social welfare, let us 
make sure that they are.
    Let me just ask you all to respond to that, starting with 
Mr. George, please.
    Mr. George. Senator, I believe you were here, or may not 
have been here----
    Senator Carper. Yes, I have been in and out. We have 
another hearing going on on the tax code. The folks from Apple 
are before the Permanent Subcommittee on Investigations, so 
there is actually some overlap there.
    The Chairman. Yes. This is tax day.
    Senator Carper. It really is.
    Mr. George. Well, the Secretary has delegated tax policy 
questions to the Assistant Secretary for Tax Policy. And, as 
this is a tax policy question, sir, I am going to have to defer 
on that.
    Senator Carper. Yes. Mr. Miller, would you respond, please?
    Mr. Miller. I will. But first I--and I am sorry that 
Senator Casey is gone. I opened my statement with an apology, 
sir, and I do apologize. And, you know, what happens on my 
watch, whether I did it or not, is like that commanding 
officer. I am responsible.
    Senator Carper. Good. Thank you.
    Mr. Miller. So I just want to state that, sir.
    Senator Carper. I appreciate that.
    Mr. Miller. On this----
    Senator Carper. You know, I did not mention you when I was 
talking about that. But go ahead.
    Mr. Miller. We have talked a little bit about this issue 
today, and that is, you know, the regulations interpret 
``exclusively'' as ``primarily.'' That puts us into a difficult 
place of figuring out what is in and outside of the (c)(4) 
work.
    I do think it makes sense to take a look at it. I do not 
know that we will be in a better place after looking at it, 
because we will still have to figure out what falls within even 
the ``exclusively.'' Is it 10 percent? Is it 15 percent? Is it 
20 percent? We will still have that problem. But it is clear 
that the world has changed since 1958, or whenever it was that 
we did that regulation, and it does make sense to take a look.
    Senator Carper. Yes.
    Mr. Shulman?
    Mr. Shulman. I do not have anything to add to what I said 
before, that I think it is incredibly difficult for the IRS to 
administer the current regulations on the book and I think it 
is well within the purview of this committee and Congress to 
take a look and be very clear. If Congress is not going to act, 
I think it is well within the purview of the Treasury to take 
those actions.
    Senator Carper. Good.
    Mr. Chairman, can I ask one more quick question, if I 
could? And you do not have to get into this, but I just want to 
put it before you. Do you know if the IRS has investigated 
whether Priorities USA or Crossroads GPS are primarily social 
welfare organizations or political in nature? Do you all know 
if that has been done?
    Mr. Miller. So I think, sir, that would be 6103 information 
that we would not be able to speak to publicly.
    Senator Carper. All right. Thanks very much.
    Thanks, Mr. Chairman.
    The Chairman. Well frankly, Senator, that is the question I 
was going to ask. You know, these are the two 800-pound 
gorillas in the room that have not been addressed, that is, 
Priorities USA and Crossroads GPS. They are the ones that spent 
a lot of money buying TV ads and influencing campaigns, 
apparently.
    There is not a lot of evidence thus far--correct me if I am 
wrong--that some of the organizations that were investigated by 
the Cincinnati office clearly spent a lot of money for 
political purposes. I do not know. That has not really come out 
here, as near as I can tell. So what about Crossroads? What 
about Priorities USA?
    I mean, it is obvious to you, it should be as 
Commissioners, that a lot of money is being spent under the 
rubric of 501(c)(4), a lot. I am wondering what you did about 
it, because that is where the abuse apparently is. That is 
where it seems to be in terms of dollars. I say ``apparent'' 
but I do not know if it is a fact.
    But what have you done about those two organizations and 
similar organizations that look like they are spending a lot of 
money? You watch TV ads, you see these 501(c)(4)s. You know 
what is going on. You both know what has been going on. What do 
you do about it? I will start with you, Mr. Shulman, because 
you were there first.
    Mr. Shulman. Yes. So let me repeat what my former colleague 
said, that all this is 6103 information, so, if I had any 
information, I could not have a discussion about this in an 
open forum.
    Let me also say that, as Commissioner, I did not get 
involved in a single case with a 501(c)(4) that I can remember, 
and it was a general policy that I would not. I think it is 
inappropriate actually for a presidential appointee, regardless 
of which party they are appointed by, to be getting involved in 
cases where the scrutiny and the decisions have to be made 
around political activity.
    Finally, I would just say, you know, sitting there as 
Commissioner, you mentioned the letter to me, Mr. Chairman. 
There were letters coming elsewhere. I will go back to what I 
said before, which is, the IRS has been put in a very difficult 
situation when it is trying to administer the tax code, serve 
Americans, get refunds out, serve businesses.
    The Chairman. I understand. I understand.
    But back to the question. I understand 6103, and frankly 
there is a way you could tell me--not here in this forum--
taxpayer information. That is what 6103 provides, in part.
    But I am asking another question. That is, what was your 
policy with respect to organizations of this size? I am not 
asking specifically about Crossroads right now, I am not asking 
specifically about Priorities USA. I am asking what, if 
anything, did you do as Commissioners to see if the law is 
properly being implemented?
    Mr. Miller. So, I can start on this, sir. I mean, I think 
on given cases, and even on the discussion, it makes all the 
sense in the world for you to come forward and ask us in a 6103 
context, and that is the way we could answer----
    The Chairman. I am asking general policy. I am not asking 
for specific taxpayer----
    Mr. Miller [continuing]. And we can come back and let you 
know that there are examinations under way and the 
determination letter processes are under way.
    The Chairman. Have you focused on these larger 
organizations? I am not asking you to name any, I am asking 
about a policy.
    Mr. Miller. There is no policy to aim one way or another on 
organizations; it is what comes through. I cannot really speak 
to what----
    The Chairman. But it looks like the Cincinnati office was 
focusing on, it seems, smaller organizations that may or may 
not have been spending money to influence campaigns. I do not 
know. I do not know what the Inspector General--let me ask the 
Inspector General about that. To what degree have the 298 or 
the 96 or the remaining 202 been involved in political 
activities?
    Mr. George. Senator, we will be engaging in a review of the 
IRS's handling and oversight of this very issue as to whether 
or not these organizations have engaged in----
    The Chairman. So you do not know?
    Mr. George. I do not have it at the ready sir, but we will 
supply that for the record.\2\
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    \2\ TIGTA plans to initiate an audit to review the Exempt 
Organizations function's oversight of sections 501(c)(4)-(c)(6) 
organizations potentially participating in political campaign 
intervention. We do not know at this time how many of the 298 
organizatons are actively engaging in political campaign intervention.
---------------------------------------------------------------------------
    The Chairman. But have you been asking that question?
    Mr. George. Yes, we are starting the audit, sir. We have 
not yet posed the question.
    The Chairman. So again, let me ask, to what degree has the 
IRS exercised a little common sense here and said, holy 
mackerel, we have to look at some of these organizations in the 
wake of Citizens United and see if there should be a change?
    To what degree did the IRS ask itself that question, either 
at the Commissioner level, sub-Commissioner, anywhere? 
Anywhere? It does not take rocket science to know what is going 
on here. I am not targeting conservatives, not targeting 
liberals. I just want them enforcing the law here. So why 
didn't somebody in the IRS, or did somebody in the IRS, think 
about this and try to do something about it?
    Mr. Miller. I think, sir, that we do have an exam program 
under way that we would be glad to walk you through. We do have 
the determination letter process. You should not assume that 
all the cases in the determination process that we are talking 
about are of either one political affiliation or another.
    The Chairman. All right. Let us go beyond the assumption. 
To what degree are there other cases that you, the IRS, are 
looking at in addition to those we have identified in the TIGTA 
report?
    Mr. Miller. I would have to come back to you on that, sir, 
but we have--we have examinations----
    The Chairman. Is it several? Many?
    Mr. Miller. I do not know whether there--I do not have a 
sense, sir. I----
    The Chairman. You do not have a sense?
    Mr. Miller. I believe there are 50 to 100, but I could be 
absolutely wrong. So, rather than throw a number out there, 
sir, let us come back to you.
    The Chairman. All right.
    Commissioner Shulman, what is your sense?
    Mr. Shulman. I have not been at the IRS for 6 months. I do 
not----
    The Chairman. No, no. When you were----
    Mr. Shulman. I do not know what is in the pipeline.
    The Chairman. No, no. When you were Commissioner, these got 
comfort letters on your watch.
    Mr. Shulman. I mean, my sense is very similar to Mr. 
Miller's, that there is an examination program under way, that 
there is--or at least, you know, was under way--that groups 
were being looked at, and these cases were being worked.
    The Chairman. All right.
    Mr. Shulman. That is the sense I have.
    The Chairman. Did it come to your mind that perhaps some of 
these organizations perhaps were abusing the intent and spirit 
of 501(c)(4)----
    Mr. Shulman. I think it would have been----
    The Chairman [continuing]. In the wake of Citizens United, 
with all the money that is being spent?
    Mr. Shulman. It came to my mind that career professionals 
should be the ones touching these cases, thinking about, are 
they using the tax-exempt laws properly, and that a 
presidential appointee should not be touching a case.
    The Chairman. That is interesting. So you should have no 
view about that subject, nor should you give direction to the 
agency. Is that correct?
    Mr. Shulman. That is not how I would state it.
    The Chairman. Oh, I am sorry.
    Mr. Shulman. What I said is, I did not want to touch any 
individual cases or give direction on individual cases.
    The Chairman. I am not saying that. You are misinterpreting 
my question. I am asking, as a policy, were you aware that 
perhaps, in the wake of Citizens United, that the exemption was 
being abused? Let me ask that simple question first.
    Mr. Shulman. I was aware that, in the news and in letters 
that we got, there were a lot of people concerned about things 
in multiple different ways with views----
    The Chairman. All right. You are aware of all these 
multiple different views.
    Mr. Shulman. So I was aware that our Tax Exempt Government 
Entities group was also aware of the need to take a look at 
501(c)(4) organizations and to have a number of exams under 
way. My understanding--which is 6 months old, the caveat--at 
the time was that there were a number of exams under way.
    The Chairman. Where does the buck stop at the IRS?
    Mr. Shulman. What is that?
    The Chairman. Where does the buck stop at the IRS? Where?
    Mr. Shulman. I mean, I think I have said clearly that all 
of this happened on my watch.
    The Chairman. You have said that, but you are dodging the 
question whether you did anything about the obvious flow of 
money going, in the wake of that Supreme Court decision, to 
501(c)(4)s. You basically----
    Mr. Shulman. I mean----
    The Chairman. I am sorry. Go ahead.
    Mr. Shulman. What is that?
    The Chairman. Go ahead.
    Mr. Shulman. I mean, I think I have told you what I have to 
say about it. I think IRS is given a very difficult task. My 
understanding was, people were on the job working on that task, 
and I, as a matter of practice and policy, did not reach down 
into the Tax Exempt Government Entities world to affect the 
cases.
    The Chairman. That is not the question I am asking. You are 
answering a different question. The question I am asking is not 
whether you affected specific cases, but whether you--let me 
ask a different question. I know my time is about up.
    Are you aware of the Supreme Court decision in Citizens 
United?
    Mr. Shulman. Yes, I am aware.
    The Chairman. You are aware of it. And are you aware of its 
holding, what it held?
    Mr. Shulman. In a general sense, I am.
    The Chairman. And what was that? What is your 
understanding?
    Mr. Shulman. My best understanding is that corporations and 
other entities can give money to political organizations.
    The Chairman. And are you aware of----
    Mr. Shulman. But I am not an expert in this law.
    The Chairman. Are you aware that suddenly 501(c)(4)s were 
getting a lot of donations and spent a lot of money?
    Mr. Shulman. I am definitely aware that there was an influx 
of 501(c)(4) applications into the IRS.
    The Chairman. Did it occur to you that perhaps, in the wake 
of the decision, that that statute was being abused? That is, 
the statute was not being used exclusively for nonpolitical 
purposes?
    Mr. Shulman. I mean, Senator, my belief is that Congress 
has given the IRS a very difficult task. I understand that you 
have a desire that we would have done more.
    The Chairman. You are making a different statement and not 
responding to my question. My question, again, is, to what 
degree were you aware of the difficulties caused by the statute 
in the Supreme Court decision, and second, to what degree did 
you do anything about it, that is, try to make sure that the 
statute was not abused?
    Mr. Shulman. I was aware, from a variety of sources, 
whether it was the media, letters, et cetera, discussions with 
Mr. Miller and other people on our team, and I was aware that 
the appropriate people were making sure that the exam plan was 
working on this issue.
    The Chairman. All right. I am not going to split hairs 
here, but that is frankly an unresponsive answer.
    Senator Hatch?
    Senator Hatch. Well, thank you, Mr. Chairman.
    Let me just say that there are plenty of 501(c)(4)s across 
the political spectrum, and some of the 501(c)(4)s that were 
really sponsored by Democrats are extremely wealthy too. I 
mean, it is not just one side or the other. It seems to me we 
ought to be very careful.
    And frankly, this targeting began before the so-called 
spike in 501(c)(4)s. By the way, there was a bigger spike in 
501(c)(5)s, which involved the unions. Some of my friends are 
advocating for a Disclose Act, but they always exclude the 
501(c)(5)s, the unions. In other words, disclose your donor 
lists, but not what is done on the other side. If you are going 
to do something in this area--and I agree, it is Congress's 
obligation to do it--we ought to do it the right way. So you 
can pick on Crossroads all you want, but there were plenty of 
liberal groups on the other side.
    The Chairman. To be clear, I know you understand, my view 
on this whole subject is----
    Senator Hatch. I am not picking on you.
    The Chairman [continuing]. Yes, both sides here, not just 
one side.
    Senator Hatch. Well, it is both sides.
    The Chairman. It is both sides, right.
    Senator Hatch. Yes. But some have indicated it is just one, 
because they hate Crossroads because it was exceptionally 
effective in many, many ways. I can understand that.
    Now, let me just say, for those calling for a ban on 
501(c)(4) political activity, I think it is beyond hypocritical 
not to call for a ban on 501(c)(5) labor groups' political 
activity as well. But we know that is never going to happen 
around here unless there is a sea change in the Congress of the 
United States.
    Now, Commissioner Shulman, Mr. Shulman, what was the date 
that you first learned from any source that the IRS Exempt 
Organizations Determinations Unit in Cincinnati was using a 
``be on the lookout,'' or BOLO, listing for terms such as ``The 
Tea Party''?
    Mr. Shulman. To the best of my recollection, it was 
sometime in the spring of 2012.
    Senator Hatch. All right. Right during the election year, 
right?
    Mr. Shulman. It was in the spring of 2012.
    Senator Hatch. All right.
    Mr. Shulman, when you learned about this problem, whom did 
you tell and on what date did you tell them?
    Mr. Shulman. I was told of the problem, as I had mentioned 
before, by Mr. Miller, and at that time I was also told that 
TIGTA was looking into the issue. And so I do not 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.
    Senator Hatch. All right.
    Well, let me go a little bit farther here. To your 
knowledge, what was the first date that anyone at the Treasury 
Department, from whatever source, learned about any Tea Party 
groups that applied for tax-exempt status being subjected to 
extra scrutiny?
    Mr. Shulman. I have no knowledge of people at the Treasury 
Department knowing about Tea Party groups being subject to 
scrutiny. Or let me say it another way: I did not have 
conversations with people at the Treasury Department about that 
matter.
    Senator Hatch. One of the problems that I have with you--
and we have always had a good relationship--but the one thing 
that bothers me there is, I wrote a letter on March 14, 2012. 
It was signed by a number of my colleagues, eight of my 
colleagues--that was on March 14, 2012--inquiring about these 
matters. Then I wrote another one to you on June 18, 2012. You 
never got back to us after having knowledge of some of these 
goings-on that were just wrong.
    That bothers me, because I think you have an obligation--
when you say one thing before the committee and then find out 
it is another--I think you have an obligation to let our 
committee know about it. We have had some criticism of the 
Congress because they have not passed certain laws that would 
make things clearer, but it is also your obligation to come 
back and tell us, well, when I testified before, I did not 
know, but now here is what happened. Is there any reason why 
you did not come to us and tell us?
    Mr. Shulman. You know, I started before--I mean, first of 
all, Senator Hatch, I appreciate your concerns. I hear your 
concerns. I am not here to argue with you.
    Senator Hatch. I know you are not.
    Mr. Shulman. I will just tell you what I did. I learned----
    Senator Hatch. You did not do anything, once you learned, 
to help us to know that you had learned that there were some 
pretty bad things going on.
    Mr. Shulman. I had learned that there was a thing called 
the BOLO list.
    Senator Hatch. Right.
    Mr. Shulman. I learned that the Treasury Inspector General 
for Tax Administration was planning to look into it. My policy/
procedure/practice at that time while I was at the IRS was, if 
I hear something that is a concern and I do not know how big a 
concern, how significant it is, all the details, if I get some 
of the facts but not all of the facts, the proper place for it 
to be is in the Inspector General's hands to track down all the 
facts. And then, once all the facts are known, that will be 
reported to Congress, to the Commissioner, to the Treasury, to 
all the appropriate parties. And I----
    Senator Hatch. But you knew this was going on, and you had 
represented that it was not going on, and then you found out 
that it was going on, and you never came to us and let us know 
what was going on.
    Mr. Shulman. I certainly do not believe, and I do not have 
any memory of representing that the BOLO list was not going on 
at a time that I knew it was going on.
    Senator Hatch. All right.
    Mr. Chairman, I would like to put these four letters, the 
two letters from my colleagues and myself and the responses 
from Mr. Miller, into the record at this point.
    The Chairman. Without objection.
    [The letters appear in the appendix on p. 192.]
    Senator Hatch. Now, Mr. Miller, to your knowledge, what was 
the first date that anyone at the Treasury Department, from 
whatever source, learned about any Tea Party groups that 
applied for tax-exempt status being subjected to extra 
scrutiny? What was the first date when you heard about that?
    Mr. Miller. I do not believe I had any conversations or any 
knowledge in advance of my taking over as Acting Commissioner 
in November of 2012, and I do not believe we had any 
conversations until the discussion about the actual report, 
which was later into 2013.
    Senator Hatch. Well, let me ask you this. To your 
knowledge, what was the first date that anyone at the White 
House, from whatever source, learned about any Tea Party groups 
that applied for tax-exempt status being subjected to extra 
scrutiny or improper scrutiny?
    Mr. Miller. I have no knowledge of any--
    Senator Hatch. You do not have any knowledge of anybody at 
the White House?
    Mr. Miller. Correct.
    Senator Hatch. All right.
    Now, let me just see here. I am just about through, but I 
might want to ask just one or two more questions.
    Just maybe back to you again, Mr. Shulman. I wrote these 
two letters to you in your capacity as IRS Commissioner in 
March and June 2012. Both of those letters were answered by Mr. 
Miller, I presume at your request, who at the time was the 
Deputy Commissioner for Services and Enforcement.
    Now, given the importance of this issue, why didn't you 
answer those letters yourself?
    Mr. Shulman. We have, you know, a process at the IRS that 
letters come in and they get answered by a variety of people.
    Senator Hatch. So you delegate that.
    Mr. Shulman. On 501(c)(4) issues, one is, I think the 
different people who answered these letters were in a better 
position to answer them than I, and two, again, I took great 
strides to run the agency in a nonpolitical, nonpartisan manner 
and to have the Commissioner not be the one commenting, who is 
the only presidential appointee besides the Chief Counsel. Not 
being the one having correspondence with Congress seemed like a 
good idea, because these issues are highly charged and 
political.
    The Chairman. Thank you. All right. Thank you very much.
    Senator Crapo? Oh, I am sorry. He is not here. Senator 
Nelson is next. Sorry.
    Senator Nelson. But a presidential appointee is there for 
the purpose of carrying out the law, and, when it becomes 
patently obvious that the law is being thwarted because the 
IRS's ability not to tax is being used by organizations to 
electioneer, then it seems to this Senator that the obligation 
of the leader of the organization, political appointee or not, 
is to step up and take responsibility that the law is not being 
obeyed.
    Whereas, Senator Hatch has pointed out from his standpoint 
that this was government run amok, it also seems to me that 
this was government that was impotent and that did not act.
    Mr. Inspector General, should we be concerned that groups 
are undermining the intent of the law and gaining tax-exempt 
status, even though electioneering is their purpose?
    Mr. George. We should be concerned if any organization is 
not adhering to the law as it has been passed by Congress and 
enacted by the President, there is no question about that.
    Senator Nelson. Well, the law as it is written is written, 
so any attempt to come back and say that we have to change or 
clarify the law seems to me to be the wrong question. The 
question is the administrative implementation of existing law 
when there are such obvious abuses.
    Mr. George. Senator? Oh, excuse me.
    Senator Nelson. Yes, sir?
    Mr. George. Senator, one of our recommendations issued in 
this report is that the IRS seek clarification from the 
Department of the Treasury, and in turn the Department of the 
Treasury seek clarification from Congress on this very issue.
    Senator Nelson. Why do you need clarification from 
Congress? The law is very clear: it says you cannot involve 
yourself in electioneering if you want this kind of tax-exempt 
status. I do not understand. Isn't that just, again, passing 
the buck? Isn't this a matter of administrative implementation 
of existing law?
    Mr. George. As you and others have indicated here, because 
of the way the law has been interpreted by the IRS over the 
course of a number of decades--I do not, in all candor, know 
whether that was done as a result of court decisions or just 
simply internal policies--further explanation is needed in this 
area, sir.
    Senator Nelson. As a matter of fact, now here is an exact 
example of how things get all contorted from the original 
legislative intent. The law was passed. Along comes a 
regulation. The regulation says exactly what the law says, 
which is, you cannot be engaging in election activities.
    Then along comes a 1981 analysis of the regulation, and it 
says, under the present law, certain exempt organizations, 
501(c)(4)s, may engage in political campaign activities. That, 
on its face, is exactly the opposite of what the law says.
    So again, this was an administrative implementation and 
interpretation, but that was 1981. We really did not have a 
problem on this until what we saw in the last year or two, with 
it becoming so patently obvious in 2011 and 2012 what was 
happening under the name of 501(c)(4)s for some public 
purposes.
    So I would hope that the administration would take some 
responsibility, if that is the IRS Commissioner, if that is the 
Secretary of Treasury, if indeed that is the President, and we 
would see some implementation of the law.
    Thank you.
    The Chairman. Thank you, Senator.
    Senator Roberts, you are next.
    Senator Roberts. Well, thank you very much.
    Mr. Miller, thank you so much for saying, ``I am 
responsible.'' I think that is the first time you have said 
that. If that is incorrect, I apologize to you. Comparing this 
to the military and saying, ``I am responsible,'' I do 
appreciate that. I think that is very candid.
    I think your advice to the next Commissioner, with the 
question posed by Senator Isakson, was that you have a 
perception problem. I would disagree with that very strongly 
and say we have a reality problem. You know, people knock on 
the door, and, if you are the IRS, that is not like when you 
have won the lottery. You are not too happy to open up the 
door.
    And I think there has been a tremendous loss in faith in 
the American government that is not entirely on the IRS's 
shoulders by any means. It is a lot of things happening today. 
Fifty percent of the people are very apathetic, the other 
people are just mad. That is not good. It is not good for the 
country.
    Mr. Shulman, you said you are not personally responsible, 
but then I think you have sort of backed off of that to some 
degree. But could you just sort of come along with Mr. Miller 
and say, ``Yes, I was responsible''?
    Mr. Shulman. Senator, I----
    Senator Roberts. It is easy, three words: ``I was 
responsible.''
    Mr. Shulman. I understand the words. What I am telling you 
is this happened on my watch, and I accept that.
    Senator Roberts. All right. But you are not personally 
responsible?
    Mr. Shulman. I am deeply regretful that this happened, and 
it happened on my watch.
    Senator Roberts. All right. Never mind. Never mind. Let us 
just move on.
    I am interested in all this business of the law, and what 
is the law. The statute came in 1913 with Woodrow Wilson and 
William B. McAdoo--Mr. Chairman, maybe we can get him to come 
before the committee--and in 1959 under Dwight David Eisenhower 
with Robert Anderson, the Secretary. That is the difference 
between ``exclusively'' then and not ``primarily.'' Then we had 
the change that the Senator from Florida was talking about.
    Then in 1998, if I can find my notes here, we had--maybe 
this was one of the great strides that you made, sir, but we 
had the IRS Restructuring Act. That really refers to the 10 
Deadly Sins, Mr. George, as you were talking about. I was going 
to ask you who Moses was on the 10 Deadly Sins to figure out 
who can be the judge in this, and it turns out it is the IRS 
Commissioner, so it was Mr. Shulman.
    I have them right here. I am not going to read them. But 
sin number 1--well, I will read three, maybe four. Sin number 1 
was to violate proper procedures to seize taxpayer assets. That 
perhaps happened. Six, no retaliation or harassing of a 
taxpayer. That is it. That is one.
    Now, these are civil penalties, by the way. Seven, a 
willful violation of taxpayer privacy. That, of course, 
happened. I would put number 11 down here as maintaining a 
BOLO. I do not know what on earth we are doing with BOLOs. That 
is a law enforcement issue, and that really offends me.
    But my question is to former Director Shulman. Did you ever 
activate these? I mean, did you ever hold anybody accountable 
to the 10 Deadly Sins?
    Mr. Shulman. So there is actually a procedure in place at 
the IRS--it was there when I got there--that I think was put in 
immediately after that law, or sometime after that law was 
passed, where most people were actually held accountable before 
they ever got to the Commissioner's level, so, if one of these 
things was violated, I think some----
    Senator Roberts. I am not talking about you. I mean, I am 
not saying that you violated these. I just wondered if you ever 
did take action on a civil action against anybody who violated 
the 10 Deadly Sins, ever.
    Mr. Shulman. I believe so, that on my watch people were 
dismissed, fired, disciplined, around the 10 Deadly Sins.
    Senator Roberts. Mr. George, is that your experience?
    Mr. George. That is our understanding, sir, that some----
    Senator Roberts. All right. And then you said this was 
being bumped up to the executive level. What do we mean by that 
in terms of the 10 Deadly Sins and going over them, and whether 
this is appropriate or not, and for that matter also, the 
statute and the regulations on the 501(c)(4)? You said it was 
being bumped up to an executive level.
    Mr. George. Oh, no. No, no.
    Senator Roberts. What?
    Mr. George. Well, I wanted to clarify that we would engage 
in a continued review of this matter----
    Senator Roberts. Right.
    Mr. George [continuing]. To determine if there were any 
violations of the 10 Deadly Sins, for lack of a----
    Senator Roberts. Well, would you agree that number 1, 6, 
and 7, as I have stated them, would be certainly applicable in 
these cases?
    Mr. George. If I may, sir, please, I am going to quote it 
directly from the report: ``It is a violation of the 
Restructuring and Reform Act of 1998, Section 1203(b)(3)----''
    Senator Roberts. Right.
    Mr. George [continuing]. ``For IRS employees to falsify or 
destroy documents to conceal mistakes made by any employee with 
respect to a matter involving a taxpayer or a taxpayer 
representative, and a violation of RRA 98, section 1203(b)(6) 
for IRS employees to violate the Internal Revenue Code, 
Treasury regulations, or policies of the IRS for purposes of 
retaliating against or harassing a taxpayer.''
    Senator Roberts. What is the status of that with regards to 
this whole episode?
    Mr. George. We are still in the process of reviewing this, 
sir, so I do not have an answer for that.
    Senator Roberts. I see. All right.
    I have just one quick question here. It is sort of a mea 
culpa. In the last 25 years, we have asked the IRS to move 
beyond its core functions, Mr. Chairman, of tax administration 
and enforcement to oversee all matters of other functions. We 
are responsible for that. All of these laudable programs have 
support from the Congress, but I think we are at a tipping 
point with regards to this whole episode, and that may be the 
Affordable Healthcare Act.
    I would like to ask all three gentlemen, how confident are 
you that the IRS has the proper oversight and management 
structures to implement the Affordable Care Act in a manner 
that will give confidence to the taxpayers that they are being 
treated in the fairest manner possible, that their personal 
health information is safeguarded, and that they will not be 
penalized if they happen to hold views that are not in the 
mainstream or otherwise unpopular? Where are we?
    Mr. George. If I may start, sir. The RRA----
    The Chairman. Very, very briefly.
    Mr. George. I am sorry.
    The Chairman. Very briefly.
    Mr. George. Certainly, sir. The ACA requires a number of 
changes in the tax code. We have issued two audits that have 
indicated that, thus far, the IRS is making progress in 
instituting changes in their software and in other procedures 
to effectuate that law.
    Senator Roberts. So are you saying you are confident or 
not?
    Mr. George. As of this stage, we have found no major 
problems in this area.
    The Chairman. Senator Burr?
    Senator Roberts. Mr. Miller? Could he respond?
    The Chairman. Very briefly, because you are already----
    Senator Roberts. It is a ``yes'' or ``no'' question. How 
confident are you? Are you confident, or are you not confident?
    Mr. Miller. I am confident.
    Senator Roberts. Good.
    The Chairman. All right. Next.
    Senator Roberts. Next question.
    Mr. Shulman. When I left in November I was confident that 
the IRS was----
    The Chairman. Thank you.
    Senator Burr?
    Senator Roberts. It is not a train wreck, Mr. Chairman. 
[Laughter.]
    Senator Burr. Mr. George?
    Mr. George. Yes, Senator?
    Senator Burr. In your audit--what is the difference between 
an audit and an investigation? It has been interchangeable 
throughout this hearing.
    Mr. George. Sir, to be precise, under the Inspector General 
Act, we at TIGTA are given the authority to conduct both audits 
and investigations in the oversight of IRS programs and 
operations.
    Audits are reviews of IRS programs to identify systemic 
problems and recommend corrective actions. Investigations are 
focused on a person or persons in response to complaints that 
we have received of misconduct that they engaged in.
    Senator Burr. So this audit could lead to an investigation?
    Mr. George. Yes, it could.
    Senator Burr. All right.
    Now, your audit did not look at leaked documents to 
ProPublica, and it did not look at leaked tax returns filed by 
the National Organization for Marriage, and it did not look at 
whether personnel within the EO forwarded individual donor 
lists to other divisions for audits. Am I correct?
    Mr. George. Senator, the Internal Revenue Code has strict 
confidentiality provisions within it, and I am not in a 
position to either confirm or deny anything as it relates to 
that question.
    Senator Burr. Could we conclude that, if you did not look 
at the items that I just mentioned that would be sort of the 
liberal groups, one cannot conclude then that there was not 
political motivation in this targeting?
    Mr. George. Senator, I am not in a position to respond to 
that question, sir.
    Senator Burr. All right.
    Mr. Miller, you stated that you thought the motivation was 
that the employees wanted to get greater efficiency. Am I 
remembering that correctly?
    Mr. Miller. I think that is right, sir.
    Senator Burr. Did you mean that the use of key words to 
determine which applications would be flagged for scrutiny and 
deep review would speed up the process?
    Mr. Miller. I think what the situation was, and I think it 
is outlined well in the report, was that in 2010 we began to 
see some cases. Someone asked that someone take a look at it 
and see whether there are other cases of a similar type. A 
decision was made at that level to centralize cases. The 
question then became how to centralize, and that is when it 
moved from e-mail traffic to----
    Senator Burr. How would you explain the fact that none of 
the key words applied to any liberal groups or liberal 
applications?
    Mr. Miller. We would have to talk to the folks who did 
that.
    Senator Burr. Would you be suspect that there was something 
political about the fact that only key words that applied to 
conservative organizations would have been flagged?
    Mr. Miller. I would agree that the perception is there. I 
would also say that, once we took a look, our folks did not 
find that necessarily to be the case. TIGTA----
    Senator Burr. When you looked, your folks--you did an 
investigation?
    Mr. Miller. We did less than an investigation. I had sent--
I think I----
    Senator Burr. Did you ask the Inspector General to look 
into this?
    Mr. Miller. I do not know whether I asked him, but I knew 
he was in already looking at this.
    Senator Burr. Mr. Shulman, you stated that you were briefed 
by Mr. Miller. Am I correct?
    Mr. Shulman. Yes.
    Senator Burr. What did you do with the information that Mr. 
Miller shared with you about the audit? Nothing?
    Mr. Shulman. So I was briefed and----
    Senator Burr. Did you ask him any questions?
    Mr. Shulman. At the time of the briefing, to the best of my 
memory, I learned three things: I learned there was a list, I 
learned that TIGTA was planning an investigation, and I learned 
that the activities had stopped.
    Senator Burr. TIGTA was planning an investigation?
    Mr. Shulman. I am sorry, an audit. That TIGTA was aware of 
it, was in, had actually been to Cincinnati, if my memory 
serves me right, and was in the process of opening an audit.
    Senator Burr. You did not ever ask Mr. Miller what the 
purpose of the investigation was?
    Mr. Shulman. Well, I think it was obvious to me when I 
heard it that something did not sound right about having a 
list. And I did not know----
    Senator Burr. But you have testified you had no idea that 
this had anything to do with the practices that were going on 
in the EO in Cincinnati, haven't you?
    Mr. Shulman. I testified, or I said earlier, that when I 
learned about it, I knew there was a list, I knew the word 
``Tea Party'' was on the list, to the best of my recollection.
    Senator Burr. So what did you do?
    Mr. Shulman. I did not know at that time what else was on 
the list.
    Senator Burr. What did you do with the information you had?
    Mr. Shulman. What did I do with it?
    Senator Burr. What did you do with it? You were the head of 
the IRS. What did you do with the information?
    Mr. Shulman. I think this was brought to the head of the 
IRS, again, with three facts: there is a list, TIGTA is aware 
of it, and TIGTA is looking into it.
    Senator Burr. But you took no action. You did not ask Mr. 
Miller to----
    Mr. Shulman. And Mr. Miller, to the best of my memory, told 
me at that time that it had been stopped and TIGTA was looking 
into it, and so there were----
    Senator Burr. And----
    Mr. Shulman. So--so for me, the----
    Senator Burr. You had knowledge of the BOLO list at this 
time?
    Mr. Shulman. What is that?
    Senator Burr. You had knowledge of the existence of the 
BOLO list at this time?
    Mr. Shulman. Well, it was brought to me at this time.
    Senator Burr. It was brought to you at that time. That was 
the first time you knew about it, when Mr. Miller brought it to 
you?
    Mr. Shulman. That is my memory. I have been out for a long 
time, but I am--you know, put it this way: I believe it was, 
and I certainly do not remember ever hearing about it before.
    Senator Burr. Mr. Miller, was that the first time you 
discussed with the then-Commissioner a BOLO list?
    Mr. Miller. I believe so.
    Senator Burr. Did you have any additional follow-up 
conversations about the scope of the audit?
    Mr. Miller. So the scope of the audit would have been the 
Inspector General coming to us and discussing that.
    Senator Burr. What action did you take as the Deputy once 
you learned of a BOLO list and potential practices that existed 
in Cincinnati?
    Mr. Miller. So, I think I outlined that for you, sir, 
earlier in my testimony.
    The Chairman. I would have to ask you to summarize it 
again.
    Mr. Miller. We made sure that our folks were trained. We 
had workshops to ensure that they knew how to do the work they 
needed to do. We took a look at the cases very carefully to see 
which of those should be----
    Senator Burr. All right. I get the gist, because I remember 
you going through it.
    Mr. George, last question. I appreciate the chair's 
patience. I asked you earlier if you briefed the Deputy 
Secretary Neal Wolin on June of 2012, and I think you said, 
``Yes, I did.'' Did you brief or regularly update the Chief 
Counsel, William Wilkins, within the IRS Legal Office?
    Mr. George. I did not, sir.
    Senator Burr. You did not?
    Mr. George. Someone on his staff was briefed, but not the 
Chief Counsel himself.
    Senator Burr. Who was that person on his staff who was 
briefed?
    Mr. George. We do not have a name, sir. But if we can 
supply it----
    Senator Burr. Would you supply that for the record?
    Mr. George. We will.
    Senator Burr. And could I ask you to give us your best 
information about how many times that individual was briefed on 
the audit?
    Mr. George. We will do our level best, yes. We will 
endeavor to do so, Senator.\3\
---------------------------------------------------------------------------
    \3\ The TIGTA audit team did not personally meet with or brief the 
IRS Chief Counsel or anyone in his office. However, during TIGTA's 
audit, the audit team received IRS e-mails involving Don Spellmann, 
Senior Counsel, Office of Division Counsel/Associate Chief Counsel (Tax 
Exempt and Government Entities). For example, an e-mail dated August 3, 
2011 from the Acting Director, Rulings and Agreements, and the IRS 
Exempt Organizations function to Mr. Spellman details plans for a 
meeting on August 4, 2011 to discuss the potential political cases. 
TIGTA also has an e-mail from Mr. Spellman on April 25, 2012 to Exempt 
Organizations function management regarding the Office of Chief 
Counsel's review of the draft guide sheet (guidance) provided to the 
Exempt Organizations function's Determinations Unit.
---------------------------------------------------------------------------
    Senator Burr. And, Mr. Shulman, I think you told me 
earlier, but I will give you one more chance at it, you told me 
you had no conversations with the Chief Counsel about what went 
on in the EO and their practices.
    Mr. Shulman. I remember having conversations with the Chief 
Counsel about general policy matters, not the kinds of matters 
we are talking about: inappropriate criteria, a BOLO list, 
about this broader conversation the committee has been having.
    Senator Burr. And the Inspector General's audit?
    Mr. Shulman. No, just about the broader conversations of 
(c)(4)s, and should there be guidance, because the Chief 
Counsel, the Assistant Secretary, and the Commissioner get 
involved in the guidance plan. I do not have a memory of 
talking to the Chief Counsel about----
    The Chairman. Thank you, Senator. Thank you, very much.
    Mr. Shulman [continuing]. About the audit.
    The Chairman. All right.
    Senator Portman?
    Senator Portman. Thanks, Mr. Chairman. I appreciate the 
second round and a chance to follow up on some of our earlier 
questions.
    Just to go back to where we were when I had to move on, we 
were talking about the fact that we sent a letter--Senator 
Hatch, myself, other members joined us--on March 14th. That 
letter was in response to, again, a lot of information we were 
getting from groups back home saying that they were being 
inappropriately asked questions that were irrelevant to what 
they thought should be relevant questions about their status, 
and that there were delays, and that there were very short time 
frames for producing significant amounts of information.
    So we wrote the letter laying out these issues and, in 
essence, asking you guys whether you were targeting groups 
politically. That was March 14th. Then on March 23rd, based on 
your testimony, Mr. Miller, you say, having received our letter 
and knowing additional information from the media I assume, you 
asked Nancy Marks, who was your Senior Technical Advisor for 
Tax Exempt Organizations, to go down and see what was going on 
and report back to you.
    You testified earlier that, for 6 weeks, you do not recall 
having asked her what she learned, and therefore you responded 
to our letter by saying everything is fine. You responded to 
our letter on April 26th--so March 14th we asked you these 
questions.
    Again, this is not about the members of this committee. I 
was not actually on the committee at the time. This is about 
the American people getting the information that was needed to 
be able to correct the situation. You now tell us today that 
you received a briefing 
1 week after you sent us a letter.
    Now, remember, your letter says everything is fine, no 
targeting. We can believe or not believe the fact that, during 
that 5-week period, you did not bother to find out what they 
were finding out down in Cincinnati. But a week after you sent 
the letter back to us, you did get a briefing. This was a May 
3rd briefing. You have testified that you were outraged when 
you got that briefing on the 3rd of May, so the week after you 
responded to us. Is that correct that you were outraged by what 
you heard?
    Mr. Miller. I was troubled, sir.
    Senator Portman. All right. You used the word ``outraged'' 
in testimony last week.
    If you were so outraged, it seems to me very odd that you 
did not try to correct the record, because you had told us in 
the letter back that everything was fine. If you knew on April 
26th, when you responded to us with that letter, what you 
learned on May 3rd, that political criteria like ``Tea Party,'' 
``Patriot,'' ``We the People'' were used, would you have told 
us in the letter that you sent to us on April 22nd?
    Mr. Miller. I do not remember the letter clearly enough, 
sir. I mean, your characterization of----
    Senator Portman. Well, no. This is the letter that you sent 
back to us based on our March 14th letter.
    Mr. Miller. Yes, sir.
    Senator Portman. You do not know about that letter?
    Mr. Miller. I do know about the letter.
    Senator Portman. All right.
    Mr. Miller. I do know about the letter.
    Senator Portman. My question to you is----
    Mr. Miller. I know I did not know----
    Senator Portman. If you----
    Mr. Miller. I did not know about the list on the 26th. I 
will tell you that my recollection of the letter was, it was 
about the donor letters that were going on, which was a 
separate and distinct aspect that----
    Senator Portman. Our letter asked specifically for the 
assurance that the suspicious inquiries were unrelated to 
``politics, that they were consistent with the IRS's treatment 
of tax-exempt organizations across the spectrum.'' It asked 
specifically what criteria and what ``bases'' there were for 
applying greater scrutiny and requesting follow-up information 
for 501(c)(4) applicants. You responded with a 10-page letter.
    Mr. Miller. To this day, sir, I do not believe there were 
political motivations, as I have explained.
    Senator Portman. All right.
    My question is, you responded with a 10-page letter saying 
it was neutral. There were only individualized, legitimate 
criteria used, not based on politics. There is no question that 
your letter was inaccurate. You learned on May 3rd that it was 
false, and yet you did nothing to correct the public record, 
even though you were outraged, based on your own testimony, by 
your May 3rd briefing.
    So, look, I think these are serious questions for us to 
ask, and I think we deserve answers, not for us, again, but for 
the American people and those who were subject to this 
inappropriate targeting.
    Mr. George, let me ask you a question about the audit. 
First, you have said that there is a difference between an 
audit and an investigation.
    Mr. George. Correct.
    Senator Portman. Can you just briefly tell us what the 
difference is in terms of how deep you go? In other words, did 
you use your full investigative powers to uncover wrongdoing? 
Did you use your broader subpoena powers, for instance, on the 
audit?
    Mr. George. We did not thus far in the production of this 
audit that we are discussing today, Senator, but there is no 
question that, as a result of some of the findings that we have 
uncovered, subsequent action will be taken by us.
    Senator Portman. So, on page 7 of your report, you state 
that Mr. Miller and subordinate employees ``stated that the 
inappropriate criteria were not influenced by any individual or 
organization outside of the IRS.'' That is on page 7 of your 
report. That has been used by the administration to say that 
there was no influence.
    Let me be clear: is that a finding of your report or is 
that simply a restatement of what IRS employees told you?
    Mr. George. It is a restatement of the information that we 
received from IRS employees, Senator.
    Senator Portman. All right.
    And that would be consistent with an audit as compared to 
an investigation?
    Mr. George. That is correct, sir.
    Senator Portman. So, given that this was only an audit, I 
take it you did not ask anyone in the administration outside of 
the IRS if they ever weighed in with the IRS on the issue of 
monitoring and approval of 501(c)(4) organizations?
    Mr. George. That is correct, sir.
    Senator Portman. So you have not even asked the question of 
anybody outside?
    Mr. George. Not at this stage, sir.
    Senator Portman. And I take it you did not subpoena or 
review any relevant e-mails, call logs, schedules, notes from 
meetings, to verify that these statements from the IRS 
employees were accurate and complete, because that is beyond 
the scope of an audit. Is that correct?
    Mr. George. Actually, though, Senator, we did review quite 
a few e-mails in the course of this.
    Senator Portman. Do you feel like it was all of the e-mails 
involved with this--call logs, schedules, notes, and so on--to 
verify those statements?
    Mr. George. Of the people whom we interviewed and of people 
at the level whom we thought would be directly involved at that 
stage.
    Senator Portman. Is it beyond the scope of an audit to ask 
people outside of the IRS whether they influenced the IRS on 
monitoring and approval of 501(c)(4)s?
    Mr. George. An audit is on a case-by-case basis, Senator. 
In this instance, again, we did not have indications due to the 
interviews that we conducted that there was any reason to go 
beyond that, but that was at the time that this audit was being 
produced, which was over the course of a year. Again, events 
subsequent to this have now caused us to reassess how and what 
we are going to look at.
    Senator Portman. Well, thank you.
    And thank you, Mr. Chairman. I think the bottom line is, 
there is a need for a fuller investigation, as you and Senator 
Hatch are undertaking. Thank you all.
    The Chairman. Thank you, Senator.
    Thank you very much, all of you, for your testimony here 
today. There are obviously many more questions not yet 
answered, and the committee will continue to look into this 
matter. But thank you very much.
    The hearing is adjourned.
    [Whereupon, at 1:35 p.m., the hearing was concluded.]













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