[Senate Hearing 114-456]
[From the U.S. Government Publishing Office]
S. Hrg. 114-456
THE INTERNAL REVENUE SERVICE'S RESPONSE
TO COMMITTEE RECOMMENDATIONS
CONTAINED IN ITS AUGUST 5, 2015 REPORT
=======================================================================
HEARING
before the
COMMITTEE ON FINANCE
UNITED STATES SENATE
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
OCTOBER 27, 2015
__________
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Printed for the use of the Committee on Finance
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COMMITTEE ON FINANCE
ORRIN G. HATCH, Utah, Chairman
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
DANIEL COATS, Indiana ROBERT P. CASEY, Jr., Pennsylvania
DEAN HELLER, Nevada MARK R. WARNER, Virginia
TIM SCOTT, South Carolina
Chris Campbell, Staff Director
Joshua Sheinkman, Democratic Staff Director
(ii)
C O N T E N T S
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OPENING STATEMENTS
Page
Hatch, Hon. Orrin G., a U.S. Senator from Utah, chairman,
Committee on Finance........................................... 1
Wyden, Hon. Ron, a U.S. Senator from Oregon...................... 3
.................................................................
WITNESS
Koskinen, Hon. John A., Commissioner, Internal Revenue Service,
Washington, DC................................................. 5
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Hatch, Hon. Orrin G.:
Opening statement............................................ 1
Prepared statement........................................... 41
Koskinen, Hon. John A.:
Testimony.................................................... 5
Prepared statement with attachments.......................... 43
Responses to questions from committee members................ 77
Wyden, Hon. Ron:
Opening statement............................................ 3
Prepared statement with attachment........................... 81
Communication
Common Cause..................................................... 89
(iii)
THE INTERNAL REVENUE SERVICE'S
RESPONSE TO COMMITTEE
RECOMMENDATIONS CONTAINED IN ITS
AUGUST 5, 2015 REPORT
----------
TUESDAY, OCTOBER 27, 2015
U.S. Senate,
Committee on Finance,
Washington, DC.
The hearing was convened, pursuant to notice, at 9:04 a.m.,
in room SD-215, Dirksen Senate Office Building, Hon. Orrin G.
Hatch (chairman of the committee) presiding.
Present: Senators Grassley, Roberts, Enzi, Thune, Isakson,
Portman, Coats, Heller, Scott, Wyden, Nelson, Carper, Cardin,
Brown, Bennet, and Casey.
Also present: Republican Staff: Kimberly Brandt, Chief
Healthcare Investigative Counsel; Chris Armstrong, Deputy Chief
Oversight Counsel; Mark Prater, Deputy Staff Director and Chief
Tax Counsel; and Justin Coon, Detailee. Democratic Staff:
Joshua Sheinkman, Staff Director; Michael Evans, General
Counsel; Daniel Goshorn, Investigative Counsel; and Doug
Calidas, Legislative Fellow.
OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM
UTAH, CHAIRMAN, COMMITTEE ON FINANCE
The Chairman. The committee will come to order, and I want
to welcome everyone to this morning's hearing and thank those
who are here today.
In May 2013, the Treasury Inspector General for Tax
Administration revealed that, in the run-up to the 2010 and
2012 elections, the Internal Revenue Service had targeted
certain organizations applying for tax-exempt status for extra
and undue scrutiny based on the groups' names and political
views.
Needless to say, we took this matter very seriously.
Indeed, at the time, both Republicans and Democrats condemned
the agency's actions. And as the Senate committee with
exclusive legislative and oversight jurisdiction over the IRS,
the Finance Committee launched a bipartisan investigation into
the matter. In fact, our investigation was the most thorough
and the only bipartisan investigation conducted with regard to
these events.
On August 5th of this year, after more than 2 years of
investigation, we released a 375-page bipartisan investigative
committee report that included approximately 4,700 pages of
exhibits. This report is, I believe, the definitive record of
what occurred at the IRS and why.
As we all know, last week, the Department of Justice stated
publicly that they would not be pressing criminal charges with
regard to these events at the IRS. This has led some to argue
that the Justice Department is corrupt or biased in some way.
Others have said that this decision proves that nothing
scandalous occurred at the IRS.
I believe the committee's report speaks for itself on this
matter. And, in my opinion, rather than fueling the echo
chamber, we would do better to focus on what we know actually
happened and what changes need to take place to make sure it
does not happen again.
That is why we are here today.
The committee's report included ten major findings that
formed the basis of various recommendations for changes that we
believe the agency should make to ensure the IRS's actions
remain aboveboard. The purpose of today's hearing is to hear
directly from the IRS about their response to our report and
their progress in adopting our recommendations. Toward that
end, I want to thank Commissioner Koskinen for being here today
and for the agency's thoughtful response to our
recommendations.
In that response, the IRS indicated that they have
implemented all of the bipartisan recommendations from the
report that are within the agency's control, as well as the
separate majority and minority recommendations.
Our overall goal here should be to restore the credibility
of the IRS and ensure that this very powerful agency treats all
American taxpayers fairly.
While I want to commend the IRS for the efforts they have
made thus far, it my understanding that, up to now, most of the
changes they have made have been procedural in nature, and very
little has been done to begin work on the needed structural
changes at the agency. Today, I hope to hear more details as to
why these types of changes are being delayed.
At the same time, I believe the Finance Committee should be
considering statutory changes that will improve upon the status
quo. For example, there was bipartisan agreement in the report
on the need to update the Hatch Act to ensure that, with regard
to political activities, IRS employees receive the same
considerations as employees of other highly sensitive agencies,
like the Federal Election Commission and the Federal Bureau of
Investigation.
In addition, as the Majority Views in the report noted, and
as I have stated publicly on multiple occasions, I have serious
concerns about the influence of labor union activity at the
IRS. While I am not anti-union and while I do not oppose
collective bargaining in general, we know that two-thirds of
IRS workers are represented by a union organization that is
very politically active and that a fair number of IRS employees
work full-time for the benefit of that union. I do not think it
is much of a stretch to argue that such a strong union presence
could have contributed to a politicized environment at the IRS.
While current law allows Federal Government employees to be
represented by unions, Congress has a made a number of
exceptions to this policy, generally with agencies that have
important law enforcement obligations or perform other highly
sensitive work. And, while I expect there to be some resistance
to this idea, I think it is only reasonable that we take the
time to consider whether the IRS should be placed in a similar
category.
I hope that today we can have a good discussion and get
Commissioner Koskinen's views on these and other legislative
proposals. Ultimately, the theme that I want to stress most
today is accountability.
Our report clearly shows that political targeting at the
IRS resulted from a number of bad decisions made by a number of
different officials. However, as of yet, very few of these
individuals have been held accountable, while others have since
received bonuses and even promotions. While I am concerned
about this apparent lack of individual accountability, I am
more concerned that the IRS lacks the necessary structural and
procedural mechanisms to ensure that, as an agency, it remains
accountable.
The recommendations we included in our report were designed
to provide this type of accountability, and I look forward to
discussing our ideas in more detail today.
Before I conclude, I just want to briefly comment on the
ongoing effort at the IRS to enact new regulations regarding
the political activities of 501(c)(4) organizations. Obviously,
this is an issue that deeply concerns a number of people
throughout the country, including members of this committee.
As we know, regulations proposed in 2013 were criticized by
people and organizations across the political spectrum and were
subsequently withdrawn. That poorly drafted proposal would have
created nonsensical rules and constitutionally dubious speech
restrictions. Oddly enough, it would have created stricter
standards for 501(c)(4) organizations than exist for public
charities, which would be a perverse reversal of roles for
these types of organizations.
While this issue is not directly related to the committee's
report on the IRS's political targeting, I think it is fair to
say that the agency still carries with it a cloud of perceived
political bias. Therefore, I would caution Commissioner
Koskinen and others in the administration that have made this
regulation a priority to focus instead on actions to restore
the IRS's credibility and to abandon any effort to inject more
rules and restrictions into the political process.
I expect that members of the committee will want to discuss
this matter today as well because, once again, it is an issue
that is on the minds of many people.
With that, I will turn to our distinguished ranking member,
Senator Wyden, for his opening remarks.
[The prepared statement of Chairman Hatch appears in the
appendix.]
OPENING STATEMENT OF HON. RON WYDEN,
A U.S. SENATOR FROM OREGON
Senator Wyden. Thank you very much, Mr. Chairman.
In early August, the Finance Committee released the final
report on the bipartisan inquiry we undertook to examine the
IRS's processing of applications for tax-exempt status. Our
investigation looked back at the period between 2010 and 2013.
The committee reviewed 1.5 million pages of e-mails and
documents and conducted interviews with more than 30 IRS
officials.
The Finance Committee inquiry, colleagues, was the only
bipartisan inquiry on either side of Capitol Hill. What we
found on a bipartisan basis was alarming bureaucratic
dysfunction. Many applicants for tax-exempt status were treated
badly and deserved much better service from their government.
For example, between 2010 and late 2011, a total of 290
applications for tax-exempt status had been set aside for
review. Only two applications had been resolved successfully.
Not 200--two. That was unacceptable mismanagement. The
investigation, however, did not find any evidence of criminal
wrongdoing.
Chairman Hatch and I both took time to speak about our
views on the Senate floor when the report was issued. The focus
of today's hearing, however, is what the IRS is doing to
guarantee, once and for all, that this type of deeply troubling
mismanagement never happens again.
The Finance Committee's report included 36
recommendations--18 were bipartisan, 12 were Democratic, and 6
were Republican. Among them:
LSet minimum training standards for managers in the
exempt organization office to ensure that these employees can
adequately perform their duties.
LInstitute a standard policy that employees must reach a
decision on all tax-exempt applications within 270 days of when
they are filed.
LCreate a position with the Taxpayer Advocate's office
dedicated solely to helping organizations applying for tax-
exempt status, and several others.
I would like to thank the Commissioner for responding to
those recommendations in a letter that he sent last month to
the chairman and me. My takeaway from the letter is that it is
the Commissioner's view that there has been genuine progress
made to clean up the mess, and I look forward to hearing his
assessment in further detail this morning.
While the Commissioner is here, I also want to address the
problem that occurred in Martinsburg, WV. Several IRS employees
in Martinsburg deleted backup tapes that likely contained e-
mails that were within the scope of the committee's inquiry
while it was ongoing.
That mistake was completely unacceptable, and it was
inexcusable. There are also several reports that there was some
lying afterward. Commissioner, that just cannot happen again. I
want to hear what the IRS is doing this morning to fix it.
Finally, on Friday the committee received a detailed letter
from the Department of Justice concerning their investigation
into this matter, and I ask unanimous consent that that be
entered into the record.
The Chairman. Without objection.
[The letter appears in the appendix on p. 82.]
Senator Wyden. One last point. The chairman mentioned this
question of the 501(c)(4) groups, and I want to be clear on
this point.
The vast majority of Americans want disclosure in political
spending. They want all sides to be more open and more
straightforward on these issues. The American people
overwhelmingly disapprove of the Citizens United decision that
knocked down some of the key limits on political campaign
spending. If there is no oversight of who receives 501(c)(4)
status, meaning anybody could get it and hide their donor list,
then political spending will be hidden even deeper in the
shadows.
So my request to you on this point, Mr. Commissioner, is
that you all work with this committee, Democrats and
Republicans, in a bipartisan fashion, to get this right.
Thank you very much, Mr. Chairman.
The Chairman. Well, thank you, Senator Wyden.
[The prepared statement of Senator Wyden appears in the
appendix.]
The Chairman. Today's witness is the Honorable John
Koskinen, the 48th Commissioner of the Internal Revenue
Service. Commissioner Koskinen was confirmed to this position
in December 2013. Prior to his appointment to lead the IRS, he
served for 4 years at Freddie Mac, where he served for a period
as the Acting Chief Executive Officer. Before that time,
Commissioner Koskinen held various high-profile positions in
public service, including President of the U.S. Soccer
Foundation, Deputy Mayor of the District of Columbia, Deputy
Director for Management at the Office of Management and Budget,
and President Clinton's Chair of the President's Council on
Year 2000 Conversion.
The Commissioner also spent more than 2 decades in the
private sector, including time as CEO and chairman of The
Palmieri Company. Commissioner Koskinen has a law degree from
Yale University School of Law and a bachelor's degree from Duke
University.
We welcome you back to the Senate Finance Committee,
Commissioner Koskinen, and we want to thank you once again for
being here today. So you can proceed with your opening remarks,
and I would ask you, if you can, to limit your opening
statement to 5 minutes.
STATEMENT OF HON. JOHN A. KOSKINEN, COMMISSIONER, INTERNAL
REVENUE SERVICE, WASHINGTON, DC
Commissioner Koskinen. Chairman Hatch, Ranking Member
Wyden, and members of the committee, thank you for the
opportunity to discuss the work the IRS has been doing to
correct the mistakes associated with the determination process
for tax-exempt status 2 years ago.
Let me reiterate my belief that the IRS must continue to do
everything possible to make sure all individuals and
organizations can be confident that they will be treated fairly
in their dealings with this agency. They need to know they will
receive fair, unbiased treatment, regardless of their political
affiliation, their position on political issues, or whom they
supported in the last election. And when someone hears from us
regarding their tax return, they need to understand it is only
because of something that is or should be on their return and
not other factors. And if someone else has the same issue
regarding their return, they will hear from us as well, within
the limits of our budget resources.
It is important because, even with our declining resources,
the IRS will still audit over 1 million taxpayers this year,
and they need to be confident they are going to be treated
fairly and in an objective manner.
The situation described by the Inspector General in his May
2013 report should never have happened, and we are doing
everything possible to ensure that the mistakes referenced in
the IG's report and reflected in the committee's bipartisan
report do not happen again. As part of our work to move
forward, we have implemented all of the recommendations from
the IG's report. The IG noted our efforts in a follow-up report
issued in March of this year.
As to the Finance Committee's own investigation, I am
pleased to report, as noted, that the IRS has accepted all of
the recommendations in the committee's report that are within
our control, and that includes recommendations in the majority
report and the minority report. And we have already made
significant progress in implementing those recommendations. Let
me briefly summarize the actions we have taken thus far.
We have taken steps to ensure the determination process for
tax-exempt status is transparent and the public can easily
obtain information on the procedures necessary to obtain a
determination.
We have reduced the processing times for applications for
tax-
exempt status, and we are committed to resolving all cases
within 270 days, as the committee has recommended. And in fact,
the cycle time right now as a result of the work we have
undertaken over the last 2 years is down to 112 days.
We continue to develop new training and workshops for
employees on a number of critical issues connected with the
application process for tax-exempt status.
We have established procedures to ensure applications
undergo a neutral review process. These include training
employees on the proper way to request additional information
when it is needed to complete action on an application.
In addition, Treasury and the IRS, as noted, are drafting
guidance on social welfare and non-social welfare activities of
501(c)(4) organizations as recommended by the Inspector
General. Our goal is to provide guidance that is clear, fair to
everyone, and easy to administer.
To ensure accountability in the determination process, the
IRS has done a number of things, including requiring managers
to conduct periodic workload reviews with their employees.
Information on the average amount of time it takes to complete
cases is regularly shared up the chain of command with me and
other IRS leaders.
Our efforts to improve accountability also included
centralizing exempt organization workforces so leaders now work
in the same location as employees who process applications for
tax-exempt status.
We have also taken actions to ensure risks are managed more
effectively in the exempt organization area and throughout the
IRS. We now have an agency-wide enterprise risk management
program, providing for the regular identification and analysis
of risks to be eliminated or managed across the agency.
To ensure we properly respond to requests under the Freedom
of Information Act, we are developing standard procedures for
employees to use when they search for information, and we will
provide training to those employees on those procedures.
As recommended by both the committee and the GAO, we are
tightening internal controls for the process we use to select
tax-
exempt organizations for audit once they are certified.
Although the GAO recently found no evidence of unfair or biased
audit selections, we agree with them that tightening the
controls will reduce the risk that any unfair selections would
occur in the future.
Another issue is the need for us to improve our records
retention process. We have initiated a process to secure the e-
mail records of all senior officials of the agency. In
addition, we are taking steps to ensure that employees preserve
official records created when they send messages using our
Office Communicator System.
While we continue working to implement the committee's
recommendations, we also appreciate the committee's bipartisan
efforts on other critical issues. For example, the committee is
considering identity theft legislation containing several
provisions that would improve tax administration. These include
accelerating due dates for information returns, allowing the
IRS to require minimum qualifications for paid tax return
preparers, and reinstating streamlined critical pay authority.
I would also urge the committee to consider two other
important legislative changes: giving the IRS correctable error
authority in limited cases and amending the Tax Equity and
Fiscal Responsibility Act statute to simplify audits of large
partnerships.
This concludes my opening statement, and I would be happy
to take your questions.
[The prepared statement of Commissioner Koskinen appears in
the appendix.]
The Chairman. Well, thank you, Mr. Commissioner. Again, I
appreciate the way your agency has worked with this committee
on our recommendations, but I also want to emphasize that there
remain several open issues stemming from the targeting of
conservative groups, and I want to get your response on two of
those issues.
The first is, I understand that there is at least one group
caught up in the targeting that is still waiting on a
determination. Can you commit that your agency is moving with
all appropriate expediency to resolve any remaining open
applications?
Commissioner Koskinen. Yes, we will do that. I cannot,
obviously, talk about any application, but we are down to just
a handful. Several of those are in litigation. In some cases,
we are still waiting for responses. But as I noted, we have
reduced the backlog, and a new application today will get
processed on average in that 112 days.
The Chairman. Okay. Secondly, in my opening statement, I
mentioned the IRS and Treasury Department's 2013 proposal to
restrict the free speech of certain groups of Americans by
rewriting 56-year-old rules governing the activity of 501(c)(4)
social welfare organizations. Now, the IRS subsequently
withdrew them after widespread bipartisan opposition. I know we
disagree on the need for changes to the rules governing (c)(4)
organizations, and I know that you have committed that no new
rules will take effect before 2017. But this leaves open the
possibility that the IRS will make proposals this year or next
year, creating confusion and uncertainty regarding the free
speech of certain groups and their ability to engage in civic
activities like nonpartisan voter registration or candidate
forums.
Can you tell the committee whether any new proposals will
be released before 2017 and, if so, when you expect that to
happen?
Commissioner Koskinen. We are, as I noted, following up on
a recommendation of the Inspector General, who said that the
``facts and circumstances'' standard, which has been used for
the last number of years, is confusing and was part of the
problem employees had in interpreting the applications of
determination from (c)(4) organizations across the spectrum. As
you noted just before my confirmation hearing, draft
regulations went out that generated 160,000 comments, all of
them suggesting changes, many of them agreeing that, for
instance, restricting the use of bipartisan/nonpartisan get-
out-the-vote campaigns, candidate forums, things that had been
done for years, should not be done, and we are taking those
into consideration.
But it is clear to us that, in fact, what we are trying to
do is not change the rules of the game. What we are trying to
do is make them clearer for IRS employees and to have a clearer
set of guidelines for those organizing these organizations and,
most importantly, for those operating them. We think that, when
you are running one of these organizations, you ought to be
able to be confident that you know what the rules are, that
nobody is going to come in afterwards and second-guess you on
the basis of what their interpretation of the facts and
circumstances are.
So I do think that the IG was right, that it would be
important to clarify--not change but clarify--the rules under
which organizations operate, and that is our goal and intent.
The Chairman. Can you tell the committee whether any new
proposals will be released before 2017 and, if so, when you
expect that to be?
Commissioner Koskinen. We do not have a timeline. We are
continuing to finish our review of all those comments and
continue to review the total statutory framework the Congress
has set up. We have made it clear that we have no intention of
influencing the next election. On the other hand, when we
reissue the proposals in the new format that we think will be
much more acceptable to people, they will be then open to
public comment for 90 days. We have committed we will have a
public hearing about it. We have committed we will keep the
committees updated on the progress.
At this point, we do not have a timeline. We would hope
that we would be able to provide these proposed new rules early
enough next year so that the work on them could be completed
well in advance of the election, so there would not be any
confusion. But I would stress that the work that we are doing
now is focused on clarifying--not changing, but clarifying--the
rules under which organizations operate. So I think once we get
those out, people will, in fact, on all sides understand much
better what it is that we are talking about within the existing
standards of operation. I think that clarity will benefit
everyone.
The Chairman. Well, with the IRS unable to meet its basic
duties of answering taxpayer phone calls and better protecting
against tax fraud, I strongly encourage you to stop spending
agency time on such controversial and counterproductive
proposals.
Commissioner Koskinen, today you have mentioned several
ways the IRS has adjusted its operations to serve taxpayers
better and even more fairly. One area in which the IRS needs to
continue to strive to do better is in protecting taxpayers'
identifying information and the vast amount of financial and
other information that the IRS maintains about taxpayers. The
IRS also needs to do better in preventing Stolen Identity
Refund Fraud.
You mentioned the regulation of paid tax return preparers,
but I know there is concern that providing such authority could
lead to more bureaucracy and potential harm to taxpayers.
Just one last question. Will you commit today that if the
IRS were to be provided authority to regulate paid tax return
preparers, the IRS will utilize the Circular 230 framework that
is already in place and not create another new regulatory
regime? And will you also commit to fully cooperating with this
committee in its oversight role over the regulation of paid tax
return preparers?
Commissioner Koskinen. I am happy to commit to both of
those positions. We fully intend to use the 230 regulatory
framework, and, in fact, if we were given the authority to
require minimum qualifications for preparers, we would run it
the same way we ran the program when we set it up in 2010,
which was under section 230, the regulation 230. So we have no
intention of expanding that, changing it. That program started
off and looked like it was doing well until the courts ruled
that we did not have the statutory authority. So the
legislation you are talking about would simply make clear we
have the authority to run the program as it was originally set
up. So there will be no surprises. People will know exactly
what it looks like, because that is what we did for almost a
year.
The Chairman. Well, thank you.
Senator Wyden?
Senator Wyden. Thank you very much, Mr. Chairman, and I
appreciate your pointing out this question of the tax
preparers, because this is another area that you and I have
worked on in a bipartisan fashion with all of our colleagues.
On the question, however, of the 501(c)(4) rules, because
this is an area where there has been, let us say, spirited
debate, I think it is very much in the public interest that the
agency clarify the rules for Americans to follow in elections.
And I would urge you, as I did in my opening statement, to work
with us on a bipartisan basis--you have heard me say that a
couple of times this morning; that is what is so important--if
you are going to come up with an approach that is substantively
right and sustainable. So I urge you to do that and to work
closely with us.
Chairman Grassley and I, Commissioner Koskinen, have been
following these news reports about the question of the IRS cell
phone tracking, and the press reported yesterday that the IRS
obtained and received training for a Hailstorm cell-site
simulator, a device which works by mimicking a cell phone tower
in order to collect metadata from phones that connect to it.
This comes on the heels of other news reports that many
companies have taken to tracking their employees' movements
through cell phone trackers in order to avoid triggering a
taxable presence in foreign countries.
Now, obviously the IRS has an important role to play in
combating money laundering and drug trafficking and
international tax dodging. My view, however, is that
enforcement and protection of personal privacy must not be
mutually exclusive. We have to have both.
So, Commissioner, what can you tell us this morning in an
open session about the IRS's use of cell-site simulators?
Commissioner Koskinen. The use of that is restricted. It is
our Criminal Investigation Division that uses that technique.
It is only used in criminal investigations. It can only be used
with a court order. It can only be used based on probable cause
of criminal activity. What it does is primarily allow you to
see point to point where communications are taking place. It
does not allow you to overhear--the technique does not--voice
communications. You may pick up texting, but I would stress it
follows the Justice Department rules. It requires a court
order, and it requires probable cause with regard to criminal
investigations. It is not used in civil matters at all. It is
not used by other employees of the IRS.
Senator Wyden. How frequently have these investigations
gone forward? In other words, how frequently are IRS criminal
investigators obtaining location data about the people they
investigate?
Commissioner Koskinen. I will have to get you that
information. I do not know how frequent it is. I just know that
it is used, as you note, primarily in cases of money
laundering, terrorism, and organized crime.
Senator Wyden. Can I have that answer within 30 days?
Commissioner Koskinen. You certainly can.
Senator Wyden. Very good.
[The information appears in the appendix on p. 77.]
Senator Wyden. On the recommendations that we are talking
about this morning, I have tried to make clear that I believe
the way the IRS handled the 501(c)(4) applications was an
unmitigated disaster, using, in effect, ham-fisted methods for
screening applications that basically let them just pile up for
what seemed like eternity, and virtually none were processed.
And certainly the agency made unacceptable mistakes in its
response to congressional inquiries, particularly taking months
to inform the committee when it discovered that Lois Lerner's
hard drive had failed.
So I think I would like to start this morning--because I
appreciated the letter that you sent to Chairman Hatch and me.
In your view, what is the most important change that you have
made in terms of responding to our bipartisan recommendations?
What is the most important change and why?
Commissioner Koskinen. I think the most important change--
and it is a combination of many of the recommendations--is to
encourage and, in fact, require the free flow of information
from the bottom of the organization to the top. What we are
trying to ensure is, if there is a problem anywhere in the
organization about anything, that employees feel empowered, in
fact, feel responsible to note that problem, report it to their
managers, and, if they feel that is not appropriate or they are
concerned about that, to report it up through the organization.
Our enterprise risk organization has its own independent line
of communication any employee can use. I have now talked to
almost 17,000 IRS employees, telling them I want them all to
view themselves as individual risk managers. I have an e-mail
box that I have gotten about 1,000 suggestions from employees
in. I have tried to get them to understand they should feel
comfortable sending me problems, concerns, or suggestions.
I think if you look back at the problem, one of the
problems that led to that inordinate and unacceptable delay was
that the problem never moved all the way up the chain of
command. It was, in fact, stuck in the middle. And also, the
chairman mentioned structural change; it was because there were
people in Cincinnati and people in Washington who did not have
very good communication.
So if the communication works better, if there are regular
reports of where the problems are, if there are issues where we
know that applications are stuck, that information should be
shared, not hidden.
Senator Wyden. One last question for you, Commissioner, and
it deals with the records and recordkeeping. Obviously, backup
tapes were erased that should not have been, and though there
is no evidence that the tapes were deliberately destroyed to
hide evidence, now there have been some reports that employees
did not own up to their mistakes when investigators came
knocking.
What is the IRS doing to ensure that its employees in the
future keep e-mails and records safe?
Commissioner Koskinen. Again, it is several things.
First of all, we discovered that it was, you know, a
mistake that should not have happened, and it obviously did not
help our response to the investigation. What we need to do is,
when we have a document protection and retention request--what
we learned is, you cannot rely on sending it out from the top
in a large organization, 85,000 employees, and assume that it
will automatically be transmitted accurately through to the
bottom. So we have made it clear that, going forward, those
retention requests will go individually through the chain of
command.
Secondly, we are training our employees as to what it means
to retain all media within a particular area. But the broader
issue that we are dealing with is, we should not be depending
upon individual hard drives and disaster recovery tapes as a
backup system. Three years ago, the agency, because of budget
constraints, made a decision not to upgrade our e-mail system.
We are now actually doing that. We should have a standard--not,
you know, some fancy thing--a standard e-mail system that
retains the records automatically, that is easily searchable.
We should not have to spend $20 million in a year responding to
legitimate congressional inquiries for information. So we need,
in the short run, to make sure, whenever there is a document
retention request, it goes throughout the organization and we
are satisfied it goes down to the front-line managers and they
understand what it means.
We also will provide training for the first time in terms
of, for all the IT people, exactly the media that should be
retained. In this particular case, again, it should not have
happened, but the people on the front lines, the two employees
involved--as the IG in his report noted, (A) nobody purposely
did this, but, (B) this was viewed as junk. It was found in a
closet. What we need to make sure is that everybody
understands, when we retain media, it is all media, wherever
you find it, however old it is or however unusable it is.
And so we think going forward that will work, but the
better solution in the long run is not to rely on backup
disaster recovery tapes and not to rely on individual hard
drives, but to, in fact, have a readily searchable backup
system of all e-mail records of the agency.
Senator Wyden. Thank you, Mr. Chairman.
The Chairman. Senator Grassley will defer until after
Senator Brown completes his questioning. Go ahead, Senator
Brown.
Senator Brown. Thank you, Mr. Chairman.
Commissioner, thank you for joining us today. I would like
to shift the focus to something this committee had an
opportunity to address last month but chose not to because of
partisan infighting and the influence of interest groups in
this town. It is the IRS's ability to regulate paid tax
preparers. Congress has repeatedly been instructed that, in
order to protect our constituents from identity theft, we must
ensure that paid tax preparers perform due diligence,
especially important and crucial for credits that assist low-
income families, such as the Earned Income Tax Credit and Child
Tax Credit principally.
As you mentioned in previous testimony, 57 percent of EITC
returns come from paid preparers, three-fifths of whom receive
no oversight from IRS. These preparers are not required to
register with your agency. There are no qualification
requirements that they must meet before assisting this group of
taxpayers. It leaves an enormous hole within our tax
enforcement infrastructure. IRS has estimated that 68 percent
of EITC claimants turn to these paid preparers to help file
their returns, likely because of the very complex eligibility
requirements already placed within the tax code.
Paid preparers who do not enroll with IRS have an up to 40
percent higher chance of submitting an improper EITC return--
not fraud, but an improper return.
Despite what some of my colleagues here might say about the
IRS's inaction on this issue, the agency tried in 2010 to bring
these preparers in line with minimum qualification standards.
As you know, the DC Circuit Court overturned the effort and
instructed Congress that it is actually our responsibility to
provide your agency with the authority to do this.
Last month, when attempting to correct this problem, some
of my colleagues balked at the idea of granting your agency
this crucial authority, and here is my question--or a couple of
questions.
Walk us through, if you would, why it is so important for
Congress to take action and to help improve tax enforcement for
this group of taxpayers. And I know, since 2010, you have taken
steps to increase compliance and reduce error rates. So if you
would, as you walk us through the whole idea of why it is
important for Congress to take action, integrate into your
comments what you have done since 2010 and the steps you have
taken.
Commissioner Koskinen. Well, as I advised the chairman,
what we are talking about, as you note, is just requiring
minimum qualifications of preparers. We are not talking about
any massive regulatory regime. It is simply that people ought
to demonstrate a minimum capacity to understand the tax code.
It is particularly important in low-income and immigrant areas
where a lot of times people are hanging out shingles saying,
``Come with me, I will get you a bigger refund.''
I would stress the vast majority of tax preparers are
honest and try to do a good job. And, in fact, we do tax
forums; we handled over 10,000 return preparers who came and
spent several days with us updating themselves.
So what we are proposing is simply, again, what we started
to do and ran for almost a year, which is requiring just
minimum continuing education, minimum qualifications for tax
preparers, particularly in areas like the EITC where, as you
note, the majority of EITC returns come from preparers, and a
significant number of those are erroneous simply because the
preparers do not have a real understanding, have had no
education, about how the program and how various credits work.
So we think it would be a significant step forward and
provide greater protection to taxpayers, especially in low-
income areas, to have some level of confidence that when they
pay a preparer to prepare that return, the preparer has some
knowledge of the tax code rather than is just somebody who hung
out a shingle, somebody's brother-in-law, somebody at a
community center, who says, ``I will fill out your returns for
you.'' Some of them are unethical. Some are crooks who say,
``Come with me, I will get you a big refund.'' Sometimes some
of them are actually collecting the refunds themselves.
Now, we are not going to get crooks out of the world, but
basically if people take the time to become educated to some
extent about what the tax law is about, it is a better
indication that they are serious about doing it well.
The EITC rate of improper payments and the volume of
improper payments is the single most intractable problem we
deal with. We have a significant problem with identity theft,
but we have just created a new partnership with the private
sector and State tax commissioners, and we are making progress
on identity theft. But we need more tools. I appreciate the
committee's support for getting W-2s earlier so that we could,
in fact, match the W-2s with the returns that we are getting.
We need access to the new hires database, which this committee
would provide us with.
It is a complicated problem. Ultimately, it goes to, as you
point out, the complexity of the eligibility requirements in
the statute, and, while the statutory framework is not my
domain, if it were simpler, that also would help.
Senator Brown. Thank you. And, Mr. Chairman, thank you, and
especially again, thanks to Senator Grassley.
One really quick comment. In Senator Portman's and my
State, United Way has played a major role in staffing and
running Volunteer Income Tax Assistance sites, which have made
a difference.
Just one last really brief question, and you can pretty
much answer ``yes'' or ``no.'' If we were to take some of these
actions that you asked for, I assume you could say with some
certainty that improper payments--some would call it fraud; it
is clearly not fraud, but improper payments--the rate of them
would be reduced.
Commissioner Koskinen. Yes. What I did when I started was,
knowing this was a problem, I said I wanted everybody in this
agency who knows about this problem and has been working on it,
to sit down and say why is it we have not made more progress
over the last 10 years. It is not for want of trying. We have
tried a range of things. And I said I wanted it to be a blank
slate. Just tell me what would we need. And what came out was,
what we needed would be to have the ability to require minimum
qualifications; we would need W-2s earlier; we would need
access to databases that would allow us to double-check what
goes on; and the final piece which I asked the committee to
consider is, we need limited correctable error authority. We
can see in returns when somebody has claimed erroneously a
child, but we cannot correct that. Under the statutes, we have
to send a notice, we have to audit those people, and there is a
limit to our ability to do that. We can do math error
corrections, and the correctable error authority would simply
allow us to--in educational tax credits, for instance, if you
went to a university not on the list, if we see that, we either
have to hold the return and deny you the credit and audit it,
or we have to let it go through. And we do not have enough
resources ever to audit our way out of this problem alone.
So that package was what I was told a year and a half ago,
and that is why we have been working with and appreciate the
support from the committee on all of those areas. If we had
those, we think we would make a significant dent in the
improper payment rate, a significant dent in the volume of
improper payments that are made under, not only the EITC, but
the educational tax credit and the additional child tax
credits.
Senator Brown. Commissioner, thank you. And I hope, Mr.
Chairman, we can work together on that as we negotiate tax
issues and extenders and all that is ahead. Thank you so much.
The Chairman. Senator Grassley?
Senator Grassley. Thank you very much for holding this very
important hearing. It is evident from the report that, at the
very least, a dysfunctional culture and poor management led to
the mistreatment of groups with a conservative philosophy
applying for tax-exempt status. It is clear to me from the
report that political biases and poor management went hand in
hand with politically motivated behavior continuing unchecked.
The targeting scandal, coupled with poor customer service
and general mismanagement, has shaken what confidence taxpayers
had in the IRS. To move beyond this, Congress and the IRS are
going to have to work together to make the necessary changes to
ensure similar abuses can never happen again.
So I think the time is right to once again revisit the
issue of taxpayers' rights and IRS structural reforms. The
bipartisan report has a number of good recommendations, and, in
addition, I want to remind my colleagues that Senator Thune and
I introduced the Taxpayer Bill of Rights Enhancement Act to
further beef it up.
I have three short questions. Mr. Commissioner, for
taxpayers to move beyond the targeting scandal, they need to
know that those who allowed it to occur have been held
accountable. My understanding is few, if any, disciplinary
actions were taken against mid-level managers who were directly
involved in the improper targeting. The bipartisan report
details one such manager who was not only never disciplined,
but received a bonus and has been promoted.
So my question: how can taxpayers applying for tax-exempt
status feel confident they will be treated fairly when
individuals who oversaw the targeting remain in place, were
never disciplined, and in some instances even promoted?
Commissioner Koskinen. I would note a couple things,
Senator.
First, as I noted in my testimony, the chain of command,
starting with the Commissioner down five levels, all those are
new. All of those have been changed as a result of this.
Secondly, as the Justice Department noted, they interviewed
100 employees and found no evidence that any employee actually
acted with regard to political bias or discrimination. So there
is not a finding in the recommendations in any of the reports
that an individual exercised political bias in selecting
applications for review.
Nonetheless, as I have stated from the start, it is a
situation that should not happen. People should not wait 2
years. The categorization was erroneous. But in terms of
discipline, as I say, the chain of command all the way down has
changed. There are new people who have gone through, and we
have pursued appropriate disciplinary review as needed. But I
would note--and I think it is important for the public to
note--that the Justice Department, as I say, talked to 100
individuals, some of whom identified themselves as
conservatives and Republicans. None of them indicated that
anyone had done anything based on political bias.
Senator Grassley. Okay. A follow-up then to something that
Senator Wyden discussed with you about the cell-site
simulators. The follow-up would be: in the past 2 months, both
the Justice Department and the Department of Homeland Security
have publicly issued policies that require greater Fourth
Amendment protections and greater transparency when these
devices are used. So my question is whether or not you could
commit to issuing such a policy statement by a date certain.
Commissioner Koskinen. We actually follow--as a regular
matter, our criminal investigators follow the Justice
Department policies, and if they are updated, we follow those.
And I am happy to commit that we will follow that Justice
policy.
Senator Grassley. Okay. My last question: this bipartisan
report that we have referred to was significantly hampered by
poor electronic record retention. My understanding is that the
IRS has been working with the National Archives and Records
Administration to implement a record management approach known
as ``Capstone'' and come into compliance with an executive
directive mandating e-mails be managed in an accessible
electronic format at least by December 31, 2016.
Two questions. Does the IRS expect to be in full compliance
with the executive directive and Capstone procedures by
December 31st next year? If not, why not? And what procedures
does the IRS have in place presently to ensure that what
happened with Lois Lerner's
e-mails does not happen again in the meantime?
Commissioner Koskinen. We will be in compliance. In fact,
we are almost there now. We have the top 350, 400 senior
executives, their e-mails are all now separately catalogued and
preserved. As I noted, our goal is to, in fact, not depend upon
hard drives and individual computers, not depend upon disaster
recovery tapes as a backup system, but to automate our e-mail
system, upgrade it to what everybody else is using, so that we
have not only a backup system separate from the normal e-mail
systems, but also one that is easily searchable and readily
searchable. And we are moving in that direction. As noted, we
have a plan that we have worked with NARA on, and we are in
compliance with that plan and the timeline. And by the end of
next year, we hope not only to beat the Capstone issues but to
be moving even with limited resources toward upgrading our e-
mail systems so that we never have this problem again.
Senator Grassley. Thank you very much.
Senator Wyden [presiding]. Senator Scott is next.
Senator Scott. Thank you, Mr. Ranking Member. Good morning.
Commissioner Koskinen. Good morning.
Senator Scott. Earlier, Senator Wyden asked you a question
about the most consequential change you have made at the IRS in
response to our report. I think your answer was, your employees
can now e-mail you in a new special e-mail box that was just
created. That was the most consequential thing you have done
based on the report?
Commissioner Koskinen. I think what I said was, the most
consequential thing I have done is tried to get every employee
to view themselves as a risk manager. If they see any problem
they have any issue with about any question, they should
immediately report it to their managers. If they have any
concern that it is not going up the chain of command, they
should report it either directly to our risk management office,
or they should report it directly to me. So they have an open
line of communication.
We have done a whole range of things. My testimony is full
of those that we have adopted. I do think that ultimately for
us to avoid these kind of problems, we need to have a situation
where no problem gets hidden----
Senator Scott. Got you.
Commissioner Koskinen [continuing]. No problem gets
ignored, no problem moves up----
Senator Scott. I am going to move on to my questions, but I
do believe, as I listened carefully to your answer, the answer
that you gave, though your testimony is filled with
recommendations and suggestions, based on your limited ability
to move forward without legislative action, the most
consequential change you have made is that there is a new e-
mail system in place where your employees can directly e-mail
you.
Commissioner Koskinen. I think that is an improper
characterization.
Senator Scott. Okay. Good enough for you.
Here is a question for you. Why are we here? I think it is
very important for us to remember why we are here having this
conversation or having this hearing. It is because in the IRS,
an agency in the Federal Government with amazing power of
intimidation, there was, has been, and hopefully no longer is,
a culture of discrimination, a culture of discrimination that
focused and targeted conservative organizations, Tea Party and
other conservative groups, 300-plus, and in addition to that,
also audited individuals who were making conservative
contributions. So we are here today not to have a conversation
about simple structural change. We are actually here today
because there was a culture of discrimination in the agency
that has the power of intimidation in a way that no other
agency in the Federal Government has, and it used that power of
intimidation against conservative organizations, and then there
was a cover-up of that intimidation. That is why we are having
this hearing today.
If you think about the fact that those conservative
organizations cumulatively waited nearly 600 years--600 years--
to receive an IRS determination, we should seriously consider
what actions are necessary for us to make sure that culture
never again exists.
You were brought in as a turnaround man, to turn this
around. And as Senator Grassley asked, who has been fired? What
are the disciplinary measures that you have taken? Do you have
the power to fire the employees who were involved? Because we
know that we have the power to promote some of the employees
because, obviously, some have been promoted, as Senator Roberts
has clearly stated earlier. I am concerned, as a taxpayer, with
the breaches that we have had, that the new culture is a
culture that is still as inconsistent with the right direction
as the old culture. And my concern for the 8,000 South
Carolinians who have had their information exposed because of
the breach is just on top of the concern that I have for this
culture that seems to target individuals based on this notion
that America is a Nation of free speech, and if they do not
like it, there is someone in the IRS who can tamp it down. That
is a problem from my perspective that we should pay close
attention to.
And then, Mr. Koskinen, you mentioned in your opening
statement that there are limited resources. My question is: if
there are limited resources, as the turnaround guy, should you
ask for the ability to take the employees, the 200-plus
employees who are working full-time on union activities, should
you take the 600,000 hours--the 600,000 hours--invested yearly
on only union activities, should you redirect, if you had the
power, the $27 million of taxpayer resources in a different
direction so as to meet the obligation of the IRS as it relates
to actually dealing with taxpayers? And, if you do not have
that authority, and I am sure you do not have all the
authority, should a part of your response be asking for the
authority? Because perhaps we need the legislation that would
empower you to complete the job as the turnaround guru that I
am sure you could be. And, if you need that legislative action,
tell us what it is so that we can work with you in making sure
that the IRS is the premier agency within the Federal
Government that emboldens people to have great confidence in
the outcome and in the process. I would love to partner with
you in that journey.
Commissioner Koskinen. If I could respond----
Senator Wyden. Briefly, Mr. Commissioner. Senator Roberts
is next.
Commissioner Koskinen. Can I respond to----
Senator Wyden. Sure; of course.
Commissioner Koskinen. First, I appreciate the offer of
support. It is important to ensure the public has confidence.
You mentioned, as a fact, the culture of discrimination.
There is no evidence that supports that there was any culture
of discrimination. As noted, the Department of Justice
interviewed 100 different employees of the IRS, some who
identified themselves as conservatives, some as Republicans.
None of them said that political bias had entered into any
decision.
In terms of individual audit selection, anyone who has
claimed to be targeted, the Inspector General has looked at
over 100 of those cases and has found not one where anyone was
``targeted'' because of their political activity. So we need to
deal with the problem, but we need to characterize it
appropriately.
The committee in a bipartisan way listed a set of
recommendations they thought would deal with this problem. We
have committed to implementing all of those recommendations
within our control. We remain committed to making sure that the
situation does not happen again. Groups should not have to wait
for 250 or 500 days to get certifications. And, in fact, it
should be noted, which we sometimes forget, you can set up a
(c)(4) organization and go into operation without the approval
of the IRS, so that anyone who wants to set up tomorrow morning
or wanted to over the last several years to become a (c)(4)
could do that on their own without our approval.
Part of the reason they need or seek our approval is
because the rules are complicated in terms of what the facts
and circumstances are, and they want to be able to have us
review that in terms of facts and circumstances, which is why I
think, if we could clarify and not rely on ``facts and
circumstances,'' it would be much easier for those interested
in becoming (c)(4) organizations to set up and operate with
confidence that the rules are clear and that nobody is going to
second-guess them.
Senator Wyden. Thank you, Commissioner.
Senator Scott. Mr. Chairman, I do need to respond to what
he said, if you do not mind giving me 30 seconds. I would
appreciate it very much.
Senator Wyden. Very briefly.
Senator Scott. In a document cited at the top of page 153,
Lois Lerner compares the approach that led to getting Al Capone
to using audits to intimidate tax-exempt organizations.
Lerner's improper intervention into the audit process is
described in section II(C)(5)(b) of the Republican views.
Examples include how Lerner may have directed audits of
Crossroads GPS, a group affiliated with Ms. Palin.
Thank you, Mr. Ranking Member.
Senator Wyden. Okay. Senator Thune?
Senator Thune. Thank you, Mr. Chairman, and I want to thank
you and Senator Hatch for holding this very important hearing.
It has been, as has already been noted, 2\1/2\ years almost
since the Finance Committee opened its bipartisan investigation
into the IRS's targeting of social welfare groups based on
their conservative political views. I think the question we
have to ask at this point is, ``What have we learned?'' Well,
certainly that the IRS was guilty of gross mismanagement or, in
the words of our ranking member, ``vast bureaucratic
dysfunction.'' But I believe we do the American people a
disservice if we attribute the inexcusable behavior of IRS
employees simply to incompetence. To do so would ignore the
fundamental problem at hand: the fact that the culture at the
IRS allowed employees to believe that they could let their
personal political views guide how they treated taxpayers, and
that there would be no repercussions whatsoever for doing so.
Simply put, we need a cultural change at the IRS. American
taxpayers should expect at the very least a culture of
accountability, a fairness, an impartiality. No taxpayer ever
again should fear that they will be discriminated against based
on their political or ideological beliefs.
And so, while I appreciate the changes the IRS is
attempting to implement on their own, I believe that more needs
to be done. And earlier this year, Senator Grassley and I
introduced the Taxpayer Bill of Rights Enhancement Act of 2015,
which is a series of measures to hold the IRS accountable to
American taxpayers. Unfortunately, the IRS has lost the trust
of the American people, and it does not have the credibility to
make the necessary reforms on its own. And I believe that the
Congress needs to act to ensure that taxpayers' rights are
protected and that there are real consequences when they are
abused. And I hope that this committee can count on the support
and cooperation of you, Mr. Commissioner, and other high-
ranking officials at the IRS and Treasury as Congress considers
new taxpayer protections.
And with that, what I would like to do is get your views on
a few of what I think are the common-sense proposals that
Senator Grassley and I have in our legislation to make the IRS
once again accountable to the American taxpayers. And I am
going to read through these and ask you to hold off on
commenting until I get to the end. And if you cannot address
these, you can answer them for the record. But I want to get
these questions in.
The first one is that last year the IRS proposed its own
Taxpayer Bill of Rights, and the question is: would you support
legislation to codify these rights and to make it the official
duty of the IRS Commissioner to ensure that IRS employees are
familiar with these rights? So that is question number one.
Second is, the Ten Deadly Sins created by the IRS
restructuring commission in 1998 require mandatory termination
of an employee who threatens to audit a taxpayer for personal
gain. Would you support amending the Ten Deadly Sins to include
threatening to audit or failing to perform an official action
for political purposes? So that is question number two.
Number three, in your recent letter to the committee, you
stated that the IRS failure to preserve electronic records such
as e-mails is clearly unacceptable, and you noted that the IRS
is implementing records management improvements. Do you support
legislation that would ban IRS employees from conducting
official business over personal e-mail, a measure that passed
the House by a voice vote earlier this year? And also, do you
support legislation that would codify the deadline by which the
National Archives has required the IRS to put updated document
retention policies in place?
Finally, and the fourth question, keeping in mind that some
conservative groups were stuck in limbo for up to 5 years on
their applications, would you support granting 501(c)(4)s the
ability to file for declaratory judgment on their application
if the IRS has not acted upon it after 270 days? And as you
know, that is something that 501(c)(3)s already possess and
access as a remedy.
All of the measures I just mentioned are included in the
Grassley-Thune Taxpayer Bill of Rights, and, as I stated
earlier, I hope that we can count on your cooperation on these
measures and others that the committee might consider to
restore the credibility and the integrity of your agency.
So I say all that, ask those questions, and you maybe can
keep track of all that, but to the degree that you can, comment
on those, Commissioner, and then if you cannot, we will
certainly welcome that for the record.
Commissioner Koskinen. I would note, when you note the
changes on our own, the changes on our own are the changes in
response to the recommendations of the bipartisan report as
well as recommendations in the majority and minority reports.
So these are not ideas that we have just by ourselves. We have
said we will implement all of the recommendations we have
control over that this committee has recommended in its report
are necessary to make sure that the delays do not happen again.
So it is not just us. We are actually doing everything you
asked us to do.
With regard to the Bill of Rights, as you noted, we pulled
together the Taxpayer Bill of Rights over a year ago. We spent
a lot of time trying to make sure taxpayers and employees are
aware of those. They are already codified in statute. That is
why we pulled them together, so that they would be in one
place. And we do think it is important for those to be--we
provide training on them for the employees. We think it is
important for taxpayers as well as employees to know what those
are. Codifying those and saying those are a Bill of Rights
would be codifying the rights that exist throughout various
statutes. We would be delighted to support that those become an
important part of the statutory framework, because they already
are. What we have done is be able to make it easier for
taxpayers to find them.
With regard to official business on personal computers,
that is a policy we already have. You are not supposed to do
that. In fact, when I first started, I sent testimony home one
day to my home computer so I could edit it, and then the next
morning I got a note saying, ``You are not supposed to do
that.'' Somebody came to my office and said, ``We assume you
are editing testimony.'' I said, ``That is right.'' The next
thing I got was an office computer for home so I would not, in
fact, send anything to my home computer. So that is a policy
that we have and enforce very stringently. It has security
issues associated with it. It is a policy. If you wanted to put
it in legislation, we would be happy to have you do that. I am
not sure we need a lot of new rules for those things.
Otherwise, I would be delighted to get back to you. I think
that clearly it is impermissible for anyone to use their
political beliefs in doing any business at the IRS. I do not
know what most people's political beliefs are at the IRS. And I
would simply note again--I know Senator Scott feels strongly
about this--that the Justice Department talked to 100 IRS
employees, several of whom self-
identified themselves as conservatives and Republicans. No one
identified a single instance in which they were instructed to
or in which they knew of anyone who took an action because of
their political beliefs. Lois Lerner clearly had very public
beliefs. Those beliefs she is welcome to have in her personal
life. They have no place and no role in the operations of the
IRS. And I do not know of any other situation or indication.
And even people who did not like Lois Lerner and did not
approve of her management talent, according to the Department
of Justice, did not feel that those views had influenced the
decision----
Senator Wyden. Colleagues, we are going to have to move on.
Senator Roberts?
Senator Roberts. I want to thank Chairman Hatch and Ranking
Member Wyden, and thank you for this hearing and our
committee's report on the IRS actions.
With regard, as stated by others, to the suppression of
electoral activities of groups whose views do not coincide with
those of the White House, having gone over the report, it is
clear this was a massive effort. And I remain deeply concerned
and, worse, have no confidence that we will have all of the
information we need to make a final determination on the IRS
activities, and more important, safeguards to protect these
groups' First Amendment rights. It is very clear, as has been
said by Senator Wyden, from the report that there was gross
mismanagement of the exemption application process for these
targeted groups. In fact, the committee agrees that, at a
minimum, there was a heightened scrutiny of applications from
certain organizations and that this scrutiny resulted in
significant delays in processing applications, which in some
cases caused the applicants to simply cease operation.
The committee also found by a bipartisan agreement that the
agency functioned in a politicized environment and that this
environment allowed for the improper processing of applications
from the targeted organizations.
The agency looks to have dropped any pretense of impartial
tax enforcement, actively worked against conservative groups,
and coordinated with the White House and other Federal
agencies, including the Department of Justice and the Federal
Election Commission, to suppress electoral activities of groups
whose views do not coincide with those of the White House.
In my reading of the factual information presented in the
report, there was a systematic suppression of free speech
rights of these organizations which I think is, sadly, ongoing.
The end result has been an egregious loss of faith in the
agency, as has been pointed out by Senator Scott, Senator
Thune, and others. This is an abhorrent situation compounded by
the agency's half-hearted efforts to locate and preserve
records relevant to the committee's investigation. In fact, the
IRS saw fit to mislead the committee about the existence of
backup data and sat on the information about computer crashes
and lost backup tapes for weeks.
Now, Mr. Koskinen, you have been on board in this decay of
the reputation and standing of the IRS. You bear a direct
responsibility, which you obviously have said, particularly in
your less-than-cooperative approach in responding to the
oversight requests of this committee.
Now, to be fair, as you have said, I know you have taken a
number of steps to address some of the issues and
recommendations identified in our report. These appear process-
oriented and very technical. At least we have this. You are
talking about delays. We are talking about targeting. But,
without question, there is much more that we can do. There are
some very common-sense structural changes we should consider.
Chairman Hatch, Ranking Member Wyden, Senator Grassley, and
others have given us a full legislative prescription.
Now, we have a number of other sound ideas that have been
offered by committee members, including legislation by Senator
Coats to provide a legal right of action when (c)(4)
applications are delayed; Senators Grassley and Portman's
Taxpayer Bill of Rights; Senator Portman's on gifts to (c)(4)s;
Senator Cornyn's small business protection proposal; and my
legislation with Senator Flake to put a stop to further action
on the (c)(4) regulation rewrite. I would like to see a real
rewrite that could take care of the politics part of this as
opposed to what might be ongoing.
These are all good first steps in reorienting the IRS away
from a political posture. I look forward to working with my
colleagues and you, sir, as indicated by Senator Scott, through
the committee as expeditiously as possible.
You have just stated that the Justice Department
interviewed 100 folks from whom there was some suspicion of
targeting groups on a political basis, and not one--not one--
was involved in any politics. Senator Scott just alluded to
this in South Carolina and in Kansas. I find this incredulous,
because the people I talk with have been targeted, and targeted
for years, and it is without question a situation where
politics was involved.
So, given the remarks of Senator Scott and given the
remarks of others--and you have gone over a disciplined review
effort at the IRS--and given that American citizens were
targeted for extra scrutiny in the exemption application
process, thereby denying them the First Amendment right, as so
eloquently stated by Senator Scott, a tactic that I think is
comparable to what is seen in a totalitarian country, take your
pick--take your pick--has anyone involved in this targeting
been fired, fined, reprimanded, denied a bonus, slapped on the
wrist, or even talked to in a stern manner?
Commissioner Koskinen. As I said in response to Senator
Scott, I respectfully would disagree with the characterization
of what the situation at the IRS is. The IG, the Department of
Justice, and GAO have all looked for instances of political
bias actually targeting anyone, and none of those reviews has
come up with a single case.
Clearly, I do not mean to minimize at all the delays, the
mismanagement that took place from the start. We have
apologized to people for those delays. It should not happen.
But continuing to characterize it as if there is a politicized
atmosphere and that is causing a lack of public confidence--if
we say that enough, there will be a lack of public confidence.
The independent investigations that have looked at that have
not found a single instance of that.
It does not mean we do not need to take the actions. You
have a bipartisan report after 2\1/2\ long years, which is, I
think, terrific. We responded quickly. We think the
recommendations you recommended to us that we have control over
are important and thoughtful, and we are going to implement
them. And our hope is that our response positively to the
committee will, in fact, restore whatever confidence has been
lost. But I would say that, again, just reiterating, I think it
is important for the public to understand that, while people
may feel they were targeted, there has been no objective review
that has found that to be true.
I do think it is corrosive to the tax compliance system if
people feel that way. We are doing everything we can to try to
assure taxpayers that when they hear from us, it is because of
an issue in their tax return or their application----
Senator Roberts. Well, I thank you for that----
Commissioner Koskinen [continuing]. And it has nothing to
do with who they are.
Senator Roberts. Excuse me. My time has run out. But I
thank you for your very optimistic take on this, and I think I
probably would agree that, with the people I have talked to who
are very irate about this, it tends to be anecdotal evidence.
And you have stated that the GAO, the Justice Department, and
Lord knows how many other people, have investigated this with
over 100 folks and found absolutely nothing wrong. That is just
not the case with regards to people whom I know in Kansas who
have been targeted and--not only targeted, but also audited. I
just find that rather incredulous that these two things do not
match up.
Commissioner Koskinen. Well, let me just make one point, if
I could, Mr. Chairman, because I think it is important. As I
noted, even with limited resources, we will do a million audits
this year. We will audit Democrats. We will audit Republicans.
We will audit independents. We will audit conservatives. We
will audit people who go to church, people who do not go to
church.
Senator Roberts. You will probably audit some members here.
Commissioner Koskinen. Right. And all of those people will
be selected by objective criteria. The GAO has reviewed that
with us. All of them need to feel that the only reason they are
hearing from us is because of an issue in their return.
Senator Roberts. But that was not the case with Lois
Lerner. It just was not. It just was not. And now she has been
cleared, and she is just collecting a pension, which gets back
to my question. Has anybody involved in this been fired, fined,
reprimanded, denied a bonus, slapped on the wrist, or even
talked to in a stern manner?
Commissioner Koskinen. The entire----
Senator Roberts. You are just saying everything is fine----
Commissioner Koskinen. I am not saying everything----
Senator Roberts [continuing]. And it is not fine.
Commissioner Koskinen. It is not fine, but it is not the
problem of political targeting. It is a problem of, in fact,
the recommendations you make and the recommendations we are
implementing. We need to have a better operation to ensure it
does not happen again.
Lois Lerner had political views that she had a right to.
She had no right to have them expressed during her working
hours. The Justice Department talked to, as I say, 100
employees----
Senator Roberts. All right. I have heard that.
Commissioner Koskinen [continuing]. And found no case
where----
Senator Roberts. I have heard that.
Commissioner Koskinen [continuing]. They were influenced by
her views, and I think it is important for us to understand
what the facts are. I would not minimize the inconvenience, the
impossible, the unacceptable way that the applications were
delayed. There is no reason for that. We are committed to
lowering that cycle time. We are down to 112 days. We are
comfortable with the 270-day----
Senator Roberts. Mr. Koskinen, my time is up, and that
means your time is up right now. I admire your tenacity, and I
admire your position. There is a great organization that you
ought to take part in here in Washington that is called the
``Flat Earth Society'' with regards to whether there was any
politics in this or not.
Senator Wyden. Mr. Chairman, several colleagues have now
made the point about targeting and political bias, and just
with your indulgence, colleagues, I want to just very briefly
respond.
The Inspector General's audit that spurred our inquiry
found zero evidence of targeting or political bias. So what we
did, because we thought it was important to be bipartisan, we
sent our investigators to ask every IRS employee directly
involved in the review of applications whether there had been
any attempt to do this targeting to exert partisan influence.
Not one employee--not one--said there was any political bias.
You all have heard me characterize this whole effort as one
involving massive bureaucratic dysfunction. But there is no
evidence of political bias.
Thank you, Mr. Chairman.
The Chairman. Well, I think you would have to be nuts to
read this and not conclude there was political bias. My gosh,
Lois Lerner herself--Lois Lerner herself--I do not care what
the left says about it. We all know there was political bias.
Senator Wyden. Mr. Chairman----
The Chairman. We all find fault with Lois Lerner, and we
ought to find fault with her.
Now, was it criminal work? I do not know. They say ``no.''
I accept that.
Senator Heller?
Senator Wyden. Mr. Chairman, just before we go to Senator
Heller, our investigators, our bipartisan investigators--this
is not somebody else; this is our people--talked to every
employee, and they said ``no political bias.''
The Chairman. I do not think our side said that.
Senator Heller?
Senator Heller. Mr. Chairman, thank you, and to the ranking
member also, thank you very much for holding this hearing. I
want to thank the ranking member also for following up on this
cell phone tracking issue of the IRS and hope that you do not
take today's response as an answer. I would anticipate they
would have one rogue member of that IRS group who could take an
issue like this and expand it far beyond the scope of what it
was initially intended for.
But having said that, Mr. Chairman, Commissioner, thank you
very much for being here, and thanks for taking your time. I
know some of these are pretty strong comments, and they are not
going to stop with me. But I do also understand that this is
the purpose of this hearing today. So we will continue that.
With the report on the IRS targeting certain conservative
groups and the recommendations from this committee, there is a
lot of concern that I am hearing from people back in my State,
and I believe we have an obligation to the American people,
also to Nevada taxpayers, to ensure that the IRS lives up to
its mission of providing, I think as you defined it, top-
quality service and also enforcing the laws with integrity and
fairness to all. I know you do not disagree with that and live
by that as much as you can, but right now, the way I see it,
the IRS is not living by those particular standards.
To say that I am disappointed with Friday's political
decision that the Justice Department would not seek criminal
charges against Lois Lerner or anyone else for the IRS
controversy is an understatement. It is unacceptable that a
government agency has yet to take action against mid-level
managers and an administration that refuses to hold accountable
employees who use their political influence to impact daily
operations of the IRS.
Commissioner, you have been there for several years now--
actually 2 years in December. Congratulations.
Commissioner Koskinen. It seems like longer.
Senator Heller. I bet it does. And I know you do believe
that you are ultimately responsible and accountable for these
actions. So I have a couple questions for you.
I will start by saying that the public trust, I think we
would agree, is critical to the IRS's success. In my home
State, I continually hear from Nevadans questioning why they
should have faith in your agency and, frankly, the Federal
Government period. You have made statements in the past about
your agency. This is a new day. This is not the IRS of 2010,
2011, or 2012. And I find it hard to explain why Nevadans
should trust the IRS when the agency, former Commissioners, and
yourself have continually misled both Houses of Congress about
whether it targeted conservative organizations.
Your agency has also stonewalled Congress's investigation
by repeatedly failing to preserve and locate records, made
inaccurate statements about the existence of backup data, and
failed to disclose to Congress the fact that records were
missing.
As I said, I believe you do feel you have a personal
responsibility for these failures. Do you feel that way?
Commissioner Koskinen. I certainly am responsible for
everything that goes on in the organization. I have told
employees that if there is a problem, it is my problem; if
somebody has made a mistake, it is my mistake; and I am
comfortable, being in charge, with that.
I think the issue has been raised about the delay in
disclosure about the hard drive crash of Lois Lerner. At the
time, when I was advised in April of 2014 that there was a
crash, it seemed to me the appropriate thing to do was to
determine what e-mails had been lost and what e-mails we could
find. We found 24,000, and we reported that to the committee.
But people have been concerned about the fact that I knew in
April and we did not provide the full report until June, which
I thought was the right thing to do. But since then, we have
taken the position that if there is an issue like that while we
are investigating it, we will advise the committee and the
public. We did that with the Get Transcript breach. We did not
know the full sweep of it, but we immediately let the chairman
know and the ranking member know that we had a problem, we told
them what we knew about it, and we continue----
Senator Heller. Do you believe the IRS broke any laws in
not backing up her e-mails, Lois Lerner's e-mails?
Commissioner Koskinen. I do not think we broke any laws. We
had an antiquated system. There is no reason to rely on
individual hard drives, no reason to rely on backup recovery
tapes as your backup system. We had an antiquated system, and a
decision was made in 2012, for budgetary purposes, not to
upgrade it. We should have done that even with budget
constraints. We would have avoided a lot of these problems.
Senator Heller. Let me ask a question for the third time. I
know Senator Scott asked this question and Senator Roberts
asked this question. It has not been answered yet. Have there
been any staffers directly involved in the tax-exempt targeting
scandals who have been fired?
Commissioner Koskinen. I cannot talk to you about
individual cases. I can--we will be happy to talk to you in
private. We are just not allowed publicly to talk about it. But
what I can say publicly is, the entire chain of command, five
levels of supervisors from the Commissioner on down, are no
longer there.
Senator Heller. No longer with the agency or no longer in
their current positions?
Commissioner Koskinen. They are no longer with the agency.
They have all been--they have all left, and I can give you the
details of how that happened, but not in public.
Senator Heller. Thank you.
Thank you, Mr. Chairman.
The Chairman. Senator Coats?
Senator Coats. Thank you, Mr. Chairman and Ranking Member.
Mr. Koskinen, obviously you have heard about the continued
frustration that many of us have had. It is no secret there has
been a loss of trust in government. It is not just your agency,
but it is many agencies. It is the function of government and
its leadership. It is reflected in the primaries on both sides.
People are just disgusted and fed up with our dysfunction. You
have talked about massive dysfunction within an agency that
people fear the most, that has the most power over individuals.
It is not going away. And so, whether it is just incompetence
or total dysfunction or the fact that government has just grown
to the point where it simply cannot handle the issues that it
needs to handle and gain the trust of the American people, my
colleagues have stated that--and I certainly think--there is no
other agency that more fed into that narrative than what
happened at the IRS.
There is no trust in the Department of Justice either. The
former Attorney General appeared to be nothing more than a
private counsel to the President of the United States, and the
decisions that came out of there did nothing to restore that
trust.
Having said that, I want to go to a specific issue here. An
Indianapolis investigative reporter brought this to my
attention. We followed up on it, and I want to see if you can
address this issue or are in the process of addressing this
issue so that it does not happen again.
My understanding of this is that, while the IRS takes
identity theft seriously when it involves significant tax
fraud, it does not do so when names and Social Security numbers
are stolen in order for an undocumented worker to get a job. A
live example of this, and there are other examples, happened to
someone in my State, and it was brought to my attention by this
investigative reporter.
An undocumented worker might submit a tax return using his
own Taxpayer Identification Number, but attach a W-2 form to it
with someone else's name and Social Security number. And when
the IRS discovers this, as you should, the legitimate
taxpayer's account gets an identity theft indicator put on it.
But the return that has been filed with false information is
still processed, and the perpetrator suffers no ill
consequences.
In the meantime, it can cause a nightmare for the
legitimate taxpayer who might get harassed with IRS letters
accusing them of not reporting income. They may even lose
income-related benefits. And as I said, one taxpayer could not
get health insurance for his children for several months
because he was a victim of this kind of identity theft.
The question I have is this. Is the IRS aware of this
issue? Is it taking steps to address this issue? If it is
prohibited by law from taking actions to stop this fraud, we
need to know that so we can modify that law. But the issue is
that the IRS discovers employment-related identity theft and
still processes the tax return that used the false information
and sends any refund to the perpetrator, it does not link the
account of the filer who submitted false information with the
account of the victimized taxpayer, nor does it mark the
account of the perpetrator in any way. The IRS does not inform
the employer that the worker submitted a false name and Social
Security number. It does not notify law enforcement that the
filer submitted false information in order to obtain
employment. And my question is, can we fix this, if you are
aware of it? And if you are not, can we work together to fix
this?
Commissioner Koskinen. It is an important and complicated
situation, as you can imagine. As a general matter, the use of
Social Security numbers for employment purposes, the INS and
Social Security pursue. Our role as tax collectors is--there
are a lot of immigrants here, whether they are illegal or they
are just not documented, undocumented immigrants who work, and
they also all want--not all--many of them want to pay taxes
because, if there is ever an amnesty, they have to demonstrate
they have paid them. So they actually get an ITIN, which they
use to file, and for us that is sufficient, and they file, and
we do fine with it.
The use of--sometimes it is relatives', sometimes it is
borrowed, sometimes it is stolen--Social Security numbers to
get the job so that an employer actually does a W-2 is a
process that, again, the INS and Social Security pursue. Our
job is, if somebody wants to pay taxes, if they want to be
compliant with their tax obligations, even though they have
citizenship challenges, our job is to collect those revenues.
And we collect a fairly significant amount, and there are ITINs
out there.
There are sometimes refunds, but generally, because they
are not eligible for most refund programs, generally what we
are doing is collecting appropriate taxes from those who are
working, even if they are here in an undocumented status. And
we try to work with taxpayers. As I say, a significant number
of those Social Security numbers are borrowed or used from
relatives or someone else. But again, we do not know where they
have come from or why, and our view is if we start--and we
talked with INS about this, and Social Security. If we start
pursuing employers and undocumented aliens, then nobody is
going to file their taxes because that will be another exposure
point. And the decision was made so long before I got here that
it was in the government's interest for undocumented citizens
to pay taxes to the extent that they want to and want to
provide support for the services they receive.
Senator Coats. Well, should it not be in the government's
interest also to care for the victim and put something in place
that will give the victims official notification that their
Social Security number has been stolen or their Tax
Identification Number has been stolen and used for false
purposes and, therefore, they are not sitting in front of an
employer saying, there has been fraud here? Because it has an
impact on individuals who have been the victims, and whether or
not the IRS should pursue this, some function of government
should pursue this. So can we try to set up something, some
process, whereby it can be moved to the agency that can do
that, if you cannot do that, or something put in place at the
IRS so that it can accomplish that and address the victim's
problem?
Commissioner Koskinen. You raise many of the facets of this
problem. We would be delighted to talk with you further about
it and figure out how we can deal with both aspects of it--
allowing people to pay taxes so that when, sometime later on,
it becomes an issue in their potential citizenship, they will
have a record of having paid taxes without discouraging that,
but at the same time protecting taxpayers, because protecting
taxpayers is an important issue for us. So we would be
delighted to talk with you further.
Senator Coats. Good. I appreciate you saying that because,
if you need authority to do it, Mr. Chairman, that is something
we should pursue. If the decision is made that another agency
should do that or another function of government should do
that, there ought to be something in place that protects the
victim as well as going after the perpetrator.
Commissioner Koskinen. I would be delighted to talk with
you further about it.
Senator Coats. Thank you. I hope we can move on that, Mr.
Chairman, because one way or another, we not only have to think
about prosecuting the person who stole the numbers or falsely
used the numbers, but the person who has been hacked or the
victim of all this needs to have some ability to clear his name
and not be denied job opportunities or other opportunities
because of this situation.
The Chairman. Thank you.
Senator Portman?
Senator Portman. Thank you, Mr. Chairman. And,
Commissioner, we thank you for being here today. As you know,
this is an issue of particular concern to me because it is of
particular concern to a lot of Ohioans. In fact, Senator Hatch
and I were the first people to raise this issue when Ohio's
501(c)(4)s were being asked inappropriate things by the IRS.
The document requests did not seem to make sense. We sent the
first letter on this back in March of 2012, and, unfortunately,
it continues today. There is an Ohio-based (c)(4) group called
``Unite for Action'' that still has not received the
determination on its tax-exempt request that it first sought in
2012. So, you know, just to remind us why we are here, the IG
report and our bipartisan report--I am not talking about, you
know, a Republican report--all said the same thing, which is
that there were words used to screen 501(c)(4) applications
like ``patriot,'' like ``9/12,'' like ``Tea Party.'' Seventy
percent of the cases tagged for additional review--70 percent--
were Tea Party cases. And to quote our report, and, again,
consistent with what the IG said, ``Such groups were
disproportionately impacted.'' No question about it.
So just to remind everybody why we are here, that is the
issue. And of course, there is distrust when that sort of thing
happens. And of course, there should have been consequences.
So I am going to focus a little on fostering this sense of
accountability you talked about in your testimony. I could not
agree with you more. And real accountability comes, of course,
from consequences.
I am one of those people, as you know, on this committee
who believes that my constituents are suffering because of a
lack of funding at the IRS. I think taxpayer service is
important, and I would like to see us increase the funding for
taxpayer service. But it is very difficult to have any kind of
increased funding for anything at the IRS as long as there is
this lack of accountability and lack of the sense that there
will be consequences for actions.
So let me be specific with you. You talked about fostering
a sense of accountability. You talked about the fact that we
need to ensure that this happens all through the system. You
answered a question today saying you sense that IRS employees
now feel more comfort in being able to talk to you and go up
through the command.
Let me ask you this question. For those who were involved
in the mismanagement, shall we say, of the conservative group
tax-
exempt filings, were there any consequences? Any consequences.
Commissioner Koskinen. As I said, the entire chain of
command, starting with the Commissioner or the then-Acting
Commissioner down five levels, are all no longer with the
agency.
Senator Portman. They have all retired with full pensions
or they have been reassigned?
Commissioner Koskinen. Well, I can talk to you in private.
I cannot talk about individual cases.
Senator Portman. Okay. Well, that is what the public
information indicates. Let me give you an example. In December
of last year, the Treasury Inspector General found that between
2010 and 2013--before your time, a lot of this--323 former
employees were rehired by the IRS for whom records show
performance and conduct issues associated with their previous
employment, resulting in them leaving through formal removal or
separation or termination, or leaving during an ongoing
investigation.
Commissioner Koskinen. Those are primarily temporary and
seasonal employees, and we have changed that policy to make
sure that that does not happen in the future.
Senator Portman. Okay. This goes to accountability. I am
glad to see you have changed that policy.
As you know, under the Restructuring and Reform Act, which
I was a co-author of, the IRS is allowed to terminate employees
who willfully violate tax law unless the penalty is mitigated
by the Commissioner. In April, the IG found that between 2004
and 2013 almost 1,600 employees had willfully violated tax law;
61 percent were handed lesser suspensions, such as reprimands
or counseling; worse, a number of these employees received
promotions and awards within a year of their willful
noncompliance with tax law.
So again, this sense of accountability has to have
consequences.
Commissioner Koskinen. And the response to that is, again,
it reflects prior practices. We have made it clear that there
will be no promotions and awards made in the year in which
there is an inability to comply with the procedures and
policies. So if there are disciplinary actions, there will not
be promotions, there will not be awards.
Senator Portman. That is good. Still, you know, 1,600
employees willfully violate, 61 percent receive lesser
suspensions. So, accountability.
Commissioner Koskinen. And the other 40 percent actually
were either suspended or dismissed. We actually dismiss a
substantial number of people every year for violations of the
rules, and I would be delighted to get you that detail.
Senator Portman. That would be helpful.
Section 2(c) of the bipartisan report goes into some detail
about the destruction of the 422 tapes that served as a backup
to Lois Lerner's destroyed hard drive. You know all about this.
We have talked about it today. These backup tapes were
destroyed sometime in early 2014. At the time, they were the
subject of a litigation hold. Your Chief Technology Officer,
Terence Milholland, has actually called the destruction of
these backup tapes ``more significant than the loss of Lois
Lerner's hard drive.''
Can you tell us today how the employees who disregarded the
litigation hold were held accountable for the destruction of
this information relevant to the committee's investigation?
Commissioner Koskinen. As the Justice Department notes,
there is further activity going on, and, again, I will be
delighted to keep the committee advised in terms of what
happens beyond that. But, again, those are two individual
cases. As I say, as a general matter, both the IG in their
year-long investigation and Justice found that no one purposely
destroyed those tapes, the employees involved, trying to
obstruct anybody's investigation. They thought of them as junk,
and they did not understand the litigation or document
retention program. But that has been thoroughly investigated by
both the IG and the Department of Justice, and both of them
found that the employees thought they were doing the right
thing.
Senator Portman. Again our understanding is, there have
been no consequences for not honoring that litigation hold. The
bipartisan report also talks about the failure of the IRS to
produce responsive documents to a 2010 FOIA request. If that
FOIA request had been responded to properly, it is my belief we
could have avoided a lot of this, maybe all of it. It was not
responded to properly. Our bipartisan report found that these
documents could have, again, kept this scandal from happening
and that the search was deficient. The IRS's narrow reading was
to exclude responsive documents.
Again, since our report has been released, has there been
any attempt to impose consequences on those who did not
properly respond to this FOIA request that could have stopped
this whole thing in the first place?
Commissioner Koskinen. That was some time ago, and I would
be happy to get you that information.
But I would note that you are exactly right. My sense of
this, before I even started, was if somebody in 2012 had said,
you know, we have a problem, we are trying to learn how to
process all of these issues, and that had gone up the chain of
command and had become public then, we would have avoided a lot
of unnecessary expense.
Senator Portman. Mr. Chairman, I just have two more quick
questions. One, our report goes into multiple mistakes made by
various employees on the be-on-the-lookout list, the so-called
BOLO list. Have any mid-level managers been reprimanded for
their role in these mistakes?
Commissioner Koskinen. Again----
Senator Wyden. And briefly, Commissioner, because Senator
Casey was passed over, and he has been waiting a long time. He
was before----
Commissioner Koskinen. I would just note again that both
the IG and the Department of Justice found that no employee
behaved improperly in the sense of political bias or doing
something that was out of the ordinary.
Senator Portman. Again, our report, our bipartisan report,
cites multiple mistakes. We understand that not only have there
been no consequences, but, in fact, based on page 101 of our
bipartisan report, some involved were actually promoted. So
again, a culture of accountability needs to be in place for us
to be able to begin this process of regaining the trust of my
constituents and the American people.
Thank you, Mr. Commissioner.
The Chairman. I do apologize to Senator Casey. I was led to
believe that Senator Portman was ahead of you. But we will call
on you now. Please forgive us.
Senator Casey. Mr. Chairman, thank you. I thank you and the
ranking member for the hearing.
Commissioner, I want to thank you as well for your work
today and your public service. You have a hard job in a
difficult time.
I want to focus on the question of resources, and this
happens on a pretty regular basis in this town, where folks in
Congress will say the IRS or any other agency has to do X, Y,
and Z, sometimes pointing the accusatory finger, but not
providing the follow-up and the resources that are essential.
And as you know, in mid-
September, I and four other members of the Senate sent a letter
to Secretary Lew talking about this issue. And I will not read
the whole letter, but in a pertinent part, we talk about the
consequences of ``shortsighted budget cuts to the IRS,'' and
then we give examples of the impact. The examples are taken
from the Treasury Inspector General, and I am quoting here from
part of the letter: ``During the 2015 filing season, only 38.5
percent of callers received assistance compared to about 75
percent the year before,'' and the problem is with not having
the resources.
So, whether it is addressing the tax gap, whether it is
improving taxpayer services, implementing data mining
procedures to identify errors, whether it is combating identity
theft, addressing improper payments, all of that depends upon
resources. It has been my experience in State government and
the Federal Government that you cannot improve a service by
magic. You have to have the tools and the resources. So the
focus that we were bringing in that letter was the result of
getting the resources that the President has recommended for
fiscal year 2016.
So can you walk through some of the impacts of those
resource constraints and how they impact your ability to
fulfill your responsibilities, and then, secondly, steps you
are taking to prevent identity theft and improve taxpayer
services?
Commissioner Koskinen. Well, the short answer is, it is a
critical problem. I testified at my confirmation hearing 2
years ago that it was the most critical problem facing the
agency, and since then the agency's budget has been cut
further.
If you look at the information, basically the thing to
understand is, the OECD just put out a report--it does it every
2 years--looking at the costs of tax administration. The IRS
spends almost half--or slightly more than half--of what the
average of the OECD developed countries do to collect a dollar
of taxes. If you look at Germany, France, England, Canada, and
Australia, they spend two to three times what we spend to
collect taxes. So the first point to understand is, we are
already the most efficient tax agency in terms of collection of
any agency of the major developed countries of the world.
Secondly, since 2010, the budget has been cut by over $1
billion. At the same time, we have 6 or 7 million more
taxpayers. We have been given ``unfunded mandates,'' as we call
them: the Affordable Care Act, the Foreign Account Tax
Compliance Act. Last year, shortly after our budget was cut, as
the only major agency with a budget cut, we were asked to
implement the ABLE Act and the Professional Employees Act.
Since then, we have been asked to implement the Health Coverage
Tax Credit Program, again, with no additional funding.
The net impact is, we get funded and we spend money on
enforcement, on taxpayer service, on information technology,
including cyber-protection and identity theft, and general
operations and maintenance. As our budget has been cut every
year over 5 years, the money has to come from somewhere. So on
taxpayer service, as you know, we had an abysmal level of
service last year. In terms of enforcement, the numbers show
that we are losing over $4 billion a year in collections
compared to what we used to collect because we have 3,000 fewer
revenue agents. Those revenue agents collect over $1 billion a
year. So actually, to save $1 billion in funding, we are losing
over $4 billion a year in tax revenue collections. So it is
costing the government four times the amount of savings in the
budget cuts.
In terms of information technology, we are dealing with
cyber-criminals around the world, organized, highly
sophisticated, well-funded. Our systems are attacked millions
of times--not thousands, millions of times--by people trying to
breach. We have been fortunate not to have a cyber-breach. We
have been unfortunate that identity theft has gotten more and
more sophisticated, so forget our Get Transcript unauthorized
access. It was by a set of very sophisticated criminals who
already had significant detailed information about taxpayers so
they could masquerade more effectively as the taxpayer.
To protect against all of that, as you say, takes
resources. If the budget is just flat, nothing will get better.
And, in fact, at flat, we need between $100 and $200 million
just to pay for the pay raises and inflation, and we no longer
have any give. You know, no one cares more about the poor level
of taxpayer service than our employees who provide that
service. They believe their mission is to help people; when
they answer a call, they feel good about solving a problem.
They are the ones who feel as badly as the taxpayers about the
fact that the lack of funding has meant that we have not had
enough people to answer the calls.
Ultimately, as I have said, we do not want to go backwards
and hire the 15,000 people we have lost. What we need to do is
stabilize and go forward to provide better service digitally.
It costs us $43 to answer a phone call, $52 to deal with
someone when they walk into our offices, and 15 to 25 cents if
we can answer the issue online digitally. And we need to move
in that direction as we go.
With regard to identity theft, it is a complicated, growing
problem. What we have done, the most significant step we have
taken is, we brought in the CEOs, in March, of the tax
preparers, the software developers, payroll providers, and the
tax revenue administrators, and created a partnership. As I
told them at the time, the purpose was not to tell them what to
do. It was to create a partnership where the private sector,
the States, and the IRS would work jointly together. We have
announced--we just announced this last week--that we have
implemented significant improvements across the tax system to
deal with and fight identity theft this year. But going
forward, again, for our systems to continue to keep up, we have
to invest in them. If our budget continues to be cut, we do not
have the money that we are going to need to do that, and
taxpayers are going to suffer, revenues will suffer, and the
agency will suffer.
Senator Casey. Commissioner, thank you for that, and, if we
are going to ask you to do a lot more, we cannot continue to
give you a lot less. So we are grateful for that answer.
Mr. Chairman, thank you very much.
The Chairman. Thank you.
Senator Nelson?
Senator Nelson. Mr. Chairman, a lot of this discussion
about whether or not there was intimidation could be obviated
if we would just go back on the 501(c)(4)s and administer to
them what the original statute said, which is civic leagues or
organizations not organized for profit but operated exclusively
for the promotion of social welfare. Along in 1959 came a
regulation to implement that statute, but they changed the word
``exclusively'' to ``primarily.'' So the regulation said an
organization is operated exclusively for the promotion of
social welfare if it is primarily engaged in promoting in some
way the social welfare.
And so all of this flap that we are going through is
unnecessary if the IRS would follow the statute that these
social welfare organizations, 501(c)(4)s, would be exclusively
for social welfare. But, of course, it is interpreted
differently, and that is why we have the chaos that we have
today in our campaign finance system where all of this--and it
is now termed ``dark money''--comes in to influence elections,
dark because it does not have to be reported who is giving the
money.
Now, the whole idea of McCain-Feingold was--and this is the
campaign finance reform from about a decade ago. The whole idea
was to open up the process and let the people know who is
influencing elections because they would know who is giving the
money. But now we see that it is nothing that a candidate for
President is raising over $100 million through 501(c)(4)s and
the public does not know who is financing that, and that money
is not being used, as the statute requires, for a social
welfare purpose but is being used to influence an election.
We could change this whole thing, Mr. Commissioner. What do
you think about all this?
Commissioner Koskinen. I think it is a complicated
situation. We have felt that at a minimum, as I have said--and
I do not know; the chairman thinks everything is clear enough
as it is--but at a minimum I think we need to clarify what the
standards are. One of the issues is, is ``primarily'' the right
standard? To understand that, again, we do not think we have
the ability to change the statutory framework that has been
established. Our job is to try to figure out how to rationalize
it and make it sensible.
Senator Nelson. Okay. And I agree with you, but the
statutory framework says ``exclusively'' for social welfare
purposes.
Now, I understand you are going through trying to figure
out some kind of guidance on this. So what are you doing in
issuing the guidance?
Commissioner Koskinen. What we are doing is looking--as I
say, we have three questions that we have asked for comments
on. One is, what is the definition of ``political activity''?
The second is, how much of it can you do? And the third part of
it is, to which (c) organization should the standard apply? And
how much of it you can do is the ``exclusively'' or
``primarily'' question. The definition, as I say, we think
should not include nonpartisan voter registration, candidate
forums, get-out-the-vote campaigns, which the previous draft
did include, so that will get simplified.
And then the question of to which organization should they
apply, we think you have to look at the (c)(3)s, (4)s, (5)s,
(6)s, and the 527s as a group to see what--as I say, ultimately
it should be up to an organization to pick which of those
categories it wants to be in. We should not be driving that by
our determinations.
But I would say that ``primarily'' is the standard used for
(5)s, (6)s, and 527s, and the 527 statute was passed in the
1970s in the context of recognizing that ``primarily'' was
already the standard. So there are limitations on what we can
do looking at only one statute. We have to look at all of the
statutes in that framework.
Senator Nelson. Okay. Now, you said ``primarily'' was--and
you listed all those statutes. But you did not say the
501(c)(4)s do not have to disclose. So what are you doing in
issuing guidance with regard to that?
Commissioner Koskinen. What we are doing is looking at that
history and looking at the fact that some of those statutory
provisions by Congress were passed using ``primarily'' as the
standard in a context in which ``primarily'' was the standard
since, as you note, 1959. So the question is to rationalize
that in light of what the congressional activity is and what
the framework is. We are reviewing all the comments. We are
actually taking a very close look at this. But it is not a
slam-dunk to change the way the process goes. As I say, as a
general matter, I do not think we are going to change the rules
of the game. I know the chairman disagrees with me. But I do
think it is important to clarify the rules of the game.
Senator Nelson. I do not understand what you just said.
Commissioner Koskinen. Maybe the better way to say it is,
we are still reviewing all of this, trying to make sure that
when we come up with the next draft, it is understandable,
sustainable, is fair to everybody, and it is not an easy
answer.
Senator Nelson. Do you agree that things have gotten out of
control with regard to the interpretation of the rule
``primarily used for a social purpose''?
Commissioner Koskinen. I think what I would agree--and our
concern is--is that the facts and circumstances of how you fit
into that category, what you are doing, what is primarily
social welfare and what is not, so primarily political
activity, should be designed and studied and assessed on facts,
and the circumstances could not be less clear.
Senator Nelson. Okay.
Commissioner Koskinen. And so we need to clarify what is in
one pocket and what is in the other.
Senator Nelson. Right. So----
Commissioner Koskinen. The question of how much you can do
of either is a separate question, but the lack of clarity in
terms of facts and circumstances, I think goes to the heart of
the problem. It is what the IG said. The IG found--its last
recommendation was that we should provide clarity. As I say, we
should make clearer what the rules of the game are, even if we
are not able to change the rules.
Senator Nelson. If you will just do this, then I think you
will be doing your constitutional duty. When you look at
``primarily a social purpose,'' those words, and you stack that
up against a commercial, paid TV advertisement that advocates
for the election of a candidate or against a candidate, then
you would understand that that is not primarily a social
purpose. That is a political purpose. And it is there that the
whole statute has been bastardized.
Commissioner Koskinen. And our view is that someone running
one of these organizations or setting it up ought to clearly
understand what is political activity, political intervention,
and what is social welfare. And the facts and circumstances do
not adequately do that. And people say, ``Well, it has been
around a long time,'' facts and circumstances. But the issue of
active political engagement by (c)(4)s is a relatively recent
occurrence, and it has demonstrated that, in fact, greater
clarity, we think, is needed. The IG agreed with that. It is
why we think that everyone would be better off if, as you note,
when you ran an ad, when you took an action, it would be clear
which side of the line it fell on. Right now, when you do
whatever you are going to do, you are subject to our
interpretation and attempt to try to be fair under a facts and
circumstances standard, which I don't think provides any
clarity at all. It does, in fact, lead to, just as you say, the
complexity of trying to figure out who is on which side of the
event.
So I think the dividing line of how much you can do is
important, but the definition of what you are doing is also
equally important if you are going to provide clarity and be
fair to everybody.
Senator Nelson. When is that clarity coming?
Commissioner Koskinen. Well, notwithstanding the
encouragement never to show up with it, we would like to try to
make sure that we could introduce the suggestion, hold the 90
days of public comment, get the public hearing held, and have
that all done before the next election. So I think the chairman
is right, so there is not a lot of confusion but it will be
clear, because everybody has to have time to adjust, we have
made it clear from the start it will not influence or be
effective during the election. It would be effective next year.
But I think to be effective next year, it has to actually be
started sometime early this year, and, again, our goal would be
to do it at a time frame outside of the active presidential
campaign, certainly after next September.
Senator Nelson. So when you decide it, it would be
effective for the following election cycle, not the election
cycle of 2016?
Commissioner Koskinen. Right. And so what we are stuck
with, and a thing to remember, is we are stuck right now
implementing a regulation that talks about facts and
circumstances. There is a misunderstanding that somehow we are
not pursuing our statutory responsibilities. We are still
processing applications. We do it much faster. We are trying to
get them through. People do not actually have to come to us if
they do not want to. But we are trying to provide standards.
But to the extent that, in the ordinary course, we will be
auditing organizations as to whether they are performing
appropriately as a 501(c)(3), the standard we have to use is
facts and circumstances. It is not that we are not in the game.
We are playing according to the rules there. What we are trying
to say is, as I say, we are not going to change the rules, we
would just like to make them clearer.
Senator Nelson. Mr. Chairman, I would just conclude by
saying that I think that the American people are going to be so
fed up by the time this presidential election is over with the
amount of dark money, undisclosed, unlimited money that comes
into the political system, that they are going to be readily
accepting of a clarifying change in the IRS statute.
Thank you, Mr. Chairman.
The Chairman. Well, thank you. And let me just say that it
is always interesting to me how our friends on the other side
who have benefitted from hundreds of billions of dollars over
the years from the union movement that are never reported are
finding fault with something that people have to report with
regard to 501(c)(4)s. There is no use kidding. Political
purposes can sometimes be social purposes, and that is why the
IRS has allowed at least 50 percent to be used for political
purposes, if I understand it correctly.
Senator Nelson. Mr. Chairman, I believe that all of it
ought to be disclosed.
The Chairman. Well, I see you do, Senator, but then all of
the union money ought to be disclosed too, and----
Senator Nelson. I agree.
The Chairman [continuing]. It amounts to hundreds of
millions of dollars.
Senator Nelson. I agree.
The Chairman. Well, it is never going to be, because the
Democrats are not going to allow that to happen. And all I can
say is, these groups have to disclose to the IRS what they are
doing, and the IRS can make some determinations as to whether
they are doing it properly or not.
Senator Nelson. See, it is this kind--if the chairman
would, respectfully this Senator asks that you would yield for
me just to make a comment. It is this kind of back-and-forth
that the American people are so sick and tired of, and then all
this money comes in from whatever source. I would agree with
you. Disclosure ought to be across the board.
The Chairman. Yes, but that is not going to happen. You
know it and I know it. And he cannot just make laws at the IRS.
Secondly, it is so one-sided in favor of Democrats that I
really do not understand what the argument is all about. All I
can say----
Senator Nelson. Mr. Chairman----
The Chairman. All I can say is, it would be wonderful if
everybody could disclose what they are doing and what it is
for. That is not going to happen. We do not have, on either
side, enough political fortitude to be able to resolve those
problems.
Senator Nelson. Mr. Chairman?
The Chairman. All I can say is, you are asking Mr. Koskinen
to unilaterally, on his own accord, straighten out how ``social
purposes'' should be interpreted when they are already
interpreted the way they are.
Senator Nelson. Mr. Chairman, I would just humbly say that
the system is not in order. It is in chaos. In my last
reelection, having to go around and comply with the laws, that
I am limited to personal money, and all of it, every dime of
it, has to be disclosed, and then having the disadvantage in my
last reelection, which was 3 years ago, the disadvantage that
all of this avalanche of unlimited and undisclosed ``where is
it coming from?'' money comes in against me to try to defeat
me, that is not a fair system.
The Chairman. It may not be, Senator, but all I can say is
that the laws have been interpreted this way, and I have to say
that many on your side will never agree that the unions should
have--and I am not saying many. A universally large percentage
on your side would say that the unions do not----
Senator Nelson. Well, let us----
The Chairman. You and I might agree, because you say that
they ought to disclose too. Well, they do disclose hard money.
It is the soft money that they do not disclose.
Now, at least these 501(c)(4)s have to disclose hard money,
and, you know, there is a reason why they do not require
people, whether it is on the Democrat side or the Republican
side, to necessarily disclose who runs these organizations,
because we know that there will be people who will deliberately
go after the people who donate----
Senator Nelson. Would the chairman yield for a question?
The Chairman [continuing]. And do it in a very unfair way,
and so this is something that is not as easy to discuss as I
think you are making it.
Senator Nelson. Would the distinguished chairman yield for
a question?
The Chairman. Sure.
Senator Nelson. And he knows that I believe that he is
distinguished and a fair-minded individual.
The Chairman. Well, likewise.
Senator Nelson. Thank you. Well, the present system is out
of kilter. It is, in effect, no campaign finance law, the way
you can do things now.
Now, would you not think that we needed some kind of order
in the system?
The Chairman. Well, we do have an order in the system. I do
not like the system myself, but the fact of the matter is that
we--I think one reason why the Supreme Court ruled the way it
did is because one side had a decided advantage of soft money
that the other side did not have, meaning the Republicans did
not have.
Now, whether that is right or wrong, neither side should
have an advantage over the other, and, unfortunately, that
continues today.
Senator Nelson. Well, the chairman will have the last word
in this hearing, but I think that the chairman and I can at
least agree that the present system, the American people are
getting fed up with it. And we had better start to find a more
equitable way to finance our elections.
The Chairman. Well, I think everybody would probably agree
with that generalization. I do not think there is any question
about that.
On the other hand, it is hard for me to see why Democrats
can complain when they have been benefitting from a whole raft
of money that is never reported and is used consistently
against Republicans throughout the country. I know. I have been
a target of some of this money. And it is not just some. It is
big-time dollars. And I suspect that is one reason why the
Supreme Court made the ruling that it did to try to even things
up. But even 501(c)(4) groups, they have to disclose how they
use their money, and they have certain obligations that exist
in law today.
Look, we are not going to solve that here. All I can say
is, the system is not fair--the Republicans think it is
disastrously not fair. Democrats are thinking, now that you
have 501(c)(4) organizations that can spend money on politics
without disclosing the names of their people that--well, let us
just go back to one of the original cases, the NAACP. Where
does it get its money? And Democrat arguments were, you should
not have to disclose who puts the money up for politics in the
NAACP because it could be used to discriminate against the
people who put the money up.
You know, these are not simple issues, but all I can say is
that I do not see how Democrats can complain when they have had
a decided advantage all these years through the unions and
other organizations that really do not ever have to report what
they are really doing at all.
Senator Nelson. Well, Mr. Chairman, this Democrat is
complaining, and the reason I am complaining is, I am sure that
the fair-minded chairman of this committee does not believe
that one wrong should be corrected with another wrong.
The Chairman. I am with you. I am with you on that. All I
am pointing out is that your side will never give up the
decided advantage it has. It is just that simple. And if you
could do that, we could do business. We could really do
business, and we could solve these problems overnight. But you
will never be able to get them to fully disclose all the soft
money they get from unions and so many other groups that I
could name.
Let me just say that we have appreciated your patience here
today, Mr. Koskinen. I do not think anybody can whitewash what
happened. I am glad you are making changes that hopefully will
ensure that some of this bias will never happen again. And I do
not see how anybody can say that, you know, these are just
mistakes. If you look at what Lois Lerner did and a raft of
others who were with her, it was a lot more than just mistakes.
It was wrong, and it was deliberately wrong. And I do not care
how much you try to whitewash it. You cannot do that.
But to make a long story short, I am very appreciative that
you are at least trying to right these wrongs and trying to do
what you should do. I have a high opinion of you, and I will
get in trouble with the House by saying this, but I have a high
opinion of you and basically think that you are trying to put
things in order. And I am going to count on your doing that.
Thank you so much for your patience throughout this
hearing.
Commissioner Koskinen. Thank you, Mr. Chairman.
The Chairman. With that, we will--and let me just say this.
Let me just thank everyone who attended and participated in
today's hearing. I thought this was a thoughtful and useful
discussion today that will hopefully help us in our future
efforts to improve the functioning of the IRS. I want to thank
you again, Mr. Koskinen, for agreeing to be here and for your
agency's response and cooperation with regard to the
committee's report and recommendations.
As always, any member of the committee should feel free to
submit written questions for the record. I am going to set the
deadline for written questions at 2 weeks from today. That
would be Tuesday, November 10th, and with that, this hearing is
now adjourned. Thanks so much.
Commissioner Koskinen. Thank you.
[Whereupon, at 11:10 p.m., the hearing was concluded.]
A P P E N D I X
Additional Material Submitted for the Record
----------
Prepared Statement of Hon. Orrin G. Hatch,
a U.S. Senator From Utah
WASHINGTON--Senate Finance Committee Chairman Orrin Hatch (R-Utah)
today delivered the following opening statement at a Committee hearing
to examine the Internal Revenue Service's (IRS) response to the
Committee's bipartisan report that detailed their investigation into
the IRS's treatment of organizations applying for tax-exempt status.
In May 2013, the Treasury Inspector General for Tax Administration
revealed that, in the run-up to the 2010 and 2012 elections, the
Internal Revenue Service had targeted certain organizations applying
for tax-exempt status for extra and undue scrutiny based on the groups'
names and political views.
Needless to say, we took this matter very seriously. Indeed, at the
time, both Republicans and Democrats condemned the agency's actions.
And, as the Senate committee with exclusive legislative and oversight
jurisdiction over the IRS, the Finance Committee launched a bipartisan
investigation into the matter.
In fact, our investigation was the most thorough and the only
bipartisan investigation conducted with regard to these events.
On August 5th of this year, after more than 2 years of
investigation, we released a 375-page bipartisan investigative
committee report that included approximately 4,500 pages of exhibits.
This report is, I believe, the definitive record of what occurred at
the IRS and why.
As we all know, last week, the Department of Justice stated
publicly that they would not be pressing criminal charges with regard
to these events at the IRS. This has led some to argue that the Justice
Department is corrupt or biased in some way. Others have said that this
decision proves that nothing scandalous occurred at the IRS.
I believe the committee's report speaks for itself on this matter.
And, in my opinion, rather than fueling the echo chamber, we would do
better to focus on what we know actually happened and what changes need
to take place to make sure it doesn't happen again.
That's why we are here today.
The committee's report included 10 major findings that formed the
basis of various recommendations for changes that we believe the agency
should make to ensure the IRS's actions remain above board.
The purpose of today's hearing is to hear directly from the IRS
about their response to our report and their progress in adopting our
recommendations. Toward that end, I want to thank Commissioner Koskinen
for being here today and for the agency's thoughtful response to our
recommendations.
In that response, the IRS indicated that they have implemented all
of the bipartisan recommendations from the report that are within the
agency's control, as well as the separate Majority and Minority
recommendations.
Our overall goal here should be to restore the credibility of the
IRS and ensure that this very powerful agency treats all American
taxpayers fairly.
While I want to commend the IRS for the efforts they have made thus
far, it my understanding that, up to now, most of the changes they've
made have been procedural in nature and very little has been done to
begin work on the needed structural changes at the agency. Today, I
hope to hear more details as to why these types of changes are being
delayed.
At the same time, I believe the Finance Committee should be
considering statutory changes that will improve upon the status quo.
For example, there was bipartisan agreement in the report on the need
to update the Hatch Act to ensure that, with regard to political
activities, IRS employees receive the same considerations as employees
of other highly-sensitive agencies, like the Federal Election
Commission and the Federal Bureau of Investigation.
In addition, as the Majority Views in the report noted, and as I
have stated publicly on multiple occasions, I have serious concerns
about the influence of labor union activity at the IRS. While I am not
anti-union and while I do not oppose collective bargaining in general,
we know that two-thirds of IRS workers are represented by a union
organization that is very politically active and that a fair number of
IRS employees work full-time for the benefit of that union. I don't
think it's much of a stretch to argue that such a strong union presence
could have contributed to a politicized environment at the IRS.
While current law allows Federal Government employees to be
represented by unions, Congress has a made a number of exceptions to
this policy, generally with agencies that have important law
enforcement obligations or perform other highly sensitive work. And,
while I expect there to be some resistance to this idea, I think it is
only reasonable that we take the time to consider whether the IRS
should be placed in a similar category.
I hope that today we can have a good discussion and get
Commissioner Koskinen's views on these and other legislative proposals.
Ultimately, the theme that I want to stress most today is
accountability.
Our report clearly shows that political targeting at the IRS
resulted from a number of bad decisions made by a number of different
officials. However, as of yet, very few of these individuals have been
held accountable, while others have since received bonuses and even
promotions. While I am concerned about this apparent lack of individual
accountability, I am more concerned that the IRS lacks the necessary
structural and procedural mechanisms to ensure that, as an agency, it
remains accountable.
The recommendations we included in our report were designed to
provide this type of accountability and I look forward to discussing
our ideas in more detail today.
Before I conclude, I just want to briefly comment on the ongoing
effort at the IRS to enact new regulations regarding the political
activities of 501(c)(4) organizations. Obviously, this is an issue that
deeply concerns a number of people throughout the country, including
members of this committee.
As we know, regulations proposed in 2013 were criticized by people
and organizations across the political spectrum, and were subsequently
withdrawn. That poorly drafted proposal would have created nonsensical
rules and constitutionally dubious speech restrictions. Oddly enough,
it would have created stricter standards for 501(c)(4) organizations
than exist for public charities, which would be a perverse reversal of
roles for these types of organizations.
While this issue is not directly related to the committee's report
on the IRS's political targeting, I think it's fair to say that agency
still carries with it a cloud of perceived political bias. Therefore, I
would caution Commissioner Koskinen and others in the administration
that have made this regulation a priority to focus instead on actions
to restore the IRS's credibility and to abandon any effort to inject
more rules and restrictions into the political process.
I expect that members of the committee will want to discuss this
matter today as well as, once again, it is an issue that is on the
minds of many people.
______
Prepared Statement of Hon. John A. Koskinen, Commissioner,
Internal Revenue Service
introduction
Chairman Hatch, Ranking Member Wyden, and members of the committee,
thank you for the opportunity to discuss the IRS's response to the
committee's report on its investigation into the processing of
applications for tax-exempt status under section 501(c) of the Internal
Revenue Code. The committee's investigation followed a report issued in
May 2013 by the Treasury Inspector General for Tax Administration
(TIGTA) on the IRS's use of improper criteria in the determination
process for 501(c)(4) applications.
Let me begin by reiterating what I have said earlier in my tenure
as IRS Commissioner. The situation described in the Inspector General's
2013 report should never have happened, and the IRS is doing everything
possible to ensure that the mistakes referenced in the Inspector
General's report do not happen again. Every taxpayer, whether an
individual or an organization, needs to be confident that they will be
treated fairly by the IRS, no matter what their political affiliation,
their position on contentious political issues, or whom they supported
in the last election.
Even with our declining resources, we will still audit over 1
million taxpayers this year. And when someone hears from us regarding
their tax return--by letter, I should add, in light of the recent
proliferation of IRS impersonation telephone scams--they need to
understand that it is only because of something that is or should be in
their tax return, and not other factors. And, if someone else has the
same issue in regard to their return, they will hear from us as well,
within the limits of our budget resources.
A shared belief in the fairness of our tax system and its
administration is fundamental to the voluntary compliance by our
citizens with the requirements of our tax laws. This compliance
provides the vast majority of the over $3 trillion in revenue that we
collect for the nation every year. We are the stewards of this system
and take our responsibility seriously.
As part of our work to move forward, we have implemented all of the
recommendations made by the Inspector General in his May 2013 report.
The changes we made in response to those recommendations include:
eliminating the use of inappropriate criteria; expediting the
processing of section 501(c)(4) applications; establishing a new
process for documenting the reasons why applications are chosen for
further review; developing guidelines for specialists in the IRS's
Exempt Organizations (EO) division on how to process requests for tax-
exempt status involving organizations engaging in potentially
significant political campaign intervention; and creating a formal,
documented process for EO determinations personnel to request
assistance from technical experts. EO is committed to providing annual
training for employees on political campaign intervention.
The Inspector General reviewed our actions and issued a follow-up
report in March of this year, noting that the IRS had taken
``significant actions'' to address his recommendations.
responding to the committee report
We appreciate the enormous amount of hard work done and time spent
by the committee and its staff in investigating this matter and
developing the report that is the subject of today's hearing. By its
thorough and detailed nature, the committee's report provides a full
account of the IRS's section 501(c)(4) processing issues.
It is important to note that the IRS cooperated fully with the
committee's investigation and the investigations conducted by other
congressional committees, the Inspector General and the Department of
Justice. Our efforts resulted in the production of more than 1.3
million pages of unredacted documents to this committee and the House
Ways and Means Committee, including approximately 80,000 e-mails sent
or received by former Director of Exempt Organizations Lois Lerner.
More than 250 IRS employees spent more than 160,000 hours working
directly on complying with the investigations, at a cost to the agency
of approximately $20 million.
I am pleased to report, as I advised the chairman and the ranking
member by letter earlier, that the IRS has accepted all the
recommendations in the committee's report that are within our control--
those that did not involve tax policy matters or legislative action.
They include 15 of the report's 18 bipartisan recommendations and also
6 of the recommendations in the separate sections prepared by the
Majority and Minority. I have attached a copy of my letter to this
testimony for inclusion in the record.
The IRS has already made significant progress in implementing the
committee's recommendations within our control. In part, this is
because a number of the committee's recommendations overlap with the
recommendations of the May 2013 Inspector General's report noted above.
In addition, we have been working diligently over the last 3 months to
implement those recommendations made by the committee that do not
overlap with those of the Inspector General.
improving processes in the exempt organizations area
Following is an overview of the significant actions that we have
already taken or are taking in response to the committee's
recommendations. For the sake of brevity, we have grouped our actions
into 10 broad categories that reflect the committee's major concerns in
relation to the processing of applications for tax-exempt status. The
categories are as follows:
Promoting Transparency and Accessibility in the Exempt
Organizations Determination Process. The IRS has taken a number of
actions to ensure that the determination process for organizations
applying for tax-exempt status is transparent, and that the public can
easily obtain information on our procedures. For example, since the
release of the Inspector General's May 2013 report, EO has made
significant progress in facilitating public access to relevant
materials through substantive updates to the Internal Revenue Manual
(IRM) sections and revenue procedures that relate to the application
process. These resources continue to be available to the public via the
IRS website, IRS.gov. Moving forward, EO will review the instructions
for the IRS forms that organizations use when applying for tax-exempt
status, and will add references to the resources available on IRS.gov
as needed.
Streamlining the Exempt Organizations Determination Process to
Ensure Timely Processing and Reduce Delay. EO is committed to
processing applications for tax-exempt status in a timely manner and
resolving all determination cases within 270 days as recommended by the
committee. The IRS has taken a number of actions since the beginning of
the committee's investigation that have been designed to reduce
processing times and eliminate any backlog. For example, in 2014 EO
began tracking cases once they became 90 days old to ensure that
potential barriers to resolution were addressed early on. This action
and others complemented measures already adopted in response to the
Inspector General's 2013 report, including the ``Optional Expedited
Process'' for 501(c)(4) organizations with potential political campaign
intervention activities. As a result of our actions, the average age of
the application inventory has been significantly reduced. From April
2014 to July 2015, applications submitted on Forms 1023--which are used
by organizations applying for 501(c)(3) status and make up the majority
of the EO application inventory--dropped from an average age of 256
days to 107 days. Applications submitted on Forms 1024--which are used
by organizations applying for tax-exempt status under section 501(c)(4)
and other Code sections--went from an average age of 256 days to 112
days. The IRS will continue its efforts to further reduce any overage
inventory among applications for tax-exempt status.
Realigning Organizational Functions for Improved Service. One of
the concerns raised in the committee's report in regard to the
management problems at the IRS in 2013 involved the decentralization of
EO leadership and employees. The IRS has made several notable
structural changes to enable performance improvements. For example, the
positions of EO Director and EO Director of Rulings and Agreements were
relocated from Washington, DC to Cincinnati, Ohio, so the EO leadership
is now located with most EO employees who process applications for tax-
exempt status. Additionally, the Tax Exempt/Government Entities
Division (TE/GE) worked closely with the Office of Chief Counsel to
move functions performing legal analysis from TE/GE to Chief Counsel.
As a result, there is now a clear separation of duties, as well as
well-defined procedures and improved lines of communication between TE/
GE leaders and their counterparts in the Office of Chief Counsel.
Fostering a Culture of Accountability. The IRS has taken a number
of steps to ensure that TE/GE employees, managers and leadership
operate in an environment of accountability in regard to the processing
of applications for tax-exempt status. For example, all TE/GE managers
are now required to conduct regular workload reviews with their
employees. In addition, the results of these reviews are shared with
the senior leadership of each function, and the TE/GE Commissioner
holds monthly Operational Reviews with each functional director.
Information on the amount of time it takes to process cases is provided
on a regular basis up the management chain, not only to TE/GE
leadership but also to the IRS Commissioner and the Deputy Commissioner
for Services and Enforcement. We believe this focus on case processing
oversight directly contributes to, and ensures, improved processing
times and reduced inventory. I would also note that the entire
leadership chain of command, starting with the Commissioner's office
and running down to the Director of Exempt Organizations and her direct
reports, was replaced over 2 years ago.
Strengthening Risk Management Through Improved Communication. The
IRS has worked to ensure risks are managed more effectively throughout
the organization, and within TE/GE in particular. In 2014, the IRS
established an agency-wide enterprise risk management program, creating
risk management liaisons in each area of our operations and providing
for the regular identification and analysis of risks to be eliminated
or managed across the agency. We are working to create a culture where
employees are encouraged to think of themselves as risk managers and to
report any issues or problems that occur. We are encouraging the
further flow of information from front-line employees up through the
organization as well as out to the front line from senior managers. As
part of this program, TE/GE and the other IRS business divisions each
established a new Risk Management Process to enable certain issues to
be elevated to the executive leadership for review and discussion. This
new and expansive process further mitigates the risk that sensitive
issues may not be elevated in a timely manner.
Bolstering Employee Training. In response to the Inspector
General's 2013 report, EO began developing new training and workshops
for employees on a number of critical issues connected with the
application process for tax-exempt status, including the difference
between issue advocacy and political campaign intervention, and the
proper way, under current law, to identify applications that require
review of potentially significant political campaign intervention. EO
is continuing to develop new ways of delivering and sharing training
materials and technical expertise. For example, to respond to the
committee's interest in this area, EO conducted training this fall for
determination specialists on quality standards, including standards for
timely case processing. TE/GE is also implementing a ``knowledge
management'' network which, when completed, will provide TE/GE
employees with easy access to information on a wide range of technical
issues, such as those involving unrelated business income tax, private
foundations and employee plans.
Ensuring Neutral Review Processes. The IRS has taken a number of
actions to ensure that a neutral review process exists for
organizations applying for tax-
exempt status. For example, in response to the Inspector General's 2013
report, the IRS provided guidance to EO employees on the proper way to
process applications for tax-exempt status when an organization does
not provide the IRS with sufficient information to reach a conclusion
about the application. In 2014, the IRS implemented new procedures to
ensure that requests for additional information in cases involving
potential political campaign intervention activities are appropriate in
scope and scale. These include the development of a template letter,
Letter 1312, ``Request for Additional Information,'' to better
standardize such requests. In addition, the Department of the Treasury
and the IRS are in the process of developing guidance on social welfare
and non-social welfare activities of 501(c)(4) organizations. Our
efforts to develop this guidance have been greatly informed by the more
than 160,000 public comments received in response to the 2013 proposed
regulations. We asked for, and received, comments on several issues,
including three major ones: the proposed definition of political
campaign activity; to which organizations that definition should apply;
and the amount of political activity an organization can engage in
consistent with a particular tax-exempt status. Our goal is to provide
guidance that is clear, fair to everyone, and easy to administer. I am
attaching for the record a summary of the comments received on these
three major issues.
Improving Procedures Under the Freedom of Information Act. The IRS
is taking several actions in response to the concern expressed by the
committee in its report that IRS employees did not properly respond to
certain FOIA requests, including requests regarding groups applying for
tax-exempt status. To ensure that employees responsible for responding
to FOIA requests have the tools they need to conduct robust searches
for such requests, which are increasingly complex in scope and volume,
the IRS's Disclosure Office is preparing guidance in the form of
written standard search procedures. This guidance will focus on many of
the more frequently requested categories of information, and will
include contact lists. Employees processing FOIA requests will be
trained in those procedures by the end of 2015. Additionally, EO in May
2015 released new procedures for handling FOIA requests involving the
Exempt Organizations area, which will help ensure searches are
appropriately conducted across all components of the EO function, as
recommended by the committee.
Reviewing the Use of the Office Communicator System. In its report,
the committee raised important questions about records retention, as
well as questions regarding IRS employees' use of the Office
Communicator System (OCS). Similar to an internal instant messaging
system, OCS enables IRS employees to hold virtual meetings and virtual
training events involving large numbers of employees and offices.
Employees also use OCS as an informal means of communication.
Currently, the IRM advises employees who create Federal records using
informal means of documentation or communication, including OCS, to
convert those records to a more structured format to facilitate records
management and enable appropriate retention. The IRS is working with
the National Archives and Records Administration (NARA) on these issues
and plans to improve this guidance by adding more specific instructions
and clarifying examples.
Responding to Government Accountability Office (GAO)
Recommendations. In June 2015, the GAO released a report on the
criteria the IRS uses to select exempt organizations for audit. In this
report, the GAO found no evidence of organizations being selected in an
unfair or biased manner. At the same time, the GAO also identified
areas where EO's system of internal controls for the audit selection
process could be improved in order to reduce the risk of returns being
selected for audit in an unfair or biased manner. When the report was
released, the IRS agreed with the GAO's recommendations, and stated
that it was in the process of implementing them. The committee has also
recommended that the IRS implement the GAO's recommendations, and we
are continuing to do so, tightening the internal controls for the audit
selection process.
enhancing records retention procedures
The investigations into the determination process for tax-exempt
status also raised another issue that we have been working to address,
and that is the need to ensure that electronic media containing
important records are preserved and protected. This issue was brought
into focus with the Inspector General's release of a report on June 30,
2015, on the IRS's production of e-mails relevant to the investigations
by the committee, the Inspector General and others into the issues
surrounding the processing of applications for tax-exempt status.
The Inspector General's June 2015 report described difficulties
encountered in searching for e-mails and retrieving them from the IRS's
outdated system for electronic records retention. This included the
erasure in March 2014 of 422 disaster recovery tapes associated with a
decommissioned IRS e-mail server, which occurred despite instructions
issued to agency employees in May 2013 to preserve these types of
records.
The Inspector General's June 2015 report stated the IG had
uncovered ``no evidence that the IRS employees involved intended to
destroy data on the tapes or hard drives in order to keep this
information from the Congress, the DOJ or TIGTA.'' Nonetheless, the
IRS's failure to ensure employees followed the document preservation
instructions is clearly unacceptable.
With the benefit of the Inspector General's report, the IRS has
been making significant progress in implementing records management
improvements. Specifically, we have initiated a process to secure the
e-mail records of all senior officials in the agency, including having
all files archived to the network rather than relying on individual
hard drives. We are also implementing records management improvements
based on recommendations from NARA.
Additionally, we have worked to increase training of front-line
information technology (IT) employees on document preservation issues,
to exert greater control over the management of our e-mail server
backups, and to continue the preservation of all disaster recovery
tapes. Collectively, these steps have helped the IRS create better
policies and procedures to minimize the risk of future data loss
incidents.
addressing other critical tax administration issues
While the IRS is working to complete the implementation of the
committee's recommendations in regard to the processing of applications
for tax-exempt status, we also appreciate the bipartisan efforts being
made by the committee on other issues critical to taxpayers and tax
administration.
One important issue involves pending legislation to extend a group
of tax provisions that expired at the end of 2014. The uncertainty we
face over the timing of the extenders legislation raises operational
and compliance risks for the IRS's delivery of the upcoming tax filing
season beginning in January and for everyone involved in tax
administration. We are grateful for the committee's efforts to ensure
that Congress makes a decision, one way or another, on this legislation
in a timely manner.
If the uncertainty over this legislation persists into December,
the IRS could be forced to postpone the opening of the 2016 filing
season. This would delay the start of processing of tax refunds for
millions of taxpayers. In order to ensure there are no disruptions to
the upcoming filing season, we believe it is critical for Congress to
make a decision on the extenders legislation no later than the end of
November. It will also be important to know whether any such
legislation will be passed with or without substantive changes to the
tax provisions. Minimal changes to the provisions will simplify changes
to IRS systems and aid the IRS in starting the tax filing season on
time.
In addition to its efforts on tax extenders, the committee has also
been considering identity theft legislation. This legislation contains
a number of provisions that would assist the IRS in its fight against
stolen identity refund fraud and also improve tax administration
generally. They include:
Acceleration of information return filing due dates. Under
current law, most information returns, including Forms 1099 and 1098,
must be filed with the IRS by February 28th of the year following the
year for which the information is being reported, while Form W-2 must
be filed with the Social Security Administration (SSA) by the last day
of February. The due date for filing information returns with the IRS
or SSA is generally extended until March 31 if the returns are filed
electronically. The proposed legislation would require these
information returns to be filed earlier, which would assist the IRS in
identifying fraudulent returns and reduce refund fraud, including
refund fraud related to identity theft.
Authority to require minimum qualifications for return
preparers. The proposed legislation would provide the agency with
explicit authority to require all paid preparers to have a minimum
knowledge of the tax code. Requiring all paid preparers to keep up with
changes in the code would help promote high quality services from tax
return preparers, improve voluntary compliance, and foster taxpayer
confidence in the fairness of the tax system. It would help the IRS to
focus resources on the truly fraudulent returns.
Expanded access to National Directory of New Hires. Under
current law, the IRS is permitted to access the Department of Health
and Human Services' National Directory of New Hires for purposes of
enforcing the Earned Income Tax Credit and verifying employment
reported on a tax return. The proposed legislation would allow IRS
access to the directory for broader tax administration purposes, which
would assist the agency in preventing stolen identity refund fraud.
Masking Social Security Numbers (SSN). Under current law, the
Form W-2 furnished to an employee must include the employee's SSN. The
proposed legislation would allow truncated SSNs on the copy of the Form
W-2 furnished to employees. This change would make it more difficult
for identity thieves to steal SSNs.
Streamlined critical pay authority. The IRS Restructuring and
Reform Act of 1998 increased the IRS's ability to recruit and retain a
small number of key executive-level staff by providing the agency with
streamlined critical pay authority. This allowed the IRS, with approval
from Treasury, to hire well-
qualified individuals to fill positions deemed critical to the agency's
success in areas such as international tax, IT, cybersecurity, online
services and analytics support. This authority, which ran effectively
for 14 years, expired at the end of fiscal year (FY) 2013. The loss of
streamlined critical pay authority has created major challenges to our
ability to retain employees with the necessary high-caliber expertise
in the areas mentioned above. The proposed legislation would reinstate
this authority.
The IRS has also discussed with the committee a number of other
proposals that would improve tax administration, and I encourage the
committee to approve these provisions as well. They include:
Correctible error authority. The IRS has authority in limited
circumstances to identify certain computation mistakes or other
irregularities on returns and automatically adjust the return for a
taxpayer, colloquially known as ``math error authority.'' At various
times, Congress has expanded this limited authority on a case-by-case
basis to cover specific, newly enacted tax code amendments. The IRS
would be able to significantly improve tax administration--including
reducing improper payments and cutting down on the need for costly
audits--if Congress were to enact a proposal contained in the
President's FY 2016 budget request to replace the existing specific
grants of this authority with more general authority covering
computation errors and incorrect use of IRS tables. Congress could also
help in this regard by creating a new category of ``correctable
errors,'' allowing the IRS to fix errors where the IRS has reliable
information that a taxpayer has an error on his/her return.
Simplification of partnership audits. Auditing of large
partnerships has become very challenging for the IRS, in part because
of the way the agency must apply the partnership audit rules contained
in the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). These
rules were designed to improve tax administration by making it possible
for the IRS to conduct audits at the partnership level, instead of
auditing each individual partner. But TEFRA was enacted when
partnerships generally were smaller than they are today, and before
they had complicated tiered structures as they do now. The TEFRA rules
generally require the IRS to notify each partner at the start of an
audit and to push any resulting adjustment down through the partnership
to each partner. Thus, a single audit can generate thousands of
adjustments. One proposal that has been offered by the Administration
would mandate certain streamlined audit and adjustment procedures for
any partnership that has 100 or more direct partners, or that has at
least one direct partner that is a pass-through entity. Under the
streamlined procedures, only direct partners would receive audit
adjustments, and any direct partner that was itself a pass-through
entity would be responsible for paying the resulting tax.
Chairman Hatch, Ranking Member Wyden, and members of the committee,
this concludes my testimony. I would be happy to take your questions.
______
Public Comments on Key Issues for Guidance for Tax-Exempt Organizations
on Political Campaign Intervention (REG-134417-13) 10/27/15
In a May 2013 report, the Treasury Inspector General for Tax
Administration (TIGTA) noted that one cause of the substantial delays
in processing applications for tax-exempt status, including
applications potentially involving significant political campaign
intervention, was confusion due to the lack of specific guidance on how
to determine whether the promotion of social welfare is the ``primary''
activity of a section 501(c)(4) organization. As a first step in
providing such guidance, the Treasury Department and the IRS published
a notice of proposed rulemaking in the Federal Register in November
2013 (2013 proposed regulations). That proposal, regarding section
501(c)(4) organizations, identified political activities related to
candidates that would not be considered to promote social welfare. More
than 160,000 written comments were received in response to the 2013
proposed regulations.
This document provides an overview of public comments received on
three key and interrelated issues on which the Treasury Department and
the IRS solicited public comment in the 2013 proposed regulations:
(1) Whether to retain or modify the ``primarily'' standard under
section 501(c)(4);
(2) The appropriate scope of the definition of nonexempt political
campaign activity under section 501(c)(4); and
(3) The potential application of a uniform definition of political
campaign intervention to all section 501(c) tax-exempt organizations.
It is important to note that this overview does not cover all of
the comments received or all of the potential issues being considered.
Any future guidance on these issues will be introduced in the form of
proposed regulations to provide the public with ample, additional
opportunity to provide input, both in the form of written comments and
at a future public hearing.
retention or modification of the ``primarily'' standard under section
501(c)(4)
The exemption from Federal income tax provided in section 501(c)(4)
to ``[c]ivic leagues or organizations not organized for profit but
operated exclusively for the promotion of social welfare'' dates back
to the enactment of the Federal income tax in 1913. For over 55 years,
the current section 501(c)(4) regulations have provided that an
organization is ``operated exclusively'' for the promotion of social
welfare within the meaning of section 501(c)(4) if it is ``primarily
engaged'' in promoting in some way the common good and general welfare
of the people of the community. Under the 1959 regulations, a section
501(c)(4) organization may engage in some political campaign
intervention, so long as the organization is operated primarily for the
promotion of social welfare. This ``primarily'' standard applies to all
section 501(c)(4) organizations, including the numerous section
501(c)(4) organizations that do not engage in political campaign
intervention but, for example, may engage in other nonexempt
activities, such as facilitating social activities for the benefit,
pleasure, or recreation of its members, or engaging in some unrelated
business activity. Given the potential impact of any change in the
``primarily'' standard on the tax status of organizations currently
described in section 501(c)(4), the Treasury Department and the IRS
solicited comments from the public on what proportion of an
organization's activities must promote social welfare for an
organization to qualify under section 501(c)(4) and whether additional
limits should be imposed on any or all activities that do not further
social welfare. The Treasury Department and the IRS also requested
comments on how to measure the activities of organizations seeking to
qualify as section 501(c)(4) organizations for these purposes.
Over 3,000 commenters expressed opinions regarding whether the
``primarily'' standard should be retained or modified. Many of these
commenters generally supported retention of the current ``primarily''
standard, which some interpreted as allowing up to 49 percent of an
organization's activities to further nonexempt purposes. Some of the
commenters who supported retention of the current ``primarily''
standard expressed the view that there is no reason or justification
for adopting a more narrow regulatory standard because, unlike section
501(c)(3) organizations, section 501(c)(4) organizations are not
subject to a statutory prohibition on political campaign intervention
activities and cannot receive tax-deductible contributions.
Other commenters suggested more restrictive standards. Some
commenters suggested restricting section 501(c)(4) organizations to
insubstantial amounts of nonexempt activity, with several suggesting
that such a standard would more closely mirror the limit Congress has
imposed on lobbying activities by section 501(c)(3) organizations.
Numerous commenters supported replacing the ``primarily'' standard with
a strict interpretation of ``exclusively,'' emphasizing the statutory
language of section 501(c)(4) requiring such organizations to be
operated ``exclusively'' for the promotion of social welfare. Several
of these commenters maintained that adopting a strict ``exclusively''
standard would substantially reduce the need for fact-intensive
analysis; that is, although the IRS would still need to determine
whether a specific activity constitutes nonexempt political activity,
the need for fact-intensive analysis to determine the amount of such
activity would be minimized. However, other commenters noted that
defining ``exclusively'' under section 501(c)(4) to allow no or only de
minimis nonexempt activity would effectively ban political campaign
intervention under section 501(c)(4) through regulations alone, whereas
the ban on political campaign intervention under section 501(c)(3) is
statutory. Moreover, a few commenters noted that the adoption of a
strict interpretation of ``exclusively'' could disrupt existing section
501(c)(4) organizations that do not engage in political campaign
intervention but do, for example, engage in nonexempt business or
social activities.
Finally, some commenters advocated for guidance that would provide
a clear percentage limit on either nonexempt activity generally or
political campaign intervention activities specifically, although the
suggested limits varied widely, ranging from 2 percent up to 49.9
percent.
Measurement of the Chosen Standard Under Section 501(c)(4)
A question related to the amount of social welfare activity in
which a section 501(c)(4) organization must engage is how activities of
an organization should be measured under the standard that is chosen.
Most commenters expressing a view on how to measure activities of
organizations seeking to qualify as section 501(c)(4) organizations
supported measuring an organization's activities in terms of its
expenditures. Some commenters expressly opposed the inclusion of
volunteer hours in the measurement of an organization's activities,
emphasizing the lack of guidance regarding how to count, allocate, and
quantify volunteer hours as well as the burden placed on organizations,
particularly those with thousands of volunteers, to track volunteer
hours in light of this uncertainty.
Interaction of the Chosen Standard Under Section 501(c)(4) With Section
527
Despite their varied views, commenters tended to agree that the
appropriate amount of nonexempt activity in which a section 501(c)(4)
organization may engage is also informed by Congress' later enactment
of section 527. Congress enacted section 527 in 1975 to govern the tax
treatment of political organizations ``primarily'' engaged in accepting
contributions or making expenditures for activities that influence or
attempt to influence elections, as well as appointments and
nominations, to public office. In addition, Congress expressly
acknowledged in the legislative history accompanying enactment of
section 527 that certain tax-exempt organizations, including section
501(c)(4) organizations, may engage in some political campaign
activities.\1\ The statute taxes such activity through section 527(f),
which imposes a tax on the lesser of a section 501(c) organization's
aggregate expenditures during any taxable year for a section 527 exempt
function or its net investment income in that taxable year. The statute
also permits a tax-exempt organization to avoid application of the
section 527(f) tax by establishing a separate segregated fund that is
treated as a section 527 political organization (and, therefore,
subject to the notice and reporting requirements imposed by sections
527(i) and (j) on section 527 organizations generally in amendments
enacted in 2000 and 2002).
---------------------------------------------------------------------------
\1\ S. Rept. No. 93-1357, 93d Cong., 2d Sess. (December 16, 1974),
at 29.
The availability of separate segregated funds was emphasized by
commenters who suggested the more restrictive standards of either
mirroring the ``no substantial part'' limit on lobbying activities in
section 501(c)(3) or strictly interpreting ``exclusively'' under
section 501(c)(4), as these separate segregated funds would provide a
transparent vehicle through which a section 501(c)(4) organization may
engage in political campaign activity without jeopardizing its tax-
exempt status. However, other commenters argued that Congress ratified
the ``primarily'' standard under section 501(c)(4) in enacting section
527; that is, Congress chose to address substantial political activity
by section 501(c)(4) organizations by imposing the section 527(f) tax
on section 527 exempt function activities by such organizations, rather
than by amending the existing ``primarily'' standard under the 1959
regulations.
scope of the definition of nonexempt political campaign activity
under section 501(c)(4)
Over the years, the IRS has stated that whether an organization is
engaged in political campaign intervention depends upon all of the
facts and circumstances of each case. The Treasury Department and the
IRS recognize that more definitive rules with respect to political
activities relating to candidates--rather than the existing fact-
intensive analysis--would be helpful in applying the rules regarding
qualification for tax-exempt status under section 501(c)(4). Therefore,
the 2013 proposed regulations provided a specific definition of
candidate-related political activity, and proposed to expand the
definition of ``candidate'' to include individuals seeking appointment
or nomination to public office as a way to link the definition of
nonexempt political activity under section 501(c) with section 527's
broader exempt function. As discussed further in this section, many
commenters objected to this proposed approach. Instead, those
commenters supported a more limited definition of nonexempt political
campaign activity under section 501(c)(4) that would exclude activities
related to nominees or appointees for public office, and that would
exclude issue advocacy and voter education and outreach activities
conducted in a nonpartisan manner and grants to section 501(c)
organizations for non-political purposes.
Definition of ``Candidate''
Traditionally, the scope of political campaign intervention under
section 501(c) has been limited to intervention in campaigns for
elective public office. In defining nonexempt candidate-related
political activity for purposes of section 501(c)(4), the 2013 proposed
regulations would have expanded the definition of ``candidate'' beyond
an individual who publicly offers himself, or is proposed by another,
for elective public office to encompass the appointment or confirmation
of executive branch officials and judicial nominees (as well as the
selection of officers in a political organization, among others). In
this way, the definition of candidate-related political activity in the
2013 proposed regulations reflected the broader scope of section 527
(and the activities to which Congress intended the section 527(f) tax
to apply).
Commenters almost universally recognized the difficulty in
reconciling section 527's broad definition of exempt function, which
includes activities related to elections, appointments, and nominations
to public office, with political campaign intervention under section
501(c), which traditionally has described only activities related to
campaigns for elective public office. Yet, of the more than 200
commenters specifically addressing the scope of ``candidate,'' the
majority generally opposed the proposed inclusion of individuals who
are proposed as nominees or appointees for public office in the
definition of candidate-related political activity as the means by
which to reconcile these two standards. Some of these commenters noted
that the IRS historically has treated a section 501(c)(3)
organization's support for, or opposition to, Senate confirmation of a
nominee as permissible (albeit restricted) lobbying activity, and
therefore reason that section 501(c)(4) organizations should be
accorded the same treatment. See Notice 88-76 (1988-2 CB 392) (holding
that attempts to influence the Senate's confirmation of a Federal
judicial nominee did not constitute political campaign intervention for
purposes of section 501(c)(3)). Some commenters emphasized the
fundamental distinction between appointive positions and elective
offices, noting that the decision of legislators to confirm or deny a
nominee is more akin to a vote on proposed legislation than to the
decision of voters in an election. Additional commenters expressed
concern that restricting the lobbying activities of section 501(c)(4)
organizations in this manner would constitute an unconstitutional
restriction of free speech, both for section 501(c)(4) organizations as
well as for section 501(c)(3) organizations engaged in lobbying
activities through a section 501(c)(4) affiliate, as contemplated in
Regan v. Taxation with Representation, 461 U.S. 540 (1983). Other
commenters argued that, if Congress had intended the term ``candidate''
within the context of section 501(c) to include nominees and
appointees, Congress could have amended section 501(c)(3) in 1975 when
it enacted section 527.
Issue Advocacy
The proximity of a communication about a candidate to the election
in which that candidate seeks office has long been a factor tending to
indicate that the communication is political campaign intervention
under section 501(c) and/or section 527 exempt function activity. See
Rev. Rul. 2007-41 and Rev. Rul. 2004-6. Accordingly, the 2013 proposed
regulations provided that candidate-related political activity would
include any public communication within 30 days of a primary election
or 60 days of a general election that refers to one or more clearly
identified candidates in that election or, in the case of a general
election, refers to one or more political parties represented in that
election. In the preamble to the 2013 proposed regulations, the
Treasury Department and the IRS explained that the proposed regulations
drew from provisions of Federal election campaign laws that treat
certain communications that are close in time to an election and that
refer to a clearly identified candidate as electioneering
communications. In addition, the Treasury Department and the IRS noted
that the proposed approach would avoid the need to consider potential
mitigating or aggravating circumstances in particular cases (such as
whether an issue-oriented communication is ``neutral'' or ``biased''
with respect to a candidate). The Treasury Department and the IRS
requested comments on whether there are particular communications that
(regardless of timing) should be excluded from the definition of
candidate-related political activity because they can be presumed to
neither influence nor constitute an attempt to influence the outcome of
an election and stated that any comments should specifically address
how the proposed exclusion is consistent with the goal of providing
clear rules that avoid fact-intensive determinations.
Many commenters expressed concern that the proposed provision would
inappropriately capture, for a substantial portion of any year in which
Federal and State elections occur, routine legislative and issue
advocacy, grassroots lobbying, and communications to or about public
officials, including old publications on the Internet, educational
materials, and news gathering and reporting--communications and
activities traditionally permitted under section 501(c)(4). In
addition, numerous commenters expressed concern that the proposed
provision would limit the ability of section 501(c)(4) organizations to
educate the public or comment on key policy issues during the period in
which citizens are most engaged and public officials are most
responsive.
Commenters also generally emphasized that any time frames
necessarily are arbitrary, in that the same communication may be
considered candidate-related political activity on day 30 or 60, but
not on day 31 or 61. Commenters also emphasized that timeframes are
both over- and under-inclusive, in that they would be ineffective at
limiting politically motivated communications prior to the relevant
pre-election period, while simultaneously limiting the ability of
groups to do legitimate policy advocacy inside it. Some commenters
stated that the proposed provision would inappropriately expand the
existing election law concept of ``electioneering communication'' from
which the timeframes are drawn--a concept limited to broadcast, cable,
or satellite communications that are directed at more than 50,000
persons in the relevant electorate. Other commenters emphasized that
the proposed approach of defining public communication as any
communication directed at 500 persons (rather than 50,000 persons in
the relevant electorate) would inappropriately capture e-mails to
internal listservs and other communications with members who actively
and affirmatively ask to receive information or to be associated with
an organization, thereby failing to distinguish such communications
from, for example, a mass media advertisement aired during a large,
televised sporting event that is aimed at members of the general public
who have no say in whether they receive it. A few commenters expressed
the concern that application of the timeframes to State and local
elections, in addition to the Federal elections already regulated by
the FEC, would greatly increase the complexity of tracking the
timeframes and candidates potentially subject to the rule.
Some commenters supported the approach of the proposed regulations,
with a few commenters positing that communications directed to the
general public that mention the name of a candidate close in time to an
election are in fact motivated by electoral politics. A few commenters
argued that the proposed provision is supported by the IRS's (and the
public's) interest in clarity and precision in standards for
determining tax-exempt status, and noted that expenditures for
candidate-related communications close in time to an election could be
made by a section 527 affiliate or a separate segregated fund subject
to the section 527(j) reporting provisions.
Regardless of whether they opposed or supported the proposed
provision, some commenters suggested exceptions for certain types of
communications, in particular for issue advocacy, in the event that a
rule treating candidate-related communications made during a specified
timeframe (in addition to those containing express advocacy) as
nonexempt political campaign activity is retained.
Voter Education and Outreach Activity
The 2013 proposed regulations would have defined candidate-related
political activity to include certain specified election-related
activities, such as the conduct of any voter registration or get-out-
the-vote drive; the preparation or distribution of any voter guide that
refers to one or more clearly identified candidates or, in the case of
a general election, to one or more political parties (including
material accompanying the voter guide); and hosting or conducting an
event within 30 days of a primary election or 60 days of a general
election at which one or more candidates in such election appear as
part of the program. In acknowledgement that these proposed provisions
may capture activities conducted in a nonpartisan and unbiased manner,
the Treasury Department and the IRS requested comments on whether any
particular election-related activities should be excepted from the
definition of candidate-related political activity as voter education
activity. If so, the Treasury Department and the IRS requested a
description of how the proposed exception would both ensure that
excepted activities are conducted in a nonpartisan and unbiased manner
and still avoid a fact-intensive analysis.
Commenters overwhelmingly opposed the proposed inclusion of voter
education and outreach activities in the definition of candidate-
related political activity without regard to whether such activities
are conducted in a partisan or nonpartisan manner. More than 20,000
commenters stated that classifying nonpartisan voter education and
outreach activity in this manner would have an adverse effect on
section 501(c)(4) organizations. Many commenters stated that such
activities promote social welfare, reasoning that nonpartisan voter
education and outreach encourages civic participation and educates and
engages the voting public. Furthermore, commenters asserted that
nonpartisan voter registration and get-out-the-vote drives, voter
guides, and candidate events are constitutionally protected activities,
and that burdening such activities raises First Amendment concerns.
Grantmaking to Other Section 501(c) Organizations
The 2013 proposed regulations would have defined candidate-related
political activity to include a contribution to any organization
described in section 501(c) that engages in candidate-related political
activity (within the meaning of the 2013 proposed regulations), unless
accompanied by a written representation that the recipient does not
engage in any such activity and made subject to a written restriction
preventing the use of the contribution for such activity.
Many commenters opposed the proposed approach to contributions.
Some commenters stated that a contribution should not be considered
candidate-related political activity if it is simply earmarked for non-
political purposes. Other commenters argued that the proposed
provision, combined with the already broad definition of candidate-
related political activity, would unduly limit the ability of section
501(c)(4) organizations to promote social welfare through grantmaking
and particularly disadvantage section 501(c)(3) organizations that rely
on section 501(c)(4) organizations for funding, as their section
501(c)(3) activities may be irreconcilable with, for example, the
inclusion of all voter registration drives within the broad proposed
definition of candidate-related political activity. In addition, many
commenters specifically opposed any need for a good-faith, written
representation that the recipient organization does not engage in
candidate-related political activity, reasoning that recipient section
501(c) organizations would be reluctant to make this certification
because recipients may not want to restrict their future activities.
Finally, many commenters expressed concern that, under the proposed
provision, the full amount of a contribution would be considered
candidate-related political activity, regardless of how little
candidate-related political activity the recipient organization engages
in.
On the other hand, many commenters supported the proposed
provision, reasoning that it is reasonable to presume that a section
501(c) organization that engages in campaign-related spending would use
contributions for that purpose. Some of these commenters expressed
concern in particular about the ``increasingly prevalent use'' of
grants by section 501(c)(4) organizations to other section 501(c)
organizations for ``general support'' that the grantor claims as social
welfare expenditures. These commenters stated that such grants enable
the recipient organization, in turn, to pass along the grant to another
section 501(c) organization and/or expend some (or all) of the grant on
political campaign activity. As evidence of such transfers, a few
commenters noted that recipients of general support grants from section
501(c)(4) organizations have reported millions in campaign spending to
the FEC.
potential application of a uniform definition of political campaign
intervention across section 501(c)
In the preamble to the 2013 proposed regulations, the Treasury
Department and the IRS solicited comments regarding whether the same or
similar approach to defining candidate-related political activity under
section 501(c)(4) should be adopted in addressing the nonexempt
political campaign activities of other section 501(c) organizations.
The Treasury Department and the IRS noted with respect to section
501(c)(3) charitable organizations, 501(c)(5) labor organizations, and
501(c)(6) business leagues in particular that any change would be
introduced in the form of proposed regulations to allow an additional
opportunity for public comment.
Several commenters expressed the opinion that political campaign
activity by section 501(c)(4), 501(c)(5), or 501(c)(6) organizations
should be an exempt activity, given the absence of an express statutory
prohibition on such activities (as exists in section 501(c)(3)). In the
context of section 501(c)(4), several commenters reasoned that any
political campaign activity should be considered to promote social
welfare because, in a democracy, it is difficult to promote ``civic
betterment and social improvements'' or effectuate changes in public
policy without promoting the election of like-minded candidates. In the
context of section 501(c)(5) and 501(c)(6) organizations, a few
commenters similarly noted that these organizations' unique exempt
purposes of furthering the shared labor or business interests of their
members and industry may be best supported through the election of
legislators that will further those interests.
More than 7,000 commenters expressed general opposition to the 2013
proposed regulations because those regulations did not apply to other
tax-exempt organizations, such as section 501(c)(5) and 501(c)(6)
organizations, reasoning that such an approach is inequitable.
Approximately 2,500 commenters expressed general support for defining
nonexempt political campaign activity by section 501(c)(4)
organizations and stated that any such definition, although not
necessarily the definition of ``candidate-related political activity''
in the 2013 proposed regulations, should apply to other tax-exempt
organizations as well. Such commenters argued that section 501(c)(4),
501(c)(5), and 501(c)(6) organizations are often prominent and
competing players in the same advocacy space, such that application of
the definition of candidate-related political activity to section
501(c)(4) organizations alone would create an uneven political playing
field and encourage the shifting of funds toward section 501(c)(5) and
501(c)(6) organizations.
Some commenters who support adopting the same or similar approach
to defining nonexempt political activities across section 501(c)(4),
501(c)(5), and 501(c)(6) expressed more hesitation with respect to a
uniform standard across section 501(c)(3) and 501(c)(4), reasoning that
the statutory prohibition on political campaign intervention activities
by section 501(c)(3) organizations indicates that additional
modifications to the definition of nonexempt political activity may be
necessary to exclude historically permissible issue advocacy and voter
education and outreach activities conducted in a nonpartisan manner--
modifications also suggested with respect to any definition of
nonexempt political campaign activity applicable under section
501(c)(4) alone. Other commenters, however, emphasized the potential
burden that different definitions would impose on section 501(c)(3)
organizations with section 501(c)(4) affiliates that may share staff,
office space, and other resources, as these organizations would need to
train their staff to understand the distinctions between the
traditional facts-and-circumstances inquiry that would still apply
under section 501(c)(3) and the definition of candidate-related
political activity in the 2013 proposed regulations that would apply
under section 501(c)(4) in order to accurately classify and track their
time and activities. Moreover, commenters argued that applying
different definitions may have a chilling effect on speech because, for
example, section 501(c)(3) organizations may be reluctant to engage in
activities that would be considered candidate-related political
activity if conducted by a section 501(c)(4) affiliate, even if those
activities are permitted under section 501(c)(3). Commenters cautioned
that the potential confusion caused by multiple standards and this
chilling effect would be more acute for small or mid-sized section
501(c)(3) organizations that may not have the means to retain legal
counsel.
Additional commenters suggested that the enactment of section 527
supports the application of a uniform definition of nonexempt political
campaign activity across section 501(c). Commenters asserted that every
category of section 501(c) organization potentially is subject to the
section 527(f) tax, indicating that section 527 exempt function
activities (which include efforts to influence both electoral and non-
electoral selection events) do not constitute tax-exempt activity when
conducted by an organization other than a section 527 political
organization (which includes a section 527(f)(3) separate segregated
fund established by a section 501(c) organization). These commenters
suggested applying a single definition of political campaign
intervention (limited to attempts to influence campaigns for elective
public office) across section 501(c) and addressing the interaction
with the section 527(f) tax by clarifying that the section 527(f) tax
would apply to (among other expenditures) any expenditures for
political campaign intervention as defined for purposes of section
501(c).
conclusion
This information is provided to the Committee to give insight into
the range of comments received on a few of the key issues under
consideration. We continue to consider all the comments received on
these and other issues.
______
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, DC 20224
September 10, 2015
The Honorable Orrin G. Hatch
The Honorable Ron Wyden
Committee on Finance
U.S. Senate
Washington, DC 20510
Dear Chairman and Ranking Member:
Thank you for your committee's bipartisan report on its investigation
into the IRS's processing of section 501(c)(3) and section 501(c)(4)
applications for tax-exempt status submitted from 2010-2013 by
organizations seeking to engage in political advocacy.
As I have testified, I believe that oversight is a critically important
management tool. The bipartisan report reflects the depth and
seriousness of this exercise of your congressional oversight authority,
as well as the enormous amount of hard work and time spent by your
committee and staff on the investigation. By its thorough and detailed
nature, the report provides the definitive account of the IRS's section
501(c)(4) processing issues.
The IRS will implement all of the report's findings and recommendations
within its control. I am enclosing a responsive report that describes
the actions the IRS has taken, and will continue to take, that relate
to each recommendation. In some cases, these actions have already
produced positive results. For example, as a result of several new
initiatives, the IRS has dramatically reduced the inventory of tax-
exempt organization applications aged 270 days or older from 32,713
applications in April 2014, to 487 applications as of August 2015. The
IRS will continue its efforts to further reduce or eliminate the
remaining over-age inventory, while also working towards achieving
similar improvements with respect to the other problems identified in
the report.
Another issue to note is the IRS's progress in ensuring that electronic
media containing important records are preserved and protected. In the
last year, the IRS has taken significant measures in this regard and is
incorporating learnings from past events. While investigating the
degaussing of disaster recovery tapes, the Treasury Inspector General
for Tax Administration (TIGTA) uncovered ``no evidence that the IRS
employees involved intended to destroy data on the tapes or hard drives
in order to keep this information from the Congress, the DOJ or
TIGTA.'' (TIGTA, Exempt Organization Data Loss, Report of
Investigation, 54-1406-008-1, June 30, 2015 (reproduced at page 4041 et
seq. of the Report Appendix)). However, the IRS's failure to ensure
complete implementation of its litigation hold is clearly unacceptable.
With the benefit of TIGTA's report, which meticulously documents the
communications breakdown among our records management personnel in
March of 2014, the IRS is implementing records management improvements.
Specifically, we have initiated a process to secure the e-mail records
of all senior officials in the agency, including having all files
archived to the network rather than on individual hard drives. We are
also implementing a plan to preserve official records based on
recommendations from a study conducted by the National Archives and
Records Administration (NARA). In addition, we have taken significant
measures to increase training of front-line IT employees on document
preservation issues, to exert greater control over the management of
our e-mail server backups, and to continue the preservation of all
disaster recovery tapes. Collectively, these steps have helped the IRS
create better policies and procedures to ensure this incident will not
happen again.
I hope the information in the enclosed report is helpful, and that the
actions described in this report demonstrate the IRS's commitment to
address and fix the problems with its processing of tax-exempt
applications. As I have testified on several occasions, the problems
confronting organizations seeking to become social welfare
organizations should never have happened and we have apologized for the
difficulties experienced. We are dedicated to doing everything we can
to ensure the public has confidence that every taxpayer will be treated
fairly and in an unbiased manner by the IRS, no matter what their
political or religious beliefs, who they voted for in the last
election, or which organizations they belong to or support. The IRS
looks forward to seeing its actions in this area translate into top
quality service for America's exempt organizations.
If you have any questions, please contact me or have your staff contact
Leonard Oursler, Director, Legislative Affairs, at (202) 317-6985.
Sincerely
John A. Koskinen
Enclosure
______
Internal Revenue Service
Report Response to:
The Senate Finance Committee's Report on the processing of sections
501(c)(3) and 501(c)(4) applications for tax-exempt status submitted by
``political advocacy'' organizations from 2010-2013 (114-119) (August
5, 2015)
September 10, 2015
Introduction
On May 20, 2013, the Senate Finance Committee initiated a bipartisan
investigation into allegations of potential targeting of certain tax-
exempt organizations by the Internal Revenue Service. On August 5,
2015, the Finance Committee released a thorough and detailed bipartisan
report on the IRS's processing of section 501(c)(3) and section
501(c)(4) applications for tax-exempt status submitted by ``political
advocacy'' organizations from 2010-2013. The Finance Committee Report
contains a number of specific and focused bipartisan findings and
related bipartisan recommendations. The Report also contains additional
recommendations prepared by the Majority and Minority staffs. The IRS
plans to implement each and every one of the Report's bipartisan
findings and recommendations within its control, as well as all the
recommendations prepared by both the Majority and Minority staffs.\1\
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\1\ The IRS also plans to address several implicit findings and
recommendations contained in the Finance Committee Report.
Prior to the Finance Committee initiating its investigation, the
Treasury Inspector General for Tax Administration, in May 2013,
released its report (2013 TIGTA Report) on the IRS's processing of
applications for tax-exempt status.\2\ The TIGTA report described
numerous problems associated with the IRS's process for determining
applicants' tax-exempt status.
---------------------------------------------------------------------------
\2\ ``Inappropriate Criteria Were Used to Identify Tax-Exempt
Applications for Review,'' TIGTA Audit Report No. 2013-10-053 (May 13,
2013); see also ``Status of Actions Taken to Improve the Processing of
Tax-Exempt Applications Involving Political Campaign Intervention''
(Reference Number: 2015-10-025) (March 27, 2015). The IRS continues to
respond to the TIGTA Report, as well as to two reports of the GAO.
``Tax-Exempt Organizations: Better Compliance Indicators and Data, and
More Collaboration with State Regulators Would Strengthen Oversight of
Charitable Organizations'' (GAO-15-164) (December 2014); ``IRS
Examination Selection Internal Controls for Exempt Organization
Selection Should Be Strengthened'' (GAO-15-514) (July 2015).
In response to the many questions posed by the Finance Committee during
its investigation and the recommendations in the 2013 TIGTA Report, the
IRS took significant actions to address the problems identified. Due to
the interrelatedness of the Finance Committee and TIGTA
recommendations, rather than addressing each recommendation in numeric
order, the framework of this report is organized topically based on the
---------------------------------------------------------------------------
main concerns of the findings and related recommendations, as follows:
1. Promoting Transparency and Accessibility in the Exempt
Organization Determination Process
2. Streamlining the Exempt Organizations Determination Process to
Ensure Timely Processing and Reduce Delay
3. Realigning Organizational Functions for Improved Service
4. Fostering a Culture of Accountability
5. Strengthening Risk Management through Improved Communication
6. Bolstering Employee Training
7. Ensuring Neutral Review Processes
8. Reviewing the Use of the Office Communicator System
9. Improving Procedures under the Freedom of Information Act
(FOIA)
10. Responding to Government Accountability Office Recommendations
11. Recommendations outside IRS Jurisdiction or that Require
Legislative Changes
This report describes IRS actions in each of these areas that are
either completed or already underway, and identifies areas for ongoing
progress and improvement. These steps started in the summer of 2013 and
continue today. Highlights of the IRS's structural, substantive, and
corrective actions include: (1) installing a new management team in the
Tax Exempt/Government Entities (TE/GE) Division; (2) developing new
training programs and conducting workshops on critical issues,
including the difference between issue advocacy and political campaign
intervention, and the proper way to identify applications that require
review of political campaign intervention activities; (3) issuing
guidelines for Exempt Organizations (EO) specialists on how to process
requests for tax-exempt status involving potentially significant
political campaign intervention; (4) creating a formal, documented
process for EO Determinations personnel to request assistance from
technical experts; and (5) reducing the over-age case inventory of EO
Determinations applications by over 98% from April 2014. The IRS is
also committed to following through on key initiatives, such as
continuing its thorough review and consideration of over 160,000 public
comments and suggestions for the development of clear, fair, and easy-
to-administer guidance relating to the measurement of political
campaign activities under section 501(c)(4), and taking further
responsive actions, as necessary.
Promoting Transparency and Accessibility in the Exempt Organizations
Determination Process \3\
---------------------------------------------------------------------------
\3\ This discussion relates to the Finance Committee's bipartisan
Finding #1 and the related bipartisan Recommendation #1. See Appendix
A, Finding B1, Recommendation B1.1.
Some of the Finance Committee's recommendations raise concerns
regarding transparency in the EO determination process. The IRS is
committed to increasing transparency and accessibility to generate more
public trust in the process. Since the release of the 2013 TIGTA
Report, the EO function has made significant progress in facilitating
public access to relevant materials through substantive updates to the
Internal Revenue Manual (IRM) sections \4\ and revenue procedures \5\
that relate to the application process. These resources continue to be
available to the public via the IRS website.\6\ The EO function has
also made new tools available to exempt organizations, including the
online, interactive Form 1023i.\7\ Moving forward, the EO function will
review the current instructions for Form 1023 and Form 1024 to
determine whether references to any of the resources available on the
IRS's website need to be added. If additional references are needed,
the IRS will ensure that all such references are included when the
instructions to the forms are updated in fiscal year (FY) 2016.
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\4\ IRM 7.1.2, 7.20.1, 7.20.2, 7.20.3, 7.20.6.
\5\ Rev. Proc. 2015-4, 2015-5, 2015-8, 2015-9, 2015-10, and 2014-
11.
\6\ www.irs.gov/Charities-&-Non-Profits/Applying-for-Tax-Exempt-
Status.
\7\ www.irs.gov/Charities-&-Non-Profits/Applying-for-Tax-Exempt-
Status.
Streamlining the Exempt Organizations Determination Process to Ensure
Timely Processing and Reduce Delay \8\
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\8\ This discussion relates to bipartisan Finding #2 and the
related bipartisan Recommendations, as well as bipartisan Finding #3
and the related Recommendation #2. See Appendix A, Finding B2,
Recommendations B2.1, B2.2, and B2.3; Finding B3, Recommendation B3.2.
It also relates to Majority Recommendation #4, p. 267. See Appendix A,
Recommendation Maj4.
Several of the Finance Committee Report's findings and recommendations
center on improving the timeliness of the EO determination process. The
EO function is committed to resolving all determination cases within
270 days. Overall, actions taken by the IRS to reduce cycle times and
eliminate the application backlog, since the beginning of the Finance
Committee's investigation, have proven extremely successful. In 2014,
the EO function modified its internal processes and began tracking
cases once they became 90-days old to ensure that potential barriers to
resolution were identified and addressed early on. Additionally, the EO
function works proactively with tax-exempt organizations on their
applications even though, in some instances, doing so may result in
---------------------------------------------------------------------------
longer processing times.
In FY 2014, the EO function conducted a thorough review of workflow
processes, aimed at reducing cycle times and eliminating a significant
backlog of applications. As a result of this review, the EO function
modified several case processing procedures for all applications,
including those with potential political campaign intervention
activities. For instance, the EO function adopted ``Streamlined Case
Processing'' \9\ and introduced Form 1023-EZ to simplify the process
for smaller applicants.\10\ These actions complemented measures already
adopted in response to the 2013 TIGTA Report, including the ``Optional
Expedited Process'' for 501(c)(4) organizations with potential
political campaign intervention activities. In fact, this new process
was so effective that TIGTA recently recommended expanding to section
501(c)(5) and section 501(c)(6) applicants.\11\, \12\
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\9\ Interim Guidance Memorandum, TE/GE-07-0315-0006 (March 12,
2015).
\10\ Per the 1023 EZ eligibility worksheet, smaller organizations
are defined as ones (1) not having gross receipts exceeding $50,000 in
any of the past 3 years and (2) with total assets not exceeding
$250,000. Additionally, a Lean Six Sigma study in 2013 for purposes of
improving the efficiency of the EO Determination process led to the
ultimate creation of the EZ form. See http://www.irs.gov/pub/irs-pdf/
i1023ez.pdf.
\11\ ``Status of Actions Taken to Improve the Processing of Tax-
Exempt Applications Involving Political Campaign Intervention,'' TIGTA
Ref. No. 2015-10-025 (March 27, 2015), p.16.
\12\ This discussion relates Minority Recommendation #3, p. 314.
See Appendix A, Recommendation Min12.
The EO function also focused on revising procedures for technical
assistance requests, which must be completed within established
timeframes.\13\ In 2013, for example, the EO function initiated a new
procedure pursuant to which specialists have 60 days to complete
responsive memorandums. In 2015, when TIGTA conducted a follow-up audit
of these new procedures, it found that the EO Technical Unit exceeded
this goal by providing responses within 40 days.\14\
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\13\ These new procedures were developed in response to a
recommendation contained in the 2013 TIGTA Report. Interim Guidance
Memorandum, TE/GE-07-0713-11 (July 15, 2013); incorporated into IRM
7.1.2 (9-22-14).
\14\ ``Status of Actions Taken to Improve the Processing of Tax-
Exempt Applications Involving Political Campaign Intervention,'' TIGTA
Ref. No. 2015-10-025 (March 27, 2015), p. 13.
These process changes have proven effective in improving timeliness and
reducing inventory. From April 2014 to July 2015, applications
submitted on Forms 1023 (which make up the majority of the EO
Determinations inventory) dropped from an average age of 256 days to
107 days, while applications submitted on Forms 1024 went from 256 days
to 112 days. For those cases that were 270 days or older, the EO
function dramatically reduced its inventory from 32,713 applications as
of April 2014 to 487 applications as of August 2015. Of the 487
remaining over-age cases, almost half are currently in ``Group
Suspense'' status, meaning the EO function cannot take action, either
because the cases are in litigation and under the jurisdiction of the
Office of Chief Counsel or the Department of Justice, or because of
taxpayer delays in responding to information requests.\15\ The EO
function will continue working toward further reducing or eliminating
the remaining over-age inventory.
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\15\ When an organization does not respond to a request for
additional information, EO follows the process contained in IRM 7.20.2.
EO will give the organization time to respond to an initial letter,
attempt to call the organization to secure a response, and in some
instances give an extension of time to respond when requested by the
organization.
Realigning Organizational Functions for Improved Service \16\
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\16\ This discussion relates to bipartisan Finding #5 and the
related bipartisan Recommendation. See Appendix A, Finding B5,
Recommendation B5.1.
After 2013, the IRS evaluated whether current organizational structures
and workplace locations were inhibiting performance. As a result of
this evaluation, the IRS has made several notable structural changes
aimed at enabling performance improvements.\17\ For instance, the EO
Director and the EO Director of Rulings and Agreements positions have
been physically relocated from Washington, DC to Cincinnati, OH, so
that the EO leadership is now physically co-located with most EO
function employees working on determination applications. Additionally,
as a result of Streamlined Case Processing and the introduction of the
Form 1023-EZ, the efficiency in EO Determinations increased
significantly. Therefore, after conducting a workload analysis,
approximately 40 EO Determinations employees in El Monte, Sacramento,
and Baltimore will be shifted to EO Examinations in October 2015. Not
only does this realignment enable the EO function to provide much-
needed resources to EO Examinations, it will also result in the
majority of the remaining EO Determinations employees being co-located
with their leadership in Cincinnati.
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\17\ See Appendix B, ``Before and After Structures of the EO
Division.''
The Tax Exempt/Government Entities Division (TE/GE) also recognized the
importance of timely and useful guidance from its legal counsel. To
help achieve that result, in early 2015, TE/GE worked closely with the
Office of Chief Counsel to realign functions that perform legal
analysis, previously housed within TE/GE, to the Office of Chief
Counsel. Additionally, the new stand-alone office of Tax Exempt and
Government Entities Division Counsel in the Office of Chief Counsel was
established, which now has responsibility for providing advice and
assistance on determinations, enforcement, and compliance issues to the
TE/GE Division, which includes EO. As a result of these actions, there
is now a clear separation of duties, as well as well-defined procedures
and improved lines of communication between TE/GE leaders and their
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counterparts in the Office of Chief Counsel.
Fostering a Culture of Accountability \18\
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\18\ This discussion relates to bipartisan Finding #2 and the
related bipartisan Recommendations, as well as bipartisan Finding #3
and the related Recommendation #1. See Appendix A, Finding B2,
Recommendations B2.1, B2.2, and B2.3; Finding B3, Recommendation B3.1.
To support and enable a successful transition to the new organizational
structure in the EO function, the IRS is ensuring that employees,
managers, and leadership are engaged in an environment of
accountability. Beginning in FY 2015, all TE/GE managers have a
managerial commitment in their performance plans to conduct regular
workload reviews with their direct reports. In EO, these workload
reviews include a proactive inventory review by managers to ensure that
employees are completing work in a timely fashion. While these reviews
are initiated between the frontline managers and their employees, the
case cycle time results and any other issues are shared with upper-
level managers and executives in the EO Division and TE/GE through
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monthly Operational Reviews.
In addition to the workload reviews, managers in all TE/GE functions,
including EO, conduct monthly Operational Reviews. These reviews ensure
that managers are properly overseeing the work of their employees,
regardless of the employees' place of duty or telework agreement. In
2014, TE/GE and EO leadership re-emphasized the need for managers in EO
Determinations to conduct regular monthly meetings with employees to
review over-age cases. Today, they continue to discuss the results of
those inventory reviews with their Director. Cycle time information
was, and continues to be, provided on a monthly basis to the EO
Director and TE/GE Commissioner. Finally, cycle time data, including
the number of over-age cases, are reported to the TE/GE Commissioner
and the IRS Deputy Commissioner for Services and Enforcement quarterly,
via the Business Performance Review process. The IRS Commissioner is
informed of the number of over-age cases through regular updates
provided every 6 weeks. As demonstrated by the data cited above, TE/GE
leadership believes that the managerial commitment and focus on case
processing oversight directly contributes to, and ensures, improved
processing times and reduced inventory. If an employee or manager is
not meeting performance timeliness standards, those issues will also be
addressed through employee appraisals. The Critical Job Elements for
TE/GE employees reference established IRM time frames for action. If
employees fail to meet performance timeliness standards, management
will address the issues in a manner consistent with the negotiated
contract between IRS Management and the National Treasury Employees
Union. Similarly, if managers fail to meet performance standards,
senior management will address the issues in a manner consistent with
the manager's performance agreement.
Strengthening Risk Management Through Improved Communication \19\
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\19\ This discussion relates to bipartisan Finding #4 and the
related bipartisan Recommendation. See Appendix A, Finding B4,
Recommendation B4.1.
Changes in processes and organization structure, along with a greater
emphasis on more regular communication, have strengthened TE/GE's
ability to manage risk effectively. More opportunities exist for
interaction between managers and employees with the implementation of
regular operational reviews, inventory reviews, and regular town hall
meetings. Furthermore, a new Risk Management Process established in TE/
GE this fiscal year as part of the IRS's development of an agency-wide
risk management program beginning in FY 2014, is a mechanism that
enables certain issues to be elevated from the group level to the
executive leadership for review and discussion. This new and expansive
process further mitigates the risk that sensitive issues may not be
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timely elevated within the organization.
During the Finance Committee's investigation, the EO function looked
closely at its Sensitive Case Report (SCR) procedures. It has since
made several revisions to strengthen the process to increase
communication and mitigate potential risks. The EO function revised
several IRM provisions to clarify the definitions of SCR issues, when
and why to elevate issues, and the difference between elevating issues
to inform managers and executives versus to obtain a decision. Issues
are now elevated during monthly management updates, and SCRs are sent
to executives who conduct a comprehensive review, ask necessary follow-
up questions, request further briefings when appropriate, and determine
potential next steps when needed.\20\
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\20\ IRM 1.54.1, ``TE/GE Roles and Responsibilities.''
The TE/GE Division, including the EO function, is also in the process
of implementing a new knowledge management process that will increase
communication by disseminating information on technical topics. Core
knowledge management teams will be made up of representatives from
diverse backgrounds, such as determinations, examinations, and
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technical.
Bolstering Employee Training \21\
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\21\ This discussion relates to bipartisan Finding #6 and the
related bipartisan Recommendation. See Appendix A, Finding B6,
Recommendations B6.1.
Providing appropriate, current, and timely training for employees is
essential to ensure revised processes and procedures are carried out as
intended. Across the IRS, annual training expenditures were
significantly reduced across the board between FY 2010 and FY 2014, as
a result of ongoing cuts in the IRS budget. Nevertheless, following the
release of the 2013 TIGTA Report, the EO function conducted substantial
employee training. Today, the EO function puts a continuing emphasis on
cost-effective training, and is developing new ways of delivering and
sharing training materials and technical expertise. For example, EO
provides a training class on the proper use of the Letter 1312,
``Request for Additional Information,'' which is used when additional
information is needed to make a determination on an EO application.
This class will continue to focus employees and managers on the
letter's proper use in potential political campaign intervention
activity cases, and will educate and reinforce understanding of both
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appropriate and inappropriate questions regarding donors.
In response to three recommendations contained in the 2013 TIGTA
Report, during the summer of 2014 the EO function held mandatory
training for all EO function employees on political campaign
intervention activities. This training comprised written materials,
virtual e-Learning sessions, and face-to-face, small-group, technical
workshops. In 2014, the EO function began holding quarterly continuing
professional education (CPE) sessions and Interim Guidance Awareness
training. The content of the CPE sessions varies, but typically focuses
on EO tax law topics. Refresher training on Interim Guidance is a
refresher course/update, delivered virtually, on the content of prior
pieces of interim guidance such as roll-out of the Emerging Issues
Committee and coverage of IRS Counsel-approved case development
questions.
Looking ahead and responsive to the Finance Committee's interest, as
part of its continuing effort to further reduce its inventory of over-
age cases, the EO function has scheduled October 2015 training for
determinations specialists on quality standards, including timely case
processing standards.
While the use of virtual e-Learning tools enables employees to receive
training from subject matter experts at reduced costs, the IRS is aware
of the need to ensure that technical content is delivered successfully
and that attendance is monitored carefully. To that end, the IRS is
using a refined and improved methodology to verify virtual training
attendance. The EO Program Management Office (PMO) now coordinates
training events for the EO function and tracks and reports on training
attendance. Employees are required to retake all training sessions they
fail to complete. If an employee, including a manager, fails to attend
a required training session, PMO notifies both the employee and the
employee's manager to ensure attendance in the near future. Further,
the failure of an employee, or manager, to attend mandatory training
sessions will be documented in their performance evaluations.
In addition to the new technical assistance procedures, the EO function
is currently implementing a knowledge management (KM) network which,
when completed, will provide EO function employees with easy access to
information on a wide range of technical issues, including, for
example, unrelated business income tax and private foundations. The
information will highlight the relevant law, applicable revenue rulings
and guidance, and frequently encountered issues. Employees will also
have access to KM subject-matter experts for additional guidance and
assistance. This process will increase information sharing across the
EO function while improving consistency in how employees approach
technical issues. The EO function has begun to deliver periodic
training events focused on its new knowledge management processes,
including their purpose, benefits, and how to access KM services for
all employees through the new KM system.
Ensuring Neutral Review Processes \22\
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\22\ This discussion relates to bipartisan Finding #2, and the
related bipartisan Recommendation, #1, as well as bipartisan Finding
#7, and the related bipartisan Recommendation #1. See Appendix A,
Findings B2 and B7, Recommendations B2.1, and B7.1.
The EO function has taken definitive steps to ensure a neutral review
process for organizations applying for tax-exempt status. First, the EO
function has focused on preventing improper requests for donor
identities at the application stage. Following the release of the 2013
TIGTA Report, the IRS provided guidance to EO function employees on
processing applications for tax-exempt status when an organization
provides information on Forms 1023 or 1024 that is insufficient for the
IRS to reach a conclusion regarding exempt status.\23\ As of 2014, the
IRS has implemented new procedures to ensure that requests for
additional information in cases involving potential political campaign
intervention activities are appropriate in scope and scale.\24\ A
template letter, Letter 1312, ``Request for Additional Information,''
was developed through careful coordination among the Office of Chief
Counsel, the Office of Taxpayer Correspondence, and the Taxpayer
Advocate Service's (TAS) Office, and it does not contain any questions
relating to names of donors. EO Determination specialists are now
instructed to use Letter 1312 in developing all such cases, and
specialists must submit all development letters to their group manager
for review and approval prior to issuance to an organization. The
categories of questions that are contained in the template Letter 1312
have been made available to the public on the IRS website since January
2014,\25\ and are updated as necessary.
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\23\ Interim Guidance Memorandum, TE/GE-07-1014-0027 (October 24,
2014).
\24\ Interim Guidance Memoranda, TE/GE-07-1214-0030 (December 10,
2014) and TE/GE-07-1214-0032 December 23, 2014).
\25\ www.irs.gov/Charities-%26-Non-Profits/Charitable-
Organizations/Exempt-Organization-Sample-Questions.
Additionally, the IRS will continue to review and improve its EO
examination case selection internal control system, an issue which was
the subject of a detailed discussion in the Finance Committee's
bipartisan report.\26\ Following the recommendations contained in the
July 2015 GAO Audit report,\27\ the EO function issued revised
procedures for the composition and operation of the Political Activity
Referral Committee.\28\ Pursuant to the revised procedures, the
committee will consist of three EO managers, selected at random. The
managers will receive appropriate training and serve on the committee
for 2 years. These procedures will ensure the committee will review and
recommend referrals for audit in an impartial and unbiased manner. The
committee must identify and document in the case file that the referral
and associated publicly available records establish that an
organization, and any relevant persons associated with that
organization, may not be in compliance with Federal tax laws. The EO
function has moved quickly to implement the new procedures. The first
three committee members under this new procedure were selected in the
beginning of August 2015. EO is committed to conducting regular reviews
to ensure that committee members operate in accordance with all aspects
of the Interim Guidance.
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\26\ See the Finance Committee Report at pp. 128-29.
\27\ ``IRS Examination Selection Internal Controls for Exempt
Organization Selection Should Be Strengthened'' (GAO-15-514) (July
2015).
\28\ Interim Guidance Memorandum TE/GE-04-0715-0018 (July 16,
2015). See Appendix C.
The Department of the Treasury and the IRS have also begun the process
of developing guidance under section 501(c)(4) on how to measure social
welfare and non-social welfare activities.\29\ The goal of this
guidance project is to move the EO determination process away from a
subjective ``facts and circumstances'' analysis and toward more
objective standards. This effort has been greatly informed by the more
than 160,000 public comments received in response to the 2013 proposed
regulations. Treasury and the IRS asked for, and received, comments on
several issues, including three major issues: the proposed definition
of political campaign activity; to which organizations that definition
should apply; and the amount of political activity an organization can
engage in consistent with a particular tax-exempt status. Ultimately,
Treasury and the IRS strive to develop guidance that is clear, fair to
everyone, and easy to administer.
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\29\ This discussion relates to Majority Recommendation #5, p. 267,
as well as Minority Recommendation #2, p. 314. See Appendix A,
Recommendations Maj5 and Min11.
Finally, the IRS has always maintained a general practice of not
involving political appointees in the handling of specific taxpayer
matters.\30\ Instead, for EO taxpayers, such matters should be resolved
by the TE/GE Commissioner or the Deputy Commissioner, Services and
Enforcement. The EO function provides SCRs to the TE/GE Commissioner,
and those SCRs are reviewed by the TE/GE Commissioner and forwarded to
the Deputy Commissioner, Services and Enforcement, as needed.
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\30\ Per IRM 1.54.1.9.1 (updated 12-20-2013), the IRS has a general
practice of not involving political appointees (viz., the Commissioner
of Internal Revenue and the IRS Chief Counsel) in the handling of
specific taxpayer matters.
Improving Procedures Under the Freedom of Information Act \31\
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\31\ This discussion relates to bipartisan Findings #8 and #9, and
the related bipartisan Recommendations. See Appendix A, Findings B8 and
B9, Recommendations B8.1, B9.1, and B9.2.
It is important to distinguish FOIA requests, which are worked by the
IRS Disclosure Office, from other types of requests for IRS records.
Similar to requests for administrative case files, which are worked by
the IRS business units, requests seeking copies of tax exempt
applications under section 6104 are worked by EO's Rulings and
Agreements Processing Section, Correspondence Unit, and not processed
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as FOIA requests by the Disclosure Office.
Regarding FOIA requests, the IRS Disclosure Office uses an established
network of contacts in each of the various business units to serve as
subject-matter experts and coordinate searches within their
organizations. The Disclosure Office relies on the business unit
contacts to identify the existence and location of responsive
documents, and to coordinate with the custodian offices.\32\ The
Disclosure Office and the business unit contacts maintain open lines of
communication, and follow-up with FOIA requestors to better define the
scope of their requests whenever there are questions.\33\ This approach
is intended to maximize public access to agency records. Similarly, IRS
guidance describes opportunities to extend the search to records
created after the date of the request if the search effort is drawn out
or was not timely initiated in an effort to provide the requester with
access to as many responsive records as possible. In all cases, the
IRS's search efforts must be documented, whether or not responsive
records exist.
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\32\ Generally, the IRS keeps records in files, e.g., exam files,
collection files, and regulation files. When a FOIA request is vague or
describes a broad program or process, it can be much more difficult to
locate custodians and responsive records. See IRM 11.3.13.5.5(6) and
IRM 11.3.13.6.2(10); (08-14-2013).
\33\ IRM 11.3.13.6.2 and 11.3.13.6.3(13); (08-14-2013).
To ensure that Disclosure Office employees at all experience levels
have the tools they need to conduct robust searches for FOIA requests,
which are increasingly complex in scope and volume, the Disclosure
Office is preparing guidance in the form of written standard search
procedures. This guidance will focus on many of the more frequently
requested categories of information and include contact lists.
Employees processing FOIA requests will be trained in those procedures
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by the end of 2015.
The Disclosure Office's existing FOIA procedures require secondary
review of all FOIA documents when records are denied in part or in full
for the proper application of the FOIA exemptions before release.\34\
The Office of Disclosure also has an embedded quality review process
pursuant to which a sample of all FOIA releases are reviewed against
quality standards, including a measure of technical accuracy of the
records released. The Disclosure Office will issue a directive by
September 30, 2015 emphasizing the importance of continuing to focus on
the adequacy of each search effort, emphasizing the IRM requirements
and stressing the need to document where deficiencies exist.\35\
Additionally, TIGTA conducts periodic reviews of the IRS's compliance
with FOIA. In some instances, TIGTA has noted incidences of improper
disclosures.\36\ The IRS responded to those reports by conducting
additional training for FOIA caseworkers.
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\34\ IRM 11.3.13.8(3) and (9); (08-14-2013).
\35\ IRM 11.3.13.6.3 (8-14-2013).
\36\ TIGTA report 2014-30-064 (9-17-2014); See
https://www.treasury.gov/tigta/auditreports/2014reports/
201430064fr.pdf.
In May 2015, the EO function released new procedures for handling FOIA
requests. These procedures were shared with the EO Functional Directors
and will be incorporated into Interim Guidance. Under the new
procedures, all FOIA requests will be coordinated through the EO
Program Management Office. That office will document and track all
requests, verify whether the request relates to efforts by other IRS
business functions, coordinate with the Disclosure Office to determine
the appropriate scope of the request, and reach out to the appropriate
EO points of contact contained within each EO function. These new
procedures will assist in ensuring that searches are appropriately
conducted across all components of the EO function, as recommended by
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the Finance Committee.
Reviewing the Use of the Office Communicator System \37\
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\37\ This discussion relates to bipartisan Finding #10 and the
related bipartisan Recommendation. See Appendix A, Finding B10,
Recommendations B10.1.
The Finance Committee's Findings and Recommendations raise important
questions about records retention, as well as questions regarding IRS
employee use of the Office Communicator System (OCS). Similar to an
internal instant messaging system, OCS enables IRS employees to hold
virtual meetings, as well as virtual training events involving large
numbers of employees and offices. These functionalities reduce expenses
for travel and meeting space. In December 2014, the IRS conducted a
review of employee use of OCS, and found that, in addition to its
business uses, it is most often used as an informal means of
communication. To address the need to maintain and safeguard Federal
records that may be created in OCS, the IRS, in coordination with
National Archives and Records Administration, is developing policies
and practices that are consistent with Federal recordkeeping
requirements. Currently, the IRM advises employees who create Federal
records using informal means of documentation or communication,
including OCS, to convert those records to a more structured format to
facilitate records management and enable appropriate retention.\38\ The
IRS plans to improve this guidance by adding more specific instructions
and clarifying examples.
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\38\ The Federal Records Act requires that the agency maintain
agency records, i.e., records created, compiled or received in the
course of agency business. The IRS policy on e-mails is that all e-
mails that relate to agency business should be printed and kept with
the file, and that work-related e-mails are subject to FOIA and
discovery. IRM 1.10.3.2.4; IRM 1.10.3.3.5 (03-06-2015).
Responding to Government Accountability Office Recommendations \39\
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\39\ This discussion relates to bipartisan Finding #7, and the
related bipartisan Recommendation #2. See Appendix A, Finding B7,
Recommendation B7.2.
The GAO's July 2015 report made 10 recommendations addressing a range
of issues, including: the substance and currency of the IRM; EO case
selection controls; EO examination criteria, approval and oversight,
additional controls, and database maintenance; referral training and
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referral controls; and closed file tracking and maintenance.
The IRS generally agrees with the GAO's recommendations. The EO
function has already begun developing action plans to address each of
them, and it is making progress towards doing so. For example, the GAO
recommended that the IRS ensure that referral committee members rotate
every 12 months by soliciting volunteers, and suggested the EO function
should revise the IRM to require an alternative rotation schedule if 12
months is not appropriate. As explained above, the EO function released
interim guidance \40\ in July 2015, announcing new procedures for the
Political Action Referral Committee that are consistent with the GAO
recommendations. In response to other GAO recommendations, the EO
function has already set FY 2016 target dates for completion of IRM
updates and operational reviews.
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\40\ TE/GE-04-0715-0018 (July 16, 2015).
The EO function will continue addressing all 10 GAO recommendations, as
quickly as it can, and the IRS will report to Congress on its progress
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in Fall 2015.
Recommendations Outside IRS Jurisdiction or That Require Legislative
Changes
The Finance Committee Report contains several recommendations that are
outside the jurisdiction of the IRS. One recommendation suggested the
creation of a position within the Taxpayer Advocate Service (TAS)
dedicated solely to assisting organizations applying for non-profit
tax-exempt status.\41\ TAS is preparing a separate response to the
Finance Committee. However, it is our understanding that TAS has
already begun to address this recommendation. Thus far, TAS has
recently created several positions relating to exempt entities: a
Revenue Agent Technical Advisor with specific exempt organization
expertise to assist all of TAS's Local Taxpayer Advocate offices with
complex EO cases; and a Systemic Advocacy Analyst with EO background
and expertise who reviews and identifies systemic problems relating to
EOs. TAS also has two attorney-advisors who work EO legal issues and EO
cases referred to TAS, one of whom reports directly to the National
Taxpayer Advocate.
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\41\ This discussion relates to bipartisan Finding #1 and the
related bipartisan Recommendation #3. See Appendix A, Finding B1,
Recommendation B1.3.
Additionally, TAS plans to hire a mid-level Advocacy Specialist in the
Washington, DC, Local Taxpayer Advocate office, who will focus on the
most complex and disputed EO cases. The Advocacy Specialist will spend
half the time working on cases in a particular area of expertise and
the other half on systemic issues such as: handling of cases, training,
the Annual Report to Congress, and serving on IRS teams, with respect
to EO. TAS is working on drafting a full description of the Advocacy
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Specialist position and will announce it in the near future.
Another bipartisan recommendation focused on revisions to the Hatch
Act.\42\ The proposal would require legislative action and accordingly,
the IRS has not taken action responsive to this recommendation.
Similarly, the Majority and the Minority each prepared lists of several
recommendations calling for legislative changes. These recommendations
included, for example, amending the Federal Service Labor-
Management Relations statute to designate the IRS as exempt from labor
organization and collective bargaining requirements,\43\ amending
section 7428 to provide for declaratory judgment actions by applicants
for tax-exempt status under section 501(c)(4), (5), and (6),\44\ and
amending several other Internal Revenue Code provisions relating to
exempt organizations.\45\
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\42\ This discussion relates to bipartisan Finding #1 and the
related bipartisan Recommendation #2. See Appendix A, Finding B1,
Recommendation B1.2.
\43\ This discussion relates to Majority Recommendation #2, p. 267.
See Appendix A, Recommendation Maj2.
\44\ This discussion relates to Majority Recommendation #3, p. 267.
See Appendix A, Recommendation Maj3.
\45\ This discussion relates to Majority Recommendation, p. 258.
See Appendix A, Recommendation Maj6.
In addition, the Committee recommended that TIGTA conduct a review of
the revised EO Examination procedures, no later than July 1, 2017.\46\
The IRS is ready and willing to cooperate with any future TIGTA review.
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\46\ This discussion relates to bipartisan Finding #7 and the
related bipartisan Recommendation #3. See Appendix A, Finding B7,
Recommendation B7.3.
Finally, both the Majority and Minority sections of the Report address
the possibility of removing the IRS from under the authority of the
Department of the Treasury and establishing it as an independent,
stand-alone agency.\47\ This recommendation raises numerous legal and
policy issues, and is outside the jurisdiction of the IRS. Accordingly,
the IRS does not intend to take any action responsive to this
recommendation.
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\47\ This discussion relates to Majority Recommendation #1, p. 267.
See Appendix A, Recommendation MAj1.
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Conclusion
The Finance Committee's extensive investigation of the IRS's processing
of applications for tax exempt status submitted by ``political
advocacy'' organizations from 2010-2013 spanned the full breadth of the
IRS's EO operations. The Finance Committee's thorough, detailed, and
balanced bipartisan report chronicles many problems with those
operations, including but not limited to: the IRS's interactions with
applicants; its handling of their applications; management oversight of
the EO process; IRS organizational structures; manager and employee
training; and taxpayer confidentiality and access to records. The
Finance Committee's report also shows the path forward, however, by
laying down a series of specific findings and recommendations.
Throughout the Finance Committee's investigation, and continuing today,
the IRS has been working hard to move along that path towards its goal
of providing top quality service to America's exempt organizations. To
that end, the IRS will continue to address the Report's bipartisan
findings and recommendations, as well as all the recommendations
prepared by the Majority and Minority staffs. As discussed in this
report, the IRS has already taken significant and important actions to
address the problems identified by the Finance Committee, and those
actions are resulting in substantive improvements.
Appendix A--Finance Committee Findings and Recommendations
1. Bipartisan (B) Findings and Recommendations
--------------------------------------------------------------------------------------------------------------------------------------------------------
Finance
Finding Description Recommendation Description Committee IRS Report Subheading
Report Page # (Page #)
--------------------------------------------------------------------------------------------------------------------------------------------------------
B1 The IRS's handling of B1.1 Publish in the instructions to all 8 Promoting Transparency
applications from advocacy relevant application forms objective and Accessibility in
organizations may affect public criteria that may trigger additional the EO Determination
confidence in the IRS. To avoid review of applications for tax-exempt Process (2)
any concerns that may exist status and the procedures IRS
that IRS decisions about specialists use to process
particular taxpayers are applications involving political
influenced by politics, the campaign activity. Prohibit the IRS
following recommendations are from requesting individual donor
made. identities at the application stage,
although generalized donor questions
should continue to be allowed, as well
as requests for representations that,
e.g., there will be no private
inurement.
--------------------------------------------------------------------------------------------------------------------------------------------------------
B1.2 Revise the Hatch Act to designate all 8 Recommendations
IRS, Treasury and Chief Counsel outside IRS
employees who handle exempt Jurisdiction or that
organization matters as ``further Require Legislative
restricted.'' ``Further restricted'' Changes (11)
employees are held to stricter rules
than most government employees and are
precluded from active participation in
political management or partisan
campaigns, even while off-duty. By
designating those employees as
``further restricted,'' the public can
be assured that any impermissible
political activity by an IRS employee
that is detected will result in
serious penalties, including removal
from Federal employment.
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B1.3 Create a position within the Taxpayer 8 Recommendations
Advocate Service dedicated solely to outside IRS
assisting organizations applying for Jurisdiction or that
non-profit tax- exempt status. Require Legislative
Changes (11)
--------------------------------------------------------------------------------------------------------------------------------------------------------
B2 The IRS systematically screened B2.1 The Exempt Organizations division 9 Streamlining the EO
incoming applications for tax- should track the age and cycle time of Determination Process
exempt status from more than all of its cases, including those to Ensure Timely
500 organizations and referred to EO Technical, so that it Processing and Reduce
implemented procedures that can detect backlogs early in the Delay (3)
resulted in lengthy delays. process and conduct periodic reviews Fostering a Culture of
Until early 2012, certain top- of over-aged cases to identify the Accountability (5)
level management was unaware cause of the delays. A list of over- Ensuring Neutral
that these applications were aged cases should be sent to the Review Processes (8)
being processed in this manner. Commissioner of the Internal Revenue
Service quarterly.
--------------------------------------------------------------------------------------------------------------------------------------------------------
B2.2 The Exempt Organizations division 9 Streamlining the EO
should track requests for guidance or Determination Process
assistance from the EO Technical Unit to Ensure Timely
so that management can assess the Processing and Reduce
timeliness and quality of the guidance Delay (3)
and assistance it provides to both Fostering a Culture of
Determinations Unit employees and the Accountability (5)
public.
--------------------------------------------------------------------------------------------------------------------------------------------------------
B2.3 The Exempt Organizations division 9 Streamlining the EO
should track requests for guidance or Determination Process
assistance from the Office of Chief to Ensure Timely
Counsel so that management can assess Processing and Reduce
the timeliness and quality of the Delay (3)
guidance and assistance it provides to Fostering a Culture of
both the Determinations Unit employees Accountability (5)
and the public. Any requests for
guidance or assistance from the Office
of Chief Counsel that have not been
responded to on a timely basis should
be promptly reported to the
Commissioner of the Internal Revenue
Service.
--------------------------------------------------------------------------------------------------------------------------------------------------------
B3 The IRS took as long as 5 years B3.1 The Internal Revenue Manual contains 9 Fostering a Culture of
to come to a decision on standards for timely processing of Accountability (5)
applications for tax-exempt cases. Enforce these existing
status submitted by Tea Party standards and discipline employees who
and other applicants fail to follow them. Managers should
potentially involved in also be held accountable if their
political advocacy. The IRS subordinates fail to follow these
lacked an adequate sense of standards.
customer service and displayed
very little concern for
resolving these cases.
--------------------------------------------------------------------------------------------------------------------------------------------------------
B3.2 For all types of tax-exempt applicants, 9 Streamlining the EO
IRS guidelines should direct employees Determination Process
to come to a decision on whether or to Ensure Timely
not it will approve an application for Processing and Reduce
tax-exempt status within 270 days of Delay (3)
when an application is filed.
--------------------------------------------------------------------------------------------------------------------------------------------------------
B4 Important issues were not B4.1 Revise the Sensitive Case Report 9-10 Strengthening Risk
elevated within the IRS. Some process or develop a more effective Management through
Sensitive Case Reports way to elevate important issues within Improved
containing information about the organization other than the Communication (6)
Tea Party applications were Sensitive Case Reports system. Require
sent to top IRS managers in the senior recipient of each Sensitive
2010, but the managers did not Case Report within the Division (a
read them. member of the Senior Executive
Service) to memorialize specific
actions taken in relation to each
issue raised in the report, and
require such report to be forwarded to
the IRS Commissioner for review.
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B5 A contributing factor to the B5.1 Evaluate whether current organizational 10 Realigning
IRS's management problems was structures and workplace locations are Organizational
the decentralization of its inhibiting performance. Make Functions for
employees, including some who appropriate adjustments to improve Improved Service (4)
worked from home as often as 4 communication between employees and
days per week, and managers who their managers.
remotely supervised employees
2,000 miles away.
--------------------------------------------------------------------------------------------------------------------------------------------------------
B6 Some managers within the EO B6.1 Set minimum training standards for all 10 Bolstering Employee
Division were not trained in managers within the EO division to Training (6)
the substantive tax areas that ensure that they have adequate
they managed, including one who technical ability to perform their
did not complete any technical jobs.
training during the 10 years
that she served in a managerial
EO position.
--------------------------------------------------------------------------------------------------------------------------------------------------------
B7 The IRS did not perform any B7.1 Review the recently enacted procedures 10 Ensuring Neutral
audits of groups alleged to to determine if: (1) the process Review Processes (8)
have engaged in improper enables the IRS to impartially
political activity from 2010 evaluate allegations of impermissible
through April 2014. During that political activity; (2) any of the
time, the IRS tried to referrals have resulted in the IRS
implement new processes to opening an examination related to
select cases for examination, political activity, and if so, whether
but a memo from Judy Kindell, such an examination was warranted; and
Sharon Light and Tom Miller (3) if necessary, the IRS should make
stated that this approach further modifications to ensure that
``arguably [gave] the it carries out the enforcement
impression that somehow the function in a fair and impartial
political leanings of [the manner.
organizations] mentioned were
considered in making the
ultimate decision.'' The IRS
recently discontinued use of
the Dual Track process and now
uses generalized procedures
when deciding whether to open
an examination of an exempt
organization's political
activities.
--------------------------------------------------------------------------------------------------------------------------------------------------------
B7.2 The IRS should fully implement all 10 Response to Government
recommendations of the Government Accountability Office
Accountability Office in their July Recommendations (11)
2015 report titled ``IRS Examination
Selection: Internal Controls for
Exempt Organization Selection Should
be Strengthened,'' GAO-15-514.
--------------------------------------------------------------------------------------------------------------------------------------------------------
B7.3 No later than July 1, 2017, we request 10 Recommendations
that TIGTA conduct a review of the outside IRS
three points noted above in Jurisdiction or that
Recommendation #1 related to the Require Legislative
revised EO Exam procedures. Changes (11)
--------------------------------------------------------------------------------------------------------------------------------------------------------
B8 On multiple occasions, the IRS B8.1 Require all outgoing FOIA responses to 11 Improving FOIA
improperly disclosed sensitive be reviewed by a second employee to Procedures (9)
taxpayer information when ensure that taxpayer information is
responding to Freedom of not improperly disclosed.
Information Act (FOIA)
requests. Employees who were
responsible for these
disclosures received minimal or
no discipline.
--------------------------------------------------------------------------------------------------------------------------------------------------------
B9 In 2010, the IRS received a FOIA B9.1 Ensure that IRS procedures specify 11 Improving FOIA
request from a freelance which organizational units within the Procedures (9)
journalist seeking information agency should be searched when the IRS
about how the agency was receives an incoming FOIA request on a
processing requests for tax- particular topic. For example, when
exempt status submitted by Tea the IRS receives a FOIA request for
Party groups. After 7 month, records related to tax-exempt
the IRS erroneously informed applications, the agency should search
the journalist that they did the records of all components within
not possess any documents that the Exempt Organizations division.
were responsive to her request.
--------------------------------------------------------------------------------------------------------------------------------------------------------
B9.2 To be consistent with the intent of 11 Improving FOIA
FOIA, employees handling FOIA requests Procedures (9)
should construe the requests broadly
and contact the requestor to clarify
the scope of the request whenever
necessary. However, the IRS should
also take appropriate measures to
safeguard taxpayer information and
avoid improper disclosure.
--------------------------------------------------------------------------------------------------------------------------------------------------------
B10 The IRS has made Office B10.1 The IRS should review how employees use 11 Review the Use of the
Communicator Server (OCS) OCS. If the program is not used for Office Communicator
instant messaging software IRS business, the agency should System (10)
available to its employees. evaluate whether it is appropriate and
Under the collective bargaining necessary. If OCS is used for official
agreement with the National IRS purposes, the IRS should take
Treasury Employees' Union, the measures to ensure such use complies
IRS agreed that it would not with Federal recordkeeping laws.
automatically save messages
sent to and from employees. As
a result, messages can only be
recovered if an employee
elected to save them. TIGTA
opined that this policy does
not necessarily violate federal
recordkeeping laws, but noted
that ``[w]hether OCS is being
used according to NARA's
guidance depends on how OCS end-
users are utilizing the
system.''
--------------------------------------------------------------------------------------------------------------------------------------------------------
2. Majority (Maj) Recommendations
--------------------------------------------------------------------------------------------------------------------------------------------------------
Maj1 The IRS must be removed from the 267 Recommendations
authority of the Treasury Department outside IRS
and established as an independent Jurisdiction or that
stand-alone agency. Require Legislative
Changes (11)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Maj2 The Federal Service Labor-Management 267 Recommendations
Relations Statute must be amended to outside IRS
designate the IRS as an agency that is Jurisdiction or that
exempt from labor organization and Require Legislative
collective bargaining requirements. Changes (11)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Maj3 Congress should amend section 7428 of 267 Recommendations
the Internal Revenue Code to enable outside IRS
applicants for tax-exempt status under Jurisdiction or that
501(c)(4), (5), and (6) to seek a Require Legislative
declaratory judgment if the IRS has Changes (11)
not rendered a decision on whether or
not it will approve an application
within 270 days. Doing so would afford
these organizations the same remedy
currently available only to 501(c)(3)
organizations, thereby advancing
parity among nonprofits.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Maj4 A key finding of this report is that 267 Streamlining the EO
many small organizations with limited Determination Process
resources were overwhelmed by unduly to Ensure Timely
burdensome IRS demands. We recommend Processing and Reduce
that the IRS establish a streamlined Delay (3)
application process for small
organizations applying for tax
exemption under 501(c)(3) and
501(c)(4) that enables them to avoid
unnecessary administrative burdens,
provided that appropriate conditions
are satisfied.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Maj5 Any further attempt by the IRS to 267 Ensuring Neutral
promulgate regulations revising the Review Process (8)
standard for determining whether
section 501(c)(4) organizations have
engaged in political campaign
intervention must not chill the free
exercise of political speech by those
organizations, nor disproportionately
affect organizations on either side of
the political spectrum.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Maj6 Legislative proposals that would 258 Recommendations
require near-universal disclosure of outside IRS
donors, such as those advanced by the Jurisdiction or that
Minority Staff, should be rejected. Require Legislative
Changes (11)
--------------------------------------------------------------------------------------------------------------------------------------------------------
3. Minority (Min) Recommendations
--------------------------------------------------------------------------------------------------------------------------------------------------------
Min1 Require (c)(4)s, (5)s, and (6)s to file 313 Recommendations
notice of formation within 24 hours outside IRS
(same as 527s). Jurisdiction or that
Require Legislative
Changes (11)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Min2 Create a bright-line test on political 313 Recommendations
activity (lobbying and campaigning)-- outside IRS
for example, a limitation of 10% of Jurisdiction or that
expenditures during the calendar year. Require Legislative
Changes (11)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Min3 Penalty: Apply Section 4955 penalty to 313 Recommendations
(c)(4)s--excise tax on excess outside IRS
political expenditures. Jurisdiction or that
Require Legislative
Changes (11)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Min4 Require the disclosure of donors who 313 Recommendations
contribute over $200 to 501(c)(4)s who outside IRS
engage in political activity (same as Jurisdiction or that
527 organizations), or $1,000, which Require Legislative
is the threshold in the Wyden- Changes (11)
Murkowski bill.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Min5 Require FEC filings to be attached to 314 Recommendations
990s. outside IRS
Jurisdiction or that
Require Legislative
Changes (11)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Min6 Require electronic filing of 990s 314 Recommendations
(included in the Senate Finance outside IRS
Committee's Tax Administration Jurisdiction or that
Discussion Draft). Require Legislative
Changes (11)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Min7 As an alternative, require disclosure 314 Recommendations
similar to 527 organizations (or by outside IRS
cross reference) for tax-exempt Jurisdiction or that
organizations that do any Require Legislative
``electioneering communications'' as Changes (11)
defined under FEC rules.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Min8 As an alternative, require tax-exempt 314 Recommendations
organizations that wish to fund outside IRS
electioneering communications to fund Jurisdiction or that
these operations through a segregated Require Legislative
527 account, thus, contributions would Changes (11)
be subject to disclosure.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Min9 As an alternative, require these 314 Recommendations
organizations be reclassified as 527 outside IRS
organizations. Jurisdiction or that
Require Legislative
Changes (11)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Min10 The Follow the Money Act introduced by 314 Recommendations
Chairman Wyden and Senator Murkowski outside IRS
requires that all individuals and Jurisdiction or that
entities engaged in independent Require Legislative
political spending, including Changes (11)
501(c)(4)s, disclose the names of
donors that contribute over $1,000 per
year. The legislation also requires
real-time disclosure of significant
independent political expenditures by
501(c)(4)s similar to the way
political candidates report spending
to the FEC. This legislation would
lessen the processing burden on the
IRS Exempt Organizations office
because its disclosure regime will
eliminate the incentive for
organizations to apply for tax-exempt
501(c)(4) status as a means to funnel
large anonymous donations into federal
elections.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Min11 A final option which would not require 314 Ensuring Neutral
changes in law envisions the IRS Review Processes (8)
reversing its decision in 1959 to
interpret ``exclusively'' as meaning
``primarily.'' The regulatory decision
that has led to hundreds of millions
of dollars of political spending by
``social welfare'' organizations could
be cancelled by another regulatory
decision setting the same standards
that applied before 1959.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Min12 The Democratic staff recommends that 314 Streamlining the EO
additional work be done to determine Determination Process
what reforms to 501(c)(5) and to Ensure Timely
501(c)(6) organizations are needed. Processing and Reduce
Delay (3)
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[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Appendix C--Interim Guidance Memorandum, TE/GE-04-0715-0018
(July 16, 2015)
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, DC 20224
TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION
July 17, 2015
Control No: TEGE-04-0715-0018
Affected IRM: 4.75.5
Expiration Date: July 16, 2017
MEMORANDUM FOR ALL EXEMPT ORGANIZATIONS MANAGERS
FROM: Tamera L. Ripperda, Director, Exempt Organizations
SUBJECT: Political Activities Referral Committee
This memorandum clarifies the composition and operations of the
Political Activities Referral Committee (PARC).
Effective immediately, a PARC will consist of three IR-04 managers (OPM
General Schedule (GS) grade 14 equivalent) who will be selected at
random. All EO Examinations and Rulings and Agreements front-line IR-04
managers are eligible for selection to a PARC. The managers who are
selected to serve on a PARC will receive appropriate training, and will
serve on that committee as a collateral assignment for a period of 2
years The inventory volume of political activities referrals received
will determine the number of PARCs established and the time commitment
required by the members of a PARC.
A PARC will review and recommend referrals for audit in an impartial
and unbiased manner. A PARC must identify and document to the case file
that the referral and associated publicly available records establish
that an organization and any relevant persons associated with that
organization may not be in compliance with Federal tax law. All PARC
members will use the Reporting Compliance Case Management System
(RCCMS) to document their activities and conclusions for the duration
of their assignment to a PARC. In order for a referral considered by
the PARC to be forwarded to an EO Examination group for audit
consideration, two out of three PARC members must make that forwarding
recommendation (majority rule).
Referral Classification Specialists will follow normal referral case
building procedures prior to submitting a referral to a PARC. This
includes, but is not limited to, IDRS information. Accurint, any
internet research and the completion of the Classification Lead Sheet.
See attached Exhibit for the Classification Lead Sheet.
This memorandum supersedes IG Memo, Procedures for Dual Track Approach
for Issues Involving Possible Political Campaign Intervention, issued
October 4, 2012.
This memorandum will expire on the earlier of 2 years from the date of
issuance or the date incorporated in the affected IRMs. If there are
any questions regarding this memorandum, those questions should be
directed to the EO Examinations Referrals Manager.
ATTACHMENT
DISTRIBUTION:
www.irs.gov
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
______
Questions Submitted for the Record to Hon. John A. Koskinen
Questions Submitted by Hon. Ron Wyden
Question. On October 26, 2015, the press reported that the IRS
obtained and received training for a cell-site simulator, commonly
referred to as a stingray, which works by mimicking a cell phone tower
in order to collect data from phones that connect to it. This comes on
the heels of other news reports that many companies have taken to
tracking their employees' movements through cell phone trackers in
order to avoid triggering a taxable presence in foreign countries. The
IRS has an important role to play in combating money laundering, drug
trafficking, and international tax dodging, but tax enforcement and
protection of personal privacy must not be mutually exclusive. Please
provide the following information about IRS use of cell-site
simulators:
How many times over the past 5 years did IRS criminal investigators
use a cell-site simulator or IMSI-catcher to extract information from a
mobile phone during the course of an investigation?
Answer. In the last five (5) years, IRS Criminal Investigation
(IRS-CI) has used cell-site simulator technology (also known as
Stingray) to track the location of forty-six (46) known cellular
devices. As discussed below, the only information captured by the
device was signaling data. The cell-site simulator device purchased is
not capable of extracting data such as email, call logs, text messages,
or photos that are stored on the target cellular device.
The cell-site simulator was first deployed in April 2012 and has
been used in support of eleven (11) Federal grand jury investigations
led by the appropriate United States Attorney's Office, which provided
oversight and guidance in obtaining the proper court orders and/or
tracking warrants. These eleven (11) investigations involved Stolen
Identity Refund Fraud (SIRF) and money laundering violations.
Thirty-eight (38) cellular devices were tracked as part of these
investigations.
IRS-CI has also used the cell-site simulator to assist other
federal and local law enforcement agencies in four (4) non IRS-CI
investigations. Three (3) of the four (4) cases were non-grand jury
State investigations. In each instance where IRS-CI provided
assistance, IRS-CI Special Agents operated the cell-site simulator,
ensured the proper State court orders had been obtained and followed
all applicable laws under the guidance of a State Prosecutor. The three
(3) cases involved attempted murder, murder and gun trafficking
investigations. These investigations tracked seven (7) cellular
devices. One (1) of the four (4) cases was a DEA federal grand jury
narcotics investigation. In this instance, IRS-CI operated the cell-
site simulator in coordination with its taskforce partner DEA. IRS-CI
verified that DEA obtained the appropriate federal court order and
followed all applicable laws under the guidance of an Assistant U.S.
Attorney (AUSA). This joint taskforce case was a narcotics
investigation and tracked one (1) cellular device.
Question. During investigations, what is the precise goal of the
use of such a device? What types of information have been collected?
Answer. As the law enforcement arm of the IRS, IRS-CI's goal of
using cell-site simulation technology is to identify and locate
individuals under investigation for potential criminal violations
within IRS-CI's investigative jurisdiction to include tax-related
identity theft and money laundering. As identified, prior to November
30, 2015, IRS-CI used the cell-site simulator to assist other federal
and local law enforcement agencies in four (4) non-IRS-CI
investigations. Subsequent to November 30, 2015, with the
implementation of IRS-CI's Cell-Site Simulator Policy, IRS-CI will no
longer deploy the cell-site simulator in non-IRS-CI investigations.
Cell-site simulators used by IRS-CI provided only the relative
signal strength and general direction of the subject cellular device;
they do not function as a GPS locator, as they do not obtain or
download any location information from the device or its applications.
When in operation mode, the cell-site simulator received unique
identifying numbers from multiple devices in the vicinity of the
simulator. Once the cell-site simulator identified the specific
cellular device it was looking for, it only obtained the signaling
information related to that particular known device. The cell-site
simulator did not remotely capture voice communication, emails, texts,
contact lists, images or any other content data from the devices.
Moreover, cell-site simulators used by IRS-CI did not provide
subscriber account information (for example, an account holder's name,
address or telephone number).
Any collected signaling data was deleted at the end of each daily
operation.
Question. During the Committee's October 27, 2015 hearing,
Commissioner Koskinen stated IRS cell-site simulators ``can only be
used with a court order. It can only be used based on probable cause of
criminal activity.'' What type of court order do IRS investigators
obtain before using cell-site simulators? Please note the number of
times each type of court order was obtained over the past 5 years.
Answer. IRS-CI Special Agents obtained the following court orders
through the United States Attorney's office in seeking approval to
utilize the cell-site simulator in criminal investigations. Other than
the three State cases and one DEA case noted, all criminal cases
utilizing the cell site simulator were Grand Jury cases within IRS-CI's
investigative jurisdiction.
Search Warrants--24
Pen Register/Trap Trace Court Order--14
Warrant and Order for Cell phone Location Information and
Pen Register--8
-IRS-CI deployed the cell-site simulator consistent with Department
of Justice (DOJ) Policy which, prior to September 3, 2015 permitted use
when authorized through a court order pursuant to the Pen Register
Statute. Department of Justice updated the policy effective September
3, 2015 to permit deployment of the device after obtaining a search
warrant supported by probable cause and issued pursuant to Rule 41 of
the Federal Rules of Criminal Procedure, subject to certain exceptions.
IRS-CI continued to follow DOJ's updated policy and then issued a
policy that mirrored the DOJ policy on November 30, 2015.
IRS-CI has also used the cell-site simulator to assist local law
enforcement agencies in three (3) non-IRS-CI State investigations. In
each instance, IRS-CI operated the cell-site simulator, ensured the
proper State court orders had been obtained and followed all applicable
laws under the guidance of a State Prosecutor.
______
Questions Submitted by Hon. Michael B. Enzi
Question.The Senate Finance Committee's bipartisan report found
that the workplace culture in the Exempt Organizations Division placed
little emphasis on valuing or providing customer service. Is this type
of culture more pervasive within the IRS than just the EO Division? How
do we know that it is not? What is the IRS doing to make sure this type
of work culture is not wide-spread, now or in the future?
Answer. Since I became IRS Commissioner 2\1/2\ years ago, I have
held town halls at IRS offices across the country, in person and
virtually, giving me the opportunity to talk with and listen to over
20,000 employees at all levels of the organization. From their
questions, concerns and suggestions I have learned of their concern
about the lack of resources that prevent them from providing the level
of taxpayer service that they think taxpayers deserve.
When you hear employees talk about the personal satisfaction they
derive from being able to answer a taxpayer's question or point them in
the right direction, you begin to understand the great emphasis IRS
employees place on valuing and providing top-quality customer service
to taxpayers. Indeed, providing taxpayers with quality service is one
of the taxpayer rights embodied in the Taxpayer Bill of Rights (TBOR)
that the IRS adopted in 2014. The TBOR is an important document that
outlines the 10 fundamental rights taxpayers have when working with the
IRS.
As a regular matter, the IRS provides year-round assistance to
taxpayers to help them fulfill their tax obligations. The taxpayer
assistance provided by the IRS comes in many forms, including: outreach
and education programs; issuance of tax forms and publications, rulings
and regulations; toll-free call centers; in-person help at Taxpayer
Assistance Centers (TAC); and our website, IRS.gov. The budget cuts
that resulted in our reduced levels of service are particularly
challenging for our employees who take pride in meeting our customers'
needs, and even with the most energetic response by our employees, the
IRS's constrained resources are such that we were not able to provide
our customers with the service that they need and deserve. The
additional funding that Congress provided the IRS for FY 2016 to
improve service to taxpayers was a very helpful development for
taxpayers and has enabled the IRS to provide our customers with more of
the quality service they need to meet their tax needs.
The IRS's commitment to taxpayer service also means assisting
taxpayers who are facing difficult economic times and other hardships
in meeting their tax obligations; and to that end, we have a variety of
installment payment options to help taxpayers who need an alternative
payment schedule.
I have personally seen and heard about many instances where IRS
employees have provided high quality service and thus, made a
difference for taxpayers. Some excerpts from some recent letters from
taxpayers: ``She was the consummate professional, and I felt her
kindness and human decency;'' ``I feel she went out of her way to help
me,'' and; ``when we complimented her service, she replied, `I love my
job.' '' Similar comments have been received from taxpayers about our
telephone assistors, employees at our Taxpayer Assistance Centers and
enforcement personnel.
As your question relates specifically to customer service in our
Exempt Organizations (EO) Division, we would like to note that EO's
commitment to providing taxpayers with timely service was the
underpinning for the IRS's streamlining of the EO determination process
that led to the creation of the Form 1023-EZ. In EO and across the IRS,
our employees and our workplace culture is committed to delivering on
the IRS mission, which is to ``provide America's taxpayers top-quality
service by helping them understand and meet their tax responsibilities
and enforce the law with integrity and fairness to all.''
Question. Regarding standards for customer service, the GAO
continues to recommend that the IRS benchmark its telephone service
measures to the best in business to help identify ways to improve
service and maintain a high quality service. According to the GAO, even
though the IRS has in the past benchmarked its telephone level of
service measures to both private and public sector organizations, the
IRS has disagreed with the GAO's recommendation to continue. The GAO
over a year ago said: ``While reduced funding has resulted in fewer
resources available to IRS, a better understanding of the nature and
size of service gaps could help it provide the best service possible
with declining resources.'' Why has the IRS declined to make this type
of effort now--that is, benchmarking its telephone level of service
measures to other organizations?
Answer. The IRS has recently decided to, as GAO suggests, update
our benchmarking comparisons against public and private sector
organizations with comparable customer service goals and challenges.
The agencies participating in the benchmark study were open to periodic
benchmark reviews; however at this time a set schedule has not yet been
established. The IRS continues to note that private sector
organizations often do not face the same budgetary constraints, budget
volatility and legislative challenges that federal agencies face. Nor
do many private sector organizations face an intense filing season,
with condensed accelerated demands for a portion of the year, and a
customer base largely interacting with us once a year rather than
transacting with us throughout the year. Therefore, defining
appropriate service levels against private industry or customer
expectations is challenging given the wide variation in private
industry business models.
Question. Of concern is the fact that the IRS has sent Consumer
Financial Protection Bureau flyers to taxpayers with their tax refund
checks. The flyers solicit information from the recipient taxpayers.
The Consumer Financial Protection Bureau has the power to examine
and to impose reporting requirements on financial institutions, enforce
certain consumer protection laws and regulations and make certain rules
and regulations. I do not believe this authority extends to soliciting
Americans' stories about money. Additionally, since the Consumer
Financial Protection Bureau is funded by a transfer of non-appropriated
funds from the Federal Reserve System's combined earnings, I question
whether it is appropriate to use taxpayer dollars to advertise the
Consumer Financial Protection Bureau, as the IRS did by including this
mailing with tax refunds. Lastly, because the Consumer Financial
Protection Bureau is supposed to be an independent organization, I do
not believe the Treasury Department should be soliciting information on
behalf of the entity.
I would appreciate answers to the following questions:
What authority did the Treasury Department rely on to
include this Consumer Financial Protection Bureau information
with IRS tax refunds?
What agency paid to print and mail the Consumer Financial
Protection Bureau flyers?
Has the IRS respected all the boundaries and complied with
all laws concerning confidential taxpayer information with the
inclusion of the Consumer Financial Protection Bureau flyer and
solicitation of information from taxpayer recipients?
Answer. The IRS does not mail refund checks to taxpayers. This
process is handled by the Bureau of Fiscal Service (BFS) at the
Department of Treasury and they make the decision about what, if
anything, will be included with the refund check. In consultation with
the BFS, we have determined the following.
Treasury's authority to make payments on behalf of the United
States Government, and to issue checks and other drafts, is found in
the United States Code at, inter alia, 31 U.S.C. Sec. Sec. 321, 3321,
and 3325. In 2013, Treasury successfully leveraged check inserts to
help federal beneficiaries meet Treasury's electronic payment
requirement. Check inserts also have been used for other purposes such
as Social Security Administration Cost of Living Adjustment
notifications or Medicare payment information. Many check inserts
include information that directs the check recipient to a government
website or a phone number for important program information. Check
insert messages may simply concern public interest matters such as
disaster preparedness or fraud and identity theft prevention.
At the request of the CFPB, the BFS included check inserts in
approximately 11.9 million tax refund mailings from February to April
of this year. The CFPB was responsible for all printing and shipping
costs related to these check inserts. The CFPB was also responsible for
reimbursing the BFS for the cost of its receiving and enclosing these
inserts (IAA for $19,397 in FY 2016). No BFS appropriations were used
as a result of the CFPB check enclosures.
The BFS is not in possession of any taxpayer recipient information
as a result of actions taken by the taxpayer in response to the CFPB
flyer. The BFS neither collects nor receives such information.
______
Prepared Statement of Hon. Ron Wyden,
a U.S. Senator From Oregon
In early August, the Finance Committee released the final report on
its bipartisan investigation into the IRS's processing of applications
from for tax-exempt status. Our investigation looked back at the period
between 2010 and 2013. The committee reviewed 1\1/2\ million pages of
e-mails and documents and conducted interviews with more than 30 IRS
officials.
Our investigation found alarming bureaucratic dysfunction. Many
applicants for tax-exempt status were treated badly and deserved much
better service from their government. For example, between 2010 and
late 2011, a total of 290 applications for tax-exempt status had been
set aside for review. Only two applications had been resolved
successfully. Not 200--two. That was unacceptable mismanagement. The
investigation, however, did not find any evidence of criminal
wrongdoing.
Chairman Hatch and I both took time to speak about our views on the
Senate floor when the report came out. The focus of today's hearing,
however, is what the IRS is doing to guarantee, once and for all, that
this type of deeply troubling mismanagement never happens again.
The Finance Committee's report included 36 recommendations--18
bipartisan, 12 Democratic, and 6 Republican. Among them were proposals
to:
Set minimum training standards for managers in the exempt
organization office to ensure those employees can adequately perform
their duties.
Institute a standard policy that employees must reach a
decision on all tax-exemption applications within 270 days of when
they're filed.
Create a position with the Taxpayer Advocate's office
dedicated solely to helping organizations applying for tax-exempt
status, and many others.
I want to thank Commissioner Koskinen for responding to those
recommendations in a letter sent last month to me and Chairman Hatch.
My takeaway from the letter is that the commissioner sees genuine
progress being made to clean up the mess, and I look forward to hearing
more about it today.
While Commissioner Koskinen is here, I also want to address the
problem that occurred in Martinsburg, WV. Low-level IRS employees in
Martinsburg deleted backup tapes that likely contained e-mails that
were within the scope of the committee's investigation while it was
ongoing.
This mistake was completely unacceptable and inexcusable, and there
are reports that there was some lying afterward. This cannot happen
again. I want to hear what the IRS is doing to fix it.
Finally, on Friday the committee received a detailed letter from
the Department of Justice concerning their investigation into this
matter, and I ask unanimous consent it be entered into the record.
Thank you, Commissioner, for being here today. It's my hope that
the committee will have a productive debate about how best to guarantee
that the kind of bureaucratic bumbling uncovered in our investigation
will never recur.
______
U.S. Department of Justice
Office of Legislative Affairs
_______________________________________________________________________
Office of the Assistant Attorney General Washington,
D.C. 20530
October 23, 2015
The Honorable Orrin G. Hatch
Chairman
Committee on Finance
U.S. Senate
Washington, DC 20510
The Honorable Ron Wyden
Ranking Member
Committee on Finance
U.S. Senate
Washington, DC 20510
Dear Mr. Chairman and Senator Wyden:
We write to inform you about the Department of Justice's criminal
investigation into whether any IRS officials committed crimes in
connection with the handling of tax-exemption applications filed by Tea
Party and ideologically similar organizations. Consistent with
statements from the Department of Justice (the Department) throughout
the investigation, we are pleased to provide additional information
regarding this matter now that we have concluded our investigation. In
recognition of not only our commitment to provide such information in
this case, but also the committee's interest in this particular matter,
we now provide a short summary of our investigative findings.
In collaboration with the FBI and Treasury Inspector General for
Tax Administration (TIGTA), the Department's Criminal and Civil Rights
Divisions conducted an exhaustive probe. We conducted more than 100
witness interviews, collected more than 1 million pages of IRS
documents, analyzed almost 500 tax-exemption applications, examined the
role and potential culpability of scores of IRS employees, and
considered the applicability of civil rights, tax administration, and
obstruction statutes. Our investigation uncovered substantial evidence
of mismanagement, poor judgment, and institutional inertia, leading to
the belief by many tax-exempt applicants that the IRS targeted them
based on their political viewpoints. But poor management is not a
crime. We found no evidence that any IRS official acted based on
political, discriminatory, corrupt, or other inappropriate motives that
would support a criminal prosecution. We also found no evidence that
any official involved in the handling of tax-exempt applications or IRS
leadership attempted to obstruct justice. Based on the evidence
developed in this investigation and the recommendation of experienced
career prosecutors and supervising attorneys at the Department, we are
closing our investigation and will not seek any criminal charges.
The Investigation
The Department's probe began in May 2013, following a TIGTA audit
report revealing the IRS's mishandling of tax-exempt applications filed
by groups it suspected to be involved in political activity. See TIGTA
Audit Report, Inappropriate Criteria Were Used to Identify Tax-Exempt
Applications for Review, Ref. No. 2013-10-053 (May 14, 2013). TIGTA's
audit report revealed that the IRS coordinated the review of applicants
for tax-exemption under Internal Revenue Code Sections 501(c)(3) and
501(c)(4), which limit the amount of political activity in which such
groups can engage. According to the audit report, one way in which the
IRS identified groups for coordinated review was through politically
focused keywords, such as ``Tea Party,'' ``9/12 Project,'' and
``Patriots,'' and the inventory of applications identified for
coordinated review was internally referred to as the ``Tea Party
cases.'' These applications were subjected to heightened scrutiny,
including burdensome and unnecessary information requests, which caused
significant processing delays. Although TIGTA's audit report detailed
no evidence or allegation of discriminatory intent, its findings were
unsettling and prompted the Department of Justice to initiate a
criminal investigation. Our probe, which was managed by an experienced
team of career prosecutors and supervising attorneys from the Criminal
Division's Public Integrity Section and Civil Rights Division's
Criminal Section, in partnership with seasoned law enforcement agents
from the FBI and TIGTA, spanned the better part of 2 years. As
explained below, our investigation confirmed the TIGTA audit report's
core factual findings and examined in detail what motivated the
decisions leading to the IRS's handling of these tax-exempt
applications.
At the investigation's outset, the Department took careful steps to
preserve the possibility of criminal prosecution in the face of
potential Fifth Amendment issues. Under the Fifth Amendment, statements
obtained from Federal employees under threat of termination--a common
occurrence in administrative investigations like the TIGTA audit--as
well as evidence derived from those statements, cannot be used against
such employees in a criminal prosecution. Garrity v. New Jersey, 385
U.S. 493, 497-98 (1967); Kastigar v. United States, 406 U.S. 441, 460
(1972). We therefore formed two teams--a prosecution team principally
responsible for the criminal investigation, and a filter team
responsible for shielding the prosecution team from statements and
information that risked contaminating an otherwise viable criminal
prosecution. Before the prosecution team was given access to fruits of
the audit report, the filter team reviewed prior statements by IRS
employees to TIGTA auditors to assess whether a court might deem them
compelled under the Fifth Amendment, and evaluated the statements and
evidence derived from these prior statements to determine whether they
could be traced to sources independent from any potentially compelled
statements. This prophylactic measure was further necessitated by IRS
leadership's order to its employees to cooperate in the parallel
congressional investigation, raising concerns that a court could deem
statements given to congressional committees to have been compelled. In
early October 2013, we determined that the filter procedure was no
longer necessary and that any potential prosecution supported by the
evidence would not be frustrated by a Fifth Amendment challenge.
The prosecution and filter teams conducted over 100 interviews.
Top-level IRS officials, including former IRS Commissioner Douglas
Shulman, former Acting IRS Commissioner Steven Miller, and former
Exempt Organizations Director Lois Lerner, voluntarily participated in
extensive interviews with the prosecution team, as did their close
advisors and career managers and line-level revenue agents directly
involved in processing tax-exempt applications. Some key witnesses were
interviewed multiple times. No person interviewed during the
investigation was made promises of non-prosecution in order to obtain
their statements.
Throughout the investigation, not a single IRS employee reported
any allegation, concern, or suspicion that the handling of tax-exempt
applications--or any other IRS function--was motivated by political
bias, discriminatory intent, or corruption. Among these witnesses were
several IRS employees who were critical of Ms. Lerner's and other
officials' leadership, as well as others who volunteered to us that
they are politically conservative. Moreover, both TIGTA and the IRS's
Whistleblower Office confirmed that neither has received internal
complaints from IRS employees alleging that officials' handling of tax-
exempt applications was motivated by political or other discriminatory
bias.
In addition to conducting interviews, we also collected and
reviewed voluminous relevant documents. On May 31, 2013, the Department
served the IRS with a demand that it preserve all documents potentially
material to the investigation, with the same obligations and subject to
the same potential sanctions that would apply had the IRS been served a
Federal grand jury subpoena. The IRS produced more than 1 million pages
of unredacted documents and asserted no privileges against disclosure.
The Department shared Congress's frustration with the IRS's revelation
in June 2014 that its document collection and preservation process was
susceptible to potentially catastrophic loss. Specifically, the IRS
revealed that its electronic backup system for e-mails was vulnerable
to the crash of a single employee's hard drive, which could result in
the permanent loss of that employee's e-mail archive. Indeed, this is
what occurred with respect to Ms. Lerner, whose hard drive crashed in
June 2011, causing the destruction of her e-mail archives. Our
confidence in the IRS's data collection process was further undermined
by the 4-month delay in its disclosure of this information, as well as
TIGTA's discovery that, in March 2014, IRS information technology
employees inadvertently destroyed more than 400 electronic backup tapes
that may have contained copies of Ms. Lerner's e-mails.
Despite these shortcomings, we are confident that we were able to
compile a substantially complete set of the pertinent documents. The
IRS collected documents from more than 80 employees--many more
employees than were regularly and directly involved in the matters
under investigation--making exceedingly remote the chance that a hard
drive crash or other technical failure experienced by any particular
employee could cause the permanent loss of any relevant e-mail or other
document. Moreover, we did not rely exclusively on the IRS to collect
documents. We also searched Ms. Lerner's entire computer and
Blackberry, obtained the complete e-mail boxes of IRS employees central
to the investigation (as opposed to obtaining only those e-mails the
IRS deemed responsive), and performed office searches of some
officials. We also obtained documents directly from several witnesses.
Our extensive witness interviews revealed no indication of any missing
material documents, and no IRS witness reported seeing any documents
that have since gone missing or are otherwise unaccounted for. Finally,
as discussed more below, our investigation revealed no evidence that
the IRS's document collection and retention problems, Ms. Lerner's hard
drive crash, or the IRS's delayed disclosure regarding these matters
were caused by a deliberate attempt to conceal or destroy information.
The Department also obtained and reviewed the IRS's tax-exempt-
application files for nearly 500 groups that applied for status between
2009 and the release of the Audit Report in May 2013, which were
subject to the IRS's coordinated review regarding political activity.
According to an analysis by the FBI, nearly 70 percent of the
applications coordinated for review were submitted by right-leaning
groups, including the Tea Party, confirming the TIGTA audit's finding
that such groups were disproportionately impacted by the IRS's
coordinated review of applications. We identified groups suffering the
most significant of the impacts of these procedures and obtained
interviews with representatives of 11 of them. Some of these interviews
were obtained through lawyers, including a firm representing as many as
50 individual organizations. Although not all of these represented
organizations agreed to be interviewed, their lawyers either informed
us that the information provided by organizations whose representatives
did agree to be interviewed was sufficient to further the Department's
criminal investigation, or provided detailed information about their
clients' interactions with the IRS. In addition, we had the benefit of
reviewing the detailed complaints filed in civil cases lodged in the
District of Columbia and Southern District of Ohio, as well as
reviewing public testimony from applicants who appeared before Congress
to describe their interactions with the IRS.
Investigative Findings
In order to bring criminal charges, we must have evidence of
criminal intent. The Department searched exhaustively for evidence that
any IRS employee deliberately targeted an applicant or group of
applicants for scrutiny, delay, denial, or other adverse treatment
because of their viewpoint. Intentional viewpoint discrimination may
violate civil rights statutes, which criminalize acting under color of
law to willfully deprive a person of rights protected by the
Constitution or Federal law. See 18 U.S.C. Sec. Sec. 241, 242.
Intentional viewpoint discrimination may also violate criminal tax
statutes that prohibit IRS employees from committing willful oppression
under color of law, for example by deliberately failing to perform
official duties with the intent of defeating the due administration of
revenue laws, or by corruptly impeding or obstructing the
administration of the Tax Code. See 26 U.S.C. Sec. Sec. 7214(a)(l),
7214(a)(3), 7212(a). These statutes require proof beyond a reasonable
doubt that an IRS official specifically intended to violate the
Constitution, tax code, or another Federal law.
As applied to this case, a criminal prosecution under any of these
statutes would require proof that an IRS official intentionally
discriminated against an applicant based upon viewpoint. It would be
insufficient to prove only that IRS employees used inappropriate
criteria to coordinate the review of applications, acted in ways that
resulted in the delay of the processing applications, or
disproportionately subjected some applicants to burdensome or
unnecessary questions. Instead, we would have to prove that such
actions were undertaken for the very purpose of harassing or harming
applicants. Proof that an IRS employee acted in good faith would be a
complete defense to a criminal charge; and proof that an IRS employee
acted because of mistake, bad judgment, ignorance, inertia, or even
negligence would be insufficient to support a criminal charge.
Our investigation found no evidence that any IRS employee acted
with criminal intent. We analyzed the culpability of every IRS employee
who played a role in coordinating for review applications or handling
them afterwards, from line-level revenue agents and managers in the
Cincinnati-based Determinations Unit, to tax law specialists and senior
executive officials based in Washington, DC. Apart from the belief by
many tax-exempt applicants affiliated with the Tea Party and similar
ideologies that they had been targeted, we found no evidence that any
IRS employee intentionally discriminated against these groups based
upon their viewpoints. To the contrary, the evidence indicates that the
decisions made by IRS employees, though misdirected, were motivated by
the desire to treat similar applications consistently and avoid making
incorrect decisions. Their plans to treat applications consistently
were poorly implemented, due to a combination of ignorance about how to
apply section 501(c)(4)'s requirements to organizations engaged in
political activity, lack of guidance from subject matter experts about
how to make decisions in an area most witnesses described as difficult,
and repeated communication and management issues. Moreover, many
employees failed to engage in critical thought about the effect their
actions (or inactions) would have upon those who applied for tax-exempt
status. We found that many IRS employees' failure to give adequate
attention to the applications at issue was caused by competing demands
on their time and an unwillingness to be held accountable for difficult
decisions over sensitive matters. We did not, however, uncover any
evidence that any of these employees were motivated by intentional
viewpoint discrimination.
As noted above, no IRS employee we interviewed, from those directly
involved in decision making to those who were primarily witnesses to
the conduct of others, reported having any information suggesting that
any action taken by any person in the IRS was done for the purpose of
harming or harassing applicants affiliated with the Tea Party or
similar groups. These witness accounts are fully supported by
contemporaneous internal IRS documents, which do not suggest that there
was a partisan political motive for any of the decisions made during
the handling of the applications. Moreover, any inference of specific
intent that might be drawn from the length of the delay in processing
applications, the burdensomeness of the information requests, or the
fact that Tea Party and ideologically similar organizations were
disproportionately affected by the IRS's coordination efforts, is
contradicted by witnesses' explanations of why IRS employees made the
decisions that they did, all of which--even if misguided--are
inconsistent with criminal intent.
Importantly, our investigation revealed that this was not the first
time that the IRS had used inept labels in organizing their review of
applications. Prior to the IRS procedures that were the subject of our
investigation, the IRS had historically coordinated review of
applications based on the applicant's name and affiliations, including
using keywords such as ``progressive'' and ``ACORN.'' This historical
practice creates a substantial barrier to establishing criminal intent,
and bolsters the conclusion that IRS employees did not believe that
coordinating for review applications using words like ``Tea Party''
could potentially violate the Constitution or the tax code, or that
this method of coordinating applications for review was discriminatory
or otherwise inappropriate. Moreover, the decision to coordinate the
review of applications and the discussions about how to handle them
were conducted openly across multiple IRS components and among many
different employees with a range of political views, including some who
voluntarily identified themselves in interviews as conservative or
Republican. Such open discussion of planned actions is inconsistent
with criminal intent.
The evidence that we developed demonstrated a disconnect between
employees in Cincinnati, who were principally responsible for
identifying the applications for review and crafting the burdensome
information requests, and employees in Washington, DC, who were
principally responsible for the delay and failure to provide guidance
on how to handle the application backlog despite repeated requests that
they do so from revenue agents and their supervisors in Cincinnati. As
a result, no one person (or group of people) was responsible for the
chain of events that resulted in the manner in which applications were
ultimately coordinated for review and then delayed. Instead, we found
overwhelming evidence that the ill-advised selection criteria,
burdensome information requests, and application delays were the
product of discrete mistakes by line-level revenue agents, technical
specialists, and their immediate supervisors, and that those mistakes
were exacerbated by oversight and leadership lapses by senior managers
and senior executive officials in Washington, DC. We developed no
evidence that the decisions IRS employees made about how to handle
applications, either in Cincinnati or Washington, were motivated by
discriminatory intent or other corrupt motive.
The one official who, by virtue of her role as Director of the
IRS's Exempt Organizations Division, arguably had the most oversight
responsibility for all tax-exempt applications, was Ms. Lerner. Due to
her position, and because the U.S. House of Representatives Ways and
Means Committee referred civil rights allegations against her to the
Department on April 9, 2014, we took special care to evaluate whether
Ms. Lerner had criminal culpability. The need for scrutiny of Ms.
Lerner in particular was heightened by the discovery and publication of
e-mails from her official IRS account that expressed her personal
political views and, in one case, hostility towards conservative radio
personalities. We therefore specifically considered whether Ms.
Lerner's personal political views influenced her decisions, leadership,
action, or failure to take action with respect to tax-exempt
applications or any other matter. We found no such evidence.
Our conclusion regarding Ms. Lerner is supported by several
factors. First, not a single IRS employee that we interviewed, some of
whom were critical of Ms. Lerner's leadership and general management
style, and some of whom volunteered that they consider themselves
politically conservative, witnessed, alleged, or suspected that Ms.
Lerner acted with a political, discriminatory, corrupt, or other
inappropriate purpose.
Second, our investigation revealed that when Ms. Lerner became
fully aware of and focused on the Cincinnati-based Determinations
Unit's use of inappropriate criteria, she recognized that it was wrong,
ordered that it stop immediately, and instructed subordinates to take
corrective action. In fact, Ms. Lerner was the first IRS official to
recognize the magnitude of the problem and to take concerted steps to
fix it. To the extent that Ms. Lerner mishandled the oversight of how
these tax-exempt applications were processed, it resulted from her
failure to digest materials available to her from which she could have
identified the problem sooner, and her delegation of corrective action
to subordinates whom she did not adequately supervise to assure that
her directions were implemented sufficiently.
Third, although Ms. Lerner exercised poor judgment in using her IRS
e-mail account to exchange personal messages that reflected her
political views, we cannot show that these messages related to her
official duties and actions with respect to the handling of these tax-
exempt applications. In fact, we uncovered no e-mail or other
communication showing that Ms. Lerner exercised her decision-making
authority in a partisan manner generally, or in the handling of tax-
exempt applications specifically, and no witness we interviewed
interpreted any e-mail or other communication they exchanged with Ms.
Lerner in such a manner.
Finally, our investigation uncovered no evidence that Ms. Lerner
intentionally caused her hard drive to crash or that she otherwise
endeavored to conceal documents or information from IRS colleagues or
this investigation. Moreover, it bears noting that Ms. Lerner
cooperated fully with our investigation, voluntarily sitting for
approximately 12 hours of interviews with no promise of immunity,
producing e-mails and documents upon request, and disclosing passwords
to her IRS Blackberry to assist in searching its contents.
We also carefully considered whether any IRS official attempted to
obstruct justice with respect to their reporting function to Congress,
the collection and production of documents demanded by the Department
and Congress, the delayed disclosure of the consequences of Ms.
Lerner's hard drive crash, or the March 2014 erasure of electronic
backup tapes. See, e.g., 18 U.S.C. Sec. Sec. 1503, 1512, 1515, 1519. At
a minimum, these statutes would require us to prove a deliberate
attempt to conceal or destroy information in order to improperly
influence a criminal or congressional investigation. We uncovered no
evidence of such an intent by any official involved in the handling of
tax-exempt applications or the IRS's response to investigations of its
conduct.\1\ Although the IRS's decision to delay the disclosure of the
consequences of Ms. Lerner's hard drive crash for more than 4 months
undermined confidence in its judgment, it was not criminal. The
evidence shows that IRS attorneys and officials spent that time
exercising due diligence to determine what had occurred, mitigating
heavily against criminal intent. Similarly, the evidence shows that IRS
officials in Washington were unaware of the March 2014 erasure of
electronic backup tapes until it was brought to their attention by
TIGTA in June 2015. Although those backup tapes should have been
protected from erasure due to the Department's preservation demand,
there is no evidence that any IRS employee intended to conceal the
backup tapes from our investigation or realized that erasing them might
violate the preservation demand. There is no basis for any obstruction
of justice charge arising from the IRS's data collection and
preservation protocol.
---------------------------------------------------------------------------
\1\ TIGTA has developed evidence that, in June 2015, GS Grade 4
employees and their supervisor working at the IRS's Enterprise
Computing Center may have made misleading statements to TIGTA about the
manner in which electronic server hard drives were inventoried. There
is no evidence suggesting that the employees were involved in the
handling of tax-exempt applications, intended to conceal information
about the IRS's handling of tax-exempt applications, or that they acted
at the behest of any of the IRS employees involved in the handling of
tax-exempt applications. Rather, the evidence suggests that the
employees failed to inventory the server hard drives properly and later
sought to avoid being held accountable for that failure. The Criminal
Division's Public Integrity Section and the Civil Rights Division's
Criminal Section determined that the possibly misleading statements had
no adverse impact on the Department's criminal investigation of the
handling of tax-exempt applications. TIGTA has informed the Department
that it intends to refer this matter to a U.S. Attorney's Office.
---------------------------------------------------------------------------
Conclusion
The IRS mishandled the processing of tax-exempt applications in a
manner that disproportionately impacted applicants affiliated with the
Tea Party and similar groups, leaving the appearance that the IRS's
conduct was motivated by political, discriminatory, corrupt, or other
inappropriate motive. However, ineffective management is not a crime.
The Department of Justice's exhaustive probe revealed no evidence that
would support a criminal prosecution. What occurred is disquieting and
may necessitate corrective action--but it does not warrant criminal
prosecution.
We hope this information is helpful. We have made a substantial
effort to provide detailed information regarding our findings in this
letter, and would be pleased to offer a briefing to address any
questions you may have on this matter. Please do not hesitate to
contact this office if we may provide additional assistance regarding
this or any other matter.
Sincerely,
Peter J. Kadzik
Assistant Attorney General
______
Communication
----------
Common Cause
Holding Power Accountable
1133 19th St., NW., Suite 900
Washington, DC 20036
United States Senate
Committee on Finance
Statement for the Record
Stephen Spaulding
Senior Policy Counsel and Legal Director
For the Hearing
``The Internal Revenue Service's Response to Committee Recommendations
Contained in Its August 5, 2015 Report''
October 27, 2015
Chairman Hatch and Ranking Member Wyden, thank you for the
opportunity to submit this statement for the record.
Last week, the Department of Justice concluded its investigation in
connection with the handling of tax-exempt applications filed by new
social welfare organizations and ``found no evidence that any IRS
official acted based on political, discriminatory, corrupt, or other
inappropriate motives.'' \1\
---------------------------------------------------------------------------
\1\ Letter from Peter J . Kadzik (Assistant Attorney General) to
Rep. Bob Goodlatte and Rep. John Conyers (Oct. 23, 2015), available at
http://online.wsj.com/public/resources/documents/IRS1023.pdf.
Instead, as this testimony explains, we believe much of this
controversy erupted because of vague IRS rules governing political
activities of tax exempt entities under Section 501(c) of the Internal
Revenue Code--and in particular, social welfare organizations. Their
lack of clarity, coupled with a substantial increase in tax-exempt
organization applications post-Citizens United, hobbled compliance and
---------------------------------------------------------------------------
enforcement.
To be clear: it was wrong for the IRS to subject some ``social
welfare'' nonprofit applications to extra scrutiny based solely on
their names and identified interests. In keeping with the findings of
this Committee's bipartisan report, the agency should take action to
ensure these mistakes are not repeated.
Specifically, the IRS and Treasury Department should write new
rules that are consistent with the Internal Revenue Code, clarify what
constitutes political activity under the tax laws, and clearly state
that social welfare organizations can spend no more than an
insubstantial amount of their resources on political activity.
The real scandal--hundreds of millions of secret dollars in our
elections funneled through a handful of social welfare organizations--
stems from a powerful combination of at least four factors: (1) a lack
of bright line standards about what constitutes partisan political
activity, including how much political activity social welfare
organizations may engage in, and how to measure it; (2) the brazen
willingness of political consultants to exploit and manipulate the
rules governing social welfare organizations by operating them as de
facto political committees; (3) an under-resourced agency that has thus
far failed to do its job to hold the largest offenders accountable; and
(4) champions of gridlock who have blocked Congress from considering
comprehensive disclosure legislation in the wake of Citizens United.
If the IRS fails to move forward in its rulemaking as discussed
above, major political groups will continue to masquerade improperly as
social welfare nonprofits under Section 501(c)(4)--solely to keep
political spenders anonymous. This deprives the American people of the
information they need about who is trying to influence their votes, and
to whom their elected officials may owe a debt of gratitude after
Election Day.
Up to and including the 2006 election cycle, social welfare groups
spent little on partisan political activity. Then, a series of court
decisions dramatically changed the status quo. First, the Supreme
Court's 2007 decision in FEC v. Wisconsin Right to Life lifted
prohibitions on corporate spending for election-related communications
except for express advocacy and its functional equivalent.\2\ That led
to a sharp increase in spending on electioneering communications by
nonprofit groups that do not disclose their donors. A far larger
increase came after the Supreme Court's 2010 decision in Citizens
United struck down all prohibitions on corporate election-related
independent, outside spending.\3\ Combined with the D.C. Circuit's
opinion in SpeechNow.org v. FEC, these decisions led to an explosion in
outside election spending.\4\ It topped $1 billion in the 2012
elections and over $500 million in the 2014 midterms.\5\
---------------------------------------------------------------------------
\2\ 551 U.S. 449 (2007).
\3\ 558 U.S. 310 (2010).
\4\ 599 F.3d 686 (2010); Richard L. Hasen, The Numbers Don't Lie,
Slate, Mar. 9, 2012, http://www.slate.com/articles/news_and_politics/
politics/2012/03/the_supreme_court_s_citizens_
united_decision_has_led_to_an_explosion_of_campaign_spending_.html
(last accessed Oct. 26, 2015).
\5\ Center for Responsive Politics, Outside Spending by Cycle,
http:/www.opensecrets.org/outsidespending/index.php (last accessed Oct.
26, 20 15).
With this increased spending came increased secrecy about who is
financing these political expenditures and, consequently, a less-
informed electorate. Approximately one-third of the outside money in
the 2012 and 2014 federal elections came from secret sources, to the
tune of $481 million, of which spending by social welfare nonprofits
accounted for approximately $375 million.\6\ These numbers, though
staggering, underestimate the total spent by these organizations to
influence campaigns, because they only include the money spent on
federal, and not state, elections. The amounts also exclude money that
funds communications that fall short of express advocacy outside of the
electioneering communications windows but are clearly intended to
influence elections.
---------------------------------------------------------------------------
\6\ Center for Responsive Politics, Outside Spending by Disclosure,
Excluding Party Committees, http://www.opensecrets.org/outsidespending/
disclosure.php (last accessed Oct. 26, 2015); Center for Responsive
Politics, 501(c) Spending, Cycle Totals, by Type, http://
www.opensecrets.org/outsidespending/nonprof_summ.php (last accessed
Oct. 26, 2015).
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
As election-related spending by social welfare organizations soared
after Citizens United and SpeechNow.org, so did the number of
applications from groups seeking 501(c)(4) tax-exempt status. They
nearly doubled between 2010 and 2012, from 1,735 in 2010 to 3,357 in
2012.\7\ Although social welfare organizations may self-
declare without submitting a formal application to the IRS, the
optional approval process provides them with more certainty that their
operations will not jeopardize their tax-exempt status.
---------------------------------------------------------------------------
\7\ Treasury Inspector General for Tax Administration,
Inappropriate Criteria Were Used to Identify Tax-Exempt Applications
for Review 3 (2013).
Congress never intended for social welfare organizations to exist
as conduits for secret political spending. In exchange for their tax
exemption, the law requires these nonprofits to engage ``exclusively''
in the promotion of social welfare.\8\ The IRS has said social welfare
activities do not include political campaign intervention.\9\ IRS
regulations muddied the waters with a primary purpose analysis that is
inconsistent with the exclusivity requirement of the Internal Revenue
Code.\10\
---------------------------------------------------------------------------
\8\ 26 U.S.C. Sec. 501(c)(4).
\9\ Treas. Reg. Sec. 1.501(c)(4)-(1)(a)(2)(ii).
\10\ Treas. Reg. Sec. 1.501(c)(4)-(1)(a)(2)(i).
Today, no bright line IRS standard exists as to how much and by
what measure the IRS should evaluate a social welfare organization's
furtherance of its primary purpose. As the IRS has explained, ``no
precise definition exists in relevant revenue rulings, cases or
regulations'' to decide if an organization is `` `primarily' engaged in
social welfare activities.'' \11\ This may ``often requir[e] a
sophisticated legal and complex factual review to evaluate the
application.'' \12\ We are left with a vague ``facts and
circumstances'' test that invites inconsistent enforcement of the law.
Even when applied properly, some political groups are out of compliance
with the existing flawed regulations.
---------------------------------------------------------------------------
\11\ IRS, Charting a Path Forward at the IRS: Initial Assessment
and Plan of Action 25 (2013).
\12\ Id. at 22.
In the wake of Citizens United, this discrepancy--coupled with a
lack of enforcement--has paved the way for several high-profile
partisan political organizations on the right and left to pose as
social welfare organizations and spend tens of millions of dollars from
undisclosed sources on elections. Ultimately, it is the secrecy that
social welfare nonprofits provide to donors that makes them attractive
vehicles for political spending, and all the more reason why Americans
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expect the IRS to do its job and enforce the law.
Citing their campaign spending and public reports about their
operations, some campaign finance reform advocates have urged the IRS
to investigate groups on the left like Priorities USA and on the right
like Crossroads GPS to gauge whether they are in fact organizations
that exist primarily to influence candidate election outcomes.\13\
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\13\ See Letter from J. Gerald Hebert, Executive Director, Campaign
Legal Center and Fred Wertheimer, President, Democracy 21 to the IRS,
September 28, 2011, available at http://www.democracy21.org/wp-content/
uploads/2014/05/9-28-2011-Letter_to_the_IRS_from_Demo
cracy_21_and_Campaign_Legal_Center.pdf.
Just last week, the Center for Responsive Politics released a
report showing how one purported social welfare organization--
``Carolina Rising''--spent 97 percent of the almost $5 million it
raised in 2014 in support of a single victorious Senate candidate.\14\
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\14\ Robert Maguire, ``Political Nonprofit Spent Nearly 100 Percent
of Funds to Elect Tillis in 2014,'' Center for Responsive Politics,
https://www.opensecrets.org./news/2015/10/political-nonprofit-spent-
nearly-100-percent-of-funds-to-elect-tillis-in-14/ (last accessed Oct.
24, 2015).
As of today, the IRS has done little to hold the most flagrant
violators accountable, despite reams of evidence that their overriding
purpose appears to be to provide anonymity for donors eager to spend
unlimited amounts of money supporting and attacking candidates for
public office.\15\
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\15\ Democracy 21 and the Campaign Legal Center have sent at least
11 letters to the IRS, thoroughly documenting the extent of Crossroads
GPS's campaign activity and its legal argument for why the IRS should
deny Crossroads GPS's social welfare status and assess penalties for
any violations of the law. They sent letters on May 6, 2014; January 2,
2013; September 27, 2012; July 23, 2012; May 24, 2012; April 17, 2012;
March 22, 2012; March 9, 2012; December 14, 2011; September 28, 2011;
and October 5, 2010 which will be provided to the Committee as an
appendix.
This troubling trend shows no sign of stopping in 2016. According
to the New York Times, supporters of former Secretary of State Hillary
Rodham Clinton are considering activating a 501(c)(4) to support her
run for the White House.\16\ On the Republican side, most of the
candidates ``have aligned with nonprofit groups to raise hundreds of
millions of dollars,'' including at least one that has already planned
a $1 million advertising campaign in support of one of the individuals
running for the nomination.\17\
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\16\ Eric Lichtblau, ``IRS Expected to Stand Aside as Nonprofits
Increase Role in 2016 Race,'' N.Y. Times, July 5, 2015, available at
http://www.nytimes.com/2015/07/06/us/politics/irs-expected-to-stand-
aside-as-nonprofits-increase-role-in-2016-race.html.
\17\ See id.
Voters deserve to know who is attempting to influence their votes
and who is speaking to them. Disclosure allows them to evaluate the
strength, content, and agenda of political messages, and is an
important tool to hold representatives accountable to their interests
instead of those of financial backers. That is why courts have
repeatedly upheld disclosure requirements.\18\
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\18\ See Letter from Fred Wertheimer, President, Democracy 21 and
Trevor Potter, President, Campaign Legal Center to Senators, Nov. 14,
2013, available at http://www.democracy21.org/wp-content/uploads/2013/
11/LETTER-TO-HSE-AND-SENATE-ON-COURTS-REJECTING-CHALLENGES-TO-
DISCLOSURE-FINAL-11-1-3-13.pdf.
Specifically, the Supreme Court ruled 8-1 in Citizens United that
disclosure by outside spending groups ``permits citizens and
shareholders to react to the speech of corporate entities in a proper
way. This transparency [in political spending] enables the electorate
to make informed decisions and give proper weight to different speakers
and messages.'' \19\ Citizens United reaffirmed prior campaign finance
cases that upheld disclosure requirements, citing ``evidence in the
record that independent groups were running election-related
advertisements `while hiding behind dubious and misleading names.' ''
\20\
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\19\ Citizens United, 558 U.S. at 371.
\20\ Id. at 367.
Consistent with this important First Amendment value--an informed
electorate--the law requires Super PACs and other Section 527
organizations to disclose their donors when they spend money to
influence elections. Political operatives should not circumvent the
constitutionally sound bed rock policy of disclosure by exploiting
inconsistent enforcement and vague regulations governing organizations
that Congress never anticipated would engage in election-related
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spending.
Impartial and consistent enforcement of the law governing nonprofit
political spending is squarely within the IRS's mandate and authority.
The IRS and Treasury Department took the important step in 2013 of
issuing a notice of proposed rulemaking, recognizing that both the
public and the government ``would benefit from clearer definitions'' of
campaign-related political activity.\21\ This action was in keeping
with one of the recommendations in the Treasury Inspector General for
Tax Administration's (TIGTA) report on the IRS's use of in appropriate
criteria to select social welfare applications for review.\22\
Importantly, TIGTA recommended that ``guidance on how to measure the
`primary activity' of . . . 501(c)(4) social welfare organizations be
included for consideration in the Department of the Treasury Priority
Guidance Plan.'' \23\
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\21\ Guidance for Tax-Exempt Social Welfare Organizations on
Candidate-Related Political Activities, 78 Fed. Reg. 71535 (proposed
Nov. 29, 2013) (to be codified at 26 CFR pt. 1).
\22\ Treasury Inspector General for Tax Administration,
Inappropriate Criteria Were Used to Identify Tax-Exempt Applications
for Review 17 (2013).
\23\ Id.
The IRS and Treasury Department's notice of proposed rulemaking was
a critical first step to solve the problem and protect the integrity of
our tax laws. Still, the proposal had significant flaws. Common Cause--
along with over 27,000 of our members who have signed our petition--
continue to urge the IRS to release a second proposed rule for comment.
We are filing over 5,000 more comments from Common Cause members this
week, urging a new rule consistent with the policy outlined in this
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statement for the record.
It is essential that the next proposed rule establish a low limit
on the amount of campaign activity a group can engage in consistent
with the Internal Revenue Code. In keeping with court precedent, new
commonsense regulations should allow an insubstantial amount of
activity that is unrelated to a 501(c)(4)'s social welfare purpose
without jeopardizing the organization's tax-exempt status. Such a rule
would permit a small amount of candidate-related political activity, so
long as it is not more than an insubstantial part of its activities.
To influence elections, an organization could establish a Section
527 organization, which requires disclosure, for all other election-
related expenditures. This appears to be what the Senate expected when
it enacted Section 527 in the first place.\24\
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\24\ Senate Rep. No 93-1357, 93rd Cong. 2d Sess. (Dec. 16, 1974),
reprinted in 1974-1 Cum. Bull. 517, 534; Miriam Galston, Vision Service
Plan v. U.S.: Implications for Campaign Activities of 501(c)(4)s, 53
Exempt Organization Tax Review 165 (2006).
We recognize that the IRS funding levels have fallen steadily from
$13.4 billion in 2010 to $10.9 billion in 2015--a one-fifth reduction
in funding, adjusting for inflation.\25\ This hobbles meaningful action
and forces the IRS to rethink its priorities. Senate appropriators
proposed another cut in the FY16 Financial Services appropriations
bill, reducing the IRS's funding another $470 million, to $10.4
billion.\26\ The IRS should not use these budgetary constraints to
justify a green light for continued misuse of social welfare
organizations.
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\25\ Brandon DeBot and Chuck Marr, Poor IRS Service Reflects
Congress's Deep Funding Cuts (June 1, 2015), Center for Budget and
Policy Priorities, available at http://www.cbpp.org/sites/default/
files/atoms/files/6-1-15tax.pdf.
\26\ Press release, Senate Committee Agrees to FY2016 Financial
Services Appropriations Bill, July 23, 20 15, available at http://
www.appropriations.senate.gov/news/majority/senate-committee-agrees-to-
fy2016-financial-services-appropriations-bill.
Of course, Congress could enact a more robust disclosure regime to
respond to the new landscape post-Citizens United. Senators, including
the ranking member of this Committee, have introduced bills that would
stem the tide, including the DISCLOSE Act (S. 229) and the Follow the
Money Act (S. 791 (113th Cong.)). The DISCLOSE Act has been subjected
to repeated filibusters in past years and has not had as much as a
hearing during this Congress, unfortunately. Still, as discussed above,
the IRS should enforce the law as written and enact regulations
consistent with the exclusivity requirements of the Internal Revenue
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Code and later case law.
The use of inappropriate criteria to single out some social welfare
applicants for scrutiny does not justify an abrogation of the agency's
duty to enforce the law fairly and impartially in the first place. The
IRS should hold political groups on the right and the left accountable
if they misappropriate the privileges of the social welfare
organization's structure. The IRS should bring its regulations in line
with the Internal Revenue Code, while watchdogging blatant efforts to
violate even the flawed rules.
Thank you, Mr. Chairman, for the opportunity to submit this
statement.
[all]