[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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                          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

                              ----------                              

                           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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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 
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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.
---------------------------------------------------------------------------
    \47\ This discussion relates to Majority Recommendation #1, p. 267. 
See Appendix A, Recommendation MAj1.
---------------------------------------------------------------------------

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.
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                  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.
--------------------------------------------------------------------------------------------------------------------------------------------------------
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)
--------------------------------------------------------------------------------------------------------------------------------------------------------

                                                               [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\
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    \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 
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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\
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    \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.
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    \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.
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    \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\
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    \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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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 
---------------------------------------------------------------------------
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.


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