Report on IRS Abuses

TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION
Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
May 14, 2013
Reference Number: 2013-10-053
This report has cleared the Treasury Inspector General for Tax Administration disclosure review process
and information determined to be restricted from public release has been redacted from this document.
Redaction Legend:
1 = Tax Return/Return Information
Phone Number | 202-622-6500
E-mail Address | TIGTACommunications@tigta.treas.gov
Website | http://www.treasury.gov/tigta HIGHLIGHTS
INAPPROPRIATE CRITERIA WERE intervention was started soon after receipt, no
USED TO IDENTIFY TAX-EXEMPT work was completed on the majority of these
APPLICATIONS FOR REVIEW applications for 13 months. This was due to
delays in receiving assistance from the Exempt
Highlights Organizations function Headquarters office.
For the 296 total political campaign intervention
applications TIGTA reviewed as of
December 17, 2012, 108 had been approved, Final Report issued on May 14, 2013 28 were withdrawn by the applicant, none had
been denied, and 160 were open from 206 to Highlights of Reference Number: 2013-10-053 1,138 calendar days (some for more than to the Internal Revenue Service Acting three years and crossing two election cycles). Commissioner, Tax Exempt and Government
Entities Division. More than 20 months after the initial case was
identified, processing the cases began in IMPACT ON TAXPAYERS earnest. Many organizations received requests
Early in Calendar Year 2010, the IRS began for additional information from the IRS that
using inappropriate criteria to identify included unnecessary, burdensome questions
organizations applying for tax-exempt status to (e.g., lists of past and future donors). The IRS
review for indications of significant political later informed some organizations that they did
campaign intervention. Although the IRS has not need to provide previously requested
taken some action, it will need to do more so information. IRS officials stated that any donor
that the public has reasonable assurance that information received in response to a request
applications are processed without from its Determinations Unit was later destroyed.
unreasonable delay in a fair and impartial WHAT TIGTA RECOMMENDED manner in the future.
TIGTA recommended that the IRS finalize the WHY TIGTA DID THE AUDIT interim actions taken, better document the
TIGTA initiated this audit based on concerns reasons why applications potentially involving
expressed by members of Congress. The political campaign intervention are chosen for
overall objective of this audit was to determine review, develop a process to track requests for
whether allegations were founded that the IRS: assistance, finalize and publish guidance,
1) targeted specific groups applying for develop and provide training to employees
tax-exempt status, 2) delayed processing of before each election cycle, expeditiously resolve
targeted groups’ applications, and 3) requested remaining political campaign intervention cases
unnecessary information from targeted groups. (some of which have been in process for
three years), and request that social welfare
WHAT TIGTA FOUND activity guidance be developed by the
Department of the Treasury. The IRS used inappropriate criteria that
identified for review Tea Party and other In their response to the report, IRS officials
organizations applying for tax-exempt status agreed with seven of our nine recommendations
based upon their names or policy positions and proposed alternative corrective actions for
instead of indications of potential political two of our recommendations. TIGTA does not
campaign intervention. Ineffective management: agree that the alternative corrective actions will
1) allowed inappropriate criteria to be developed accomplish the intent of the recommendations
and stay in place for more than 18 months, and continues to believe that the IRS should
2) resulted in substantial delays in processing better document the reasons why applications
certain applications, and 3) allowed unnecessary potentially involving political campaign
information requests to be issued. intervention are chosen for review and finalize
and publish guidance. Although the processing of some applications
with potential significant political campaign DEPARTMENT OF THE TREASURY
WASHINGTON, D.C. 20220
TREASURY INSPECTOR GENERAL
FOR TAX ADMINISTRATION
May 14, 2013
MEMORANDUM FORACTING COMMISSIONER, TAX EXEMPT AND GOVERNMENT
ENTITIES DIVISION
FROM: Michael E. McKenney
Acting Deputy Inspector General for Audit
SUBJECT: Final Audit Report – Inappropriate Criteria Were Used to Identify
Tax-Exempt Applications for Review (Audit # 201210022)
This report presents the results of our review to determine whether allegations were founded that
the Internal Revenue Service (IRS): 1) targeted specific groups applying for tax-exempt status,
2) delayed processing of targeted groups’ applications for tax-exempt status, and 3) requested
unnecessary information from targeted groups. This audit was initiated based on concerns
expressed by members of Congress and reported in the media regarding the IRS’s treatment of
organizations applying for tax-exempt status. This review is included in our Fiscal Year 2013
Annual Audit Plan and addresses the major management challenge of Tax Compliance
Initiatives.
We would like to clarify a few issues based on the IRS response to our report. The response
states that our report views approvals as evidence that the Exempt Organizations function should
not have looked closely at those applications. We disagree with this statement. Our objection
was to the criteria used to identify these applications for review. We believe all applications
should be reviewed prior to approval to determine whether tax-exempt status should be granted.
The IRS’s response also states that issues discussed in the report have been resolved. We
disagree with this statement as well. Nine recommendations were made to correct concerns we
raised in the report, and corrective actions have not been fully implemented. Further, as our
report notes, a substantial number of applications have been under review, some for more than
three years and through two election cycles, and remain open. Until these cases are closed by the
IRS and our recommendations are fully implemented, we do not consider the concerns in this
report to be resolved. Management’s complete response to the draft report is included as
Appendix VIII. Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
Copies of this report are also being sent to the IRS managers affected by the report
recommendations. If you have any questions, please contact me or Gregory D. Kutz,
Assistant Inspector General for Audit (Management Services and Exempt Organizations).
2Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
Table of Contents
Background ……………………………………………………………………………………………. Page 1
Results of Review ………………………………………………………………………………….. Page 5
The Determinations Unit Used Inappropriate Criteria
to Identify Potential Political Cases …………………………………………………….. Page 5
Recommendation 1: ………………………………………………………… Page 10
Recommendations 2 and 3: ………………………………………………. Page 11
Potential Political Cases Experienced Significant
Processing Delays …………………………………………………………………………….. Page 11
Recommendations 4 and 5: ………………………………………. Page 16
Recommendations 6 through 8: ………………………………….. Page 17
The Determinations Unit Requested Unnecessary
Information for Many Potential Political Cases …………………………………….. Page 18
Recommendation 9: ……………………………………………….. Page 21
Appendices
Appendix I – Detailed Objective, Scope, and Methodology …………………… Page 22
Appendix II – Major Contributors to This Report …………………………………. Page 25
Appendix III – Report Distribution List ………………………………………………. Page 26
Appendix IV – Outcome Measures ……………………………………………………… Page 27
Appendix V – High-Level Organizational Chart of Offices
Referenced in This Report …………………………………………………………………. Page 29
Appendix VI – Timeline of Written Criteria for Identifying
Potential Political Cases …………………………………………………………………….. Page 30
Appendix VII – Comprehensive Timeline of Events …………………………….. Page 31
Appendix VIII – Management’s Response to the Draft Report ………………. Page 44 Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
Abbreviations
BOLO Be On the Look Out
EO Exempt Organizations
I.R.C. Internal Revenue Code
IRS Internal Revenue Service Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
Background
Organizations, such as charities, seeking Federal tax exemption are required to file an application
with the Internal Revenue Service (IRS). Other organizations, such as social welfare
organizations, may file an application but are not required to do so. The IRS’s Exempt
Organizations (EO) function, Rulings and Agreements office, which is headquartered in
Washington, D.C., is responsible for processing applications for tax exemption. Within the
Rulings and Agreements office, the Determinations Unit in Cincinnati, Ohio, is responsible for
reviewing applications as they are received to determine whether the organization qualifies for
tax-exempt status.
In Fiscal Year 2012,1
70 percent of all closed applications for tax-exempt status were approved
during an initial review with little or no additional information from the organizations. If
substantial additional information is needed, the application is placed in unassigned inventory
until it can be assigned to a specialist in the Determinations Unit for further processing. The
specialist develops a letter(s) requesting the additional information and issues it to the
organization. Once the specialist receives all the necessary information to determine whether an
organization should be afforded tax-exempt status, a final determination letter is issued to the
organization either approving or denying the request for tax-exempt status.
If the Determinations Unit needs technical assistance processing applications, it may call upon
the Technical Unit in the Rulings and Agreements office in Washington, D.C.2
The IRS’s goal
for processing all types of applications for tax-exempt status was 121 days in Fiscal Year 2012;
however, some cases may take substantially longer. For example, the EO function states in its
Fiscal Year 2013 Work Plan that applications requiring additional information are not assigned
for review until an average of five months after they are received.
Most organizations requesting tax-exempt status must submit either a Form 1023, Application
for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, or
Form 1024, Application for Recognition of Exemption Under Section 501(a), depending on the
type of tax-exempt organization it desires to be. For example, a charitable organization would
request exemption under Internal Revenue Code (I.R.C.) Section (§) 501(c)(3),3
whereas a social
welfare organization would request exemption under I.R.C. § 501(c)(4).4
1
A 12-consecutive-month period ending on the last day of any month. The Federal Government’s fiscal year begins
on October 1 and ends on September 30.
2
For a high-level organizational chart of offices referenced in this report, see Appendix V.
3
I.R.C. § 501(c)(3) (2012).
4
I.R.C. § 501(c)(4) (2012).
Page 1Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
The I.R.C. section and subsection an organization is granted tax exemption under affects the
activities it may undertake. For example, I.R.C. § 501(c)(3) charitable organizations are
prohibited from directly or indirectly participating in or intervening in any political campaign on
behalf of or in opposition to any candidate for public office (hereafter referred to as political
campaign intervention).5
However, I.R.C. § 501(c)(4) social welfare organizations,
I.R.C. § 501(c)(5)6
agricultural and labor organizations, and I.R.C. § 501(c)(6)7
business leagues
may engage in limited political campaign intervention. Figure 1 highlights certain characteristics
of common types of tax-exempt organizations.
Figure 1: Characteristics of Certain
Common Types of Tax-Exempt Organizations
I.R.C. §§ 501(c)(4),
Characteristic I.R.C. § 501(c)(3) (c)(5), and (c)(6)
May receive tax deductible charitable
contributions. Yes No
May engage in political campaign
intervention. No Limited (must not constitute
primary activity of organization)
Must publicly disclose the identity
its donors.
of No No
May engage
activity).
in lobbying8
(i.e., legislative Limited (must not
be substantial)
Yes (unlimited amount
if in furtherance of
tax-exempt purposes)
May engage in general advocacy9
not
related to legislation or the election of
candidates.
Yes (permitted as an
educational activity)
Yes (unlimited amount
if in furtherance of
tax-exempt purposes)
Must apply with the IRS. Yes No
Source: Draft Advocacy Guide Sheet and Internal Revenue Manual.
5
Political campaign intervention is the term used in Treasury Regulations §§ 1.501(c)(3)-1, 1.501(c)(4)-1,
1.501(c)(5)-1, and 1.501(c)(6)-1.
6
I.R.C. § 501(c)(5) (2012).
7
I.R.C. § 501(c)(6) (2012).
8
An organization engages in lobbying, or legislative activities, when it attempts to influence specific legislation by
directly contacting members of a legislative body (Federal, State, or local) or encouraging the public to contact those
members regarding that legislation. An organization also engages in lobbying when it encourages the public to take
a position on a referendum. Lobbying is distinguished from political campaign intervention because lobbying does
not involve attempts to influence the election of candidates for public office.
9
An organization engages in general advocacy when it attempts to 1) influence public opinion on issues germane to
the organization’s tax-exempt purposes, 2) influence nonlegislative governing bodies (e.g., the executive branch or
regulatory agencies), or 3) encourage voter participation through “get out the vote” drives, voter guides, and
candidate debates in a nonpartisan, neutral manner. General advocacy basically includes all types of advocacy other
than political campaign intervention and lobbying.
Page 2Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
During the 2012 election cycle, the activities of tax-exempt organizations received media
coverage concerning the amount of money spent on influencing elections. According to the
Center for Responsive Politics, tax-exempt groups, such as I.R.C. § 501(c)(4), I.R.C. § 501(c)(5),
and I.R.C. § 501(c)(6) organizations, spent $133 million in Calendar Year 2010 on Federal
candidate-oriented expenditures. In Calendar Year 2012, this figure increased to $315 million.10
In addition, as shown in Figure 2, the number of applications for tax-exempt status has increased
over the past four fiscal years.11
Figure 2: Number of Applications for
I.R.C. §§ 501(c)(3)–(6) Tax-Exempt
Status Received by the IRS
Fiscal
Year
I.R.C. Subsection
501(c)(3) 501(c)(4) 501(c)(5) 501(c)(6)
2009 65,179 1,751 543 1,828
2010 59,486 1,735 290 1,637
2011 58,712 2,265 409 1,836
2012 66,543 3,357 1,081 2,338
Source: These data were provided by the EO function as
background and were not validated for accuracy or reliability.
During the 2012 election cycle, some members of Congress raised concerns to the IRS about
selective enforcement and the duty to treat similarly situated organizations consistently. In
addition, several organizations applying for
I.R.C. § 501(c)(4) tax-exempt status made allegations that
the IRS 1) targeted specific groups applying for tax-exempt
status, 2) delayed the processing of targeted groups’
applications for tax-exempt status, and 3) requested
unnecessary information from targeted organizations.
Lastly, several members of Congress requested that the IRS
investigate whether existing social welfare organizations
are improperly engaged in a substantial, or even
predominant, amount of campaign activity.
We initiated this audit based on concerns expressed by Congress and reported in the media
regarding the IRS’s treatment of organizations applying for tax-exempt status. We focused our
10 The Center for Responsive Politics obtained its information from the Federal Election Commission. We only
included expenditures reported to the Federal Election Commission specifically for advocating the election or defeat
of clearly identified Federal candidates.
11 Some of this increase may be due to the reapplication of those organizations whose tax-exempt status was revoked
as a result of not filing information returns for three consecutive years.
Page 3
This audit focused on
allegations that the IRS targeted
specific groups applying for
tax-exempt status, delayed the
processing of targeted groups’
applications, and requested
unnecessary information from
targeted organizations.Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
efforts on reviewing the processing of applications for tax-exempt status and determining
whether allegations made against the IRS were founded.12 Tax-exempt application case files
were selected for review in June 2012 and were reviewed as provided by the EO function
between July and November 2012. We did not review whether specific applications for
tax-exempt status should be approved or denied.
This review was performed at the EO function Headquarters office in Washington, D.C., and the
Determinations Unit in Cincinnati, Ohio, during the period June 2012 through February 2013.
We conducted this performance audit in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions
based on our audit objective. We believe that the evidence obtained provides a reasonable basis
for our findings and conclusions based on our audit objective. Detailed information on our audit
objective, scope, and methodology is presented in Appendix I. Major contributors to the report
are listed in Appendix II.
12 A future audit is being considered to assess how the EO function monitors I.R.C. §§ 501(c)(4)–(6) organizations
to ensure that political campaign intervention does not constitute their primary activity.
Page 4Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
Results of Review
The Determinations Unit Used Inappropriate Criteria to Identify
Potential Political Cases
The Determinations Unit developed and used inappropriate criteria to identify applications from
organizations with the words Tea Party in their names. These applications (hereafter referred to
as potential political cases)13 were forwarded to a team of specialists14 for review. Subsequently,
the Determinations Unit expanded the criteria to inappropriately include organizations with other
specific names (Patriots and 9/12) or policy positions. While the criteria used by the
Determinations Unit specified particular organization names, the team of specialists was also
processing applications from groups with names other than those identified in the criteria. The
inappropriate and changing criteria may have led to inconsistent treatment of organizations
applying for tax-exempt status. For example, we identified some organizations’ applications
with evidence of significant political campaign intervention that were not forwarded to the team
of specialists for processing but should have been. We also identified applications that were
forwarded to the team of specialists but did not have indications of significant political campaign
intervention. All applications that were forwarded to the team of specialists experienced
substantial delays in processing. Although the IRS has taken some action, it will need to do
more so that the public has reasonable assurance that applications are processed without
unreasonable delay in a fair and impartial manner in the future.
Criteria for selecting applications inappropriately identified organizations based
on their names and policy positions
The Determinations Unit developed and began using criteria to identify potential political cases
for review that inappropriately identified specific groups applying for tax-exempt status based on
their names or policy positions instead of developing criteria based on tax-exempt laws and
Treasury Regulations.
**********************************1*****************************************
**********************************1*******************************************
*1***. According to media reports, some organizations were classified as I.R.C. § 501(c)(4)
social welfare organizations but operated like political organizations. ********1**********
13 Until July 2011, the Rulings and Agreements office referred to these cases as Tea Party cases. Afterwards, the
EO function referred to these cases as advocacy cases.
14 Initially, the team consisted of one specialist, but it was expanded to several specialists in December 2011. The
EO function referred to this team as the advocacy team.
Page 5Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
*********************************1**************************************. Soon
thereafter, according to the IRS, a Determinations Unit specialist was asked to search for
applications with Tea Party, Patriots, or 9/12 in the organization’s name as well as other
“political-sounding” names. EO function officials stated that, in May 2010, the Determinations
Unit began developing a spreadsheet that would become known as the “Be On the Look Out”
listing (hereafter referred to as the BOLO listing),15 which included the emerging issue of Tea
Party applications. In June 2010, the Determinations Unit began training its specialists on issues
to be aware of, including Tea Party cases. By July 2010, Determinations Unit management
stated that it had requested its specialists to be on the lookout for Tea Party applications.
In August 2010, the Determinations Unit distributed the first formal BOLO listing. The criteria
in the BOLO listing were Tea Party organizations applying for I.R.C. § 501(c)(3) or
I.R.C. § 501(c)(4) status. Based on our review of other BOLO listing criteria, the use of
organization names on the BOLO listing is not unique to potential political cases.16 EO function
officials stated that Determinations Unit specialists interpreted the general criteria in the
BOLO listing and developed expanded criteria for identifying potential political cases.17
Figure 3 shows that, by June 2011, the expanded criteria included additional names (Patriots and
9/12 Project) as well as policy positions espoused by organizations in their applications.
Figure 3: Criteria for Potential Political Cases (June 2011)
“Tea Party,” “Patriots” or “9/12 Project” is referenced in the case file
Issues include government spending, government debt or taxes
Education of the public by advocacy/lobbying to “make America a better place to live”
Statement in the case file criticize how the country is being run
Source: EO function briefing dated June 2011.
The mission of the IRS is to provide America’s taxpayers top quality service by helping them
understand and meet their tax responsibilities and by applying the tax law with integrity and
fairness to all. According to IRS Policy Statement 1-1, IRS employees accomplish this mission
by being impartial and handling tax matters in a manner that will promote public confidence.
However, the criteria developed by the Determinations Unit gives the appearance that the IRS is
not impartial in conducting its mission. The criteria focused narrowly on the names and policy
15 The BOLO listing includes a consolidated list of emerging issues the EO function identifies for dissemination to
Determinations Unit specialists.
16 We did not review the use of other named organizations on the BOLO listing to determine if their use was
appropriate.
17 During interviews with Determinations Unit specialists and managers, we could not specifically determine who
had been involved in creating the criteria. EO function officials later clarified that the expanded criteria were a
compilation of various Determinations Unit specialists’ responses on how they were identifying Tea Party cases.
Page 6Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
positions of organizations instead of tax-exempt laws and Treasury Regulations. Criteria for
selecting applications for the team of specialists should focus on the activities of the
organizations and whether they fulfill the requirements of the law. Using the names or policy
positions of organizations is not an appropriate basis for identifying applications for review by
the team of specialists.
We asked the Acting Commissioner, Tax Exempt and Government Entities Division; the
Director, EO; and Determinations Unit personnel if the criteria were influenced by any
individual or organization outside the IRS. All of these officials stated that the criteria were not
influenced by any individual or organization outside the IRS. Instead, the Determinations Unit
developed and implemented inappropriate criteria in part due to insufficient oversight provided
by management. Specifically, only first-line management approved references to the Tea Party
in the BOLO listing criteria before it was implemented. As a result, inappropriate criteria
remained in place for more than 18 months. Determinations Unit employees also did not
consider the public perception of using politically sensitive criteria when identifying these cases.
Lastly, the criteria developed showed a lack of knowledge in the Determinations Unit of what
activities are allowed by I.R.C. § 501(c)(3) and I.R.C. § 501(c)(4) organizations.
Determinations Unit employees stated that they considered the Tea Party criterion as a shorthand
term for all potential political cases. Whether the inappropriate criterion was shorthand for all
potential political cases or not, developing and using criteria that focuses on organization names
and policy positions instead of the activities permitted under the Treasury Regulations does not
promote public confidence that tax-exempt laws are being adhered to impartially. In addition,
the applications for those organizations that were identified for processing by the team of
specialists experienced significant delays and requests for unnecessary information that is
detailed later in this report.
After being briefed on the expanded criteria in June 2011, the Director, EO, immediately
directed that the criteria be changed. In July 2011, the criteria were changed to focus on the
potential “political, lobbying, or [general] advocacy” activities of the organization. These
criteria were an improvement over using organization names and policy positions. However, the
team of specialists subsequently changed the criteria in January 2012 without executive approval
because they believed the July 2011 criteria were too broad. The January 2012 criteria again
focused on the policy positions of organizations instead of tax-exempt laws and Treasury
Regulations. After three months, the Director, Rulings and Agreements, learned the criteria had
been changed by the team of specialists and subsequently revised the criteria again in May 2012.
(See Appendix VI for a complete timeline of criteria used to identify potential political cases).
The May 2012 criteria more clearly focus on activities permitted under the Treasury Regulations.
As a result of changes made to the criteria without management knowledge, the Director,
Rulings and Agreements, issued a memorandum requiring all original entries and changes to
criteria included on the BOLO listing be approved at the executive level prior to implementation.
Page 7Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
The team of specialists processed applications by organizations with names
other than Tea Party, Patriots, and 9/12
To determine if organizations other than those specifically identified in the inappropriate criteria
were processed by the team of specialists, we reviewed the names on all applications identified
as potential political cases.18 Figure 4 shows that approximately one-third of the applications
identified for processing by the team of specialists included Tea Party, Patriots, or 9/12 in their
names, while the remainder did not. According to the Director, Rulings and Agreements, the
fact that the team of specialists worked applications that did not involve the Tea Party, Patriots,
or 9/12 groups demonstrated that the IRS was not politically biased in its identification of
applications for processing by the team of specialists.
Figure 4: Breakdown of Potential Political Cases by Organization Name
72
11
13
202
Tea Party
9/12
Patriots
Other
Source: EO function Potential Political Case Tracking Sheet as of May 31, 2012.
While the team of specialists reviewed applications from a variety of organizations, we
determined during our reviews of statistical samples of I.R.C. § 501(c)(4) tax-exempt
applications that all cases with Tea Party, Patriots, or 9/12 in their names were forwarded to the
team of specialists.19
18 We could not determine which potential political cases may have been identified based on an organization’s
policy positions.
19 We determined this through two statistical samples of 338 (7.5 percent) from a universe of 4,510 I.R.C. § 501(c)(4)
tax-exempt applications filed during May 2010 through May 2012 that were not forwarded to the team of specialists.
See Appendix I for details on our sampling methodology.
Page 8Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
Some applications with indications of significant political campaign intervention
were not identified for review by the team of specialists
In May 2012, the Director, Rulings and Agreements, approved the current criteria for identifying
potential political cases. The criteria are “501(c)(3), 501(c)(4), 501(c)(5), and 501(c)(6)
organizations with indicators of significant amounts of political campaign intervention….” To
determine if all cases with indications of significant political campaign intervention were sent to
the team of specialists, we reviewed two statistical samples of I.R.C. § 501(c)(4) applications.
 Applications That the IRS Determined Required Minimal or No Additional
Information for Processing – We reviewed a statistical sample of 94 I.R.C. § 501(c)(4)
cases closed from May 201020 through May 2012 from a universe of 2,051 applications
that the IRS determined required minimal or no additional information from the
organizations (also referred to by the EO function as merit closures). We determined that
two (2 percent) of 94 approved applications had indications of significant political
campaign intervention and should have been forwarded to the team of specialists.21
Based on our statistical sample, we project an estimated 44 merit closure applications
were not appropriately identified as potential political cases during this time period.22
 Applications Identified by the IRS That Required Additional Information for
Processing – We reviewed a statistical sample of 244 I.R.C. § 501(c)(4) cases closed
from May 2010 through May 2012 or open as of May 31, 2012, from a universe of
2,459 applications that the IRS determined required additional information from the
organizations applying for tax-exempt status (also referred to by the EO function as full
development applications) but were not forwarded to the team of specialists. For the
applications that were available for our review, we found that 14 (6 percent)23 of
237 applications24 included indications of significant political campaign intervention and
should have been processed by the team of specialists.25 We project an estimated 141 full
development applications were not appropriately identified as potential political cases
during this time period.26
20 May 2010 was chosen because it is the first date that we were informed that the Determinations Unit was using
criteria which identified specific organizations by name.
21 Neither of the two cases involved a Tea Party, Patriots, or 9/12 organization.
22 See Appendix IV.
23 None of the 14 cases involved a Tea Party, Patriots, or 9/12 organization.
24 We could not analyze seven sampled application case files because of incomplete documentation in the case files
(six applications) or the case file could not be located (one application). See Appendix IV.
25 We determined that eight applications were appropriately forwarded to the team of specialists. Five of the
eight application case files involved Tea Party, Patriots, or 9/12 organizations.
26 See Appendix IV.
Page 9Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
To determine if cases without indications of significant political campaign intervention were
sent to the team of specialists, we reviewed all of the applications identified as potential
political cases as of May 31, 2012.
 Applications That the IRS Determined Should Be Processed by the Team of
Specialists – We reviewed all 298 applications that had been identified as potential
political cases as of May 31, 2012. In the majority of cases, we agreed that the
applications submitted included indications of significant political campaign intervention.
However, we did not identify any indications of significant political campaign
intervention for 91 (31 percent) of the 296 applications27 that had complete
documentation.28
We discussed our results with EO function officials, who disagreed with our findings.
Although EO function officials provided explanations about why the applications should
have been identified as potential political cases, the case files did not include the specific
reason(s) the applications were selected. EO function officials also stated that
applications may not literally include statements indicating significant political campaign
intervention.29 According to EO function officials, organizations may not understand
what constitutes political campaign intervention or may provide vague descriptions of
certain activities that the EO function knows from past experience potentially involve
political campaign intervention. In these cases, the EO function believes it is important
to review the applications to ensure that political campaign intervention is not the
organizations’ primary activity. To provide further assurance that Determinations Unit
employees are handling tax matters in an impartial manner, it would be helpful to
document specifically why applications are chosen for further review.
Recommendations
The Director, EO, should:
Recommendation 1: Ensure that the memorandum requiring the Director, Rulings and
Agreements, to approve all original entries and changes to criteria included on the BOLO listing
prior to implementation be formalized in the appropriate Internal Revenue Manual.
Management’s Response: The IRS agreed with this recommendation and will
ensure that the procedures set forth in the memorandum requiring the Director,
27 We could not complete our review of two cases due to inadequate documentation in the case files. See
Appendix IV.
28 Seventeen (19 percent) of the 91 applications involved Tea Party, Patriots, or 9/12 organizations.
29 It should also be noted that, in some cases, specialists obtained additional information after the application was
received that indicated the organizations were involved in political campaign intervention which was not available in
the initial application documentation we reviewed.
Page 10Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
Rulings and Agreements, to approve in advance all original entries and changes to the
BOLO listing are made part of the Internal Revenue Manual.
Recommendation 2: Develop procedures to better document the reason(s) applications are
chosen for review by the team of specialists (e.g., evidence of specific political campaign
intervention in the application file or specific reasons the EO function may have for choosing to
review the application further based on past experience).
Management’s Response: The IRS proposed an alternative corrective action to
our recommendation. The IRS stated it will review its screening procedures to
determine whether, and to what extent, additional documentation can be implemented
without having an adverse impact on the timeliness of case processing.
Office of Audit Comment: We do not believe this alternative corrective action fully
addresses the recommendation. Developing procedures to better document the reasons
applications are chosen for further review would help ensure that applications are being
handled in an impartial manner. In addition, as detailed in the next section of this report,
the average time these applications have been open is 574 days as of December 17, 2012.
We do not believe documenting a brief explanation about why applications are chosen for
review would have an adverse impact on the timeliness of case processing.
Recommendation 3: Develop training or workshops to be held before each election cycle
including, but not limited to, the proper ways to identify applications that require review of
political campaign intervention activities.
Management’s Response: The IRS agreed with this recommendation and will
develop training on the topics described in Recommendations 3, 5, 6, and 9. Because
election cycles are continuous, the IRS will develop a schedule which ensures that
staff have the training as needed to handle potential political intervention matters.
Potential Political Cases Experienced Significant Processing Delays
Organizations that applied for tax-exempt status and had their applications forwarded to the team
of specialists experienced substantial delays. As of December 17, 2012, many organizations had
not received an approval or denial letter for more than two years after they submitted their
applications. Some cases have been open during two election cycles (2010 and 2012). The
IRS Strategic Plan 2009–2013 has several goals and objectives that involve timely interacting
with taxpayers, including enforcement of the tax law in a timely manner while minimizing
taxpayer burden. The EO function does not have specific timeliness goals for processing
applications, such as potential political cases, that require significant follow-up with the
Page 11Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
organizations.30 The time it takes to process an application depends upon the facts and
circumstances of the case.
Potential political cases took significantly longer than average to process due to ineffective
management oversight. Once cases were initially identified for processing by the team of
specialists, the Determinations Unit Program Manager requested assistance via e-mail from the
Technical Unit to ensure consistency in processing the cases. However, EO function
management did not ensure that there was a formal process in place for initiating, tracking, or
monitoring requests for assistance. In addition, there were several changes in Rulings and
Agreements management responsible for overseeing the fulfillment of requests for assistance
from the Determinations Unit during this time period. This contributed to the lengthy delays in
processing potential political cases. As a result, the Determinations Unit waited more than
20 months (February 2010 to November 2011) to receive draft written guidance from the
Technical Unit for processing potential political cases.
As a result, the IRS delayed the issuance of letters to organizations approving their tax-exempt
status. For I.R.C. § 501(c)(3) organizations, this means that potential donors and grantors could
be reluctant to provide donations or grants.31 In addition, some organizations withdrew their
applications and others may not have begun conducting planned charitable or social welfare
work. The delays may have also prevented some organizations from receiving certain benefits of
the tax-exempt status. For example, if organizations are approved for tax-exempt status, they
may receive exemption from certain State taxes and reduced postal rates. For organizations that
may eventually be denied tax-exempt status but have been operating while their applications are
pending, the organizations will be required to retroactively file income tax returns and may be
liable to pay income taxes for, in some cases, more than two years.
To analyze the delays, we: 1) reviewed the events that led to delays in processing potential
political cases, 2) compared the amount of time cases assigned to the team of specialists were
open to applications that were not assigned to the team of specialists, and 3) determined if
organizations were eligible to sue the IRS due to delays in processing certain applications.
Potential political cases experienced long processing delays
The team of specialists stopped working on potential political cases from October 2010 through
November 2011, resulting in a 13-month delay, while they waited for assistance from the
Technical Unit. Figure 5 illustrates significant events and delays concerning potential political
cases. For a comprehensive timeline of events related to potential political cases, see
Appendix VII.
30 The EO function, however, had an overall goal to process merit and full development tax-exempt applications in
121 days for Fiscal Year 2012.
31 Of 298 cases reviewed, 89 were I.R.C. § 501(c)(3) organizations.
Page 12Inappropriate Criteria Were Used to
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Figure 5: Timeline of Events and Delays Involving the Processing
of Potential Political Cases (*****1******* Through May 2012)
Source: Interviews of EO function employees and our review of EO function e-mails.
Ineffective oversight by management led to significant delays in processing potential political
cases. ***************************************1*****************************
**********1*******************************. In April 2010, the Determinations Unit
Program Manager requested via e-mail a contact in the Technical Unit to provide assistance with
processing the applications. A Technical Unit specialist was assigned this task and began
working with the team of specialists. The team of specialists stopped processing cases in
October 2010 without closing any of the 40 cases that were begun. However, the Determinations
Unit Program Manager thought the cases were being processed. Later, we were informed by the
Director, Rulings and Agreements, that there was a miscommunication about processing the
cases. The Determinations Unit waited for assistance from the Technical Unit instead of
Page 13
Date Events and Delays
******1****** *****************************1*******************************
*******************1**********.
April 2010 The team of specialists is formed with one specialist who is assigned potential
political cases and begins working on them with the assistance of a Technical Unit
employee.
October 2010 The team of specialists stops processing potential political cases while waiting for
assistance from the Technical Unit.
July 2011 The EO function decides to develop written
to process the potential political cases.
guidance for the Determinations Unit
November 2011 Draft written guidance is provided to the Determinations Unit.
December 2011 Additional specialists are added to the team of specialists.
January 2012 Specialists begin issuing additional information request letters to organizations
applying for tax-exempt status, requesting that the information be provided in
two to three weeks. These time periods are standard response times given for any
information request and are included in the Internal Revenue Manual.
February 2012 Concerns are raised in the media regarding requests for significant amounts of
information from organizations applying for tax-exempt status. The Director, EO,
stops specialists from issuing any more letters requesting information. Instead,
letters allowing extensions of 60 days to respond to previous additional information
letters were developed and issued in March and April 2012. These letters also noted
that applicants should contact the IRS if they needed longer than 60 days to respond.
May 2012 A workshop is given to Determinations Unit specialists assigned to potential
political cases. Afterwards, a review of all the open cases is completed to
recommend whether additional processing is necessary or whether the cases can
be closed (as of December 17, 2012, 160 applications were still being processed). Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
continuing to process the cases. The Determinations Unit Program Manager requested status
updates on the request for assistance several times via e-mail. Draft written guidance was not
received from the Technical Unit until November 2011, 13 months after the Determinations Unit
stopped processing the cases. As of the end of our audit work in February 2013, the guidance
had not been finalized because the EO function decided to provide training instead.32
Many organizations waited much longer than 13 months for a decision, while others have yet to
receive a decision from the IRS. For example, as of December 17, 2012, the IRS had been
processing several potential political cases for more than 1,000 calendar days. Some of these
organizations received requests for additional information in Calendar Year 2010 and then did
not hear from the IRS again for more than a year while the Determinations Unit waited for
assistance from the Technical Unit. For the 296 potential political cases we reviewed,33 as of
December 17, 2012, 108 applications had been approved, 28 were withdrawn by the applicant,
none had been denied, and 160 cases were open from 206 to 1,138 calendar days (some crossing
two election cycles).
In March 2012, the Deputy Commissioner, Services and Enforcement, asked the Senior
Technical Advisor to the Acting Commissioner, Tax Exempt and Government Entities Division,
to look into concerns raised by the media about delays in processing applications for tax-exempt
status from Tea Party groups and the nature of the questions being asked related to the
applications. In April 2012, the Senior Technical Advisor to the Acting Commissioner, Tax
Exempt and Government Entities Division, along with a team of EO function Headquarters
office employees, reviewed many of the potential political cases and determined that there
appeared to be some confusion by Determinations Unit specialists and applicants on what
activities are allowed by I.R.C. § 501(c)(4) organizations. We believe this could be due to the
lack of specific guidance on how to determine the “primary activity” of an I.R.C. § 501(c)(4)
organization. Treasury Regulations state that I.R.C. § 501(c)(4) organizations should have social
welfare as their “primary activity”; however, the regulations do not define how to measure
whether social welfare is an organization’s “primary activity.”
As a result of this confusion, the EO function Headquarters employees provided a two-day
workshop to the team of specialists in May 2012 to train them on what activities are allowable by
I.R.C. § 501(c)(4) organizations, including lobbying and political campaign intervention. After
this workshop, potential political cases were independently reviewed by two people to determine
what, if any, additional work needed to be completed prior to making a decision to approve or
deny the applications for tax-exempt status. This review continued on any newly identified
potential political cases. Prior to the hands-on training and independent reviews, the team of
specialists had only approved six (2 percent) of 298 applications. After the hands-on training
32 In response to the National Taxpayer Advocate’s 2007 Annual Report to Congress, the IRS commented that
putting guide sheets for processing applications for tax-exempt status on its Internet site would result in fewer
delays.
33 *************************************1******************************************.
Page 14Inappropriate Criteria Were Used to
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and independent reviews began, the Determinations Unit approved an additional 102 applications
by December 2012.34 In addition, it was decided that applications could be approved, but a
referral for follow-up could be sent to another unit,35 which could review the activities of an
organization at a later date to determine if they were consistent with the organization’s
tax-exempt status.
Potential political cases were open much longer than similar cases that were not
identified for processing by the team of specialists
For Fiscal Year 2012, the average time it took the Determinations Unit to complete processing
applications requiring additional information from organizations applying for tax-exempt status
(also referred to by the EO function as full development cases) was 238 calendar days according
to IRS data. In comparison, the average time a potential political case was open as of
December 17, 2012, was 574 calendar days (with 158 potential political cases being open longer
than the average calendar days it took to close other full development cases).36 Figure 6 shows
that more than 80 percent of the potential political cases have been open more than one year.
Figure 6: Number of Calendar Days Potential Political Cases
Were Open (as of December 17, 2012)
Total
Cases
Number and Percentage37 of Potential
Political Cases Open by Calendar Day Range
0–120
Calendar
Days
121–180
Calendar
Days
181–270
Calendar
Days
271–365
Calendar
Days
More
Than 365
Calendar
Days
160 0
(0%)
0
(0%)
3
(2%)
28
(18%)
129
(81%)
Source: Our analysis of EO function documentation.
34 Of the 102 applications, 29 (28 percent) involved Tea Party, Patriots, or 9/12 organizations.
35 The Review of Operations Unit completes compliance reviews on tax-exempt organizations to determine whether
they are operating in accordance with their tax-exempt purposes and are current with their filing requirements. Unit
personnel review information available on IRS systems, filed returns, applications for tax exemption, and the
Internet to assess the organizations’ operations and make recommendations for further actions.
36 See Appendix IV.
37 Percentages may not equal 100 percent due to rounding.
Page 15Inappropriate Criteria Were Used to
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Some charitable organizations were eligible to sue the IRS for declaratory
judgment due to the delays in processing applications
The Determinations Unit did not always timely approve or deny the applications for
I.R.C. § 501(c)(3) tax-exempt status for potential political cases. However, the tax law provides
organizations with the ability to sue the IRS to force a decision on their applications if the IRS
does not approve or deny their applications within 270 calendar days.38
As of May 31, 2012,39 32 (36 percent) of 89 I.R.C. § 501(c)(3) potential political cases were open
more than 270 calendar days, and the organizations had responded timely to all requests for
additional information, as required. As of the end of our fieldwork, none of these organizations
had sued the IRS, even though they had the legal right. In another 38 open cases, organizations
were timely in their responses to additional information requests, but the 270-calendar-day
threshold had not been reached as of May 31, 2012. These 38 organizations may have the right
to sue the IRS in the future if determinations are not made within the 270-calendar-day period.
Recommendations
The Director, EO, should:
Recommendation 4: Develop a process for the Determinations Unit to formally request
assistance from the Technical Unit and the Guidance Unit.40 The process should include actions
to initiate, track, and monitor requests for assistance to ensure that requests are responded to
timely.
Management’s Response: The IRS agreed with this recommendation and will
develop a formal process for the Determination Unit to request assistance and to
monitor such requests.
Recommendation 5: Develop guidance for specialists on how to process requests for
tax-exempt status involving potentially significant political campaign intervention. This
guidance should also be posted to the Internet to provide transparency to organizations on the
application process.
Management’s Response: The IRS proposed alternative corrective action to our
recommendation. The IRS will develop training on the topics described in
Recommendations 3, 5, 6, and 9. Because election cycles are continuous, the IRS
38 Revenue Procedure 2012-09 provides further guidance on the implementation of this right.
39 Tax-exempt application case files were selected for review in June 2012 based on a May 31, 2012, listing of
applications being processed by the team of specialists.
40 The Guidance Unit provides formal and informal guidance that explains how certain laws, such as regulations,
revenue rulings, revenue procedures, notices, and announcements, may apply to exempt organizations.
Page 16Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
noted that it will develop a schedule which ensures that staff have the training as
needed to handle potential political intervention matters.
Office of Audit Comment: We do not believe that this alternative corrective action
fully addresses our recommendation. We believe that specific guidance should be
developed and made available to specialists processing potential political cases. Making
this guidance available on the Internet for organizations could also address a concern
raised in the IRS’s response that many applications appear to contain incomplete and
inconsistent information.
Recommendation 6: Develop training or workshops to be held before each election cycle
including, but not limited to: a) what constitutes political campaign intervention versus general
advocacy (including case examples) and b) the ability to refer for follow-up those organizations
that may conduct activities in a future year which may cause them to lose their tax-exempt status.
Management’s Response: The IRS agreed with this recommendation and will
develop training on the topics described in Recommendations 3, 5, 6, and 9. Because
election cycles are continuous, the IRS reported that it will develop a schedule which
ensures that staff have the training as needed to handle potential political intervention
matters.
Recommendation 7: Provide oversight to ensure that potential political cases, some of which
have been in process for three years, are approved or denied expeditiously.
Management’s Response: The IRS agreed with this recommendation and stated
that, while this is an ongoing project, it is closely overseeing the remaining open cases
to ensure that it reaches determinations as expeditiously as possible.
The Acting Commissioner, Tax Exempt and Government Entities Division, should:
Recommendation 8: Recommend to IRS Chief Counsel and the Department of the Treasury
that guidance on how to measure the “primary activity” of I.R.C. § 501(c)(4) social welfare
organizations be included for consideration in the Department of the Treasury Priority Guidance
Plan.41
Management’s Response: The IRS agreed with this recommendation and will
share this recommendation with the IRS Chief Counsel and the Department of
Treasury’s Office of Tax Policy.
41 The Department of the Treasury issues a Priority Guidance Plan each year to identify and prioritize the tax issues
that should be addressed through regulations, revenue rulings, revenue procedures, notices, and other published
administrative guidance.
Page 17Inappropriate Criteria Were Used to
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The Determinations Unit Requested Unnecessary Information for
Many Potential Political Cases
The Determinations Unit sent requests for information that we later (in whole or in part)
determined to be unnecessary for 98 (58 percent) of 170 organizations that received additional
information request letters.42 According to the Internal Revenue Manual, these requests should
be thorough, complete, and relevant. However, the Determinations Unit requested irrelevant
(unnecessary) information because of a lack of managerial review, at all levels, of questions
before they were sent to organizations seeking tax-exempt status. We also believe that
Determinations Unit specialists lacked knowledge of what activities are allowed by
I.R.C. § 501(c)(3) and I.R.C. § 501(c)(4) tax-exempt organizations. This created burden on the
organizations that were required to gather and forward information that was not needed by the
Determinations Unit and led to delays in processing the applications. These delays could result
in potential donors and grantors being reluctant to provide donations or grants to organizations
applying for I.R.C. § 501(c)(3) tax-exempt status. In addition, some organizations may not have
begun conducting planned charitable or social welfare work.
After receiving draft guidance in November 2011, the team of specialists began sending requests
for additional information in January 2012 to organizations that were applying for tax-exempt
status. For some organizations, this was the second letter received from the IRS requesting
additional information, the first of which had been received more than a year before this date.
These letters requested that the information be provided in two or three weeks (as is customary in
these letters) despite the fact that the IRS had done nothing with some of the applications for
more than one year. After the letters were received, organizations seeking tax-exempt status, as
well as members of Congress, expressed concerns about the type and extent of questions being
asked. For example, the Determinations Unit requested donor information from
27 organizations43 that it would be required to make public if the application was approved, even
though this information could not be disclosed by the IRS when provided by organizations
whose tax-exempt status had been approved. Figure 7 shows an example of requests sent to
organizations applying for tax-exempt status regarding donors.
42 See Appendix IV.
43 Of the 27 organizations, 13 had Tea Party, Patriots, or 9/12 in their names.
Page 18Inappropriate Criteria Were Used to
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Figure 7: Example of Requests for Information Regarding
Past and Future Donors in Letters Sent in January/February 2012
Provide the following information for the income you received and raised for the years from
inception to the present. Also, provide the same information for the income you expect to
receive and raise for 2012, 2013, and 2014.
a. Donations, contributions, and grant income for each year, which includes the following
information:
1. The names of the donors, contributors, and grantors. If the donor, contributor, or
grantor has run or will run for a public office, identify the office. If not, please
confirm by answering this question “No.”
2. The amounts of each of the donations, contributions, and grants and the dates you
received them.
3. How did you use these donations, contributions, and grants? Provide the details.
If you did not receive or do not expect to receive any donation, contribution, and grant income,
please confirm by answering “None received” and/or “None expected.”
Source: Application case files.
After media attention, the Director, EO, stopped issuance of additional information request
letters and provided an extension of time to respond to previously issued letters. The Deputy
Commissioner for Services and Enforcement then asked the Senior Technical Advisor to the
Acting Commissioner, Tax Exempt and Government Entities Division, to find out how
applications were being processed and make recommendations. The Senior Technical Advisor
and a team of specialists visited the Determinations Unit in Cincinnati, Ohio, and began
reviewing cases. As part of this effort, EO function Headquarters office employees reviewed the
additional information request letters prepared by the team of specialists and identified
seven questions that they deemed unnecessary. Subsequently, the EO function instituted the
practice that all additional information request letters for potential political cases be reviewed by
the EO function Headquarters office before they are sent to organizations seeking tax-exempt
status. In addition, EO function officials informed us that they decided to destroy all donor lists
that were sent in for potential political cases that the IRS determined it should not have
requested. Figure 8 lists the seven questions identified as being unnecessary.
Page 19Inappropriate Criteria Were Used to
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Figure 8: Seven Questions Identified As Unnecessary by the EO Function
Number Question
1 Requests the names of donors.
2 Requests a list of all issues that are important to the organization and asks that
the organization indicate its position regarding such issues.
3 Requests 1) the roles and activities of the audience and participants other than
members in the activity and 2) the type of conversations and discussions
members and participants had during the activity.
4 Asks whether the officer, director, etc., has run or will run for public office.
5 Requests the political affiliation of the officer, director, speakers, candidates
supported, etc., or otherwise refers to the relationship with identified
political party–related organizations.
6 Requests information regarding employment, other than for the organization,
including hours worked.
7 Requests information regarding activities of another organization – not just
the relationship of the other organization to the applicant.
Source: EO function review of additional information request letters.
We reviewed case file information for all 170 organizations that received additional information
request letters and determined that 98 (58 percent) had received requests for information that was
later deemed unnecessary by the EO function. Of the 98 organizations:
 15 were informed that they did not need to respond to previous requests for information
and, instead, received a revised request for information.
 12 either received a letter or a telephone call stating that their application was approved
and they no longer needed to respond to information requests they had received from the
IRS.
Page 20Inappropriate Criteria Were Used to
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Figure 9 shows excerpts from the approval letter developed for organizations that did not need to
respond to a previous additional information request letter.
Figure 9: Excerpts From a Template Approval Letter, Which Includes a Statement
That Previously Requested Information Is No Longer Needed
Dear Applicant:
We are pleased to inform you that upon review of your application for taxexempt status we have determined that you are exempt from Federal income tax
under section 501 (c) (4) of the Internal Revenue Code. Because this letter
could help resolve any questions regarding your exempt status, you should
keep it in your permanent records.
Please not that we have just completed another review of your request to be
recognized as tax-exempt under section 501 (c) (4) of the Internal Revenue
Codes. Based on that review, we concluded that we do not need the additional
materials previously requested because your application and materials provide
sufficient information.
Source: IRS template approval letter.
Recommendation
Recommendation 9: The Director, EO, should develop training or workshops to be held
before each election cycle including, but not limited to, how to word questions in additional
information request letters and what additional information should be requested.
Management’s Response: The IRS agreed with this recommendation and will
develop training on the topics described in Recommendations 3, 5, 6, and 9. Because
election cycles are continuous, the IRS reported that it will develop a schedule which
ensures that staff have the training as needed to handle potential political intervention
matters.
Page 21Inappropriate Criteria Were Used to
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Appendix I
Detailed Objective, Scope, and Methodology
The overall objective was to determine whether allegations were founded that the IRS:
1) targeted specific groups applying for tax-exempt status, 2) delayed processing targeted
groups’ applications for tax-exempt status, and 3) requested unnecessary information from
targeted groups. To accomplish our objective, we:
I. Assessed the actions taken by the EO function in response to the increase in applications
for tax-exempt status from organizations potentially involved in political campaign
intervention.
A. Interviewed EO function management to identify steps taken and who authorized
them. We also developed a timeline of events.
B. Obtained a list of applications that were identified for processing by the team of
specialists and determined the status of the identified cases (open, approved, denied,
etc.) through May 31, 2012. We also received an updated list of identified cases
through December 17, 2012, to determine the status of each initial case as of this date.
C. Determined whether procedures and controls in place since May 2010 resulted in
inconsistent treatment of applications potentially involving political campaign
intervention.
II. Determined whether changes to procedures and controls since May 2010 affected the
timeliness of reviewing applications potentially involving political campaign
intervention.
A. Interviewed EO function personnel to determine whether there were any outside
influences that affected the timeliness of reviewing potential political cases.
B. Reviewed all 89 I.R.C. § 501(c)(3) potential political cases to determine whether they
were processed within the 270-day standard required by law.
III. Determined whether the actions taken by the EO function to identify applications for
tax-exempt status of organizations potentially involved in political campaign intervention
were consistent.
A. Selected a statistical sample of 244 open and closed I.R.C. § 501(c)(4) application
cases from a universe of 2,459 cases that the IRS determined needed significant
additional information (full development) on the Employee Plans/Exempt
Organizations Determination System from May 2010 through May 2012 to determine
whether they should have been identified for processing by the team of specialists.
Page 22Inappropriate Criteria Were Used to
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We selected our statistical sample using the following criteria: 90 percent confidence
level, 50 percent error rate,1
and ± 5 percent precision rate. We used a random sample
to ensure that each application case had an equal chance of being selected, which
enabled us to obtain sufficient evidence to support our results. A contracted
statistician reviewed our projections.
1. Obtained the universe of 2,459 cases from the Employee Plans/Exempt
Organizations Determination System and performed validity checks to ensure that
the data were accurate. We found the data could be relied on for this review.
2. Obtained a statistical sample of open and closed application cases.
3. Determined whether application cases with potential political campaign
intervention issues were identified for processing by the team of specialists.
4. Interviewed EO function personnel to obtain their perspective on any application
cases we identified that should have been identified for processing by the team of
specialists but were not.
B. Selected a statistical sample of 94 closed I.R.C. § 501(c)(4) application cases from a
universe of 2,051 cases that the IRS determined did not need significant additional
information (merit cases) on the Employee Plans/Exempt Organizations
Determination System from May 2010 through May 2012 to determine whether they
should have been identified for processing by the team of specialists. We selected
our statistical sample using the following criteria: 90 percent confidence level,
10 percent error rate,2
and ± 5 percent precision rate. We used a random sample to
ensure that each application case had an equal chance of being selected, which
enabled us to obtain sufficient evidence to support our results. A contracted
statistician reviewed our projections.
1. Obtained the universe of 2,051 cases from the Employee Plans/Exempt
Organizations Determination System and performed validity checks to ensure that
the data were accurate. We found the data could be relied on for this review.
2. Obtained a statistical sample of closed application cases.
3. Determined whether application cases with potential political campaign
intervention issues were not identified for processing by the team of specialists.
1
An expected error rate of 50 percent was chosen because we determined that cases needing significant additional
information had criteria that included the names of specific groups.
2
An expected error rate of 10 percent was chosen because procedures require that cases with political issues
generally need significant additional information.
Page 23Inappropriate Criteria Were Used to
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4. Interviewed EO function personnel to obtain their perspective on any applications
we identified that should have been identified for processing by the team of
specialists but were not.
C. Obtained and reviewed all 298 application cases identified for processing by the team
of specialists as of May 31, 2012, to determine whether they were correctly identified.
1. Determined whether application cases were correctly identified for processing by
the team of specialists.
2. Interviewed EO function personnel to obtain their perspective on any cases we
identified that should not have been identified for processing by the team of
specialists.
D. Computed the average cycle time of processing potential political cases and
compared it to the average cycle time for processing similar cases that were not
processed by the team of specialists.
E. Determined the number of organizations that may have been adversely affected by
inconsistent treatment.
IV. Determined whether the EO function consistently had a reasonable basis for requesting
information from organizations seeking tax-exempt status that were potentially involved
in political campaign intervention.
A. Reviewed all 170 potential political cases that were issued additional information
request letters to determine whether the letters included questions deemed
unnecessary by the EO function.
B. Interviewed EO function personnel to obtain their perspective on additional
information that was requested that may not have been necessary to help make a
determination decision.
C. Determined the number of taxpayers that may have been adversely affected.
Internal controls methodology
Internal controls relate to management’s plans, methods, and procedures used to meet their
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance. We determined the following
internal controls were relevant to our audit objective: EO function policies, procedures, and
practices for identifying and processing applications for tax-exempt status with indications of
political campaign intervention. We evaluated these controls by interviewing personnel,
reviewing documentation, reviewing statistical samples of applications for tax-exempt status, and
reviewing applications identified as involving potential political campaign intervention.
Page 24Inappropriate Criteria Were Used to
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Appendix II
Major Contributors to This Report
Gregory D. Kutz, Assistant Inspector General for Audit (Management Services and Exempt
Organizations)
Russell P. Martin, Acting Assistant Inspector General for Audit (Management Services and
Exempt Organizations)
Troy D. Paterson, Director
Thomas F. Seidell, Audit Manager
Cheryl J. Medina, Lead Auditor
Julia Moore, Senior Auditor
Michael A. McGovern, Auditor
Evan A. Close, Audit Evaluator
Page 25Inappropriate Criteria Were Used to
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Appendix III
Report Distribution List
Acting Commissioner C
Office of the Commissioner – Attn: Chief of Staff C
Chief Counsel CC
Deputy Commissioner for Services and Enforcement SE
National Taxpayer Advocate TA
Acting Deputy Commissioner, Tax Exempt and Government Entities Division SE:T
Director, Exempt Organizations, Tax Exempt and Government Entities Division SE:T:EO
Director, Office of Legislative Affairs CL:LA
Director, Office of Program Evaluation and Risk Analysis RAS:O
Office of Internal Control OS:CFO:CPIC:IC
Audit Liaison: Director, Communications and Liaison, Tax Exempt and Government Entities
Division SE:T:CL
Page 26Inappropriate Criteria Were Used to
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Appendix IV
Outcome Measures
This appendix presents detailed information on the measurable impact that our recommended
corrective actions will have on tax administration. These benefits will be incorporated into our
Semiannual Report to Congress.
Type and Value of Outcome Measure:
 Reliability of Information – Actual; nine application case files that were either incomplete or
could not be located for us to review (see page 5).
Methodology Used to Measure the Reported Benefit:
During our review of applications for tax-exempt status that were not identified for the team of
specialists, we were unable to review seven case files because the case file lacked complete
documentation (six cases) or the case file could not be located (one case). In addition, during our
review of all identified potential political cases through May 31, 2012, we were unable to
analyze two case files because of incomplete documentation.
Type and Value of Outcome Measure:
 Reliability of Information – Potential; 44 organizations whose tax-exempt applications were
not appropriately identified as having significant potential political campaign intervention
(see page 5).
Methodology Used to Measure the Reported Benefit:
We selected a simple random sample of 94 I.R.C. § 501(c)(4) cases closed from May 2010
through May 2012 from a universe of 2,051 applications that the IRS determined required
minimal or no additional information from organizations applying for tax-exempt status. During
our case reviews, we determined that two cases were not appropriately identified as having
significant potential political campaign intervention. We projected, with 90 percent confidence,
an actual error rate of between 0.38 percent and 6.55 percent1
and that between eight and
134 applications2
were not properly identified for processing by the team of specialists.
1
The point estimate error rate for the sample is 2.13 percent. The 90 percent confidence interval was calculated
using the Exact Binomial Method.
2
The point estimate number of error applications is 44. The 90 percent confidence interval was calculated using the
Exact Binomial Method.
Page 27Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
Type and Value of Outcome Measure:
 Reliability of Information – Potential; 141 organizations whose tax-exempt applications were
not appropriately identified as having significant potential political campaign intervention
(see page 5).
Methodology Used to Measure the Reported Benefit:
We selected a simple random sample of 244 I.R.C. § 501(c)(4) cases closed from May 2010
through May 2012 or open as of May 31, 2012, from a universe of 2,459 applications that the
IRS determined required additional information from organizations applying for tax-exempt
status.3
During our case reviews, we determined that 14 cases were not appropriately identified
as having significant potential political campaign intervention. We projected, with 90 percent
confidence, an actual error rate of between 3.38 percent and 8.43 percent4
and that between
84 and 198 applications5
were not properly identified for processing by the team of specialists.
Type and Value of Outcome Measure:
 Taxpayer Burden – Potential; 158 organizations that waited longer than average for the IRS
to make a decision regarding their tax-exempt status (see page 11).
Methodology Used to Measure the Reported Benefit:
We obtained data from the EO function on the average number of days it took to determine
whether an application for tax-exempt status was approved or denied. In Fiscal Year 2012, it
took on average 238 days to close a case that needed additional information from the
organization prior to approving or denying the application. As of December 17, 2012, there were
158 potential political cases that were open more than 238 calendar days.
Type and Value of Outcome Measure:
 Taxpayer Burden – Potential; 98 organizations that received additional information request
letters with questions that were later deemed unnecessary by the EO function (see page 18).
Methodology Used to Measure the Reported Benefit:
We reviewed 170 potential political cases that had received additional information request letters
from the Determinations Unit. Using a list of seven questions/topics that the EO function
categorized as unnecessary, we identified 98 potential political cases that included additional
information request letters asking questions deemed unnecessary by the EO function.
3
We found that seven cases from the sample of 244 were not reviewable because of incomplete documentation.
4
The point estimate error rate for the sample is 5.91 percent with a precision of ± 2.52 percent.
5
The point estimate number of error applications is 141 with a precision of ± 57 applications.
Page 28Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
Appendix V
High-Level Organizational Chart
of Offices Referenced in This Report
The following is a high-level organizational chart of offices we discuss in this report, starting
with the Deputy Commissioner for Services and Enforcement, who reports to the IRS
Commissioner.
Page 29
Acting Commissioner, Tax
Exempt and Government
Entities Division
Washington, DC
Deputy Commissioner for
Services and Enforcement
Washington, DC
Senior Technical
Advisor
Washington, DC
Director, EO
Washington, DC
Director, Rulings
and Agreements
Washington, DC
Program
Manager,
Determinations
Unit
Cincinnati, OH
Technical
Specialists
Washington, DC
Manager,
Technical Unit
Washington, DC
Manager,
Guidance Unit
Washington, DC
Determinations
Specialists
Cincinnati, OH
Guidance
Specialists
Washington, DC
Senior Technical
Advisor
Washington, DC Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
Appendix VI
Timeline of Written Criteria for
Identifying Potential Political Cases
The following illustrates the changes to the written criteria provided to Determinations Unit
employees for identifying applications for the team of specialists.
Page 30
Date Criteria Developed or Actions Taken
February 2010 ************************1******************************
************************1**************.
March–April The Determinations Unit began searching for other requests for tax
2010 exemption involving the Tea Party, Patriots, 9/12, and I.R.C. § 501(c)(4)
applications involving political sounding names, e.g., “We the People” or
“Take Back the Country.”
July 2010 Determinations Unit management requested its specialists to be on the
lookout for Tea Party applications.
August 2010 First BOLO listing issued with criteria listed as “…various local
organizations in the Tea Party movement…applying for exemption under
501(c)(3) or 501(c)(4).”
July 2011 Criteria changed to “Organizations involved with political, lobbying, or
advocacy for exemption under 501(c)(3) or 501(c)(4)” based on the
concerns the Director, EO, raised in June 2011.
January 2012 Criteria changed to “Political action type organizations involved in
limiting/expanding government, educating on the constitution and bill of
rights, social economic reform/movement” based on Determinations Unit
concerns that the July 2011 criteria was too generic.
May 2012 Criteria changed to “501(c)(3), 501(c)(4), 501(c)(5), and 501(c)(6)
organizations with indicators of significant amounts of political campaign
intervention (raising questions as to exempt purpose and/or excess private
benefit).” Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
Appendix VII
Comprehensive Timeline of Events
The following chart illustrates a timeline of events from February 2010 through July 2012
involving the identification and processing of potential political cases. It shows that there was
confusion about how to process the applications, delays in the processing of the applications, and
a lack of management oversight and guidance. The timeline was developed using documentation
provided by the EO function as well as numerous interviews with EO function personnel.
Page 31
Date Event Additional Details Source
February 25,
2010
****************1************************ E-Mail
Around
March 1, 2010
The Determinations Unit Group Manager asked a
specialist to search for other Tea Party or similar
organizations’ applications in order to determine the
scope of the issue. The specialist continued to complete
searches for additional cases until the precursor to the
BOLO listing was issued in May 2010.
Determinations Unit
personnel indicated that
they used the description
Tea Party as a shorthand
way of referring to the
group of cases involving
political campaign
intervention rather than to
target any particular group.
The specialist used Tea
Party, Patriots, and 9/12 as
part of the criteria for these
searches.
Interview
March 16–17,
2010
Ten Tea Party cases were identified. The Acting
Manager, Technical Unit, requested two more cases be
transferred to Washington, D.C.
***********************1*********************
Not all of the ten cases had
Tea Party in their names.
E-Mail
April 1–2, 2010 The new Acting Manager, Technical Unit, suggested the
need for a Sensitive Case Report on the Tea Party cases.
The Determinations Unit Program Manager agreed.
E-Mail
April 5, 2010 ****************1*************************** E-Mail
April 5, 2010 A Determinations Unit specialist developed a list of
18 identified Tea Party cases during a search of
applications. Three had already been approved as
tax-exempt.
While the heading of the
document listing these
18 cases referred to Tea
Party cases, not all of the
organizations listed had
Tea Party in their names.
E-Mail Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
Page 32
Date Event Additional Details Source
April 19, 2010 The first Sensitive Case Report was prepared by the
Technical Unit.
Sensitive Case Reports are
shared with the Director,
Rulings and Agreements,
and a chart summarizing
all Sensitive Case Reports
is provided to the Director,
EO.
Documentation
April 25–26,
2010
The Determinations Unit Program Manager requested
Technical Unit contacts for the specialist assigned to
work other Tea Party cases. Contacts were received.
*************************1*******************
*********************
E-Mail
May 17, 2010 The Determinations Unit specialist will send additional
information request letters to the Technical Unit for
review prior to issuance as part of the Technical Unit’s
attempt to provide assistance to the Determinations Unit.
E-Mail
May 26, 2010 ******************1**************************
**************
E-Mail
May 27, 2010 The Technical Unit began reviewing additional
information request letters prepared by the
Determinations Unit.
Interview
and E-Mail
June 7, 2010 Determinations Unit began training its specialists on
emerging issues to watch for, including an emerging
issue referred to as Tea Party Cases.
Documentation
June 14, 2010 *******************1************************* E-Mail
June 30, 2010 ********************1************************ **********1*********** E-Mail
July 2010 Determinations Unit management requested its
specialists to be on the lookout for Tea Party
applications.
E-Mail
July 2, 2010 ***************1***************************** E-Mail
July 27, 2010 Prior to the BOLO listing development, an e-mail was
sent updating the description of applications involving
potential political campaign intervention and providing a
coordinator contact for the cases. The description was
changed to read, “These cases involve various local
organizations in the Tea Party movement [that] are
applying for exemption under 501(c)(3) or 501(c)(4).”
Interview and
Documentation Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
Page 33
Date Event Additional Details Source
August 12, 2010 The BOLO listing was developed by the Determinations
Unit in order to replace the existing practice of sending
separate e-mails to all Determinations Unit employees as
to cases to watch for, potentially abusive cases, cases
requiring processing by the team of specialists, and
emerging issues. The description of applications
involving potential political campaign intervention on
the BOLO listing was the same description used in the
July 27, 2010, e-mail.
Interview and
Documentation
August 2010 The responsibility for applications involving potential
political campaign intervention was moved to a different
team of specialists as part of a group realignment within
the Determinations Unit.
Interview and
Documentation
October 2010 Applications involving potential political campaign
intervention were transferred to another Determinations
Unit specialist. The specialist did not work on the cases
while waiting for guidance from the Technical Unit.
Per the Director, Rulings
and Agreements, there was
a miscommunication about
not working the cases
while waiting for guidance.
Interviews
October 19,
2010
Technical Unit personnel forwarded a memorandum to
their Acting Manager describing the work completed on
the Tea Party cases by the Technical Unit. Included was
a list of the cases the Technical Unit had assisted the
Determinations Unit with.
The list included 40 cases,
18 of which did not have
Tea Party in their names.
E-Mail
October 26,
2010
Determinations Unit personnel raised concerns to the
Technical Unit with the approach being used to develop
the Tea Party cases: Why does the Technical Unit need
to review every additional information request letter
when a template letter could be approved and used on all
the cases?
E-Mail
November 16,
2010
A new coordinator contact for potential political cases
was announced.
Interview and
Documentation
November 16–17,
2010
A Determinations Unit Group Manager raised concern to
the Determinations Unit Area Manager that they are still
waiting for an additional information request letter
template from the Technical Unit for the Tea Party cases.
The coordinator had received calls from taxpayers
checking on the status of their applications.
E-Mail
November 17,
2010
The Determinations Unit Program Manager discussed
Tea Party cases with the Technical Unit manager.
Review of the cases by the Technical Unit found that not
all of the cases had the same issues so a template letter
had not been developed.
E-Mail Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
Date Event Additional Details Source
December 13,
2010
The Determinations Unit Program Manager asked the
Technical Unit manager for a status on the Tea Party
cases. The Technical Unit manager responded that they
were going to discuss the cases with the Senior
Technical Advisor to the Director, EO, shortly.
E-Mail
January 28,
2011
The Determinations Unit Program Manager requested an
update on the Tea Party cases from the Technical Unit
Acting Manager.
E-Mail
January 2011 A new person
Manager role.
took over the Technical Unit Acting Interview
February 3,
2011
The Technical Unit Acting Manager provided an update
to the Determinations Unit Program Manager on the
cases being worked by the Technical Unit. Letters were
being developed and would be reviewed shortly.
E-Mail
March 2, 2011 A Determinations Unit Group Manager reminded the
Determinations Unit Program Manager to follow up with
the Technical Unit on the status of the Tea Party cases.
E-Mail
.
March 30, 2011 *******************1************************.1
E-Mail
March 31, 2011 The Determinations Unit Program Manager stated that,
while waiting for assistance from the Technical Unit, the
Determinations Unit still needed to work Tea Party cases
to the extent possible.
This contradicts the
October 2010 decision not
to work cases until
assistance is received from
the Technical Unit and
supports the statement of
the Director, Rulings and
Agreements, that there was
a miscommunication about
not working the cases
while awaiting assistance.
E-Mail
April 13, 2011 *****************1***************************. E-Mail
June 1–2, 2011 The Acting Director, Rulings and Agreements, requested
criteria used to identify Tea Party cases from the
Determinations Unit Program Manager. The
Determinations Unit Program Manager requested criteria
from a Determinations Unit Group Manager.
E-Mail
1
The Taxpayer Advocate Service is an independent organization within the IRS that provides assistance to
taxpayers whose tax problems have not been resolved through normal IRS channels. Taxpayer Advocate Service
employees must, at times, rely on assistance from employees assigned to other IRS functions. To request assistance,
the Taxpayer Advocate Service issues an Operations Assistance Requestspecifying the actions needed to help
resolve the taxpayer’s problem.
Page 34Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
Page 35
Date Event Additional Details Source
June 2, 2011 A Determinations Unit Group Manager provided criteria
for identifying potential Tea Party cases to the
Determinations Unit Program Manager. Information
was then forwarded to the Acting Director, Rulings and
Agreements.
These criteria are very
different than the
BOLO listing criteria
available at the time.
E-Mail
June 6, 2011 **************************1******************
*******************************
E-Mail
June 6, 2011 The Acting Director, Rulings and Agreements,
commented that the criteria being used to identify Tea
Party cases may have resulted in over-inclusion.
**********************1**********************
**
E-Mail
June 6, 2011 The Determinations Unit Program Manager mentioned
that the Determinations Unit needed assistance from the
Technical Unit to ensure consistency.
E-Mail
June 29, 2011 A briefing was held with the Director, EO. The briefing
paper noted that the Determinations Unit sent cases that
met any of the criteria below to a designated team of
specialists to be worked:
 “Tea Party,” “Patriots,” or “9/12 Project” is
referenced in the case file.
 Issues include Government spending, Government
debt, or taxes.
 Education of the public via advocacy/lobbying to
“make America a better place to live.”
 Statements in the case file criticize how the country
is being run.
Over 100 applications were identified by this time. It
was decided to develop a guide sheet for processing
these cases.
The briefing paper for the
Director, EO, was prepared
by Tax Law Specialists in
the Technical Unit and the
Guidance Unit and was
reviewed by the Acting
Manager, Technical Unit.
A Guidance Unit specialist
was the primary author of
the briefing paper.
During the briefing, the
Director, EO, raised
concerns over the language
of the BOLO listing
criteria. The Director, EO,
instructed that the criteria
be immediately revised.
Documentation
and E-Mail
July 5, 2011 A conference call was held with the Technical Unit; the
Director, EO; and the Determinations Unit Program
Manager. They developed new criteria for identifying
cases. The Determinations Unit Program Manager made
changes to the BOLO listing. The criteria were changed
to “organizations involved with political, lobbying, or
advocacy for exemption under 501(c)(3) or 501(c)(4).”
E-Mail Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
Page 36
Date Event Additional Details Source
July 5, 2011 The EO function Headquarters office would be putting
document together with recommended actions for
identified cases.
a E-Mail
July 23, 2011 The Technical Unit was assigned a new person to
coordinate with the Determinations Unit.
E-Mail
July 24, 2011 Work commenced on the guide sheet when the Acting
Manager, Technical Unit, asked tax law specialists to
draft a list of things for Determinations Unit specialists
to look for when working these cases.
E-Mail
August 4, 2011 Rulings and Agreements office personnel held a meeting
with Chief Counsel so that everyone would have the
latest information on the issue.
E-Mail
August 4, 2011 A Guidance Unit specialist asked if Counsel would
review a check sheet prior to issuance to the
Determinations Unit. The Acting Director, Rulings and
Agreements, responded that Counsel would review it
prior to issuance.
E-Mail
August 10, 2011 *******************1*************************
**********************
Documentation
September 15,
2011
The Determinations Unit Program Manager sent a list of
all identified cases to the Acting Director, Rulings and
Agreements, so that the Technical Unit could complete a
limited “triage” of the cases using available information
from the electronic case files. A Technical Unit
specialist reviewed the list to determine if any cases
could be closed on merit or closed with an adverse
determination letter. This triage was considered a third
screening.
E-Mail
September 21,
2011
The draft guide sheet was sent for review and comment
to various EO function Headquarters office employees.
E-Mail
October 2011 A new person took
and Agreements.
over as the Acting Director, Rulings Interview
October 24,
2011
A Technical Unit manager forwarded initial triage results
to the Determinations Unit.
E-Mail
October 25,
2011
Based on the categories and terminology used in the
triage results spreadsheet, the Determinations Unit
Program Manager was unclear what the Determinations
Unit should do with the triage results – close cases,
develop further, etc. – and requested the status on the
guidance from the Technical Unit.
E-Mail Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
Page 37
Date Event Additional Details Source
October 26,
2011
A Technical Unit specialist provided further explanation
of the triage results in an e-mail to the Determinations
Unit Program Manager.
E-Mail
October 30,
2011
The Determinations Unit Program Manager contacted
the Acting Manager, Technical Unit, asking additional
questions regarding the triage results and requesting a
status update on the Technical Unit guidance.
******************1**************************
******************1**************************
E-Mail
November 3,
2011
An updated draft version of the guide sheet
EO function employees for comment.
was sent to E-Mail
November 6,
2011
The Acting Manager, Technical Unit, had a Technical
Unit specialist provide more details on the triage results,
and informed the Determinations Unit Program Manager
that the guidance was being reviewed prior to issuance.
E-Mail
November 6,
2011
The Acting Director, Rulings and Agreements, informed
the Acting Manager, Technical Unit, and the
Determinations Unit Program Manager that, based on
feedback received, the guidance developed would not
work in its present form – it was “too lawyerly” to be
useful and needed the Determinations Unit input.
Interview
and E-Mail
November 15,
2011
The Determinations Unit Program Manager forwarded
the Technical Unit specialist’s triage results to the Senior
Technical Advisor to the Director, EO, per the Director’s
request.
E-Mail
November 22,
2011
The Acting Manager, Technical Unit, forwarded the
clarified triage results to the Determinations Unit
Program Manager.
E-Mail
November 23–30,
2011
A new Determinations Unit coordinator was assigned
oversight of the cases by a Determinations Unit Group
Manager. The draft Technical Unit guidance was
provided to the Group Manager. The coordinator began
working cases after receiving the guidance in
anticipation of a team being assembled to work the
cases.
Interview
and E-Mail
November 2011 The Determinations Unit specialist assigned the cases
began working them after receiving the draft Technical
Unit guidance.
Interview Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
Page 38
Date Event Additional Details Source
December 7–9,
2011
A team of Determinations Unit specialists was created to
review all the identified cases. An employee from
Quality Assurance was also part of the team. The
Technical Unit provided contacts for them.
E-Mail
December 16,
2011
The first meeting was held by the team of specialists. Interview
and E-Mail
January 2012 The first batch of letters requesting additional
information for applications containing incomplete or
missing information was issued by Determinations Unit
specialists based, in part, on their reading of the draft
guidance issued by the Technical Unit.
Interview
and E-Mail
January 2012 A Determinations Unit specialist was tasked with
performing a secondary screening of identified potential
political cases to ensure that they involved political
activities and not just general or lobbying advocacy.
Interviews
January 25,
2012
The BOLO listing criteria were again updated. The
criteria was revised as “political action type
organizations involved in limiting/expanding
Government, educating on the Constitution and Bill of
Rights, social economic reform/movement.” The
coordinator contact was changed as well.
Interview and
Documentation
February 27,
2012
A member of the team of specialists asked when to start
issuing additional information request letters to
applicants again.
E-Mail
February 27,
2012
The Determinations Unit Program Manager questioned
why the team of specialists was not issuing additional
information request letters. The Determinations Unit
Group Manager for the team of specialists had told the
team coordinator to stop developing template questions,
not to stop issuing additional information request letters.
The miscommunication was corrected on
February 29, 2012.
E-Mail
February 29,
2012
The Director, EO, requested that the Acting Director,
Rulings and Agreements, develop a letter to clearly
inform applicants what was going to happen if they did
not respond to the additional information request letters
and giving them more time for their responses.
E-Mail Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
Page 39
Date Event Additional Details Source
February 29,
2012
The Director, EO, stopped any more additional
information request letters from being issued on
advocacy cases until new guidance was provided to the
Determinations Unit. In addition, the Acting Director,
Rulings and Agreements, discussed with the
Determinations Unit Program Manager about having
specialists print out website information and asking the
organizations to verify the information instead of asking
for applicants to print out the website information.
E-Mail
February–March
2012
Numerous news articles began to be published with
complaints from Tea Party organizations about the IRS’s
unfair treatment. Congress also began to show interest
in the IRS’s treatment of Tea Party organizations.
Documentation
March 2012 A new person became Acting Group Manager of the
team of specialists.
Interview
March 1, 2012 A draft list of template questions was prepared by the
team of specialists and forwarded to the Guidance Unit.
Questions included asking
for donor information.
E-Mail
March 5, 2012 The Acting Manager, Technical Unit, established
procedures for reviewing the first favorable
determination letter drafted by the Determinations Unit.
E-Mail
March 6, 2012 ****************1****************************
***********************
E-Mail
March 8, 2012 The Deputy Commissioner for Services and
Enforcement requested that, if a taxpayer called about
having to provide donor information, the Determinations
Unit would allow them to not send the donor names but
would inform them that the IRS may need it later.
E-Mail
March 8, 2012 The Acting Director, Rulings and Agreements, sent to
the Determinations Unit Program Manager for comment
a draft letter on giving applicants additional time to
respond to the additional information request letters.
The Determinations Unit Program Manager raised a
concern of giving organizations that were not compliant
with standard response timelines special treatment.
E-Mail
March 15, 2012 The Determinations Unit received guidance on how to
handle different scenarios based upon the status of their
cases. Those I.R.C. § 501(c)(4) organizations that had
not responded to an additional information request letter
were issued another letter giving them an additional
60 days to respond. Those letters were to be issued by
March 16, 2012. This additional time letter was a
one-time occurrence.
Interview
and E-Mail Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
Page 40
Date Event Additional Details Source
March 23, 2012,
and March 27,
2012
The Senior Technical Advisor to the Acting
Commissioner, Tax Exempt and Government Entities
Division, and the Deputy Commissioner for Services and
Enforcement discussed concerns with the media
attention the Tea Party applications were receiving. The
Deputy Commissioner for Services and Enforcement
asked the Senior Technical Advisor to look into what
was going on in the Determinations Unit and make
recommendations.
Interview
April 2012 The Acting Director, Rulings and Agreements, learned
that the BOLO listing criteria had been changed on
January 25, 2012, and informed the Director, EO.
Interview
April 4, 2012 The Determinations Unit received the extension letter for
issuance to I.R.C. § 501(c)(3) organizations that had not
responded to a previous additional information request
letter.
E-Mail
April 17, 2012 Tax Exempt and Government Entities Division
Headquarters office employees received the Technical
Unit triage results and the draft guidance provided by the
Technical Unit. Template questions developed by the
team of specialists were also provided.
E-Mail
April 23, 2012 Senior Technical Advisor to the Acting Tax Exempt and
Government Entities Division Commissioner visited the
Determinations Unit in Cincinnati, Ohio, with a group of
EO function employees, and reviewed about half of the
identified cases.
Interview
April 24, 2012 The Acting Director, Rulings and Agreements, requested
that the Senior Technical Advisor to the Director, EO,
review all the additional information request letters
issued and identify troubling questions, which
organizations received them, and which members of the
team of specialists asked them.
E-Mail
April 25, 2012 The Senior Technical Advisor to the Director, EO,
provided results of the additional information request
letter review, including a list of troubling questions.
The results included the
names of donors as a
troubling question.
E-Mail
April 25, 2012 Chief Counsel’s office provided additional comments on
the draft guidance developed for the Determinations
Unit.
E-Mail Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
Page 41
Date Event Additional Details Source
May 8, 2012 The Determinations Unit Program Manager was
informed that EO function Headquarters office
employees planned to visit Cincinnati, Ohio, to provide
training on cases and perform a review of the cases to
recommend what additional actions, if any, were needed
to make a determination.
E-Mail
May 9, 2012 The Director, Rulings and Agreements, asked about the
process for updating the BOLO listing.
E-Mail
May 14–15,
2012
Training was held in Cincinnati, Ohio, on how to process
identified potential political cases. The Senior Technical
Advisor to the Director, EO, took over coordination of
the team of specialists from the Determinations Unit.
E-Mail
May 16, 2012 A joint team of Determinations Unit specialists and
EO function Headquarters office employees began
reviewing all potential political cases began in
Cincinnati, Ohio. Cases were divided into four groups
with recommendations for how to proceed: favorable
determination, favorable with limited development,
significant development, and probably adverse. This
took around three weeks to complete. A worksheet was
used to document the reviews.
E-Mail
May 17, 2012 The Director, Rulings and Agreements, issued a
memorandum outlining new procedures for updating the
BOLO listing. The BOLO listing criteria were updated
again. New criteria reads: “501(c)(3), 501(c)(4),
501(c)(5), and 501(c)(6) organizations with indicators of
significant amounts of political campaign intervention
(raising questions as to exempt purpose and/or excess
private benefit).”
Suggested additions and
changes must be approved
by a Determinations Unit
coordinator, the
Determinations Unit
Program Manager, and the
Director, Rulings and
Agreements.
Interview
and E-Mail
May 21, 2012 The EO function determined that the requested donor
information could be destroyed or returned to the
applicant if not used to make the final determination of
tax-exempt status. It does not need to be kept in the
administrative file. A letter would be issued to the
organizations informing them that the donor information
was destroyed.
Interview
and E-Mail
May 24, 2012 A telephone call script was developed to inform some
organizations that had not responded to the additional
information requests that it was not necessary to send the
requested information and that their applications had
been approved. Also, an additional paragraph was
developed for the determination letter.
E-Mail Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
Page 42
Date Event Additional Details Source
May 2012 After the review of identified cases was completed, each
Determinations Unit specialist working cases was
assigned a Technical Unit employee to work with on the
cases. The Technical Unit employee reviewed all
additional information request letters prior to issuance.
The Quality Assurance Unit began reviewing
100 percent of the cases prior to closure. The Quality
Assurance Unit review will shift from 100 percent
review to a sample review once a comfort level with the
results of the quality review was achieved.
Interview
May 2012 A decision was made to refer cases to the Review of
Operations Unit for follow-up if there were indications
of political campaign intervention but not enough to
prevent approval of tax-exempt status.
Interview
and E-Mail
June 4, 2012 A draft letter was developed to send to organizations that
provided donor information. The letter would inform the
organizations that the information was destroyed.
E-Mail
June 7, 2012 The Director, Rulings and Agreements, provided
guidance on how to process cases now that they had
been reviewed and divided into categories. Any new
cases received would go through the same review
process prior to assignment.
E-Mail
July 15, 2012 A new Acting Determinations Unit Group Manager was
overseeing the team of specialists.
Interview Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
Appendix VIII
Management’s Response to the Draft Report
Page 43Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
Page 44Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
Page 45Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
Page 46Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
Page 47Inappropriate Criteria Were Used to
Identify Tax-Exempt Applications for Review
Page 48