IRS Could Still Target Politically Oriented Groups, Warns GAO

Safeguards, While In Place, Have Weaknesses

IRS Targeting Protest
Tea Party Activists Protest IRS Targeting. Mark Wilson/Getty Images

In 2013 the Internal Revenue Service admitted it had improperly targeted conservative political groups for extra scrutiny of their tax-exempt status. If you figured the IRS has taken steps to make sure it never happens again, you figured wrong, says a top government watchdog.

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In that 2013 scandal, the IRS singled out the organizations to audit by searching for words like “Tea Party” or “Patriot” or “Liberty” in their names.

While Congress never identified exactly who did it, a person or persons had clearly ordered the action. In doing so, they bypassed IRS internal controls, which the Government Accountability Office found were weak then and remain weak today. 

What Controls?

Within the IRS, the Exempt Organizations (EO) unit is responsible for reviewing organizations’ applications for tax-exempt status and ensuring that existing tax-exempt organizations comply with the tax laws.​​

In his testimony to Congress, Jay McTigue, GAO’s director of strategic issues explained that the IRS uses various controls to ensure that the EO selects exempt organizations for examination in ways that will adhere to the IRS’ mission of “applying the tax law with integrity and fairness to all.”

For example, to ensure that tax-exempt organizations to be audited are properly selected, the EO unit employs what McTigue called “well-documented procedures,” which can be altered or overridden only with the approval of IRS executive management.

In the 2013 scandal, Congress never identified exactly who, if anyone, in IRS executive management had ordered or approved the targeting. Unfortunately, McTigue reported, those “documented procedures” are riddled with undocumented holes.

But, Those Controls Are Weak

The bad news is that the GAO found several areas where the EO’s controls were either poorly designed or implemented, which could result in future cases of organizations being improperly selected for audits based solely on their political, religious, educational or other views.

 

The worst examples of control weaknesses identified by the GAO included:

  • There are ways for IRS staff to alter the audit selection processes without executive management approval. The GAO found that for some processes – including applying selection criteria to organizations under consideration for audit – are not included in the IRS’ Internal Revenue Manual as required. “As a result, staff are not required to obtain executive management approval to deviate from these procedures,” stated McTigue. “This increases the risk of unfair selection of organizations' returns for examination.”
     
  • The EO unit’s management often fails to monitor audit selection list decisions to ensure that selection decisions are documented and approved, to help ensure fairness.

In fact, McTigue told Congress that the GAO’s investigation of IRS files revealed that about 12% to 34% of cases where EO unit staff initially selected an organization for examination, but ultimately decided not to perform the examination, were missing the indication of management approval of the final decision, as required in the Internal Revenue Manual.

“Continuous monitoring is an element of internal control” stated McTigue. Taken as a whole, the deficiencies we found point to insufficient monitoring of case processing.”

The Chosen Five

According to McTigue, certain types of tax-exempt audit selections are reviewed by only one individual within the EO unit. Five individuals, known as classifiers, determine the potential for specific audit decisions to require the approval of IRS management.

For example, one classifier reviews audit selections that might attract media attention and audits of churches, while another classifier reviews audits related to political activity. These five classifiers serve as the sole “gatekeepers” for deciding whether an audit selection moves forward or is subjected to management review.

However, the five classifiers are not cross-trained to review other types of referrals, according to McTigue. “Internal control standards dictate that key duties and responsibilities should be divided among different people to reduce the risk of error,” he stated.

“Even if other safeguards are in place, having the same individual initially classify all political activity or all high profile and church referrals increases the potential for error or unfairness.”

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In the end, the GAO recommended 10 actions the IRS should take in order to avoid any more targeting scandals. A few of these included: include all tax-exempt audit selection procedures in the Internal Revenue Manual, thus making them subject to executive management approval; developing additional examination selection monitoring procedures; and implementing a system to ensure that political activity, high profile, and church referrals are not always reviewed by the same classifier.

According to Mr. McTigue, the IRS “generally” agreed with the GAO. Of course, history has shown it usually does.