“It breaks my heart,” said Steven T. Miller, until recently the acting internal revenue commissioner, addressing a skeptical Senate panel on Tuesday to explain how the next chief of the tax service will have to “put in place safeguards so that the American people can regain their trust that the IRS is nonpartisan.”
But neither he nor Douglas Shulman, the most recent fully tenured commissioner who left the office in November, agreed with lawmakers’ charges that that an office within the agency’s tax exempt organizations division was motivated by political bias in its apparent mishandling of applications for tax-free status and its intrusive demands over the past three years from “tea party” and other activist groups.
“This happened on my watch, and I deeply regret it,” Shulman told the Senate Finance Committee in his first public statement since the scandal broke 10 days ago. “It put a blemish on the agency.” But the Internal Revenue Service during this period faced “a number of challenges,” Shulman said, citing the 2009 economic stimulus checks to taxpayers, an offshore tax crackdown and modernization of the IRS’s technology systems “while still carrying out its core mission of getting returns processed and refunds sent out while educating the public,” he said.
When Shulman read the inspector general’s recent report last week on documenting severe mismanagement at a Cincinnati office tasked with centralizing determinations on tax-exempt applications, he was “dismayed and saddened by the conclusions that the service was not acting as should have, in a nonpolitical, nonpartisan way, which it does the majority of the time,” he said. “The effect is bad for the agency and the American taxpayer.”
Both Shulman and Miller denied they knew details about the political labels being used by the Cincinnati-based employees and denied they spoke of the matter to higher-ups in Treasury or the White House. “At the time, and as of now,” Shulman said, “I believe I took the proper steps because the matter was being looked at by the inspector general.”
But committee Republicans as well as Democrats made clear that they expect more answers on the individuals who carried out the operation and the awareness of the problem at higher levels, while also promising to consider legislation to clarify for the IRS the extent to which nonprofit organizations can participate in politics while claiming tax-free status and donor privacy.
In opening the hearing, Finance Chairman Max Baucus, D-Mont., quoted statesman Adlai Stephenson on how governing depends on “good judgment,” a quote that is “etched at IRS headquarters,” he said.
“The Cincinnati employees abused this trust,” he said. They created what the inspector general called “a bureaucratic mess, were ignorant about tax laws, defiant of their supervisors and blind to the appearance of impropriety,” said Baucus, promising a bipartisan investigation that includes detailed written questions and demands for documents from IRS.
After demanding to know who was responsible for the mismanagement, he asked Shulman, “Why wasn’t someone fired in 2011? It sounds like someone was not doing his job.”
Ranking Minority Member Sen. Orrin G. Hatch, R-Utah, said that contrary to comments by some in the Obama administration, “these hearings are not a sideshow to distract from the president’s agenda. The American people expect the IRS to exercise its authority in a neutral, nonpartisan way.” Calling the IRS “one of the most powerful agencies in our government,” Hatch said he was particularly disturbed that Miller and Shulman had responded to lawmakers’ earlier written queries about reports of intrusive questions and delays in tax-exempt applications by denying such activity was going on. “Why didn’t you correct the record” once you found out in 2012? he asked, wagging a finger. “That’s a lie of omission.”
Miller replied, “I did not lie, sir, I answered the questions truthfully. I didn’t agree that there was a political motivation, which was borne out by the inspector general’s report.” Miller called the Cincinnati employees’ actions “foolish mistakes made in trying to be more efficient.” He said the agency is “moving forward and has learned its lesson. Management will take appropriate action to hold accountable those responsible,” he said. When he learned of the problem, he added, he sent a team to investigate, stopped the intrusive letters from going out and provided special training workshops and oral counseling to the staff.
When Sen. Debbie Stabenow, D-Mich., asked Shulman why it took two years for IRS to fix the problem, Shulman replied, “I wasn’t there, and it just came to light so I haven’t been able to ask questions. But when someone spotted the problem, it should have been run up the chain.”
J. Russell George, the Treasury Inspector General for Tax Administration who conducted the audit, called the episode “a breakdown in management,” describing his work as an audit of programs, which differs from an investigation that probes individual conduct. “Suffice it to say this matter is not over,” he said. “We will review and it may ultimately lead to an investigation,” he said, adding that any wrongful release of taxpayer information could be a criminal violation.
Sen. Charles Grassley, R-Iowa., sought and gained an apology from Miller for working with Lois Lerner, chief of the IRS Exempt Organization Division, in planting a question with an audience member at an American Bar Association panel this month, which got the scandal rolling. “We were trying to start the story, with the public and Congress at the same time. It was a bad idea and it didn’t work out,” Miller said.
Sen. Pat Roberts, R-Kan., decried what he called “lies, for which no one takes responsibility. The IRS has been operating in a higher politicized environment for three years,” he said. Tracing the chain of command by name up from the IRS to Treasury to the White House counsel’s office, he said, “it must have been directed from Washington.”
In response to Sen. Robert Menendez, D-N.J., Miller attributed some of the problem to a $1 billion cut from the IRS budget in recent years, noting that the exempt organization division was faced with 70,000 applications after training had been “cut drastically.” Only in recent years, Miller said, has the flow of political money been called into question at the IRS, “but we were not crisp in responding.”
Sen. Bill Nelson, D-Fla., took a “different tack, focusing on how we got into this mess.” He noted that the statute requires tax-exempt 501(c)(4) organizations to perform “exclusively” social welfare activity while the Treasury regulation from 1958 altered that to mean “primarily.” “Where is the IRS in enforcing this rule in the first place?” he asked. “The government may have been running amok but it also was also impotent,” he said. He and Baucus promised efforts to clarify and close the loophole.”