Acting Internal Revenue Commissioner Danny Werfel on Monday released results of his promised 30-day internal review of the agency’s mishandling of applications for tax-exempt status from conservative nonprofits, confirming that IRS has ended the use of so-called “be on the lookout” lists and is creating a process for possible disciplinary action.
The IRS mission statement exhorts employees to “enforce the law with integrity and fairness to all,” the report noted. But “the inappropriate criteria used to screen applications for tax exempt status within the Exempt Organizations unit of the IRS were inconsistent with the standards set out in this mission statement,” the report said.
“It is critical that the IRS takes steps to ensure accountability, address the problems uncovered in recent weeks and improve the operations of the IRS to continue to carry out our critical mission on behalf of the public,” Werfel said in a statement. “We have made a number of changes already, more are in the works and even more will develop as we move forward.”
Citing limits of the 1974 Privacy Act, the three-part report did not name employees but expressed agreement with the conclusions and recommendations issued in May by the Treasury Inspector General for Tax Administration. It said that all top executives at the IRS have been replaced.
It also announced a new voluntary process to help certain applicants gain fast-track approval to operate as a 501(c)(4) tax-exempt entity if they are being reviewed for advocacy questions and have been in the IRS application backlog for more than 120 days.
The report called for establishing an Enterprise Risk Management Program to provide a common framework for capturing, reporting and addressing risk areas across the IRS.
And it announced the recent appointment of an accountability board that will determine within 60 days possible disciplinary action against employees -- mostly in the Exempt Organization Division’s Cincinnati office -- based on the so-called “Douglas factors.” They stem from a landmark decision by the Merit Systems Protection Board that established criteria supervisors must consider in determining an appropriate penalty. The accountability board consists of senior executives and human resources professionals from across the IRS and Office of Personnel Management representatives.
Titled “Charting a Path Forward at the IRS: Initial Assessment and Plan of Action,” the report acknowledged the ongoing investigations into the alleged targeting of conservative nonprofits that has erupted into a political scandal.
The report asserted that “there is no current evidence that the selection criteria in other IRS organizations is inappropriate.” But a coming agency-wide review of compliance selection criteria will be shared with the Treasury Department, the IRS Oversight Board and the chairmen of the House Ways and Means Committee and the Senate Finance Committee.
Treasury Secretary Jack Lew said, “Thanks to the hard work of Mr. Werfel and the IRS leadership team, important progress has been made in strengthening the IRS so that it can provide high-quality and fair taxpayer service. Deputy Secretary [Neal] Wolin and I look forward to continuing our ongoing engagement with Mr. Werfel and the IRS team to accomplish this critical goal.” He added that Werfel will be traveling outside Washington in the coming weeks to meet with taxpayers, business leaders and community officials to seek new ways to make the IRS more efficient and consumer-friendly.
House Ways and Means Committee Chairman Rep. Dave Camp, R-Mich., released a statement saying, “Though the IRS report details some immediate first steps that have been taken to correct management flaws at the agency, the IRS still needs to provide clear answers to the most significant questions -- who started this practice, why was it allowed to continue for so long, and how widespread was it? This culture of political discrimination and intimidation goes far beyond basic management failure and personnel changes alone won’t fix a broken IRS. Instead, real reforms must be implemented so that the American people know their government and their tax code are working for them, not targeting them for their beliefs.”
Marcus Owens, an attorney with Caplin & Drysdale who spent years as director of the IRS’ Exempt Organizations Division, told Government Executive that his reading of the controversy tells him that “it’s not clear that any laws were violated,” except, he said, that some IRS employees received threatening phone calls. “I don’t know of any laws that would pertain to processing of applications for exemption, and whether the proper names were used to categorize the cases or not, it doesn’t appear to be a matter to which the law speaks.”
Rather than being a legal scandal, Owens said, the controversy is “an extension of the political debate that has been going on in this county since Obama was elected, between conservatives on one side and progressives and liberals on other. It’s a continuation of the same sort of struggle that has swept up a bunch of IRS employees trying to do their jobs.”
Owens added that the philanthropic community should be concerned that the episode has “pretty much decapitated tax administration in the nonprofit area in that all the key positions in” the Exempt Organizations and Tax-Exempt and Government Entities divisions “are filled with people with no tax law background, much less exempt organizations background, who are not equipped to make these kinds of decisions.” He said his sense is that “staff are under siege and demoralized and that work has ground to a halt.”
Asked whether since-departed top IRS officials should have alerted Congress earlier when they learned of the problems in the Cincinnati office, Owens said, “it’s a judgment call, not a legal call. If asked a question by Congress, officials need to respond truthfully. But it becomes not a question of misleading Congress, but of whether something happened of sufficient gravitas” where they ought to take it upon themselves to bring it Congress' attention. “It there’s an outstanding request, tell me every time X happens,” Owens said, that’s one thing. “ But if once upon a time Congress was interested in the topic and then something happens, I don’t necessarily know there was understanding they should be volunteering it, or even if it’s material. Such judgment calls are tailor-made for being misinterpreted, either intentionally or inadvertently.”