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Scant evidence of fixes at IRS after scandal

9:36 AM, Nov 24, 2013   |    comments
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WASHINGTON -- More than six months after a top Internal Revenue Service official acknowledged the agency inappropriately scrutinized the applications for tax exemption by tea party and other conservative groups, the scandal has faded from the headlines and moved to Congress' back burner.

But it's unclear how much has changed inside the IRS to fix the underlying problems that led to the targeting.

Some argue the agency has taken significant steps to revamp a flawed review process that left certain groups waiting years for approval and subjected others to intrusive, burdensome questioning.

"A great deal has changed at the IRS to prevent this from happening again," said Rep. Elijah Cummings of Maryland, the top Democrat on the House Oversight and Government Reform Committee, one of three congressional panels to investigate the matter. Cummings cited leadership changes, better training for managers and screeners, and a streamlined application processes, among other things.

But where some see progress, others see superficial tweaks and a still-festering problem.

"I'm quite sure they're not going to go after tea party groups again," said Paul Streckfus, editor of a trade journal focused on tax-exempt issues. "The larger question is, is the system working better than it did? And the answer, as far as I can tell, is it's not." He said IRS screeners are still overloaded and the tax-exempt unit has been paralyzed by the scandal.

Here's a rundown of what's changed - and what hasn't:

• The IRS' top ranks have been purged

The Obama administration has installed new leadership in key posts at the agency. Lois Lerner - who as the director of the IRS' exempt organizations division became the public face of the scandal - has resigned. And the IRS' commissioner, Steven Miller, is long gone.

"The IRS has removed five of its most senior managers," said Rep. Sander Levin of Michigan, the top Democrat on the House Ways and Means Committee, another panel investigating the matter.

But not everyone thinks the leadership turnover at the IRS has translated into a better review process.

Marcus Owens, a Washington-based tax attorney and former director of the IRS' exempt organizations division, said he fears the IRS unit has been weakened by the departures of senior staff. Seasoned lawyers such as Holly Paz, who served as a senior technical manager, helped create the legal standards that front-line agents followed, he said. But Paz left and was replaced by a non-lawyer, Owens said.

With her and others out, "That's a lot of new faces in new roles, with a lot of backlog facing them from the get-go," Owens said. "I worry that delays (in reviewing applications) are only going to get worse at this point."

• A ban on BOLOs

One of first steps by the new IRS commissioner, acting chief Danny Werfel, was to ban the use of watch lists - also known as BOLOs, for "Be On the Look Out" lists. Such lists were used by workers in the Cincinnati field office to flag certain applications for extra scrutiny.

An inquiry by the Treasury's internal watchdog concluded Cincinnati-based IRS employees used "inappropriate" criteria - by targeting applications from groups with words such as "tea party," "patriot" and "9/12" in their names - to send applications into a lengthy review process. Werfel said officials later discovered the use of other BOLOs, some with terms describing liberal groups.

The IRS chief subsequently barred the use of all such watch lists. Now, screeners in Cincinnati are instructed to make assessments based on a group's activities and purpose, "not names or labels," Werfel said at a September hearing before the Ways and Means Committee.

• New review process with more neutral instructions for front-line workers

Werfel said in September that he's moved "aggressively" to improve screening methods and bolster training for IRS employees charged with reviewing applications for tax-exempt status. It's an often difficult task, requiring screeners to figure out how much political activity these non-profit groups are engaged in - and whether it is extensive enough to preclude them from receiving tax-exempt status. Werfel said the IRS has issued new instructions to screeners on the best ways to determine the extent of an organization's political campaign intervention.

But the IRS has not detailed what specific guideposts have taken the place of the BOLOs. And there's some indication that the new guidance isn't all that clear.

One IRS worker told congressional investigators that he was giving all applications from political advocacy groups a secondary screening, no matter what. Without the BOLOs, "we really don't have any direction," this Cincinnati agent, whose name was not released, told the panel's staff.

• Murky decades-old rule still in place

The law governing certain tax-exempt groups - those organized under the 501(c)(4) section of the IRS code - states that they should be "operated exclusively for the promotion of social welfare." But in 1959, the IRS issued a rule saying such organizations could participate in other activities as long as it was not their "primary" activity.

The switch from requiring such groups to operate "exclusively" for social welfare to making that their "primary" purpose opened the door for such groups to become involved in politics. And the IRS has never given its screeners a clear definition of "primary."

"There's no bright-line test," Paz told congressional investigators - a complaint echoed by others.

Critics say that until the rule is changed or clarified, the underlying problem will remain, with IRS workers struggling to measure a group's political activity without a good sense of how much is too much.

"The problems here ... are not going to be solved by training workers in Cincinnati, even though that's fine," said Fred Wertheimer, president of Democracy 21, a campaign finance reform advocacy group. "The solution to this problem is a clear, bright-line test that properly implements a statute that says c4s should engage only in social welfare (activities)."

• Wait times for applicants still long

During the 2012 election, the IRS racked up a backlog of more than 500 tax-exempt applications, with many sitting in limbo for months or even years because of miscommunication between officials in Cincinnati and Washington about how to proceed.

Werfel says the IRS has significantly reduced that pileup, closing at least 304, or nearly 59%, of those cases. The IRS also created an expedited process for certain groups to self-certify as non-profits if they've been waiting for tax-exempt status for more than 120 days. The IRS can audit groups after they secure the tax exemption to make sure they are in compliance.

But some are still waiting. And new applications aren't moving, either. The IRS says on its website that it's currently processing tax-exempt applications submitted in May 2012 - meaning the current wait time is about 18 months.

Applications "just don't seem to be moving at all," said Owens, the former IRS official. "The IRS just isn't saying anything to the public or even giving guidance to professionals in the tax field."

• Cincinnati office still facing big workload without adequate resources

The IRS' exempt organizations unit receives more than 60,000 applications per year, most of which are handled by 300 employees in the Cincinnati field office.

With so many cases coming in and no new resources to handle them, "they're falling farther and farther behind," said Streckfus, the editor of the trade journal. "This is a problem of inventory management."

He said it would take additional funding - or maybe even shifting the tax-exempt workload to a new agency - to really root out the problems that caused the targeting scandal. But he said lawmakers in Congress seem more interested in pointing fingers over who is to blame for the problem than in fixing it.

James Pilcher writes for the Cincinnati Enquirer.

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