The IRS Scandal, Day 806

GAO, IRS Should Strengthen Internal Controls for Exempt Organization Selection (GAO-15-753T):

There are several areas where EO's controls were not well designed or implemented. The control deficiencies GAO found increase the risk that EO could select organizations for examination in an unfair manner—for example, based on an organization's religious, educational, political, or other views. Examples of internal control deficiencies GAO found include the following:

Staff could deviate from procedures for some selection processes without executive management approval. GAO found that procedures for some processes—such as applying selection criteria to organizations under consideration for review—are not included in the IRM, as required by IRS policy. As a result, staff are not required to obtain executive management approval to deviate from these procedures. This increases the risk of unfair selection of organizations' returns for examination.

EO management does not consistently monitor selection decisions. GAO found that IRS does not consistently monitor examinations and database files to ensure that selection decisions are documented and approved, to help ensure fairness. GAO's review of examination files found that approval of some selection decisions was not documented, as required by EO procedures. For example, GAO's analysis of a sample of files suggests that an estimated 12 to 34 percent of cases where 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 IRM. Continuous monitoring is an element of internal control; EO management has not been conducting sufficient monitoring to ensure that required approvals were taking place.

House Committee on Ways and Means Subcommittee on Oversight Hearing, IRS Audit Selection Process (July 23, 2015):

Subcommittee Chairman Peter Roskam, Opening Statement:

Welcome, everyone. Today we’re going to review a new report from the independent Government Accountability Office, or GAO, about how the IRS decides to audit tax-exempt organizations.

Two years ago, we learned that the IRS was targeting conservative organizations that were applying for tax-exempt status. The Exempt Organizations division, under Lois Lerner’s direction, had a checklist of reasons to select certain groups for extra scrutiny. That checklist included criteria such as whether an organization’s application referred to conservative buzzwords like ‘Tea Party,’ or ‘Patriots,’ or if the groups criticized how the country was being run. Targeted groups were subjected to intrusive and burdensome questionnaires. An Iowa pro-life group was outrageously instructed to tell the IRS about their prayers. Many of these groups had to wait for years to get an answer from the IRS on their applications—if they got one at all. We’re here today because some of those groups, in addition to all of that scrutiny, also got audited.

To date, the IRS has basically tried to assure this committee and the American people that this won’t happen again simply by saying ‘Lois Lerner doesn’t work here anymore.’ But after we learned about the targeting of non-profit applicants, this committee asked GAO to review whether the problem was much bigger than that. We asked: can the IRS target tax-exempt groups in the audit process?

GAO released that report today. It says:

The control deficiencies GAO found increase the risk that [the Exempt Organizations unit] could select organizations for examination in an unfair manner—for example, based on an organization’s religious, educational, political, or other views.

GAO found many examples where the IRS failed to follow its own internal controls or document audit selection decisions. Failure to document is a real problem because where there is no documentation, there is no way to know if an audit was commenced based on merit or bias. There is also no way to hold someone accountable for bad acts.

I’m deeply concerned about how the IRS decides which organizations to audit in the first place. Many times when a non-profit organization is audited, it’s because a computer program flags problems with an organization’s paperwork. But about 20 percent of audits are set in motion because the IRS gets a complaint about an organization. These so-called referrals can come from an individual, from the news media or even from someone’s political adversary.

When the IRS receives a complaint, an employee looks to see if there is a likely tax violation. There are only five IRS employees who serve as these gatekeepers of the audit process, and they each cover only one issue area. The gatekeeper reviewing political activity complaints has been there since 2009. That means that for the past 6 years, only one person in the entire IRS has been reviewing political activity referrals to decide if they should move on in the audit process.  

If one of these gatekeepers decides there is audit potential, the complaint is sent to a referral committee with disturbingly lax standards. What’s worse, over 25 percent of audits GAO reviewed that were started because of a complaint had no description of the allegation in the file—that is, one in four audits GAO looked at had no explanation of the reason for the audit. In some instances, GAO found that entire case files were missing. This means no one can go back and determine if the audit was begun for a fair reason, or an unfair reason.

It is stunning that in response to these findings, the IRS said that ‘although the report states that a hypothetical risk exists that returns could be selected unfairly, the draft report did not find any evidence that this has happened.’

As we will show today, that’s just not true. The Inspector General tells this committee they have referred multiple cases of improper audit selection to the Justice Department for criminal prosecution in 2014 alone.  There’s nothing hypothetical about that.

And I’ll remind my colleagues that in 2013, after the Inspector General concluded the IRS unfairly targeted groups applying for non-profit status, the IRS response was very similar. They said, ‘[W]e have not found evidence of intentional wrongdoing by IRS personnel.’

To the contrary, this Committee uncovered evidence showing Ms. Lerner acted in defiance of internal controls that were supposed to prevent any one IRS employee from blocking a group’s application or sending them to audit. Ms. Lerner was not only familiar with these internal controls, but these were policies she created and spoke of publicly as a way of commending the agency’s impartiality. The evidence shows that Ms. Lerner maliciously and intentionally bypassed these controls, reaching into her division and directing specific organizations be subjected to audit, something IRS rules said she could not do.

It is disappointing that over two years later, it is still possible that the IRS can select groups for adverse treatment based on their personal political, religious, or educational beliefs. There isn’t proper documentation of allegations or decisions to audit; there are a handful of gatekeepers with sweeping authority and broad discretion; and there is a broken referral committee process.

The IRS has been entrusted with powerful authority to review and audit organizations, and with that comes a very serious responsibility to the American people. The IRS must acknowledge these problems and take concrete action to ensure a Lois Lerner 2.0 situation cannot happen. This committee will continue to work to reform this broken system and ensure the IRS treats all Americans fairly and equally.

House Committee on Ways & Means Oversight Subcommittee on Oversight, Watchdog Report: IRS Audit Process at Risk of Abuse, Targeting

Today, the Government Accountability Office (GAO) released a report detailing striking flaws in the IRS audit selection process that could lead to targeting of organizations based on their political beliefs and other First Amendment protected views. In the wake of the Lois Lerner scandal—which revealed that the IRS targeted conservative groups—the Ways and Means Committee asked GAO to look into the IRS audit process for tax-exempt organizations. The committee feared that the IRS could use its vast auditing power to target groups the same way. These fears were confirmed in today’s report. 

GAO’s final report shows that the current audit process indeed is ripe for improper targeting. According to GAO, “the control deficiencies GAO found increase the risk that EO (Exempt Organizations unit) could select organizations for examination in an unfair manner—for example, based on an organization’s religious, educational, political, or other views.”

The GAO report’s supporting findings include:

• IRS’s audit procedures are not sufficiently documented or followed, and in some instances, GAO found that even the IRS did not have a record of why certain cases were selected for audit.
• The same small group of people have been reviewing audit referrals, which are essentially third-party complaints made to IRS, for years without sufficient review or oversight of their decisions.
• Management within IRS does not consistently monitor selection decisions, which could allow people with bias to unfairly select organizations for audit.

These weaknesses undermine the agency’s commitment to serving taxpayers, as well as the integrity of tax administration as a whole. Audits can cost a huge amount of time and money—and can devastate a non-profit organization. After all that has taken place, it is astonishing that the IRS still operates in a way that allows the targeting of people based on their beliefs to go unchecked.

Panel #1:

• Jay McTigue (Director, Strategic Issues, Government Accountability Office) (Testimony)
• John Koskinen (Commissioner, IRS) (Testimony)

Panel #2:

• Michelle Easton (President, Clare Boothe Luce Policy Institute) (Testimony)
• Joseph R. Metzger (Vice President, Leadership Institute) (Testimony)
• Elizabeth J. Kingsley (Partner, Harmon, Curran, Spielberg & Eisenberg) (Testimony)

Press and blogosphere coverage:

• BizPac Review, Watchdog Group Finds NEW Evidence in IRS Corruption Case; Obama STILL Lying About It
• Bloomberg, IRS Should Avoid Bias Risk in Auditing Nonprofits, GAO Finds
• Daily Caller, Higher Risk Of IRS Unfairly Auditing Conservative Groups
• Fox News, GAO: 'Americans Still Vulnerable to IRS Audits Over Personal Beliefs'
• The Hill, GAO: Too Much Bias Risk in IRS Audit System
• The Hill, GOP to IRS: Just Admit Tea Party Was Targeted
• The Hill, Republican to IRS: Audit Planned Parenthood
• PBS, Poor Oversight at IRS Increases Risk of Unfairly Auditing Political Groups, Watchdog Group Says
• U.S. News & World Report, GAO Says IRS Ripe for Unfair Audits
• Washington Times, IRS Risks ‘Unfair’ Audits of Nonprofits: Watchdog

• The IRS Scandal, Day 805 (July 23, 2015)
• The IRS Scandal, Day 804 (July 22, 2015)
• The IRS Scandal, Day 803 (July 21, 2015)
• The IRS Scandal, Day 802 (July 20, 2015)
• The IRS Scandal, Day 801 (July 19, 2015)
• The IRS Scandal, Days 701-800 (April 10, 2015 - July 18, 2015)
• The IRS Scandal, Days 601-700 (Dec. 31, 2014 - April 9, 2015)
• The IRS Scandal, Days 501-600 (Sept. 22, 2014-Dec. 30, 2014)
• The IRS Scandal, Days 401-500 (June 14, 2014 - Sept. 21,2014)
• The IRS Scandal, Days 301-400 (Mar. 6, 2014 - June 13, 2014)
• The IRS Scandal, Days 201-300 (Nov. 26, 2013 - Mar. 5, 2014)
• The IRS Scandal, Days 101-200 (Aug. 18, 2013 - Nov. 25, 2013)
• The IRS Scandal, Days 1-100 (May 10, 2013 - Aug. 17, 2013)