Diving Deeper into the TIGTA IRS Audit
Inside the Treasury Department's Inspector General for Tax Administration investigation into the IRS scandal.
This post is the second in a series that explores aspects of the unfolding IRS Scandal, and, in particular, the TIGTA Audit. The first post from this series, looking at the different Non-Profit designations involved—can be found here. Note, all references to the audit contain two page numbers. The first corresponds to the page number that appears on the page of the document. The second refers to the page within the PDF.
[5/28 Update – Article was updated to correct a poorly worded sentence and add an additional finding and some additional context]
A week ago, the Treasury Department’s Inspector General for Tax Administration (TIGTA) released the findings of an investigation into the IRS’s Exempt Organization Division (EO). The EO oversees organizational requests for tax exempt status — in particular 501(c)3 and 501(c)4 status. One of the primary goals of the investigation was to determine whether or not the Determination’s Unit, based in Cincinnati Ohio, improperly targeted applications submitted by conservative groups. The release of the audit generated lots of news and commentary, the vast majority of which was focused on the first of three major findings in the report—namely that the Determination’s Unit used “inappropriate criteria to identify organizations applying for review for indications of significant political campaign intervention.” (Highlights/PDF page 2)
While the audit may seem old news, it remains the largest publicly released collection of verified facts about the IRS scandal. As such, it is impossible to have a grounded discussion of the scandal without understanding the contents of the report. Further given recent developments, like the decision of EO Director Lois Lerner to invoke the 5th Amendment in her recent appearance before Congress, it may very well be all of the major information we have for the foreseeable future.
The focus on the first finding—the use of inappropriate selection methods—has led many to miss a number of the report’s other important findings. Rather than falling back on pure partisanship and sensationalism as an explanation for this happening—though both have surely contributed—I’d like to suggest three reasons the reporting of the audit’s content have missed some of these points.
#1. The report’s non-linear structure
The body of the audit is arranged around TIGTA’s three main findings:
- Section 1: “The Determinations Unit Used Inappropriate Criteria to Identify Potential Political Cases”
- Section 2: “Potential Political Cases Experienced Significant Processing Delays”
- Section 3: “The Determinations Unit Requested Unnecessary Information for Many Potential Political Cases”
Many media summaries of the audit appear to be built upon a mistaken belief that the three sections build on one another—i.e. need to be read in a linear fashion. That is simply not the case. While some of the information overlaps across the sections, each finding needs to be read as separate from the other two.
Unfortunately, the construction of the report, contributes to this confusion. Perhaps the most egregious example occurs in the highlights/summary section:
WHY TIGTA DID THE AUDIT
[…] The overall objective of this audit was to determine whether allegations were founded that the IRS: 1) targeted specific groups applying for tax-exempt status, 2) delayed processing of targeted groups’ applications, and 3) requested unnecessary information from targeted groups.
It’s understandable why anyone reading this passage would see the three findings as building upon each other. However, the findings tell a different story.
Again, the first finding was that the Determination’s Office used inappropriate criteria to target certain conservative groups. More specifically TIGTA ruled that reviewers’ decision to flag applications based on the applying organization’s name and/or its policy statements—rather than their specified activities—was inappropriate because it gave the appearance of bias. Simply put, Tea Party and other conservative groups were “targeted,” in so much as their names, possibly among others, appeared on a BOLO, or “Be On the Look Out [for]” list created by and circulated within the Determinations department.
So, without a doubt, in the first section, the phrase “targeted” group refers specific conservative groups. However, in the second and third sections of the report, the phrase “targeted group” refers to all groups whose applications were put into the specialist review cue due to concerns over potential political involvement.
This gets to what I consider to be one of the most under-reported aspects of this story: while it’s true that conservatives have a lot to be pissed about, the fact is that, once a file was flagged for specialist review, all groups, regardless of political persuasion or ideology, received the exact same, unconscionably shitty treatment. All flagged applications experienced the same extreme delays in the processing of their documents. And likewise, many of these groups received the same, often intrusive requested for clarification.
#2. Gaps in information
Anyone who has done a close read of the audit will realize that it contains a number of information gaps. For example, a close read suggests that there were more terms on the BOLO list than discussed in the audit (see 6-7, PDF p12-3 — footnote 16 in particular). Because the section of the audit involving the BOLO list was restricted to the treatment of Conservative groups, the audit doesn’t provide additional information about whether or not this is the case. So we are left not knowing (a) how often BOLO lists were used in general, and (b) if other groups were being identified by their names as well. (As a side note: the Audit doesn’t ever find fault with using BOLO lists in general, simply the choice to using an organization’s name as a trigger for review).
Likewise, TIGTA make it clear that they were focused on investigating charges of inappropriate flagging of certain applications based on the BOLO list. The audit only discusses applications in terms of the sections of the BOLO list the Inspector General was investigating. No attempt was made to actually categorize the applications based on ideological or political alignment (see 8, PDF p14 — footnote 8 in particular).
That means, for example, while we know that 1/3 of the applications flagged as “Potentially Political” contained the terms “tea party”, ” from the BOLO list—and are therefore assumed to be from Conservative groups—we have no idea about the contents or political alignment of the remaining 2/3rds of the flagged applications. That means, for example, while we know that 1/3 of the applications flagged as “Potentially Political” contained the terms “tea party”, “patriots”, and “9/12″ from the BOLO list, but we have no idea about the contents or political alignment of the remaining 2/3rds of the flagged applications. [5/28 – Updated for clarity based on feedback from Andy and others].
#3. Reporting cycles
Sadly, the final reason that some of these points have been missed has to do with the nature of reporting cycles. As a reporter said to me once “the only way to get a story in on time, when it will have the most impact, is to get it wrong.” The more confusing the document, the greater the chance that things get missed on the first few passes.
Likewise, for as much work as I’ve put into this article, I’m sure that I’m going to miss a lot. Thankfully we have comments to serve as a catch all.
These three factors—not to mention the sensationalizing—have led to reporters, in my opinion, overemphasizing the conservative/Tea Party aspect of this scandal, and missing-or at the very least, underreporting—other, equally important parts.
So what have reports missed, or under-reported?
Again, there are some big points that I think have been lost in much of the reporting. One, as stated above, is how badly all “flagged applications” were treated. Once you were in the specialist cue, politics didn’t matter. Chances are you were going to be waiting and asked some very prying questions.
[Updated 5/28] This points to a critical point, our nation’s tax enforcement institution has been charged with deciding what does and what does not constitute political activities. I think this, in particular, should stop and give us pause. Why is a financial collections institution being put in the place of being the primary reviewed of political action? Especially given that we have an entirely different government agency–The Federal Elections Commission–which oversees elections and political parties?
Of equal importance is that the Audit makes it abundantly clear that few people within in the IRS understand, let alone can articulate, what constitutes Significant Political Campaign Intervention in regards to 501(c)4’s. The report contains numerous references to this issue. Also, the auditors repeatedly recommend that the EO draft and publish clear and easily articulable guidelines on this topic. It’s telling that these are the only two recommendations that the IRS pushes back on (Recommendation 2—11/PDF p17—and Recommendation 5— 16/PDF p22). In both cases, TIGTA’s responses to the EO’s response convey a strong sense of exasperation at the EO’s continued denial of the scope of the problem.
On the topic of management, another thing that has been under-reported is—believe it or not—the total breakdown of management within the EO. I realize this seems like something that actually has been covered. But, so far, the only thing that’s been discussed is the finding of “insufficient managerial oversight” regarding how managers in Washington were seemingly unaware that Determinations Unit specialists were inventing their own criteria for reviewing cases (and later overturning management’s decisions without letting anyone know).
What most reports have missed is that the EO’s problems go far beyond the Determinations Unit. For example, the Technical Unit—another EO division, separate from the Determinations Unit—took more than 20 months to draw up draft procedures for the processing the 501(c)4 reviews (12, PDF p18). The net result of the delay was that Determinations Specialists simply stopped processing applications that had been forwarded to them for additional review for 13 months until they had a process to work with. The audit tells us that senior management wasn’t aware of the long delay in draft procedures (12-4, PDF p18-20). Nor was senior management aware that the specialists had decided to stop review work until the draft procedures were complete. (IBID)
As many commentors have pointed out here, and in other places, these managerial problems alone serve as justification for the recent decision to suspend, and most likely fire, Lois Lerner.
On Specialists and the Review Statistics
Turning to the specialists, the audit indicates that initial reviewers actually did a pretty good job of identifying signs of potential political intervention. Auditors found that only 2% of initially approved applications—an estimated 44 out of over 2000—should have been sent to specialists for further review. Of course, one can argue that this success rate was accomplished by flagging far too many applications for specialist review.
However, the facts don’t necessarily bear that out.
There were two reasons why an application was flagged: (1) Potential Political Campaign Intervention and (2) an incomplete applications. On the second one, the Auditors never give any indication that applications were incorrectly flagged as incomplete or needing additional information. As to the more contentious issue, after reviewing almost all of the 298 flagged applications, 69% of them—205—contained signs of “significant political campaign intervention.” (10/ PDF p16) Again, those 298 applications were the ones that all were significantly delayed and asked some unnecessary questions.
Let me note that even though a group that was “correctly” flagged for review, there’s no reason that it should not still end up with 501(c)4 status. For example, the phrasing of the application could make the group appear more directly political than it actually is. [Major Update 6/5: After reading a piece by Martin A. Sullivan at Tax Analysists, I reviewed my notes an realized that I misinterpreted the data. The audit reveals that of the 91 applications flagged BOLO list only 17 did NOT include evidence of significant campaign intervention. So rather than having an 18% success rate, the BOLO list had an 82% success rate. That means it had a *higher* success rate than the standard review’s 69%.]
However, its important to note that success rate significantly drops when one looks at the applications flagged using “names” as the key BOLO criteria. Among the targeted conservative groups with BOLO list names, auditors found only 18% —17 of 91— of the applications proved to be correctly flagged. (ibid, see footnote 28) We cannot say for certain whether the use of names as a BOLO flag was intentionally, politically motivated. The specialists who developed it claimed the BOLO names list functioned as a shorthand for identifying applications that they felt most likely to contain potential political activity. However, it’s abundantly clear that it was an ineffective method of identifying problem applications. Unfortunately, TIGTA only evaluated the effectiveness of the use of names. We have no data on whether-or-not flagging policy statements was any more, or less, effective.
Likewise, the specialists didn’t do so well when it came to requesting follow-up information—though its not as abysmally as some reports would lead you to believe. The audit found that 58% of information requests were found to have sought data that was later deemed to be unnecessary. However, contra some analysis, the report clearly did not say that those 58%—98 organizations in all—should not have received any follow-up questioning. After an internal review of information requests, the EO sent revised information requests to a number of those groups. (20, PDF p26) One has to wonder how many of those unnecessary questions were asked because the specialist was confused about the 501(c)4 criteria.
Some final thoughts (for now)
This article only scratches the surface of the content of the audit. And I suspect much more is going to come out in the comments thread. There is one other revelation that I—as someone who studies journalism—found particularly interesting. I was struck by the role that the media (news and, by association, conservative media) played in helping initiate actions that helped both end and begin this scandal.
As mentioned about, it was a combination of media reports and congressional requests that sparked the audit in the first place. We also learn from the time-line and Section 1, that media reporting in 2010 is what helped initiate the current situation. Reading around redactions, we discover that stories about the potential abuse of the 501(c)4 structure by political groups caused mangers within the EO to call for more thorough reviews of 501(c)4 applications (11/ PDF p5).
We also learn that news reports in February of 2012 (19/ PDF p13) about processing delays and requests for intrusive questions led to an executive order stopping new requests for information and to providing unlimited extensions to those who had already received requests. Perhaps this is the most damning thing that can be said about EO management problems–and again why Lerner had to go–Administrators apparently learned about what their divisions were doing from media, rather than internal, reports.