The Internal Revenue Service's Targeting of Conservative Tax

U.S. House of Representatives

Committee on Oversight and Government Reform

Darrell Issa (CA-49), Chairman

The Internal Revenue Service’s Targeting of Conservative Tax-

Exempt Applicants: Report of Findings for the 113

Congress

Staff Report

113th Congress

December 23, 2014

“I’ve reviewed the Treasury Department watchdog’s report, and the misconduct

that it uncovered is inexcusable. It’s inexcusable, and Americans are right to be

angry about it, and I am angry about it. I will not tolerate this kind of behavior in

any agency, but especially in the IRS, given the power that it has and the reach

that it has into all of our lives.”

— President Barack Obama, May 15, 2013.

“If, on the other hand, you’ve got an office in Cincinnati, in the IRS office that – I

think, for bureaucratic reasons, is trying to streamline what is a difficult law to

interpret about whether a non-profit is actually a political organization, deserves a

tax exempt agency. And they’ve got a list, and suddenly everybody’s outraged.”

— President Barack Obama, December 5, 2013.

†

“[T]here were some bone-headed decisions . . . out of a local office . . . . Not even

mass corruption, not even a smidgeon of corruption, I would say.”

— President Barack Obama, February 2, 2014.

‡

The White House, Statement by the President (May 15, 2013).

†

Hardball with Chris Matthews (MSNBC television broadcast Dec. 5, 2013) (interview with President Barack

Obama).

‡

“Not even a smidgeon of corruption”: Obama downplays IRS, other scandals, FOX NEWS, Feb. 3, 2014.

ExecutiveSummary

On October 14, 2010, President Barack Obama stood before a youth town hall in

Washington, D.C., fielding questions during the combative midterm election campaign season.

When asked about the rising Tea Party movement, the President responded that “what has

happened is layered on top of some of that general frustration that has expressed itself through

the Tea Party, there is an awful lot of corporate money that’s pouring into these elections right

now.”

The President continued: “But you have these innocuous-sounding names, and we don’t

know where this money is coming from. I think that is a problem for our democracy. And it’s a

direct result of a Supreme Court decision that said they didn’t have to disclose who their donors

are.”

Five days later, Lois Lerner addressed a much smaller audience at Duke University.

Speaking about the upcoming election, Lerner echoed the President’s sentiments. “The Supreme

Court dealt a huge blow,” she said, “overturning a 100-year old precedent that basically

corporations couldn’t give directly to political campaigns. And everyone is up in arms because

they don’t like it. . . . They want the IRS to fix the problem. . . . I won’t know until I look at

their [tax return form] 990s next year whether they have done more than their primary activity as

political or not. So I can’t do anything right now.”

The pressure to “fix the problem,” as articulated by Lois Lerner, originated with

President Obama and senior party leadership. The pressure on the IRS to regulate political

speech by tax-exempt organizations mounted in the wake of the Supreme Court’s decision in

Citizens United v. Federal Election Commission. Barnstorming the country, President Obama

derided conservative tax-exempt groups as “shadowy,” “phony,” and even “a threat to our

democracy.”

Other prominent Democratic leaders joined the President’s call to arms,

pressuring the IRS to take an aggressive stance against political speech by tax-exempt entities.

For twenty-seven months, from February 2010 until May 2012, the Internal Revenue

Service systematically targeted conservative tax-exempt applicants for additional scrutiny and

delay. The IRS’s targeting of conservative tax-exempt applications was just one symptom of the

Administration’s broader response to perceived shortcomings of federal campaign-finance law

and the Citizens United decision. As prominent Democratic politicians and the media

condemned conservative non-profit groups, the IRS sought ways to rein in the groups’ political

speech. Lois Lerner initiated a “c4 project” – careful to ensure that it was not “per se political” –

and called applications filed by Tea Party groups “very dangerous” because she believed that

they could undo existing IRS limits on non-profit political speech.

The White House, Remarks by the President in a Youth Town Hall (Oct. 14, 2010).

Id.

See “Lois Lerner Discusses Political Pressure on IRS in 2010,” YOUTUBE (Dec.. 10, 2013),

http://www.youtube.com/watch?v=EH1ZRyq-1iM (transcription by Committee).

See H. COMM. ON OVERSIGHT & GOV’T REFORM, HOW POLITICS LED THE IRS TO TARGET CONSERVATIVE TAX-

XEMPT APPLICANTS FOR THEIR POLITICAL BELIEFS (June 16, 2014) [hereinafter “HOW POLITICS LED THE IRS TO

TARGET CONSERVATIVE TAX-EXEMPT APPLICANTS”].

Id.

The rhetoric led the IRS to hold a deeply skeptical view of the merits of applications filed

by new conservative groups. Line-level IRS employees, trained to identify and elevate any

applications that could draw media attention, flagged the first Tea Party applications for their

Washington superiors. As Washington employees evaluated the applications, they wondered

whether the groups’ activities were “good” non-profit activities or merely “emotional”

propaganda with “little educational value.”

With heavy skepticism, the IRS subjected these

groups to years of needless delays and burdensome questioning, causing real harm to many of

the applicants. Of the applications that received additional scrutiny, only seven contained the

word “progress” or “progressive,”

all of which were subsequently approved by the IRS,

while

Tea Party groups received unprecedented review and experienced years-long delays. Unlike the

applications from conservative groups, the small batch of applications from liberal-oriented

groups received additional scrutiny for non-political reasons.

Flagrant and pervasive management failures by Washington officials contributed

substantially to the misconduct. When asked to answer questions about allegations of IRS

targeting, these senior officials – including former Commissioner Doug Shulman and Exempt

Organizations Director Lois Lerner – covered up the wrongdoing by providing incomplete and

misleading information to Congress. Shulman specifically gave Congress “assurances” that the

IRS was not targeting Tea Party groups, when he knew at that time that those groups had been

identified using inappropriate criteria, that they had been subjected to excessive delays, and that

they had been harassed with unnecessary and burdensome questioning. Lerner, likewise, made

several false statements to the Committee, and specifically defended to the Committee the IRS’s

use of certain questions that the IRS had already identified internally as inappropriate.

The IRS’s misconduct had real consequences, and its leadership’s knowing failure to be

fully candid with Congress exacerbated the injuries of the groups awaiting a resolution. The

targeting silenced conservative non-profits during the 2012 election cycle. As the IRS ignored

tax-exempt applications, donors stopped giving to the groups, overall interest waned, and some

groups even stopped their operations.

The IRS’s delays also resulted in the automatic

revocation of some groups’ exemptions by operation of law because the groups had been waiting

for resolutions so long that they did not file for renewal within the statutorily proscribed period.

The Committee’s investigation highlights the unfortunate reality of the IRS. Because

“[t]he power to tax involves the power to destroy,”

American taxpayers expect the IRS to be

neutral, independent, and apolitical. The modern-day IRS, however, with its vast authority, has

violated these basic tenets. The IRS’s outsized role in implementing ObamaCare – a highly

partisan law rammed through Congress without any meaningful bipartisan compromise – has

fundamentally transformed the tax agency. Evidence shows an IRS responsive to the partisan

See Gregory Korte, IRS List Reveals Concerns over Tea Party ‘Propaganda,’ USA TODAY, Sept. 18, 2013.

“The IRS’s Systematic Delay and Scrutiny of Tea Party Applications”: Hearing before the H. Comm. on Oversight

& Gov’t Reform, 113th Cong. (2013) (statement of J. Russell George).

Hearing on the Internal Revenue Service’s Exempt Organizations Division Post-TIGTA Audit: Hearing before the

Subcomm. on Oversight of the H. Comm. on Ways & Means, 113th Con. (2013) (opening statement of Chairman

Boustany).

See Patrick O’Connor, Groups Recount Tax Battle’s Toll, WALL ST. J., May 14, 2013.

McCulloch v. Maryland, 17 U.S. 316, 431 (1819).

iii

policy objectives of the White House and an IRS leadership that coordinates with political

appointees of the Obama Administration.

The Treasury Department – the IRS’s absentee parental agency – is not blameless in this

scandal. With the IRS, the Treasury Department secretly considered potential regulations on the

political speech of 501(c)(4) non-profits. As the IRS considered how to leak information about

the targeting before the TIGTA audit report’s release, it informed and coordinated with the

Treasury Department. Senior Departmental leadership, after consulting with the White House,

tacitly condoned the IRS’s ill-advised strategy of minimizing the fallout by apologizing for the

targeting through a planted question at an obscure tax conference. Most disconcerting, according

to the IRS’s independent inspector general, the Treasury Department’s senior leadership was

informed of the IRS targeting before the 2012 presidential election.

Lois Lerner’s faux apology on May 10, 2013, sparked a firestorm that led to the departure

of five IRS officials and caused fundamental damage to the agency’s credibility. Lerner’s words

triggered initial outrage. From the White House, President Obama called the targeting

“inexcusable,” promising to work “hand in hand” with Congress as “it performs it oversight

role” in examining the IRS’s misconduct.

But as weeks wore on and the initial outrage faded, a

deliberate effort emerged to minimize and obfuscate the misconduct. The Administration

claimed the misconduct was the responsibility of rogue line-level agents in the IRS Cincinnati

office.

A senior congressional Democrat proclaimed the “case is solved” just as the

investigation began.

Treasury Secretary Lew implied that the misconduct amounted to a

“phony” scandal.

The President, who had earlier called the conduct “inexcusable,” now wrote

it off to a bureaucratic “list” in “an office in Cincinnati.”

The Obama Administration refuses to accept any responsibility or accountability in wake

of the IRS’s targeting of conservative tax-exempt applicants. Attorney General Eric Holder

appointed a substantial contributor to President Obama as a leading Justice Department

investigator. The other Justice Department entities involved in the IRS investigation – the Public

Integrity Section and the Federal Bureau of Investigation – are similarly conflicted, meeting with

Lois Lerner and the IRS in 2010 to discuss the possible prosecution of non-profit groups. Before

all the facts were gathered, politicized leaks from the Justice Department promised that no

criminal charges would be filed. A week later, President Obama told a national television

audience that there was “not even a smidgeon of corruption” in the IRS targeting.

Meanwhile,

The White House, Statement by the President (May 15, 2013).

The White House, Press Briefing by Jay Carney (May 21, 2013) (noting that “IRS line personnel had improperly

targeted conservative groups”); Chelsea J. Carter, Drew Griffin, & David Fitzpatrick, ‘Angry’ Obama Announces

IRS Leader’s Ouster after Conservatives Targeted, CNN (May 16, 2013),

http://www.cnn.com/2013/05/15/politics/irs-conservative-targeting/ (noting that “the IRS has identified two ‘rogue’

employees in the agency’s Cincinnati office as being principally responsible”).

State of the Union with Candy Crowley (CNN television broadcast June 9, 2013) (interview with Rep. Elijah E.

Cummings).

Fox News Sunday (Fox News television broadcast July 28, 2013) (interview with Treasury Secretary Jacob Lew).

Hardball with Chris Matthews (MSNBC television broadcast Dec. 5, 2013) (interview with President Barack

Obama).

“Not even a smidgeon of corruption”: Obama downplays IRS, other scandals, FOX NEWS, Feb. 3, 2014.

the Obama White House, which earlier pledged its unfettered assistance, outright refused to

cooperate with the Committee’s fact-finding.

Not to be outdone, the IRS and congressional Democrats sought to obstruct the

investigation and confuse the facts. Ranking Member Elijah Cummings publicly declared the

“case is solved” only weeks after the investigation began. Working with the IRS, congressional

Democrats peddle a false narrative of bipartisan targeting using self-serving documents produced

by the IRS on a prioritized schedule. The IRS slow-rolled document productions to the

Committee, delayed the Committee’s access to key witnesses, and withheld documents prior to

Committee interviews. The IRS has still not fully complied with three Committee subpoenas for

documents.

The Committee on Oversight and Government Reform has conducted a comprehensive

investigation to date of the IRS’s inappropriate treatment of conservative applicants for tax-

exempt status. The Committee released a series of reports to update the public on the findings to

date and to recommend reforms. To date, the Committee has released five reports:

 “Interim update on IRS Investigation of tax exempt applicants” (September 17, 2013);

 “Lois Lerner’s Involvement in the IRS Targeting of Tax-Exempt Organizations (March

11, 2014)”;

 “Debunking the Myth that the IRS Targeted Progressives (April 7, 2014)”;

 “Pressure from the Left Led the IRS and DOJ to Restrict Freedom of Speech (June 16,

2014)”; and,

 “Making Sure Targeting Never Happens: Getting Politics Out of the IRS and Other

Solutions” (July 12, 2014).

This staff report updates the five that precede it and details the Committee’s investigative

findings as of the end of the 113th Congress. The fact-finding is not yet complete. Several

categories of documents and records subpoenaed by the Committee have not been produced.

Additionally, TIGTA recently announced that it restored approximately 30,000 e-mails to and

from Lois Lerner that the IRS previously claimed were permanently lost or destroyed. While

investigators continue to gather information from all sources, the Committee releases the

findings contained herein to improve the transparency and accountability of the nation’s tax

administration.



Findings

The Committee’s investigation has resulted in the following findings to date about the

Internal Revenue Service’s inappropriate treatment of tax-exempt applicants:

 The Internal Revenue Service targeted conservative-oriented applicants for tax-

exempt status;

 Unlike applications from conservative groups, the small batch of applications from

liberal-oriented groups received additional scrutiny for non-political reasons. Of the

applications that received additional scrutiny, only seven contained the word

“progress” or “progressive,” all of which were subsequently approved by the IRS,

while Tea Party groups were subjected to an unprecedented degree of review and

years-long delays.

 Senior Internal Revenue Service officials covered up the misconduct and misled

Congress about the existence and nature of the targeting;

 The Internal Revenue Service sought to rein in conservative-oriented non-profits as

early as 2010;

 The Administration is using the targeting as pretext to support its proposed regulation

to limit political speech of conservative non-profits;

 Mismanagement among the senior leadership of the Internal Revenue Service

contributed to the targeting;

 The Internal Revenue Service and the Obama Administration knowingly and wrongly

blamed line-level employees for the misconduct;

 Employees of the Internal Revenue Service inappropriately used non-official e-mail

to conduct official government business;

 The Internal Revenue Service has compromised its traditional position as an

independent tax administrator;

 The Obama Administration exhibited a lack of accountability for the IRS misconduct;

 Lois Lerner’s refusal to testify hindered the Committee’s investigation;

 The Internal Revenue Service obstructed the Committee’s investigation; and

 The White House and congressional Democrats obstructed the Committee’s

investigation.

TableofContents

Executive Summary ......................................................................................................................... i

Findings........................................................................................................................................... v

Table of Contents ........................................................................................................................... vi

Table of Names .............................................................................................................................. ix

Internal Revenue Service ........................................................................................................... ix

Department of the Treasury ....................................................................................................... xi

Department of Justice ............................................................................................................... xii

The White House ...................................................................................................................... xii

Table of Figures ........................................................................................................................... xiii

Introduction ..................................................................................................................................... 1

Background of the targeting............................................................................................................ 3

Section 501 organizations and political speech .......................................................................... 3

Citizens United v. Federal Election Commission ....................................................................... 5

Rhetorical Backlash to Citizens United ...................................................................................... 6

How the IRS targeted conservatives: A narrative of wrongdoing .................................................. 9

February 2010: The initial applications are identified and elevated to Washington due to

“media attention” ........................................................................................................................ 9

March 2010: Washington requests additional Tea Party applications to work as “test” cases

and orders Cincinnati to “hold” the rest .................................................................................... 11

April 2010: Washington creates a Sensitive Case Report to alert senior IRS leadership about

the potential for Tea Party “media attention” ........................................................................... 12

April 2010: Washington employee Carter Hull is assigned to work the test applications and

oversee Cincinnati’s work ........................................................................................................ 14

Summer 2010: Hull works the test applications as other applications sit in Cincinnati ........... 15

Fall 2010: Cincinnati’s requests for guidance go unanswered ................................................. 16

February 2011: Lerner orders a “multi-tier review” of the Tea Party test applications ........... 17

April 2011: Lerner’s advisor Judith Kindell reviews the test applications ............................... 19

June-July 2011: Lerner is fully briefed on the treatment of Tea Party applications ................. 21

Summer 2011: Chief Counsel’s office reviews the test applications ....................................... 23

Summer 2011: Hull is replaced by novice IRS specialist Hilary Goehausen ........................... 24

Fall 2011: Goehausen futilely attempts to triage the growing Tea Party backlog .................... 25

Fall 2011: Washington develops a guide sheet to shape Cincinnati’s review of the backlogged

applications ............................................................................................................................... 27

January 2012: Washington’s guide sheet leads to objectionable questions to applicants ........ 28

February 2012: The Oversight Committee seeks information from Lerner ............................. 29

Spring 2012: The IRS’s internal review identifies misconduct ................................................ 30

vii

May 2013: The IRS finally acknowledges and apologizes for the targeting ............................ 35



Lessons from the targeting: What the Committee has found about the IRS’s inappropriate

treatment of conservatives ............................................................................................................ 37

The IRS targeted conservative groups ...................................................................................... 38

The IRS was acutely aware of political rhetoric pressing the IRS to regulate conservative

tax-exempt groups engaged in political activity ................................................................... 39

The IRS treated conservative-affiliated applicants distinctly from other similarly situated

applicants .............................................................................................................................. 47

Senior IRS officials covered up and misled Congress about the existence and nature of the

IRS’s targeting .......................................................................................................................... 54



Lerner made false statements to the Committee ................................................................... 54

Shulman gave false statements to Congress ......................................................................... 57

Miller withheld information from Congress about the targeting .......................................... 62

The IRS’s false claim that key evidence was lost or destroyed prolonged the investigation ... 66

The IRS claimed that years of e-mails sent and received by Lois Lerner and other IRS

employees were destroyed .................................................................................................... 67

IRS Commissioner John Koskinen misled Congress about the IRS’s destruction of Lois

Lerner’s e-mails .................................................................................................................... 70

IRS employees openly sought to avoid congressional scrutiny by shielding e-mail

communications .................................................................................................................... 76

The IRS targeting and cover-up directly harmed conservative groups applying for tax-exempt

status ......................................................................................................................................... 78

IRS actions suppressed conservative voices during the 2012 election ................................. 79

IRS delays in processing applications led to the auto-revocation of exempt status ............. 80

There is conflicting evidence on whether the Treasury Department was aware of the IRS

targeting in 2012 ....................................................................................................................... 81

The IRS sought other methods to rein in politically active non-profits as early as 2010 ......... 87

The IRS sought to curb politically active non-profits ........................................................... 88

The IRS sought to deny tax-exempt applicants engaged in political speech ........................ 94

The IRS sought to publicize that it was taking action on tax-exempt groups engaged in

political speech ...................................................................................................................... 96

The IRS sought to regulate politically active social-welfare groups .................................. 102

The IRS’s plans mirrored Administration-wide attempts to stifle free political speech ..... 104

The IRS targeting is a pretext for the Administration’s proposed regulation on political speech

of social welfare organizations ............................................................................................... 106

Mismanagement by senior IRS leadership failed to effectively prevent and later to stop the

targeting of conservative-oriented groups .............................................................................. 111



Doug Shulman, former Commissioner ............................................................................... 112

Jonathan Davis, Chief of Staff to Commissioner Shulman ................................................ 116

Steven Miller, Acting Commissioner ................................................................................. 119

viii

Nikole Flax, Chief of Staff to Steven Miller ....................................................................... 124



William Wilkins, Chief Counsel ......................................................................................... 126

Joseph Grant, Acting Commissioner, Tax Exempt and Government Entities .................... 128

Lois Lerner, Director, Exempt Organizations ..................................................................... 131

Holly Paz, Director, Rulings and Agreements .................................................................... 140

The IRS and the Obama Administration knowingly and wrongly blamed line-level IRS

employees for the misconduct ................................................................................................ 143

Washington was involved from the beginning ................................................................... 144

Washington was heavy handed in its approach to the cases ............................................... 146

The IRS and the Obama Administration coordinated on Lerner’s apology ....................... 147

Cincinnati IRS employees felt that Washington threw them “under the bus” .................... 153

The Obama Administration’s IRS is not an independent tax administrator ........................... 157

ObamaCare has politicized the IRS .................................................................................... 157

The IRS acts as a political arm of the Obama Administration, rather than an independent tax

administrator ....................................................................................................................... 159

There are indications of political bias in the IRS ................................................................ 161

The Administration’s investigation of the targeting ............................................................... 165

The Department of Justice’s role in the targeting ............................................................... 172

Administrative oversight of the IRS failed to prevent the targeting or disclose the misconduct

in a timely manner .................................................................................................................. 180

Lois Lerner’s refusal to testify hindered the Committee’s investigation ................................ 181

Lerner’s failed assertion of her Fifth Amendment privilege .............................................. 182

Lerner continued to defy the Committee’s subpoena ......................................................... 186

Lerner’s testimony is critical to the Committee’s investigation ......................................... 189

The IRS obstructed and delayed the Committee’s investigation ............................................ 191

The IRS failed to comply with three Committee subpoenas .............................................. 192

The IRS destroyed documents relevant to the Committee’s investigation ......................... 194

The IRS slow-rolled document productions and excessively redacted documents ............ 196

The IRS withheld documents relevant to witness interviews and prolonged the Committee’s

investigative efforts ............................................................................................................. 198

The White House and Congressional Democrats obstructed the Committee’s investigation 199

The White House refused to assist the Committee’s fact-finding efforts ........................... 199

The Ranking Member sought to disrupt the investigation .................................................. 201

The case of True the Vote ................................................................................................... 203

Tax administration working for the taxpayers: Suggested reforms ........................................... 207

Conclusion .................................................................................................................................. 208

TableofNames

InternalRevenueService

Name Title

Catherine Barre Acting Director, Legislative Affairs

Ronald Bell

Exempt Organizations Specialist, Exempt Organizations

Determinations Unit

Steven Bowling Senior Manager, Exempt Organizations Determinations Unit

Robert Choi

Director, Employee Plans (January 2011 – present)

Director, Exempt Organizations, Rulings and Agreements

(April 2007 – December 2010)

Janine Cook

Deputy Division Counsel/Deputy Associate Chief Counsel,

Office of Chief Counsel, Tax Exempt and Government

Entities

Eric Corwin Deputy Chief Counsel, Technical, Office of Chief Counsel

Jonathan Davis Chief of Staff to Douglas Shulman

Nanette Downing Director, Exempt Organizations, Examinations

Catherine Duval

Counselor to the Commissioner (November 2013 – August

2014)

Donna Elliot-Moore Tax Law Specialist, Exempt Organizations Technical Unit

David Fish Manager, Exempt Organizations Guidance Unit

Nikole Flax Chief of Staff to Steven Miller

Amy Franklin-Giuliano

Attorney-Advisor, Office of Chief Counsel, Tax Exempt and

Government Entities, Exempt Organizations Branch

Hilary Goehausen Tax Law Specialist, Exempt Organizations Technical Unit

Joseph Grant

Commissioner, Tax Exempt and Government Entities Division

(May 2013 – June 2013)

Acting Commissioner, Tax Exempt and Government Entities

Division (December 2010 – May 2013)

Steven Grodnitzky Group Manager, Exempt Organizations Technical Unit

Name Title

Joseph Herr Revenue Agent, Exempt Organizations Determinations Unit

Elizabeth Hofacre Revenue Agent, Exempt Organizations Determinations Unit

Carter Hull

Senior Tax Law Specialist, Exempt Organizations Technical

Unit

Sarah Hall Ingram

Director, Affordable Care Act Office (December 2010 – April

2014)

Commissioner, Tax Exempt and Government Entities Division

(April 2009 – December 2010)

Victoria Judson

Division Counsel/Associate Chief Counsel, Office of Chief

Counsel, Tax Exempt and Government Entities

Thomas Kane

Deputy Associate Chief Counsel, Procedure and

Administration, Office of Chief Counsel

Elizabeth Kastenberg Tax Law Specialist, Exempt Organizations Technical Unit

Frank Keith Chief, Communications and Liaison

Judith Kindell

Senior Technical Advisor to the Director, Exempt

Organizations

John Koester Revenue Agent, Exempt Organizations Determinations Unit

John Koskinen Commissioner (December 2013 – present)

Lois Lerner Director, Exempt Organizations

Sharon Light

Senior Technical Advisor to the Director, Exempt

Organizations

Justin Lowe

Technical Advisor to the Commissioner, Tax Exempt and

Government Entities Division

Nancy Marks

Senior Technical Advisor to the Commissioner, Tax Exempt

and Government Entities Division

David Marshall

Attorney, Office of Chief Counsel, Tax Exempt and

Government Entities, Exempt Organizations Branch

Steven Miller

Acting Commissioner (November 2012 – May 2013)

Deputy Commissioner for Services and Enforcement (2009 –

November 2012)

Gary Muthert Revenue Agent, Exempt Organizations Determinations Unit

Jennifer O’Connor Counselor to the Commissioner (May 2013 – November 2013)

Name Title

Leonard Oursler Director, Legislative Affairs

Holly Paz

Director, Exempt Organizations, Rulings and Agreements

(January 2011 – June 2013);

Acting Manager, Exempt Organizations Technical Unit

(September 2009 –March 2010, September 2010 – December

2010)

Stephen Seok Group Manager, Exempt Organizations Determinations Unit

Michael Seto Manager, Exempt Organizations Technical Unit

John Shafer Group Manager, Exempt Organizations Determinations Unit

Ronald Shoemaker

Supervisory Tax Law Specialist, Exempt Organizations

Technical Unit

Douglas Shulman Commissioner (March 2008 – November 2012)

Don Spellmann

Senior Counsel, Office of Chief Counsel, Tax Exempt and

Government Entities, Exempt Organizations Branch

Christopher Sterner Deputy Chief Counsel, Operations, Office of Chief Counsel

Cindy Thomas Manager, Exempt Organizations Determinations Unit

Joseph Urban

Technical Advisor to the Commissioner, Tax Exempt and

Government Entities Division

Daniel Werfel Principal Deputy Commissioner (May 2013 – December 2013)

William Wilkins Chief Counsel

DepartmentoftheTreasury

Name Title

Adewale “Wally” Adeyemo Deputy Chief of Staff

Hannah Stott-Bumsted Senior Counsel, Office of General Counsel

J. Russell George Treasury Inspector General for Tax Administration

Ruth Madrigal Attorney-Advisor, Office of Tax Policy

xii

Name Title

Mark Mazur Assistant Secretary for Tax Policy

Christopher Meade General Counsel

Mark Patterson Chief of Staff (January 2009 – May 2013)

Christian Weideman

Chief of Staff (May 2013 – present)

Deputy General Counsel (March 2010 – May 2013)

DepartmentofJustice

Name Title

Barbara Bosserman Attorney, Civil Rights Division

James Cole Deputy Attorney General

James Comey Director, Federal Bureau of Investigation

Eric Holder Attorney General

Richard Pilger

Director, Election Crimes Branch, Public Integrity Section,

Criminal Division

Jack Smith Chief, Public Integrity Section, Criminal Division

Andrew Strelka Attorney, Tax Division

TheWhiteHouse

Name Title

Mark Childress Deputy Chief of Staff

Eric Schultz Deputy Press Secretary

Ed Siskel Deputy White House Counsel

Jonathan Su Special Counsel to the President

xiii

TableofFigures

Figure 1: E-mail from Sharon Camarillo to Cindy Thomas, Feb. 25, 2010 ................................. 10



Figure 2: E-mail from Steven Grodnitzky to Lois Lerner & Robert Choi, Apr. 28, 2010 ........... 13

Figure 3: E-mail from Lois Lerner to Michael Seto, Feb. 1, 2011 ............................................... 18

Figure 4: E-mail from Judith Kindell to Lois Lerner & Holly Paz, Apr. 7, 2011 ........................ 20

Figure 5: IRS Briefing Document Prepared for Lois Lerner ........................................................ 22

Figure 6: E-mail from Lois Lerner to Sarah Hall Ingram, Aug. 31, 2010 .................................... 40

Figure 7: E-mail from Sarah Hall Ingram to Terry Lemons et al., Sept. 21, 2010 ....................... 41

Figure 8: IRS Significant Case Report Summary, August 2011 (enlarged) ................................. 49

Figure 9: E-mail from Judith Kindell to Lois Lerner, July 18, 2012 ............................................ 53

Figure 10: E-mail exchange between Steven Miller & Nikole Flax, June 18, 2012 .................... 63

Figure 11: E-mail from Lois Lerner to Joseph Urban, July 25, 2012 ........................................... 65

Figure 12: E-mail from Lois Lerner to David Fish & Nikole Flax, June 29, 2011 ...................... 70

Figure 13: E-mail from Lois Lerner to Sarah Hall Ingram, Aug. 31, 2010 .................................. 88

Figure 14: E-mail from Lois Lerner to Judith Kindell et al., Sept. 15, 2010 ................................ 89

Figure 15: E-mail from Lois Lerner to Cheryl Chasin et al., Sept. 16, 2010 ................................ 89

Figure 16: E-mail from Lois Lerner to Christopher Giosa, Nov. 29, 2012 .................................. 90

Figure 17: E-mail from Hilary Goehausen to Jodi Garuccio, Apr. 22, 2013 ................................ 96

Figure 18: E-mail exchange between Lois Lerner & Nancy Marks, Apr. 1, 2013 ....................... 97

Figure 19: E-mail from Lois Lerner to Christopher Wagner, Jan. 31, 2013 ................................. 99

Figure 20: E-mail from Lois Lerner to Nikole Flax et al., Mar. 27, 2013 .................................. 101

Figure 21: TEGE (EO) New Projects Proposed for FY 2013-2014 PGP ................................... 103

Figure 22: E-mail from Ruth Madrigal to Victoria Judson et al., June 14, 2012 ....................... 107

Figure 23: E-mail from Lois Lerner to Sharon Light, July 10, 2012 .......................................... 132

Figure 24: E-mail from Lois Lerner to Sharon Light, Jan. 24, 2013 .......................................... 133

Figure 25: E-mail from Lois Lerner to Holly Paz, Mar. 27, 2013 .............................................. 134

Figure 26: E-mail exchange between Lois Lerner & Meghan Biss, May 4, 2013 ..................... 135

Figure 27: E-mail from Lois Lerner to Maria Hooke, Apr. 9, 2013 ........................................... 137

Figure 28: E-mail from Holly Paz to Lois Lerner et al., Feb. 2, 2011 ........................................ 141

Figure 29: E-mail from Nikole Flax to Adewale Adeyemo, Apr. 22, 2013 ............................... 149

Figure 30: E-mail exchange between Christian Weideman & Jonathan Su, Apr. 24, 2013 ....... 152

Figure 31: E-mail from Jonathan Su to Christian Weideman, Apr. 25, 2013 ............................. 152

Figure 32: E-mail from Cindy Thomas to Lois Lerner, May 10, 2013 ...................................... 154

Figure 33: E-mail from Pamela LaRue to Jonathan Davis & Beth Tucker, Sept. 19, 2012 ....... 160

Figure 34: E-mail from Floyd Williams to Doug Shulman et al., Mar. 8, 2012 ......................... 160

Figure 35: E-mail exchange between Don Spellmann & Janine Cook, July 19, 2011 ............... 163

Figure 36: E-mail from Holly Paz to Cindy Thomas, June 1, 2011 ........................................... 164

Figure 37: E-mail from Ronald Shoemaker to Andrew Strelka et al., Mar. 17, 2010 ................ 169

Figure 38: E-mail exchange between Lois Lerner & Andrew Strelka, Aug. 23, 2013 ............... 170

Figure 39: E-mail from Lois Lerner to Nikole Flax, May 8, 2013 ............................................. 173

Figure 40: E-mail from Jack Smith to Raymond Hulser et al., Sept. 21, 2010 .......................... 174

Figure 41: E-mail from Sarah Hall Ingram to Steve Miller et al., Sept. 29, 2010 ...................... 175

Figure 42: E-mail exchange between Joseph Urban & Nancy Marks, Oct. 19, 2010 ................ 176

Figure 43: E-mail exchange between Cheryl Chasin & Judith Kindell, Oct. 5, 2010 ................ 177

xiv

Figure 44: E-mail from Lois Lerner to Sherry Whitaker et al., Oct. 5, 2010 ............................. 177



Figure 45: E-mail exchange between Lois Lerner & Richard Pilger, Oct. 6, 2010 .................... 178

Figure 46: E-mail from Richard Pilger to Unnamed FBI Agent, Oct. 5, 2010 ........................... 179

Figure 47: Excessive IRS redaction ............................................................................................ 197

Figure 48: E-mail from William Norton to Catherine Barre & Floyd Williams, Mar. 28, 2012 202

Introduction

The Committee on Oversight and Government has conducted a thorough investigation of

the IRS misconduct reported in an audit conducted by the Treasury Inspector General for Tax

Administration (TIGTA).

Since May 10, 2013 – when former IRS official Lois Lerner leaked

the findings of the TIGTA report – the Committee has reviewed more than 1,317,000 pages of

documents from the IRS, TIGTA, the Department of Treasury, the Department of Justice, the

Federal Election Commission, the IRS Oversight Board, former and current IRS employees, and

other sources. The Committee shared documents and information with House Ways and Means

Committee investigators, and relied on the Ways and Means Committee’s unique ability to

obtain documents covered by Section 6103 of Title 26 of the U.S. Code, which generally

prohibits the release of tax information by an IRS employee.

The Committee conducted 44 comprehensive transcribed interviews of current and

former IRS officials, ranging from front-line employees in the IRS’s Cincinnati office to the

former Commissioner of the IRS. The Committee conducted six transcribed interviews with

current and former Treasury Department officials and two transcribed interviews with Justice

Department attorneys. The Committee also held several public hearings on the misconduct. The

findings contained herein represent the state of the Committee’s investigation as of the end of the

113th Congress. In light of the November 2014 discovery that TIGTA located an estimated

30,000 e-mails to and from Lois Lerner that the IRS had previously declared to be lost forever,

and because the IRS has still not fully complied with three Committee subpoenas, the

investigation is ongoing.

The Committee found that the IRS targeted conservative-oriented applicants for tax-

exemption by treating them in a manner distinct from other applicants. This disparate treatment

of conservative tax-exempt applicants grew out of Democratic rhetoric critical of the Supreme

Court decision in Citizens United v. Federal Election Commission and calling on the IRS to

carefully scrutinize the groups.

Beginning in February 2010, conservative tax-exempt applicants were identified for

additional scrutiny based solely upon their name and political beliefs. Upon direction of Lois

Lerner, the IRS did not process these applications until Washington IRS employees – including

attorneys in the IRS Chief Counsel’s office – evaluated and developed two “test” cases. As a

result, a large backlog of overwhelmingly conservative-oriented applicants developed and these

applicants suffered substantial and unjustified delays. When the IRS attempted to work through

this backlog in late 2011 and early 2012, the agency asked inappropriate and burdensome

questions of these groups, including questions about the identity of the organizations’ donors.

Only seven applications in the IRS backlog contained the word “progress” or “progressive,”

all

See TREASURY INSPECTOR GEN. FOR TAX ADMIN., INAPPROPRIATE CRITERIA WERE USED TO IDENTIFY TAX-

XEMPT APPLICATIONS FOR REVIEW (May 14, 2013) [hereinafter “TIGTA Audit Rpt.”].

“The IRS’s Systematic Delay and Scrutiny of Tea Party Applications”: Hearing before the H. Comm. on

Oversight & Gov’t Reform, 113th Cong. (2013) (statement of J. Russell George).

of which were then approved by the IRS,

while Tea Party groups received unprecedented

review and experienced years-long delays. While some liberal-oriented groups were singled out

for scrutiny, evidence shows it was for reasons other than their political beliefs.

Senior leadership within the IRS knew about the inappropriate treatment of tax-exempt

applicants as early as 2011. In 2012, Commissioner Doug Shulman and Chief Counsel William

Wilkins separately became aware of the backlog of tax-exempt applicants. Commissioner

Shulman, despite knowing of the backlog and delays and the IRS’s use of inappropriate donor

questions, gave “assurances” to Congress in March 2012 that the IRS was not targeting

conservative-oriented applicants. His testimony, then and now, was misleading and incomplete

at best. Although the witnesses interviewed by the Committee have denied any knowledge of

intentional targeting, the fundamental fact remains that the IRS systematically treated

conservative-oriented applicants in a manner different from other applicants. This disparate

treatment began because of IRS concern about the extension of the Citizens United holding to

federal tax law.

This report details the Committee’s investigation to date. This investigation has furthered

the findings explained in TIGTA’s audit report dated May 14, 2013. Although TIGTA admirably

highlighted the grievous problems present in the IRS, the nature of its review as an audit, rather

than an investigation, prevented a better examination. Other serious deficiencies existed in

TIGTA’s review. First, TIGTA allowed a senior IRS official to be present every time it

interviewed an IRS employee, thereby contaminating the information given in those sessions. In

addition, TIGTA regularly updated the IRS of its findings and also shared multiple versions of its

audit report with IRS management, affording the IRS an opportunity to preemptively spin the

contents of the nonpublic audit report and then attempt to bury the news by acknowledging the

misconduct at a Friday morning tax-law seminar.

Based on lessons learned during this investigation, one matter is clear: the Internal

Revenue Service is broken and in need of serious reform. Toward that end, the Committee

released a report in July 2014 that contained fifteen proposals to address politicization of the

IRS.

The report recommended, among other things, that the IRS is removed as a regulator of

political speech for social-welfare groups. On September 17, 2014, the U.S. House of

Representatives approved five bills by voice vote that respond to the Internal Revenue Service’s

targeting of conservative organizations and other abuses of taxpayers at the IRS.

Two of the

bills were authored by Oversight and Government Reform Committee members, and three were

written by Ways and Means Committee members.

Hearing on the Internal Revenue Service’s Exempt Organizations Division Post-TIGTA Audit: Hearing before the

Subcomm. on Oversight of the H. Comm. on Ways & Means, 113th Con. (2013) (opening statement of Chairman

Boustany).

H. Comm. on Oversight & Gov’t Reform, Staff Report: Making Sure Targeting never Happens: Getting Politics

out of the IRS and Other Solutions, 113th Cong. (July 12, 2014).

Backgroundofthetargeting

Tax-exempt organizations have existed since the birth of the United States. Legislators

have considered tax exemption for certain organizations as far back as 1894, during the first

attempt at instituting a federal income tax.

The Revenue Act of 1913, which established the

federal tax system, included numerous exemptions for organizations usually operated not-for-

profit.

In the 1950s, a revision of the tax code established the current categories of tax

exemption in section 501 of the Internal Revenue Code.

Since then, federal law has recognized

several categories of tax-exemption.

In 2010, the Supreme Court issued an opinion that found a federal election law to be an

unconstitutional limitation of free speech.

Affirming fundamental rights to free speech, the

Court held that Congress could not bar a corporation or union from independently expressing

support or disapproval of a candidate for public office. The decision incited criticism from many

members of the media and the Obama Administration. The resulting political backlash was swift

and severe. President Obama, allies in Congress, and the media started a public relations

campaign to demonize the Court’s decision and delegitimize the non-profit organizations

affected by it. This political atmosphere created the conditions for the IRS’s targeting of

conservative groups.

Section501organizationsandpoliticalspeech

The Internal Revenue Code recognizes several different types of organizations exempt

from federal taxation.

The most common types are § 501(c)(3) for charitable, religious, and

educational organizations; § 501(c)(4) for organizations promoting social welfare; § 501(c)(5)

for labor unions; and § 501(c)(6) for business and trade associations.

Federal law protects the

names and identities of contributors to organizations that qualify for exemption under § 501(c).

The law also restricts the level of political speech permissible by the various categories of tax-

exempt organizations.

Section 501(c)(4) of the federal tax code explicitly recognizes as tax-exempt any “[c]ivic

leagues or organizations not organized for profit but operated exclusively for the promotion of

social welfare.”

The applicable Treasury regulation, issued in 1959, clarifies the statute. The

regulations states: “An organization is operated exclusively for the promotion of social welfare if

See PAUL ARNSBERGER, MELISSA LUDLUM, MARGARET RILEY, AND MARK STANTON, A HISTORY OF THE TAX-

XEMPT SECTOR: AN SOI PERSPECTIVE, available at http://www.irs.gov/pub/irs-soi/tehistory.pdf.

Tariff Act, ch. 16, §2(G) (1913) (current version at I.R.C. §501).

ARNSBERGER, LUDLUM, RILEY, AND STANTON, supra note 25.

Citizens United v. Fed. Election Comm’n, 558 U.S. 310 (2010).

See I.R.C. § 501(c).

See ERIKA K. LUNDER, CONG. RESEARCH SERV., TAX-EXEMPT ORGANIZATIONS: POLITICAL ACTIVITY

RESTRICTIONS AND DISCLOSURE REQUIREMENTS (2010), available at https://www.charitableplanning.com/

cpc_1790452-1.pdf.

See I.R.C. § 6104.

I.R.C. § 501(c)(4).

it is primarily engaged in promoting the common good and general welfare of the people of the

community.”

The IRS reiterated in 1981 that an entity organized under § 501(c)(4) could

engage in political speech, stating that “an organization may carry on lawful political activities

and remain exempt under section 501(c)(4) as long as it is primarily engaged in activities that

promote social welfare.”

For decades, the IRS has interpreted the law to mean that a § 501(c)(4) group must be

primarily engaged in social welfare activities.

However, under § 501(c)(4), an organization

could still lawfully engage in political speech. A § 501(c)(4) group may engage in unlimited

issue advocacy – that is, activities in support or opposition of a public policy issue – and a

limited amount of political campaign intervention.

The IRS makes this determination using an

informal 51 to 49 percent ratio and a “facts and circumstances” test to assess whether a group is

primarily engaged in social welfare.

Under the IRS’s long-held interpretation, a § 501(c)(4)

group’s primary purpose may be social welfare even if the group engages in a significant amount

of political campaign intervention.

Some Democratic politicians and commentators have vocally lobbied that the IRS should

abandon its decades-long interpretation of tax law. They argue that the IRS should bar §

501(c)(4) organizations from engaging in political activity.

Some assert, incorrectly, that §

501(c)(4) groups should not conduct political advocacy because the groups receive taxpayer-

funded benefits as public charities.

But § 501(c)(4) groups are not charities; they are social

welfare organizations. Their statuses as social welfare organizations make them fundamentally

different from public charities organized under § 501(c)(3), which receive a benefit derived from

their eligibility to receive tax-deductible contributions.

Entities organized under § 501(c)(4) do

not receive any tax-deductible contributions; there is no revenue effect to their tax-exemption.

If, as some Democrats and members of the media have urged, the IRS changes the way it

treats § 501(c)(4) groups, those groups would have to reorganize as § 527 organizations, subject

to disclosure requirements under federal law.

This change would allow political adversaries of

those groups, or the causes that they advocate for, to identify and harass their donors. For this

reason, and others, the Supreme Court protects anonymous political speech.

In fact,

Treas. Reg. § 1.501(c)(4)-1(a)(2).

Revenue Ruling 81-95, 1981-1 C.B. 332.

See ERIKA K. LUNDER & L. PAIGE WHITAKER, CONG. RESEARCH SERV., 501(C)(4)S AND CAMPAIGN ACTIVITY:

ANALYSIS UNDER TAX AND CAMPAIGN FINANCE LAWS (2013), available at http://electionlawblog.org/wp-

content/uploads/CRS-Report-on-IRS-Line-Between-Issue-Advocacy-and-Campaign-Activity-2013.pdf.

I.R.C. § 501(c)(4); Treas. Reg. § 1.501(c)(4)-1(a)(2).

See, e.g., Transcribed interview of Ronald Bell, Internal Revenue Serv., in Wash., D.C. (June 13, 2013); Raymond

Chick & Amy Henchey, M. Political Organizations and IRC 501(c)(4), I.R.S. Cont. Prof. Ed. Text (1995), available

at http://www.irs.gov/pub/irs-tege/eotopicm95.pdf.

Cf., e.g., “A Review of Criteria Used by the IRS to Identify 501(c)(4) Applications for Greater Scrutiny”: Hearing

before the S. Comm. on Finance, 113th Cong. (2013) (statement of Senator Carper) (“[T]he code says that these

501(c)(4) non-profit organizations, their activities must be, I think, exclusive for social welfare. . . . And it doesn’t

say anything about giving tax-exempt status for any political activity. It says exclusively for social welfare.”).

See Bradley A. Smith, The Latest IRS Power Grab, WALL ST. J., Dec. 8, 2013.

I.R.C. § 170.

I.R.C. § 527(j).

See, e.g., NAACP v. Alabama, 357 U.S. 449 (1958).

harassment of the sort that the Supreme Court sought to prevent has already occurred. In 2008,

the general counsel to President Obama’s campaign wrote the Department of Justice demanding

a criminal investigation into the “anonymous donors” of a prominent conservative non-profit.

The calls for greater disclosure coincided with the emergence of grassroots conservative-

leaning groups organized in opposition to Obama Administration policies during the 111th

Congress, when Democrats controlled Congress.

As more groups formed in opposition to the

President’s policies, specifically his economic and health reform agenda, they coalesced into a

loose affiliation that came to be known as the Tea Party movement.

Many of these new

community-based, conservative-leaning groups began to seek tax-exempt status under §

501(c)(4). As they did, Democrats called for greater donor disclosure.

These calls only grew

louder in the wake of a 2010 Supreme Court decision that President Obama himself declared

“damaging to our democracy” because it would “allow corporate and special interest takeovers

of our elections.”

At a time when Democrats controlled both chambers of Congress, President

Obama expressed a specific concern that “no one will actually know who’s really behind”

campaign advertisements that are run against incumbent politicians.

CitizensUnitedv.FederalElectionCommission

In 2008, Citizens United – a non-profit that advocates for “traditional American values of

limited government, freedom of enterprise, strong families, and national sovereignty and

security”

– released a documentary critical of then-Senator Hillary Clinton. Expecting the

documentary to air through the Democratic primary and in anticipation of possible Federal

Election Commission (FEC) enforcement action, Citizens United sought an injunction to prevent

the FEC’s enforcement and allow the group to air the documentary without any campaign

finance liability.

The case eventually made its way up to the Supreme Court as Citizens United

v. Federal Election Commission.

The Supreme Court issued its decision on January 21, 2010. The Court struck down parts

of speech restrictions in the Bipartisan Campaign Reform Act as violations of the First

Amendment’s guarantee of free speech. The Court “rejected the argument that political speech

of corporations or other associations should be treated differently under the First Amendment”

and upheld numerous precedents that recognized First Amendment protections for

corporations.

Describing the law as “an unprecedented governmental intervention into the

realm of speech,” the Court noted that “[n]o sufficient governmental interest justifies limits on

See Kimberley A. Strassel, Conservatives became targets in 2008, WALL ST. J., May 23, 2013.

See, e.g., Ben McGrath, The Movement, THE NEW YORKER, Feb. 1, 2010.

See Andres Madestam, Daniel Shoag, Stan Veuger, & David Yanagizawa-Drott, Do Political Protests Matter?

Evidence from the Tea Party Movement, 128 Q.J.

OF ECON. 1633, 1666 (Nov. 2013).

See, e.g., Press Release, Durbin Urges IRS to Investigate Spending by Crossroads GPS (Oct. 12, 2010), available

at http://www.durbin.senate.gov/public/index.cfm/pressreleases?ID=833d8f1e-bbdb-4a5b-93ec-706f0cb9cb99.

The White House Blog (Jul. 26, 2010).

Id.

Citizens United, Who We Are, http://www.citizensunited.org/who-we-are.aspx (last visited July 8, 2014).

Citizens United v. Fed. Election Comm’n, 558 U.S. 310 (2010).

Id. at 342-45.

the political speech of non-profit or for-profit corporations.”

The Court therefore struck down

the arbitrary restrictions on free political speech, explaining that “political speech must prevail

against laws that would suppress it, whether by design or inadvertence.”

RhetoricalBacklashtoCitizensUnited

As the Committee detailed in its June 2014 staff report, the reaction to the Citizens

United opinion was immediate.

On the same day of the decision, Robert Gibbs, President

Obama’s Press Secretary, warned that Americans “should be worried that special interest groups

that have already clouded the legislative process are soon going to get involved in an even more

active way in doing the same thing in electing men and women to serve in Congress.”

January 23, 2010, President Obama proclaimed that the “ruling strikes at our democracy itself”

and “opens the floodgates for an unlimited amount of special interest money into our

democracy.”

Less than a week later, the President publicly chastised the Supreme Court during

his State of the Union address. With Justices in attendance, the President declared:

With all due deference to separation of powers, last week the Supreme

Court reversed a century of law that I believe will open the floodgates for

special interests – including foreign corporations – to spend without limit

in our elections. I don’t think American elections should be bankrolled by

America’s most powerful interests, or worse by foreign entities. They

should be decided by the American people.

The Citizens United decision sparked a prolonged campaign to disparage conservative-

leaning groups that many left-leaning politicians and commentators feared would be aided by the

decision. From January 2010 through the November 2010 election, President Obama and his

allies orchestrated a rhetorical assault against conservative-leaning groups. In speeches around

the country, the President derided these organizations as “shadowy” groups with “benign-

sounding” names that are pouring millions of dollars into “attack ads against Democratic

candidates.”

The President called these groups “phony” and urged a “fix” to the Supreme

Court’s Citizens United decision.

Throughout this rhetorical campaign, the President and other prominent Democratic

politicians questioned the legitimacy of conservative-leaning tax-exempt groups and accused

them of deception and ill-intent. For example, in a weekly address in May 2010, President

Obama stated:

Id. at 336, 365.

Id. at 336-37.

HOW POLITICS LED THE IRS TO TARGET CONSERVATIVE TAX-EXEMPT APPLICANTS, supra note 4.

The White House, Briefing by White House Press Secretary Robert Gibbs and PERAB Chief Economist Austan

Goolsbee (Jan. 21, 2010).

The White House, Weekly Address: President Obama Vows to Continue Standing Up to the Special Interest on

Behalf of the American People (Jan. 23, 2010).

The White House, Remarks by the President in the State of the Union Address (Jan. 27, 2010).

See HOW POLITICS LED THE IRS TO TARGET CONSERVATIVE TAX-EXEMPT APPLICANTS, supra note 4.

Id.

We’ve all seen groups with benign-seeming names sponsoring television

commercials that make accusations and assertions designed to influence

the public debate and sway voters’ minds. Now, of course every

organization has every right in this country to make their voices heard.

But the American people also have the right to know when some group

like “Citizens for a Better Future” is actually funded entirely by

“Corporations for Weaker Oversight.”

Later, in a July 2010 White House Rose Garden speech, the President proclaimed:

Because of the Supreme Court’s decision earlier this year in the Citizens

United case, big corporations . . . can buy millions of dollars worth of TV

ads – and worst of all, they don’t even have to reveal who’s actually

paying for the ads. . . . These shadow groups are already forming and

building war chests of tens of millions of dollars to influence the fall

elections.

The next month, the President sounded the same theme, this time singling out one conservative

group by name. He declared:

Right now all around this country there are groups with harmless-sounding

names like Americans for Prosperity, who are running millions of dollars

of ads against Democratic candidates all across the country. And they

don’t have to say who exactly the Americans for Prosperity are. You

don’t know if it’s a foreign-controlled corporation. You don’t know if it’s

a big oil company, or a big bank. You don’t know if it’s a [sic] insurance

company that wants to see some of the provisions in health reform

repealed because it’s good for their bottom line, even if it’s not good for

the American people.

As the 2010 midterm election neared, President Obama amplified his rhetoric. In a September

campaign stop, he stated:

[L]ast year, there was a Supreme Court decision called Citizens United.

They’re allowed to spend as much as they want without ever revealing

who’s paying for the ads. That’s exactly what they’re doing. Millions of

dollars. And the groups are benign-sounding: Americans for Prosperity.

Who’s against that? Or Committee for Truth in Politics. Or Americans

for Apple Pie. Moms for Motherhood. I made those last two up. None of

them will disclose who’s paying for these ads. You don’t know if it’s a

Wall Street bank. You don’t know if it’s a big oil company. You don’t

The White House, Weekly Address: President Obama Calls on Congress to Enact Reforms to Stop a “Corporate

Takeover of Our Elections” (May 1, 2010).

The White House, Remarks by the President on the DISCLOSE ACT (July 26, 2010).

The White House, Remarks by the President at a DNC Finance Event in Austin, Texas (Aug. 9, 2010).

know if it’s an insurance company. You don’t even know if it’s a foreign-

controlled entity.”

Days later during his weekly radio address, the President said:

Now, as an election approaches, it’s not just a theory. We can see for

ourselves how destructive to our democracy this can become. We see it in

the flood of deceptive attack ads sponsored by special interests using front

groups with misleading names. We don’t know who’s behind these ads or

who’s paying for them.

During another campaign event two days later for a Democratic Senatorial candidate, the

President made it clear that his concern stemmed from how Citizens United affected the electoral

prospects of Democratic candidates. He proclaimed:

Right now, all across this country, special interests are running millions of

dollars of attack ads against Democratic candidates. And the reason for

this is last year’s Supreme Court decision in Citizens United, which

basically says that special interests can gather up millions of dollars – they

are now allowed to spend as much as they want without limit, and they

don’t have to ever reveal who’s paying for these ads.

Senior White House advisor David Axelrod similarly warned that conservative groups were

“spending tens of millions of dollars. In some districts, they’re spending more money than the

candidate – candidates themselves on negative ads from benign-sounding Americans for

Prosperity, the American Crossroads Fund. No. These are front groups for special interests.”

The rhetorical campaign culminated only weeks before the election, as President Obama

tied his disdain for Citizens United with the emergence of conservative-leaning groups. During a

youth town hall event, the President stated:

I do think that what has happened is layered on top of some of that general

frustration that has expressed itself through the Tea Party, there is an

awful lot of corporate money that’s pouring into these elections right now.

. . . But if you’re in a battleground state right now, you are being

bombarded with negative ads every single day and nobody knows who is

paying for these ads. They’ve got these names like “Americans for

Prosperity” or “Moms for Motherhood” or – actually that last one I made

up. But you have these innocuous-sounding names, and we don’t know

The White House, Remarks by the President at a Reception for Connecticut Attorney General Richard Blumenthal

(Sept. 16, 2010).

The White House, Weekly Address: President Obama Castigates GOP Leadership for Blocking Fixes for the

Citizens United Decision (Sept. 18, 2010).

The White House, Remarks by the President at Finance Reception for Congressman Sestak (Sept. 20, 2010).

ABC News, ‘This Week’ Transcript: Axelrod, McConnell, and Queen Rania (Sept. 26, 2010), available at

http://abcnews.go.com/ThisWeek/week-transcript-axelrod-mcconnell-queen-rania/story?id=11729101

&singlePage=true.

where this money is coming from. I think that is a problem for our

democracy. And it’s a direct result of a Supreme Court decision that said

they didn’t have to disclose who their donors are.

Throughout 2010, President Obama forcefully pushed his rhetoric against Citizens

United, so-called “secret money” in politics, and the emergence of conservative non-profit

groups. The President very publicly called these groups “shadowy” front groups for foreign

special interests. He challenged the motives of these conservative groups and implied that their

donors sought to remain anonymous for nefarious reasons. In short, the President questioned the

legitimacy of these groups and their political activities, going so far as to call them a “threat to

our democracy.” Indisputably, this persistent and very public campaign had a real effect on how

the IRS approached these groups.

HowtheIRStargetedconservati ves:Anarrativeofwrongdoing

Within the backdrop of Citizens United and anonymous political speech, the IRS

systematically targeted and delayed tax-exempt applications filed by conservative-leaning

organizations. The story of how the targeting began and how it progressed is a complex

narrative. The audit report issued by the Treasury Inspector General for Tax Administration in

May 2013 only tells part of the story. This report attempts – with the information known at this

time – to present the narrative of bias, mismanagement, and wrongdoing within the Obama

Administration’s IRS.

February2010:Theinit ialapplicationsareidentifiedandelevatedto

Washingtondueto“mediaattention”

In late February 2010, a screener in the IRS’s Cincinnati office spotted an application for

tax-exempt status from a Tea Party group whose identity has still not been disclosed. Although

two similar applications had been processed and approved previously, the Cincinnati office

elevated this application to the Washington office due to “media attention” surrounding the Tea

Party movement. The next day, the Washington office confirmed that it would work the

application due to the potential for media attention. Over the next two-plus years, the IRS would

not approve any application for tax-exempt filed by a Tea Party-related group.

On February 25, 2010, Jack Koester, a Cincinnati screener, alerted his supervisor, John

Shafer, about the Tea Party application, noting “[r]ecent media attention to this type of

organization indicates to me that this is a ‘high profile’ case.”

Shafer forwarded Koester’s

e-mail to his supervisor, Sharon Camarillo.

Camarillo, in turn, elevated the e-mail to her

The White House, Remarks by the President in a Youth Town Hall (Oct. 14, 2010).

E-mail from John Koester, Internal Revenue Serv., to John Shafer, Internal Revenue Serv. (Feb. 25, 2010)

(emphasis added) [IRSR 428452].

E-mail from John Shafer, Internal Revenue Serv., to Sharon Camarillo, Internal Revenue Serv. (Feb. 25, 2010)

[IRSR 428452].

supervisor, Exempt Organizations Determinations (“EO Determinations”) Manager Cindy

Thomas.

Camarillo wrote:

Cindy: Please let ‘Washington’ know about this potentially politically

embarrassing case involving a ‘Tea Party’ organization. Recent media

attention to this type of organization indicates to me that this is a ‘high

profile’ case.

Thomas likewise elevated the application to the attention of her supervisor, Holly Paz, the then-

Manager of the Exempt Organizations Technical Unit in Washington (“EO Technical”), asking

“whether EO Technical wants this case because of recent media attention.”

The following day,

February 26, Paz responded, writing: “I think sending it up here is a good idea given the

potential for media interest.”

Figure 1: E-mail from Sharon Camarillo to Cindy Thomas, Feb. 25, 2010

At the time, the Tea Party movement was in the news often. The movement arose in

response to the economic and healthcare policies of the Obama Administration and the

Democratic-led 111th Congress.

The media covered various Tea Party-led protests in

Washington, D.C., and other cities in opposition to the President’s policies, including

ObamaCare.

News outlets also covered the movement’s opposition to the President’s policies

during the inaugural Tea Party convention, held in early February 2010.

As the movement

E-mail from Sharon Camarillo, Internal Revenue Serv., to Cindy Thomas, Internal Revenue Serv. (Feb. 25, 2010)

[IRSR 428451].

E-mail from Sharon Camarillo, Internal Revenue Serv., to Cindy Thomas, Internal Revenue Serv. (Feb. 25, 2010)

(emphasis added) [IRSR 428451].

E-mail from Cindy Thomas, Internal Revenue Serv., to Holly Paz, Internal Revenue Serv. (Feb. 25, 2010) [IRSR

428451].

E-mail from Holly Paz, Internal Revenue Serv., to Cindy Thomas, Internal Revenue Serv. (Feb. 26, 2010) [IRSR

428451].

Philip Rucker, Tea Party convention begins in Nashville, W

ASH

OST

, Feb. 5, 2010.

See, e.g., David Barstow, Tea Party lights fuse for rebellion on right, N.Y.

IMES

, Feb. 15, 2010.

Kate Zernike, Palin assails Obama at Tea Party meeting, N.Y.

IMES

, Feb. 6, 2010.

grew, some – including then-Speaker Nancy Pelosi – used the national media to publicly

question the funding sources for the groups and the level of grassroots support.

March2010:WashingtonrequestsadditionalTeaPartyapplicationsto

workas“test”casesandordersCincinnatito“hold”therest

The Washington IRS office’s interest in the initial Tea Party application forced the

Cincinnati office to assess how many similar applications were pending in the IRS’s queue.

When the line employees discovered several additional applications by mid-March 2010, the

Washington office asked for two additional applications to work as “test” cases. It ordered the

Cincinnati employees to “hold” the remainder of the applications until Washington specialists

evaluated the test cases.

Following the Washington office’s acceptance of the initial application, Cincinnati

screening group manager John Shafer asked his employees to identify similar applications

pending at that time with the phrase “Tea Party.”

By March 16, 2010, the screening group had

identified ten more Tea Party applications.

Cincinnati manager Cindy Thomas notified Holly

Paz, asking: “Did you know about these additional 10 tea party cases? Do you want all of them

or do you want a few and then give us advice as to what to do with remaining?”

Paz replied: “I

think we should take a few more cases (I’d say 2) and would ask that you hold the rest until we

get a sense of what the issues may be.”

On April 2, Washington received the two applications,

a 501(c)(3) application filed by the Prescott Tea Party, and a 501(c)(4) application filed by the

Albuquerque Tea Party.

Meanwhile, at the same time that Paz ordered Cincinnati to hold all Tea Party

applications, the Washington IRS office sought to determine whether it held any additional Tea

Party cases. Ronald Shoemaker, a group manager in EO Technical, sent an e-mail to a number

of IRS agents with the subject “lookout,” writing: “Be on the lookout for a tea party case. If you

have received or do receive a case in the future involving an exemption for an organization

having to do with [the] tea party let me know.”

As a result of Paz’s order to “hold” the remaining Tea Party applications in Cincinnati,

the front-line screeners conducted a more thorough search for similar applications already

See Peter Overby, Who’s raising money for Tea Party movement, NAT’L PUBLIC RADIO, Feb. 19, 2010; Pelosi

claims Tea Party hijacked by GOP, F

OX NEWS, Feb. 28, 2010.

Transcribed interview of Gary Muthert, Internal Revenue Serv., in Wash., D.C. (May 30, 2013).

E-mail from John Shafer, Internal Revenue Serv., to Cindy Thomas, Internal Revenue Serv. (Mar. 16, 2010)

[IRSR 428450].

E-mail from Cindy Thomas, Internal Revenue Serv., to Holly Paz, Internal Revenue Serv. (Mar. 17, 2010) [IRSR

428450].

E-mail from Holly Paz, Internal Revenue Serv., to Cindy Thomas, Internal Revenue Serv. (Mar. 17, 2010)

[Muthert 1].

See Internal Revenue Serv., Timeline for the 3 exemption applications that were referred to EOT from EOD

[IRSR 58346-49].

E-mail from Ronald Shoemaker, Internal Revenue Serv., to Ellen Berick et al., Internal Revenue Serv. (Mar. 17,

2010) [IRSR 631577].

received by the IRS. Shafer testified that he asked his screeners to develop criteria for

identifying other Tea Party applications so that the group ensured the applications did not “go

into the general inventory as we were looking for consistency.”

Gary Muthert, one of Shafer’s

screeners, created the criteria of “Tea Party,” “Patriots,” and “9/12” by searching the public

websites of Tea Party groups.

Other screeners developed criteria such as “issues include

government spending, government debt and taxes”; “educate the public through

advocacy/legislative activities to make America a better place to live”; and “statements in the

case file that are critical of how the country is being run.”

By early April 2010, at the request and direction of the Washington office, Cincinnati

screeners began to identify and hold any tax-exempt application meeting any of these criteria.

These applications were removed from the IRS’s general inventory and held in a special group

assigned to the Tea Party applications.

April2010:WashingtoncreatesaSensitiveCaseReporttoalertseniorIRS

leadershipaboutthepotentialforTeaParty“mediaattention”

The sensitivity surrounding the “test” Tea Party applications was not lost on the

Washington employees who examined the cases. When the Technical Unit received these two

“test” cases in late March 2010, Steve Grodnitzky, the Unit’s then-acting manager,

asked for

more information about the applications.

Donna Elliot-Moore, a Washington tax law specialist

who processed the arrival of the applications, casually replied that the case looked “more

educational but with a republican slant obviously.”

Grodnitzky, reiterating the applications’

potential for media attention, assigned group manager Ronald Shoemaker to have a “sensitive

case report” prepared for the Tea Party applications.

According to IRS employees, a sensitive case report is a monthly report prepared within

the Exempt Organizations Division and designed to inform senior IRS leadership about

particular issues or applications.

The reports are collected from all units within Exempt

Organizations and elevated through the IRS chain of command. The Exempt Organizations

Transcribed interview of John Shafer, Internal Revenue Serv., in Wash., D.C. (June 6, 2013).

Transcribed interview of Gary Muthert, Internal Revenue Serv., in Wash., D.C. (May 30, 2013).

E-mail from John Shafer, Internal Revenue Serv., to Cindy Thomas, Internal Revenue Serv. (June 2, 2011) [71-

000048].

Holly Paz began maternity leave on Mar. 17, 2010. Transcribed interview of Holly Paz, Internal Revenue Serv.,

in Wash., D.C. (May 21, 2013).

E-mail from Steven Grodnitzky, Internal Revenue Serv., to Donna Elliot-Moore & Ronald Shoemaker, Internal

Revenue Serv. (Mar. 31, 2010) [Muthert 7].

E-mail from Donna Elliot-Moore, Internal Revenue Serv., to Steven Grodnitzky & Ronald Shoemaker, Internal

Revenue Serv. (Apr. 1, 2010) [Muthert 7].

E-mail from Steven Grodnitzky, Internal Revenue Serv., Ronald Shoemaker & Cindy Thomas, Internal Revenue

Serv. (Apr. 5, 2010) [Muthert 6]; E-mail from Steven Grodnitzky, Internal Revenue Serv., to Donna Elliot-Moore &

Ronald Shoemaker, Internal Revenue Serv. (Apr. 1, 2010) [Muthert 7].

See Transcribed interview of Robert Choi, Internal Revenue Serv., in Wash., D.C. (Aug. 21, 2013); Transcribed

interview of Michael Seto, Internal Revenue Serv., in Wash., D.C. (July 11, 2013).

Director Lois Lerner typically received a chart compiling and summarizing the various reports at

the end of each month.

On April 28, 2010, Grodnitzky e-mailed a summary chart of sensitive case reports to

Lerner, specifically alerting her to the inclusion of information about the Tea Party cases.

Grodnitzky wrote to Lerner:

Of note, we added one [sensitive case report] concerning 2 Tea Party cases

that are being worked here in DC. Currently, there are 13 Tea Party cases

out in EO Determinations [in Cincinnati] and we are coordinating with

them to provide direction as to how to develop those cases based on our

development of the ones in DC.

Grodnitzky testified that he included the Tea Party applications on the sensitive case report due

to their potential for media attention.

The Tea Party movement continued to be in the media

during this time, most notably due to a large-scale April 2010 tax day protest in Washington.

Figure 2: E-mail from Steven Grodnitzky to Lois Lerner & Robert Choi, Apr. 28, 2010

Later, in May 2010, Lerner acknowledged the existence of the Tea Party applications in

response to Grodnitzky’s summary chart of sensitive case reports. Lerner wrote to him: “Tea

Party cases – applications for c3? What’s their basis?”

Grodnitzky responded:

The organizations are arguing education, but the big issue for us is

whether they are engaged in political campaign activity. . . . I have asked

the [tax law specialist] and front line manager to coordinate with Cincy as

Transcribed interview of Steven Grodnitzky, Internal Revenue Serv., in Wash., D.C. (July 16, 2013).

E-mail from Steven Grodnitzky, Internal Revenue Serv., to Lois Lerner & Robert Choi, Internal Revenue Serv.

(Apr. 28, 2010) [IRSR 141809].

Transcribed interview of Steven Grodnitzky, Internal Revenue Serv., in Wash., D.C. (July 16, 2013).

See Tea Party protestors descend on D.C. with new ‘Contract from America,’ FOX NEWS, Apr. 15, 2010.

E-mail from Lois Lerner, Internal Revenue Serv., to Steven Grodnitzky & Robert Choi, Internal Revenue Serv.

(May 13, 2010) [IRSR 167872-73].

to how to develop their cases, but not resolve anything until we get

clearance from you and Rob [Choi].

In August 2010, after Lerner received another sensitive case report, she asked her assistant to

print out the report prepared for the Tea Party applications for her review.

April2010:WashingtonemployeeCarterHullisassignedtoworkthetest

applicationsandoverseeCincinnati’swork

The Washington IRS office began to exert near-total control over the evaluation and

processing of the Tea Party tax-exempt applications in April 2010. At the same time that

Grodnitzky instructed Shoemaker to initiate a sensitive case report, he also asked Shoemaker to

assign a tax law specialist to “coordinate with Cincy as they have a number of Tea Party cases as

well.”

Shoemaker assigned tax law specialist Carter Hull to the task. Hull, a federal employee

with almost fifty years of experience, was a recognized expert in § 501(c)(4) applications with

indications of political activity.

100

Meanwhile, in Cincinnati, veteran revenue agent Elizabeth Hofacre drew the assignment

of working the Tea Party applications pending in the Determinations Unit that were awaiting

guidance from Washington.

101

On April 30, 2010, Hofacre was assigned about twenty Tea Party

applications that were pending in Cincinnati at that time.

102

Around this time, Hofacre created

an alert for revenue agents to identify other, similar cases “involv[ing] local organizations in the

Tea Party movement [that] are applying for exemption under 501(c)(3) or 501(c)(4).”

103

This

language became the first iteration of the “Tea Party” entry on the now-infamous “Be on the

Lookout” (BOLO) list.

Although intended to aid Cincinnati revenue agents, the BOLO found its way into the in-

boxes of Washington personnel as well. When Hofacre first circulated the BOLO in August

2010, she mistakenly sent the e-mail to the IRS Washington office as well as the Cincinnati

office.

104

Both Rob Choi, then-Director of Rulings and Agreements, and tax law specialist

Elizabeth Kastenberg, testified that they received the BOLO list at that time.

105

Neither,

however, took any action after receiving the BOLO list.

E-mail from Steven Grodnitzky, Internal Revenue Serv., to Lois Lerner et al., Internal Revenue Serv. (May 13,

2010) [IRSR 167872].

E-mail from Lois Lerner, Internal Revenue Serv., to Akaisha Douglas et al., Internal Revenue Serv. (Aug. 3,

2010) [IRSR 163358].

E-mail from Steven Grodnitzky, Internal Revenue Serv., to Cindy Thomas & Ronald Shoemaker, Internal

Revenue Serv. (Apr. 5, 2010) [Muthert 6].

100

Transcribed interview of Carter Hull Internal Revenue Serv., in Wash., D.C. (June 14, 2013).

101

See Transcribed interview of Elizabeth Hofacre, Internal Revenue Serv., in Wash., D.C. (May 31, 2013).

102

Id.

103

Internal Revenue Serv., BOLO Iteration History.

104

Transcribed interview of Elizabeth Hofacre, Internal Revenue Serv., in Wash., D.C. (May 31, 2013).

105

Transcribed interview of Robert Choi, Internal Revenue Serv., in Wash, D.C. (Aug 21, 2013); Transcribed

interview of Elizabeth Kastenberg, Internal Revenue Serv., in Wash., D.C. (July 31, 2013).

Summer2010:Hullworksthetestapplicationsasotherapplicationssitin

Cincinnati

As the Washington office began to evaluate the test applications, the Cincinnati office

continued to hold the growing queue of applications pending there. Only seven applications in

the backlog were identifiable as from “progressive” groups,

106

and all seven were subsequently

approved by the IRS.

107

Meanwhile, applications from Tea Party groups received an

unprecedented degree of scrutiny and years-long delays. Revenue agent Elizabeth Hofacre,

unable to make determinations without Washington’s approval, grew increasingly frustrated. By

the time Hofacre transferred out of EO Determinations in October 2010 due to her frustration,

the backlog of Tea Party cases awaiting Washington’s guidance had swelled to about 60

applications and was still growing.

108

In late spring 2010, Washington tax law specialist Carter Hull began to develop the two

test applications by issuing letters to both applicants requesting additional information or

clarifications about information on their applications. Hull sent letters to the Prescott Tea Party

and the Albuquerque Tea Party on April 14, and April 21, respectively.

109

The IRS received the

Albuquerque Tea Party’s response on June 8.

110

The IRS, however, did not receive a response

from the Prescott Tea Party. On May 26, the IRS closed its application on the grounds of

“failure to establish.”

111

The closure of the Prescott Tea Party’s application left Washington without a 501(c)(3)

test application. To ensure that it had both a 501(c)(3) and 501(c)(4) to work as test cases, the

Washington office asked Cincinnati for a replacement 501(c)(3) application in late May 2010.

112

On June 30, the Cincinnati office transferred an application for 501(c)(3) status filed by

American Junto, Inc. to Washington to replace the Prescott Tea Party’s application.

113

Meanwhile, as Hull developed the test cases, Hofacre attempted to work the applications

pending in Cincinnati. Starting in April 2010, Hofacre began drafting information-request letters

for the applicants. However, rather than sending the letters immediately as typically done,

Hofacre sent them to Hull for his review and editing.

114

When the applicants sent responses to

106

“The IRS’s Systematic Delay and Scrutiny of Tea Party Applications”: Hearing before the H. Comm. on

Oversight & Gov’t Reform, 113th Cong. (2013) (statement of J. Russell George).

107

Hearing on the Internal Revenue Service’s Exempt Organizations Division Post-TIGTA Audit: Hearing before

the Subcomm. on Oversight of the H. Comm. on Ways & Means, 113th Con. (2013) (opening statement of

Chairman Boustany).

108

Transcribed interview of Elizabeth Hofacre, Internal Revenue Serv., in Wash., D.C. (May 31, 2013).

109

Internal Revenue Serv., Timeline for the 3 exemption applications that were referred to EOT from EOD [IRSR

58346-49].

110

Internal Revenue Serv., Timeline for the 3 exemption applications that were referred to EOT from EOD [IRSR

58346-49].

111

Internal Revenue Serv., Timeline for the 3 exemption applications that were referred to EOT from EOD [IRSR

58346-49].

112

See Transcribed interview of Carter Hull, Internal Revenue Serv., in Wash., D.C. (June 14, 2013); Internal

Revenue Serv., Timeline for the 3 exemption applications that were referred to EOT from EOD [IRSR 58346-49].

113

Internal Revenue Serv., Timeline for the 3 exemption applications that were referred to EOT from EOD [IRSR

58346-49].

114

Transcribed interview of Elizabeth Hofacre, Internal Revenue Serv., in Wash., D.C. at 34 (May 31, 2013).

Hofacre, she forwarded that information to Hull as well.

115

Hofacre testified that she had “no

autonomy or no authority to act on [Tea Party applications] without Carter Hull’s influence or

input.”

116

Hull testified that he could not provide any information to Hofacre “until I knew

which way the Service was going.”

117

Until Hull’s superiors informed him on “which way the

Service was going,” Hull could not provide this information to Hofacre and Hofacre could not

process the applications.

The lack of autonomy frustrated Hofacre. She testified: “I was preparing these letters,

sending them to Carter Hull, being micromanaged to death, and it was just really frustrating.”

118

She explained that this Washington review delayed the evaluation process, testifying that “at first

[Hull’s response] was more timely, but then as I was being assigned more cases, his responsive

time really dropped down, to by the time I finished, I had numerous letters up there that I never

got any feedback on.”

119

The delays became so frustrating that Hofacre sought a transfer to

another IRS division in July 2010, which she received in October 2010.

120

Her replacement

would fare no better in awaiting Washington’s assistance.

Fall2010:Cincinnati’srequestsforguidancegounanswered

By fall 2010, the delays continued. Applications continued to come in to Cincinnati,

which sought to process them, but could not due to the lack of direction from Washington.

Recognizing the problem, Cincinnati manager Cindy Thomas questioned the close Washington

oversight of the Tea Party applications and repeatedly sought the status of Washington’s

promised guidance. That guidance never came.

In October, Ron Bell replaced Hofacre as the coordinator of the Tea Party applications.

He, however, had no better luck in processing the growing backlog of applications. When Bell

asked his supervisor, Steve Bowling, about what to do with the applications, Bowling told him,

“we’re holding them pending, we’re waiting for guidance from headquarters.”

121

The guidance

never came. Bell testified to the Committee that he “took the cases in October/November 2010,

and they were reassigned in November 2011 [and] I didn’t get any guidance during that

timeframe.”

122

The lack of guidance was not for failure to ask. Several times during the latter months of

2010, Cindy Thomas inquired of Holly Paz about the status of Washington’s long-promised

guidance. In one e-mail from late-October 2010, Thomas voiced her unit’s frustration with the

process:

115

Id. at 37.

116

Id.

117

Transcribed interview of Carter Hull, Internal Revenue Serv., in Wash., D.C. (June 14, 2013).

118

Transcribed interview of Elizabeth Hofacre, Internal Revenue Serv., in Wash., D.C. (May 31, 2013).

119

Id.

120

Id.

121

Transcribed interview of Ronald Bell, Internal Revenue Serv., in Wash., D.C. (June 13, 2013).

122

Transcribed interview of Ronald Bell, Internal Revenue Serv., in Wash., D.C. at 21 (June 13, 2013).

I have a concern with the approach being used to develop the tea party

cases we have here in Cincinnati. . . . Personally, I don’t know why

[Carter Hull] needs to look at each and every additional information letter.

It seems to me that if he reviewed a template letter and approved it we

should be good to go. Then when we get responses, we need to coordinate

these cases as a group and not try to work them one by one. Right now, I

believe we have approximately 45 or more of these cases. . . . . [C]ould

we schedule some time to discuss the approach that is being used and

come up with a process so we can get these moving?

123

Despite her frustration, the Washington office could not provide Thomas with a date certain for

the guidance. In each response, the proposed timeline became later and later.

124

Hull could not provide guidance until he knew how the IRS as an agency would approach

the Tea Party applications. Despite his decades of experience and his recognized expertise in the

area, Hull could not make the determinations on his own. Instead, the test applications wound

their way further up the IRS bureaucracy.

February2011:Lernerordersa“multi‐tierreview”oftheTeaPartytest

applications

Almost a year after the initial application was identified and evaluated to Washington, the

IRS was no closer to resolving the burgeoning backlog of applications in Cincinnati. As 2011

opened, veteran employee Carter Hull had made recommendations on how to resolve the two test

cases in Washington based on his decades of experience and expertise. His recommendations

were not carried out. Instead, in February 2011, Exempt Organizations Director Lois Lerner

ordered the Tea Party test applications to undergo an unprecedented “multi-tier” review.

On February 1, Michael Seto sent Lois Lerner the chart of sensitive case reports from

January 2011, including information about the Tea Party test cases.

125

Lerner responded the

same day, opining that the “Tea Party Matter [is] very dangerous” and ordering the test

applications to be reviewed by Kindell and the Chief Counsel’s office.

126

She wrote:

Tea Party Matter very dangerous. This could be the vehicle to go to court

on the issue of whether Citizen’s [sic] United overturning ban on

corporate spending applies to tax exempt rule. Counsel and Judy Kindell

123

E-mail from Cindy Thomas, Internal Revenue Serv., to Holly Paz, Internal Revenue Serv. (Oct. 26, 2010) [IRSR

66846].

124

See E-mail from Michael Seto, Internal Revenue Serv., to Cindy Thomas, Internal Revenue Serv. (Feb. 3, 2011);

E-mail from Holly Paz, Internal Revenue Serv., to Cindy Thomas, Internal Revenue Serv. (Dec. 13, 2010) [IRSR

66844-445].

125

E-mail from Michael Seto, Internal Revenue Serv., to Lois Lerner, Internal Revenue Serv. (Feb. 1, 2011) [IRSR

161810].

126

E-mail from Lois Lerner, Internal Revenue Serv., to Michael Seto, Internal Revenue Serv. (Feb. 1, 2011) [IRSR

161810].

need to be in on this one please . . . . Cincy should probably NOT have

these cases . . . .

127

Paz responded to Lerner, assuaging her concerns and confirming the heavy-handed Washington

control over the applications. She wrote:

Tea Party – Cases in Determs are being supervised by [Carter Hull] at

each step – he reviews info from TPs, correspondence to TPs, etc. No

decisions are going out of Cincy until we go all the way through the

process with the c3 and c4 cases here. I believe the c4 will be ready to go

over to Judy [Kindell] soon.

128

Apparently seeking an alternative ground for denying the applications, Lerner replied, “even if

we go with a 4 . . . , they may want to argue they should be 3s, so it would be great if we can

get there without saying the only reason they don’t get a 3 is political activity.”

129

Paz

separately instructed Michael Seto, the manager of EO Technical, that “Tea Party needs to go to

Judy, then Counsel (we were already planning on going to Judy and guess we’ll do Counsel

too).”

130

Figure 3: E-mail from Lois Lerner to Michael Seto, Feb. 1, 2011

Seto described Lerner’s instructions for the “multi-tier” review of the Tea Party test

applications during his transcribed interview with Committee staff. He testified:

A She sent me e-mail saying that when these cases need to go

through multi-tier review and they will eventually have to go to

Ms. Kindell and the chief counsel’s office.

127

Id.

128

E-mail from Holly Paz, Internal Revenue Serv., to Lois Lerner & Michael Seto, Internal Revenue Serv. (Feb. 2,

2011) [IRSR 156543].

129

E-mail from Lois Lerner, Internal Revenue Serv., to Holly Paz & Michael Seto, Internal Revenue Serv. (Feb. 2,

2011) (emphasis added) [IRSR 147510].

130

E-mail from Holly Paz, Internal Revenue Serv., to Michael Seto, Internal Revenue Serv. (Feb. 2, 2011) [IRSR

159428].

Q Ms. Lerner told you this in an e-mail?

A That’s my recollection.

Q Okay. Just for clarification, we’re talking about January-February

of 2011. So is that the time period that you recall receiving?

A I think so.

***

Q An e-mail from Ms. Lois Lerner directing you that these cases,

these Tea Party cases would need to go through a multi-level

review?

A Yes, it has to go to, yes, Counsel, yep.

131

Lerner ordered the multi-tier review even though veteran tax law specialist Carter Hull

had already developed recommendations on the applications. By late 2010, Hull had

recommended “the (c)(4) be recognized as exempt, and . . . the (c)(3) should not be recognized

as exempt.”

132

As a matter of practice within the Technical Unit, Hull shared the applications and

his recommendations with a colleague, Elizabeth Kastenberg, for her review.

133

In March 2011,

Kastenberg independently reviewed the applications and suggested – just as Lerner ordered –

that she and Hull seek subject-matter guidance from Judy Kindell, Lerner’s senior technical

advisor.

134

Kindell’s review marked the beginning of the multi-tier review.

April2011:Lerner’sadvisorJudithKindellreviewsthetestapplications

Judith Kindell served as Lois Lerner’s senior technical advisor. In that position, she

advised Lerner on technical issues relating to tax law for exempt organizations, including issues

relating to political activities for tax-exempt groups.

135

In April 2011, Kindell reviewed the two

test applications and, consistent with Lerner’s directive, suggested that the Chief Counsel’s

office review the cases.

By April 1, Carter Hull and Elizabeth Kastenberg had completed their reviews of the test

cases and had scheduled a meeting with Kindell to discuss the applications.

136

Kindell met with

Hull and Kastenberg on April 7, in which she recommended that they gather more information to

131

Transcribed interview of Michael Seto, Internal Revenue Serv., in Wash., D.C. (July 11, 2013).

132

Transcribed interview of Carter Hull, Internal Revenue Serv., in Wash., D.C. (June 16, 2013).

133

Transcribed interview of Elizabeth Kastenberg, Internal Revenue Serv., in Wash., D.C. (July 31, 2013).

134

Id.

135

Transcribed interview of Judith Kindell, Internal Revenue Serv., in Wash., D.C. (Oct. 29, 2013).

136

E-mail from Elizabeth Kastenberg, Internal Revenue Serv., to Michael Seto, Ronald Shoemaker, & Carter Hull,

Internal Revenue Serv. (Apr. 1, 2011) [IRSR 69910].

develop a basis for denying the applications on another ground.

137

Later that day, she e-mailed

Lerner and Paz about the “sensitive (c)(3) and (c)(4) applications,” writing:

I just spoke with Chip Hull and Elizabeth Kastenberg about two cases they

have that are related to the Tea Party – one a (c)(3) application and the

other a (c)(4) application. I recommended that they develop the private

benefit argument further and that they coordinate with Counsel. They also

mentioned that there are a number of other (c)(3) and (c)(4) applications of

orgs related to the Tea Party that are currently in Cincinnati.

138

Lerner responded by reiterating her direction for Washington control: “[T]hese could blow up

like crazy if the Determs folks let one out incorrectly . . . . Can Cindy [Thomas] have all of them

assigned to one or two folks who don’t make a move without Counsel/Judy involvement?”

139

Paz assured Lerner: “They have been told not to issue [determinations] until we work through

the test cases we have here.”

140

Separately, Paz informed Lerner that the Cincinnati office was

then holding 102 additional Tea Party applications pending the completion of the test cases.

141

Figure 4: E-mail from Judith Kindell to Lois Lerner & Holly Paz, Apr. 7, 2011

Following Kindell’s review of the applications, the IRS sent a second development letter

to American Junto on April 27, 2011.

142

American Junto responded on May 18, 2011.

143

Nonetheless, despite the responsiveness of the applicants, the IRS did not act. The test

137

See Transcribed interview of Judith Kindell, Internal Revenue Serv., in Wash., D.C. (Oct. 29, 2013).

138

E-mail from Judith Kindell, Internal Revenue Serv., to Lois Lerner & Holly Paz, Internal Revenue Serv. (Apr. 7,

2011) [IRSR 66847].

139

E-mail from Lois Lerner, Internal Revenue Serv., to Holly Paz & Judith Kindell, Internal Revenue Serv. (Apr. 7,

2011) [IRSR 350220].

140

E-mail from Holly Paz, Internal Revenue Serv., to Lois Lerner & Judith Kindell, Internal Revenue Serv. (Apr. 7,

2011) [IRSR 350220].

141

E-mail from Holly Paz, Internal Revenue Serv., to Lois Lerner & Judith Kindell, Internal Revenue Serv. (Apr. 7,

2011) [IRSR 350219].

142

Internal Revenue Serv., Timeline for the 3 exemption applications that were referred to EOT from EOD [IRSR

58346-49].

143

Id.

applications continued through the multi-tier review as the backlog in Cincinnati continued to

grow.

June‐July2011:LernerisfullybriefedonthetreatmentofTeaParty

applications

Exempt Organizations Director Lois Lerner became fully aware of the nature and extent

of the IRS’s treatment of Tea Party applications during the summer of 2011. While evidence

shows that Holly Paz, Lerner’s top deputy in the division that handles applications for tax-

exempt status, likely had awareness of the applications as early as March 2010, Lerner asked in

May 2011 for Cincinnati to send a copy of the Crossroads GPS application to Washington for

review by her office. Later, in July 2011, Lerner requested a briefing on the specific criteria used

by the IRS to identify Tea Party applications. Although she ordered the label and the criteria to

be changed, the multi-tier review and delays continued.

In late May 2011, Lerner requested that Paz arrange a briefing for her on “a whole passel

of ‘tea Party related’ [sic] cases being worked in Cincy that [Carter Hull] is overseeing/

coordinating.”

144

In preparation for the briefing, Paz e-mailed Cincinnati manager Cindy

Thomas requesting the criteria used by the screening agents to “label a case a ‘Tea Party case’”

due to concerns about “over-inclusion.”

145

Paz also asked Thomas to send “a copy of the

Crossroads Grassroots Policy Strategies . . . application[.] Lois wants Judy to take a look at it so

she can summarize the issues for Lois.”

146

It is unclear why Lerner specifically requested the

application filed by Crossroads GPS, a well-known and visible conservative group. To the best

of the Committee’s awareness, the Crossroad GPS application was the only application pending

in Cincinnati at that time to be specifically requested by Lerner for review.

The briefing for Lerner occurred on July 5.

147

Tax law specialist Justin Lowe led the

meeting, which included Paz, Hull, Kastenberg, Thomas, and others.

148

At this briefing, Lowe

told Lerner that the backlog of Tea Party applications pending in Cincinnati had grown to “over

100.”

149

He also notified her about the specific criteria used by IRS personnel to screen cases

into this backlog.

150

A briefing paper prepared by Lowe for the meeting summarized the criteria:

[EO Determinations] Screening identified this type of case as an emerging issue

and began sending cases to a specific group if they meet any of the following

criteria:

o “Tea Party,” “Patriots” or “9/12 Project” is referenced in the case file

144

E-mail from Lois Lerner, Internal Revenue Serv., to Holly Paz, Internal Revenue Serv. (May 27, 2011) [IRSR

196483].

145

E-mail from Holly Paz, Internal Revenue Serv., to Cindy Thomas, Internal Revenue Serv. (June 1, 2011) [IRSR

69914-15].

146

Id.

147

Transcribed interview of Holly Paz, Internal Revenue Serv., in Wash., D.C. (May 21, 2013).

148

Id.

149

Justin Lowe, Internal Revenue Serv., Increase in (c)(3)/(c)(4) Advocacy Org. Applications (2011); Transcribed

interview of Justin Lowe, Internal Revenue Serv., in Wash., D.C. (July 23, 2013).

150

Id.

o Issues include government spending, government debt or taxes

o Education of the public by advocacy/lobbying to “make America a better

place to live”

o Statements in the case file criticize how the country is being run . . . .

151

Figure 5: IRS Briefing Document Prepared for Lois Lerner

Although Lerner and others regularly referred to the applications as “Tea Party” cases

since February 2010, Lerner directed her staff to change the label for the cases and the criteria

used to identify the applications. Hull told Committee staff that Lerner ordered the cases now to

be labeled as “advocacy organizations” because “[s]he said that the Tea Party was just too

pejorative.”

152

Hull’s supervisor, Ron Shoemaker, testified that Lerner “raised a concern about

the name that we were using for these cases. We were using Tea Party cases. And she thought

that advocacy cases would be a better term because there’s a suggestion that Tea Party may be a

partisan or prejudicial kind of term.”

153

During the meeting, reflecting her feeling that the term “Tea Party” was “pejorative,”

Lerner ordered a change in the BOLO criteria away from its Tea Party-related criteria.

154

The

new BOLO language became: “Organization involved with political, lobbying, or advocacy for

exemption under 501(c)(3) or 501(c)(4).”

155

Lerner also directed the Technical Unit to conduct a

“triage” of over-100 applications in the backlog and to develop a “guide sheet” document to

assist revenue agents in Cincinnati with processing the cases.

156

Lerner, however, did not stop,

and the harassment and delays continued.

A contemporaneous IRS document shows that the Lerner and her staff discussed during

the meeting adding further restrictions on 501(c)(3) and 501(c)(4) groups. According to a

memorandum prepared for EO Technical Manager Michael Seto, Lerner recommended requiring

tax-exempt groups to “make certain representations regarding compliance with the checklist and

certain issues (i.e. they won’t politically intervene) in order to pin them down in the future if they

151

Id.

152

Transcribed interview of Carter Hull, Internal Revenue Serv., in Wash., D.C. (June 14, 2013).

153

Transcribed interview of Ronald Shoemaker, Internal Revenue Serv., in Wash., D.C. (June 21, 2013).

154

Transcribed interview of Holly Paz, Internal Revenue Serv., in Wash., D.C. (May 21, 2013).

155

Internal Revenue Serv., BOLO Iteration History.

156

Transcribed interview of Michael Seto, Internal Revenue Serv., in Wash., D.C. (July 11, 2013).

engage in prohibited activities.”

157

Lerner also recommended that the line-level employees

research whether tax-exempt applicants are registered with the Federal Elections Commission

and, if so, “ask additional questions.”

158

Summer2011:ChiefCounsel’sofficereviewsthetestapplicat ions

As summer 2011 progressed, the test Tea Party applications continued to weave through

the IRS bureaucracy. Pursuant to Lerner’s multi-tier review, the Exempt Organization Division

sent both test cases to the IRS Chief Counsel’s office for review. The Chief Counsel’s office,

after only a cursory review of the applications, returned them to Exempt Organizations for even

more work.

The Chief Counsel’s office received the Albuquerque Tea Party’s § 501(c)(4) application

and case file on June 27, 2011.

159

It is unclear when it received the American Junto’s § 501(c)(3)

materials. In late July, Janine Cook, the Deputy Division Counsel, and Don Spellmann, a senior

counsel, met with Lerner, Paz, and senior IRS executive Nan Marks about how to process the

Tea Party cases.

160

According to Spellmann, “[t]he meeting in July was to talk about just this

large group of cases. And what – what we were told by Exempt Organizations was that they

were going to send over two for counsel to review. My understanding, subsequently, is that

counsel already had those two cases . . . .”

161

Though the Chief Counsel’s office had the test applications, its review was not conducted

with any particular urgency. The applications had been assigned to David Marshall and Amy

Franklin-Giuliano, attorneys in the Exempt Organizations branch within the Chief Counsel’s

office.

162

However, neither Marshall nor Franklin-Giuliano began their reviews immediately.

163

As Marshall wrote in a late-July e-mail, “Amy and I have both been sufficiently busy that we

have not turned much attention to the case. We presently are scheduled to talk preliminarily

about how to proceed in processing the case next Wednesday afternoon. We wanted to wait until

we heard from Don [Spellmann] the results of this week’s meeting [with Lerner].”

164

When Marshall and Franklin-Giuliano finally reviewed the applications, their reviews

were cursory at best. Their work took only a week to complete.

165

Marshall described his

review as merely a “legal judgment based on what we have, do we believe it is favorable, do we

157

Memorandum from Hilary Goehausen, Internal Revenue Serv., to Mike Seto, Internal Revenue Serv. (July 6,

2011) [IRSR 487709].

158

Id.

159

Internal Revenue Serv., Timeline for the 3 exemption applications that were referred to EOT from EOD [IRSR

58346-49].

160

Transcribed interview of Don Spellmann, Internal Revenue Serv., in Wash., D.C. (July 12, 2013); Transcribed

interview of Janine Cook, Internal Revenue Serv., in Wash., D.C. (Aug. 23, 2013).

161

Transcribed interview of Don Spellmann, Internal Revenue Serv., in Wash., D.C. (July 12, 2013).

162

See Transcribed interview of David Marshall, Internal Revenue Serv., in Wash., D.C. (July 26, 2013);

Transcribed interview of Amy Franklin-Giuliano, Internal Revenue Serv., in Wash., D.C. (Aug. 9, 2013).

163

See E-mail from David Marshall, Internal Revenue Serv., to Kenneth Griffin, Internal Revenue Serv. (July 26,

2011) [IRSR 1330].

164

Id.

165

Transcribed interview of Amy Franklin Giuliano, Internal Revenue Serv., in Wash., D.C. (Aug. 9, 2013).

believe it is not favorable, or do we have insufficient information to make a determination.”

166

Franklin-Giuliano similarly described the narrow scope of her review during a transcribed

interview. She testified:

Q Were you able to make a recommendation on this case?

A I wasn’t really asked for a recommendation. I was asked to go

through the case file to identify – because it was such a close call,

to kind of focus on what I thought the underlying social welfare

purpose was, as well as to be aware of the political advocacy.

167

The reviews were also severely limited as a result of Cook and Spellmann’s meeting with

Lerner in July 2011. From that meeting, the decision was made to return the applications to

Exempt Organizations so that it could gather information about the groups’ activities during the

2010 election cycle.

168

This decision was made even before Marshall or Franklin-Giuliano had

an opportunity to independently evaluate the applications.

169

In this way, it appears as if the

outcome of the review by the Chief Counsel’s office was predetermined.

In early August, consistent with the decision to develop the 2010 election information,

the Chief Counsel’s office returned the two test applications to Exempt Organizations. Around

the same time, Marshall and Franklin-Giuliano led a meeting to instruct Exempt Organizations

personnel on “the kinds of information that might be of assistance in getting information about

what may have occurred during that latter part of 2010 when there was an election going on.”

170

Even after eighteen months of review by several segments of the agency, the IRS’s delays

continued and the Cincinnati backlog grew unaddressed as the IRS sought further information to

deny the applications.

Summer2011:HullisreplacedbynoviceIRSspecialistHilaryGoehausen

At some point during the summer of 2011, Technical Unit Manager Michael Seto

removed Carter Hull from the Tea Party test applications. He replaced Hull, a decades-long IRS

veteran, with rookie IRS employee Hilary Goehausen, who had joined the agency only months

before.

171

This decision exacerbated the already-lengthy delays experienced by the Tea Party

groups applying for tax-exempt status.

Seto testified that he reassigned Hull because Hull was “going way, way, way too slow”

on the applications.

172

This explanation is curious given that Hull had completed his review by

166

Transcribed interview of David Marshall, Internal Revenue Serv., in Wash., D.C. (July 26, 2013).

167

Transcribed interview of Amy Franklin-Giuliano, Internal Revenue Serv., in Wash., D.C. (Aug. 9, 2013).

168

E-mail from Don Spellmann, Internal Revenue Serv., to David Marshall & Kenneth Griffin, Internal Revenue

Serv. (July 28, 2011) [IRSR 1330].

169

Transcribed interview of Amy Franklin Giuliano, Internal Revenue Serv., in Wash., D.C. (Aug. 9, 2013).

170

Transcribed interview of David Marshal, Internal Revenue Serv., in Wash., D.C. (July 26, 2013).

171

Transcribed interview of Michael Seto, Internal Revenue Serv., in Wash., D.C. (July 11, 2013); Transcribed

interview of Hilary Goehausen, Internal Revenue Serv., in Wash., D.C. (July 2, 2013).

172

Transcribed interview of Michael Seto, Internal Revenue Serv., in Wash., D.C. (July 11, 2013).

late 2010 and that it was Lerner who had created additional delays due to the multi-tier review.

Seto replaced Hull, a veteran IRS employee with recognized expertise in § 501(c)(4)

organizations, with novice tax law specialist Hilary Goehausen with the apparent goal of training

her as an expert.

173

In light of the perceived sensitivities of these test applications, which Lerner had

recognized as “dangerous” and for which she ordered an unprecedented “multi-tier” review, it

would have made sense to assign them to an IRS veteran like Hull. The decision to address the

backlog by replacing Hull, an employee with 48 years of experience, in favor of training

Goehausen, a new employee with only months of experience, creates the appearance that IRS

managers wanted to install someone who could be more easily trained to handle applications

from conservative groups in a way that deviated from well-established IRS processes for

reviewing § 501(c)(4) applications.

The test applications, however, were not transferred to Goehausen immediately. In fact,

following the August meeting with the Chief Counsel’s office, Hull began drafting a new

information-request letter for one of the test applications but he never sent it.

174

Goehausen

completed Hull’s draft and drafted an additional letter, which were sent to American Junto and

the Albuquerque Tea Party on November 18 and November 16, respectively.

175

Goehausen

received a response from the Albuquerque Tea Party on January 11, 2012.

176

American Junto,

however, did not response to the letter, telling the IRS they “couldn’t take it anymore.”

177

Fall2011:GoehausenfutilelyattemptstotriagethegrowingTeaParty

backlog

By fall 2011, the backlog of Tea Party applications awaiting guidance in Cincinnati had

grown to well over 150 applications.

178

IRS leadership assigned Hilary Goehausen to conduct a

“triage” of the backlogged applications. While this triage ultimately proved futile to resolving

the backlog, it illuminated how the IRS skeptically viewed the activities of the Tea Party

applicants.

Using a list of the backlogged applications sent from Cincinnati, Goehausen reviewed

each application and offered comments intended to assist the Cincinnati employees process the

case.

179

In an e-mail describing her findings, Goehausen explained:

173

Transcribed interview of Michael Seto, Internal Revenue Serv., in Wash., D.C. (July 11, 2013); Transcribed

interview of Hilary Goehausen, Internal Revenue Serv., in Wash., D.C. (July 2, 2013).

174

Transcribed interview of Carter Hull, Internal Revenue Serv., in Wash., D.C. (June 14, 2013).

175

Transcribed interview of Hilary Goehausen, Internal Revenue Serv., in Wash., D.C. (July 2, 2013); Internal

Revenue Serv., Timeline for the 3 exemption applications that were referred to EOT from EOD [IRSR 58346-49].

176

Internal Revenue Serv., Timeline for the 3 exemption applications that were referred to EOT from EOD [IRSR

58346-49].

177

Transcribed interview of Carter Hull, Internal Revenue Serv., in Wash., D.C. (June 14, 2013); Internal Revenue

Serv., Timeline for the 3 exemption applications that were referred to EOT from EOD [IRSR 58346-49].

178

See Gregory Korte, IRS List Reveals Concerns over Tea Party ‘Propaganda,’ USA TODAY, Sept. 18, 2013

179

Transcribed interview of Hilary Goehausen, Internal Revenue Serv., in Wash., D.C. (July 2, 2013); Transcribed

interview of Lucinda Thomas, Internal Revenue Serv., in Wash., D.C. (June 28, 2013).

Where I had concerns about whether the (c)(3)s and (c)(4)s were actually

engaging in good (c)(3)/(c)(4) activities – and not just making

inflammatory, emotionally charged statements without any factual support

or educational aspects to activities – I made notes reflecting such. Where

it simply states “general advocacy” or “general advocacy/legislative

advocacy” (or lobbying), without comments, those organizations appeared

to be fine (no development).

180

Goehausen also evaluated the applications for “propaganda,” which she identified as “a kind of

inflammatory, emotionally charged statement giving one side, trying to say the public on an issue

by only being one-sided and not giving – not discussing both sides of an issue.”

181

In an attachment to the e-mail, Goehausen provided specific comments for each

backlogged application. These comments are illustrative of how the IRS viewed the merits of

the applications. According to a version published by USA Today, in addition to describing

some groups as “anti-Obama,” the comments questioned the legitimacy of the applicants’

activities.

182

For example, the comment to the application filed by the 1776 Tea Party read in

part: “[P]ostings on website show little educational value; appear primarily emotional.”

183

The

comment to the application filed by the Patriots of Charleston read: “Both general advocacy and

some apparent political campaign activities (ie negative Obama commentary); more development

may be needed to determine if good c4 activities.”

184

The comment to Crossroads GPS’s

application read: “Lobbying and general advocacy org; however, significant anti-Obama rhetoric

and articles; appears to be an anti-Obama Administration website; however there are

educational materials on site.”

185

Several other comments characterized groups’ activities as

having “little to no educational value”; being “highly inflammatory”; exhibiting “emotional

rhetoric, nothing objective or informational”; and containing “substantial anti-Obama

information.”

186

The triage was not helpful for the Cincinnati office’s purposes in working through the

backlog.

187

Rather than advising the Cincinnati office on which applications could be approved,

Goehausen provided value-laden comments that were not helpful. As Cindy Thomas testified:

I didn’t think [the triage] was helpful at all because what I was looking for

is a quick look . . . to like just tell us can this can be approved or should

not be approved or we need additional information? And [the triage] was

more comments written and I could not tell.

188

180

E-mail from Hilary Goehausen, Internal Revenue Serv., to Cindy Thomas, Internal Revenue Serv. (Oct. 26,

2011) [IRS 287].

181

Transcribed interview of Hilary Goehausen, Internal Revenue Serv., in Wash., D.C. (July 2, 2013).

182

Gregory Korte, IRS List Reveals Concerns over Tea Party ‘Propaganda,’ USA TODAY, Sept. 18, 2013.

183

Id.

184

Id. (emphasis added).

185

Id. (emphasis added).

186

Id.

187

Transcribed interview of Cindy Thomas, Internal Revenue Serv., in Wash., D.C. (June 28, 2013).

188

Transcribed interview of Cindy Thomas, Internal Revenue Serv., in Wash., D.C. (June 28, 2013).

The triage conducted in fall 2011 did nothing to resolve the pending applications or reduce the

backlog of Tea Party applications. As a missed opportunity, it instead only served to broadcast

the IRS’s institutional skepticism of the legitimacy of tax-exempt activities conducted by the Tea

Party applicants.

Fall2011:WashingtondevelopsaguidesheettoshapeCincinnati’sreview

ofthebackloggedapplications

Since March 2010, the IRS Cincinnati office had been holding all incoming Tea Party

applications pending guidance from the Washington office. During this time, the backlog of

cases had grown from 10 to over 160 as the test applications bounced around the IRS

bureaucracy in Washington. Finally, in fall 2011, the Washington office began to prepare its oft-

promised guidance, even though the test applications were not yet finalized. This assistance

came in the form of a “guide sheet” initially authored by novice tax law specialist Hilary

Goehausen with assistance from senior Exempt Organizations leaders.

Technical Unit manager Michael Seto tasked Goehausen with creating the guide sheet in

late July 2011.

189

Goehausen began the drafting process in August 2011, compiling statutes,

regulations, and other pertinent information to assist revenue agents in Cincinnati in evaluating

applications with indications of political activity.

190

By November 2011, Goehausen had a

completed draft, which was reviewed by fellow tax law specialist Justin Lowe and group

manager Steve Grodnitzky.

191

Other, more senior officials also reviewed the draft guide sheet,

including Judy Kindell and Sharon Light, Lerner’s senior technical advisors.

192

The close involvement of Lerner’s team shows the degree of importance that the IRS

placed utilizing the guide sheet to influence how Cincinnati reviewed the backlogged

applications. Seto explained that the guide sheet was intended to be a template for Cincinnati

employees in evaluating and processing backlogged applications. He testified:

Q Was the guide sheet intended to be used as a template for [EO

Determinations] personnel to base development – further

development letters?

A Yes, the guide sheet look at the element [sic], and the EO

Determinations specialists would analyze – analyze the facts

against the guide sheet and see whether it is educational, political

189

E-mail from Michael Seto, Internal Revenue Serv., to Hilary Goehausen & Justin Lowe, Internal Revenue Serv.

(July 24, 2011) [IRSR 69916].

190

Transcribed interview of Hilary Goehausen, Internal Revenue Serv., in Wash., D.C. (July 2, 2013); E-mail from

Michael Seto, Internal Revenue Serv., to Hilary Goehausen & Justin Lowe, Internal Revenue Serv. (July 24, 2011)

[IRSR 69916].

191

Transcribed interview of Hilary Goehausen, Internal Revenue Serv., in Wash., D.C. (July 2, 2013).

192

Transcribed interview of Judith Kindell, Internal Revenue Serv., in Wash., D.C. (Oct. 29, 2013).

intervention and so forth, so they could develop and process the

case.

193

To this end, Seto sent the guide sheet to Thomas in November 2011.

194

Once the Cincinnati office received the guide sheet, it assembled a team of senior agents

to use the document to begin processing the application backlog. Cindy Thomas testified that

Washington approved and supported this approach for processing the backlog.

195

She testified:

A When – in November of 2011 we got this like guide sheet and then

it was, the discussions were going to be moving forward with

getting these cases. So I believe it was a discussion with the

Washington office about how are we going to start processing

these cases. . . . So [we] put this team together and then have them

start sending out the development letters. Also we have a

representative from [EO Quality Assurance] that would be

involved, and also two tax law specialists from the Washington

office would be involved. So that team would be in place that I had

been looking for many months prior or years prior.

Q And so Washington knew you were putting this team together and

they approved of this process?

A Oh, yes.

Q They were supportive of the efforts to try to put this team together?

A Yes.

196

Cincinnati revenue agent Stephen Seok was selected to lead this “advocacy team.”

197

At the

time, there were about 160 to 170 pending Tea Party applications in the Cincinnati backlog.

198

As the advocacy team began to process this backlog using Washington’s guide sheet, the guide

sheet’s use led to objectionable and harassing information-request letters.

January2012:Washington’sguidesheetleadstoobjectionablequestions

toapplicants

193

Transcribed interview of Michael Seto, Internal Revenue Serv., in Wash., D.C. (July 11, 2013).

194

Id.; E-mail from Michael Seto, Internal Revenue Serv., to Cindy Thomas, Internal Revenue Serv. (Nov. 6, 2011)

[IRSR 69902].

195

Transcribed interview of Lucinda Thomas, Internal Revenue Serv., in Wash., D.C. (June 28, 2013).

196

Transcribed interview of Lucinda Thomas, Internal Revenue Serv., in Wash., D.C. (June 28, 2013).

197

Transcribed interview of Stephen Daejin Seok, Internal Revenue Serv., in Wash., D.C. (June 19, 2013).

198

Id.

After almost two years of inaction, the IRS Cincinnati office began to process backlogged

Tea Party applications in January 2012 using the guide sheet drafted by the Washington office.

Using this guide sheet, the agents drafted questions – later deemed to be inappropriate – designed

to solicit information mandated by the guide sheet. These inappropriate questions raised

significant public and congressional interest in how the IRS was processing Tea Party tax-

exempt applications.

Beginning in January 2012, the Cincinnati advocacy team began using the guide sheet to

draft questions in information-request letters sent to applicants.

199

Specifically, team leader

Stephen Seok testified that he “developed those questions mostly out of the EO Tech guidance

worksheet. . . . [T]he EO Tech guidance worksheet did not give us the sample of questions, but

has very . . . detailed, extensive, the issues and questions there. So I took those, made into the

questionnaire – questions, most of my questions.”

200

The questions developed based on the

guide sheet included questions asking for information about groups’ donors, which Seok said

were “consistent” with the guide sheet.

201

The IRS and the inspector general later found some of

these questions to be inappropriate.

Separately in January 2012, Cincinnati revenue agents began to realize the screening

criteria used to identify applications were overly broad. The BOLO language instituted in July

2011 by Lois Lerner had resulted in the over-inclusion of applications, capturing some

applications that had absolutely no indications of political activity.

202

For that reason, in late

January 2012, the BOLO was again changed to read: “Political action type organizations

involved in limiting/expanding Government, educating on the Constitution and Bill of Rights,

social economic reform/movement.”

203

The January 2012 change would mark the final iteration

of inappropriate BOLO criteria language.

February2012:TheOversightCommitteeseeksinformationfromLerner

The information-request letters sent by the IRS in early 2012 raised considerable alarms

among the groups that received them. In particular, the IRS’s request for information about

groups’ donors and other questionable information concerned applicants who had already waited

years for resolutions. After some of these groups contacted their congressmen, the House

Oversight and Government Reform Committee requested a meeting with the IRS to discuss the

treatment of Tea Party applications.

In February 2012, Lerner briefed staff of the Oversight Committee about the IRS’s

process for evaluating tax-exempt applications. Lerner never informed the Committee about the

true nature of the IRS’s treatment of the applications. Instead, she told Committee staff that the

IRS’s criteria for evaluating tax-exempt applications had not changed. Lerner also mentioned to

the staff the guide sheet developed by the Washington office and used by revenue agents to

199

Id.

200

Id.

201

Id.

202

See Transcribed interview of Ronald Bell, Internal Revenue Serv., in Wash., D.C. (June 13, 2013).

203

Internal Revenue Serv., BOLO Iteration History.

process applications. Lerner agreed to provide a copy of the guide sheet to the Committee.

204

As a product of this meeting, Chairman Issa and Chairman Jordan later sent a formal letter to

Lerner requesting information in March 2012.

205

Following the Committee’s briefing with Lerner, Committee staff contacted the Treasury

Inspector General for Tax Administration (TIGTA) to discuss how the IRS processes tax-exempt

applications. Committee staff met with TIGTA representatives on March 8, 2012.

206

After the

meeting, TIGTA began an audit into the IRS’s process for evaluating tax-exempt applications.

Despite a formal request from Chairman Issa and Chairman Jordan for periodic briefings

207

– as

well as multiple requests from Committee staff – TIGTA did not inform the Committee of its

findings until late on May 10, 2013.

208

Lerner’s promise to provide the Committee with the guide sheet sparked a mild panic

within the IRS, because the guide sheet had not been vetted for release outside of the IRS by the

Chief Counsel’s office. Lerner asked the Chief Counsel’s office to conduct a rushed, twenty-

four-hour review of the document.

209

Although they worked hard to review and edit the

document, the attorneys in the Chief Counsel’s office did not believe the guide sheet was ready

for “prime time.”

210

Lerner’s staff, conversely, believed the version edited by the attorneys was

too wonky and not practical.

For two months, Lerner’s staff traded versions with Chief Counsel attorneys, until finally

Lerner decided not to publicize the guide sheet or to provide it to the Committee – despite her

promise to do so.

211

By that time, the IRS’s own internal review had identified serious problems

with the treatment of the Tea Party applications.

Spring2012:TheIRS’sinternalreviewidentifiesmisconduct

By early 2012, questions about the IRS’s treatment of conservative-leaning tax-exempt

applicants began to receive significant public attention. This public scrutiny and congressional

attention led the IRS to initiate an internal review of the allegations of harassment and

inappropriate treatment of Tea Party tax-exempt applicants. By early May 2012, this internal

review identified the same severe misconduct that the inspector general’s report documented a

year later.

204

Briefing by Lois Lerner, Internal Revenue Serv., to H. Comm. on Oversight & Gov’t Reform staff (Feb. 24,

2012).

205

Letter from Darrell Issa & Jim Jordan, H. Comm. on Oversight & Gov’t Reform, to Lois Lerner, Internal

Revenue Serv. (Mar. 27, 2012).

206

Treasury Inspector Gen. for Tax Admin., What is the timeline for TIGTA’s involvement with this tax-exempt

issue (provided to the Committee May 2013).

207

See Letter from Darrell Issa & Jim Jordan, H. Comm. on Oversight & Gov’t Reform, to J. Russell George,

Treasury Inspector Gen. for Tax Admin. (June 28, 2012).

208

Treasury Inspector Gen. for Tax Admin., What is the timeline for TIGTA’s involvement with this tax-exempt

issue (provided to the Committee May 2013).

209

Transcribed interview of David Marshall, Internal Revenue Serv., in Wash., D.C. (July 26, 2013); Transcribed

interview of Janine Cook, Internal Revenue Serv., in Wash., D.C. (Aug. 23, 2013).

210

Transcribed interview of Don Spellmann, Internal Revenue Serv., in Wash., D.C. (July 12, 2013).

211

Transcribed interview of Judith Kindell, Internal Revenue Serv., in Wash., D.C. (Oct. 29, 2013).

In late February 2012, following Lerner’s briefing with the Oversight Committee, Deputy

Commissioner Steve Miller requested a meeting with Lerner to discuss the IRS’s treatment of

these applications. Lerner informed Miller that there was a backlog of about 200 applications,

that the applications were severely delayed, and that the IRS had issued development letters

asking for donor information from applicants.

212

Miller passed along this information to IRS

Commissioner Doug Shulman.

213

Meanwhile, Congress began to ask critical questions. During a hearing before the Ways

and Means Subcommittee on Oversight on March 22, 2012, Subcommittee Chairman Charles

Boustany asked Commissioner Shulman about the reports of IRS harassment of Tea Party

groups. Shulman testified:

Rep. BOUSTANY. One other question. It’s come to my attention, I’ve

gotten a number of letters, we’ve seen some recent

press allegations that the IRS is targeting certain

Tea Party groups [a]cross the country — requesting

owners’ documents requests, delaying approval for

tax-exempt status and that kind of thing. Can you

elaborate on what’s going on with that? Can you

give us assurances that the IRS is not targeting

particular groups based on political leanings?

Mr. SHULMAN. Thanks for bringing this up because I think there’s

been a lot of press about this and a lot of moving

information, so I appreciate the opportunity to

clarify. First, let me start by saying, yes, I can

give you assurances.

214

Whether a coincidence or not, the day after Commissioner Shulman’s “assurances,” on

March 23, Miller convened a meeting of his senior staff to discuss the Tea Party applications.

215

Miller opted to launch an internal review of the processing of the cases “to find out why the

cases were there and what was going on.”

216

Miller articulated a concern that the IRS’s requests

for applicants’ donor information “were not very good.”

217

Miller chose senior IRS employee Nan Marks to conduct the internal review. A veteran

of the IRS Chief Counsel’s office and the TEGE Commissioner’s office, Miller respected

212

Transcribed interview of Steven Miller, in Wash., D.C. (Nov. 13, 2013).

213

Id.

214

“Internal Revenue Service Operations and the 2012 Tax Return Filing Season”: Hearing Before the Subcomm.

on Oversight of the H. Comm. on Ways &Means, 112th Cong. (2012) (question and answer with Chairman

Boustany) (emphasis added).

215

Transcribed interview of Steven Miller, in Wash., D.C. (Nov. 13, 2013).

216

Id.

217

Id.

Marks’s judgment and independence.

218

Miller asked Marks to investigate the allegations of

misconduct that had been made in the media and in congressional letters. Marks testified:

Q How was the purpose of the review described to you?

A [Mr. Miller] discussed the allegations that he was hearing that

cases were being targeted based on possibly who they were or

what they believed; that people were getting questions that went

beyond the scope of normal case development; that cases were

staying open for a long time. And he said, I want you to find out if

any of these problems are actually present, and if they are, I want

you to come back and tell me what you’re finding and tell me what

you think we could do to get the cases back on the right track and

ensure that this isn’t happening.

***

Q Was any part of your review intended to determine whether Tea

Party organizations were being treated similarly to other types of

organizations on different parts of the political spectrum?

A Well, the allegation that they were being treated differently was

one of the concerns. So, yeah, part of what I would have been

looking at is were taxpayers being treated differently based on who

they were. I’m not sure at the time whether that was said as Tea

Party or whether that was said as conservative, I don’t know. But

one of the allegations was that taxpayers were being treated

differently based on who they were. And if that was happening,

that’s wrong. I mean, taxpayers should be treated based on what

they do.

219

Marks began the internal review in April 2012.

220

She traveled from Washington to

Cincinnati with a team of Washington officials to conduct the review.

221

Her team reviewed a

sampling of application files and information-request letters, and also conducted a group

interview with several Cincinnati employees.

222

Early on, it became apparent to Marks’s team

that misconduct had occurred, particular with respect to IRS requests for applicants’ donor

information. Marks testified: “Judy Kindell and somebody else did that [information-request

letter] review, and before I went down to Cincinnati they came back and reported that they were

seeing some questions that they thought were overreaching in almost any context.”

223

218

Id.

219

Transcribed Interview of Nancy Marks, in Wash., D.C. (Oct. 8, 2013).

220

Id.

221

Marks herself traveled twice – once from April 23 to 26, 2012, and again from April 30 to May 2, 2012 – to

Cincinnati. E-mail from Cathy Barre, Internal Revenue Serv., to Oversight Committee staff (July 10, 2013).

222

Transcribed interview of Nancy Marks, in Wash., D.C. (Oct. 8, 2013).

223

Transcribed Interview of Nancy Marks, in Wash., D.C. (Oct. 8, 2013).

By late April 2012, Marks and her team had completed the review. She presented her

findings at a meeting on May 3 to Miller; Lerner; Miller’s Chief of Staff, Nikole Flax; EO

Rulings and Agreements Director, Holly Paz; Acting TEGE Commissioner, Joseph Grant; and

TEGE Commissioner, Sarah Hall Ingram.

224

Marks informed the group about the use of the

BOLO and inappropriate screening criteria to identify applications, the excessive processing

delays experienced by the applicants, the use of inappropriate questions, and the fact that

Washington had worked two test cases years earlier.

225

Miller described Marks’s findings during his transcribed interview with Committee staff.

He testified:

A She said that there were cases there, that there were problems in

training, there were problems in coordination, there were problems

in development. She indicated that the cases needed development,

and that was the first I heard about the BOLO list. She also told me

that the BOLO list was fixed. She gave me a rough timeline of

when it changed and the variations on a theme, and she told me

they found no evidence of wrongdoing, intentional wrongdoing,

that this seemed to be inappropriate and foolish, but not

intentionally political or otherwise.

***

Q Sir, when Ms. Marks informed you of the BOLO, did she explain

to you what the criteria was in each iteration of the BOLO?

A Roughly.

Q Do you recall what she told you?

A She told me about the names and that it had changed at one point.

I don’t think she was precise on the time. She walked me through

the names, Lois’ revision, the subsequent change again, and where

they were then.

Q She told you initially it was Tea Party, Patriots, 9/12?

A I believe so.

***

224

Transcribed interview of Steven Miller, in Wash., D.C. (Nov. 13, 2013); Transcribed interview of Nancy Marks,

in Wash., D.C. (Oct. 8, 2013); Transcribed interview of Sarah Hall Ingram, Internal Revenue Serv., in Wash., D.C.

(Sept. 23, 2013); Transcribed interview of Joseph Grant, in Wash., D.C. (Sept. 25, 2013); Transcribed interview of

Nikole Flax, Internal Revenue Serv., in Wash., D.C. (Oct. 22, 2013).

225

Id.

Q And did Ms. Marks give you any information about how long the

cases had been pending, the delays?

A She gave me some sense that they had been waiting a long time,

the original 2010 date, and that they were not being worked on as

actively as they needed to be.

***

Q And did Ms. Marks explain to you any information on the specific

questions asked of the applicants in the development letters?

A So I think there was a discussion of some coordination that was

going on, but I get a little confused, frankly, as to whether that was

part of the discussion in February or May, but I think there was

some in both.

Q I see. And, sir, at this time, in May of 2012, did Ms. Marks give

you any information about these two or three cases being sent to

Washington for development?

A I think as she wound me through how this had happened, I think

she did at that point talk about that.

Q Do you recall what she told you about that?

A It was just – my impression is it was not dissimilar from what was

said in the TIGTA report itself. There were a couple of cases that

were sent and sent back and that they worked on them, but it was

not – there was not a heavy discussion on that. It’s just how we

got into the flow of the discussion.

Q I see. And did Ms. Marks give you any sense of the fact that the

backlogged cases in Cincinnati were waiting pending guidance

from the specialists in Washington?

A Yes. There was clearly a disconnect between the specialists in

Washington and the Cincinnati office.

Q Sir, what was your reaction to hearing Ms. Marks present this

information to you?

A Well, I thought we needed to move the cases along, we needed to

get the people the help they needed to move those cases along, and

those cases that should have been approved should have been

moving.

Q Did you see the situation she described as a problem?

A Yes.

226

The findings of the IRS internal review in May 2012 mirrored the same conclusions that

TIGTA identified in its May 2013 audit. In fact, Holly Paz admitted that the IRS reached the

same conclusions as TIGTA in her transcribed interview with Committee staff. She testified:

Q Ms. Marks actually briefed [the Oversight Committee after May

10, 2013] and informed us that essentially her findings [after the

internal review in May 2012] were essentially the same as what

ultimately TIGTA reported this year. Is that consistent with your

understanding?

A. Yes. That is consistent with my understanding.

227

Miller also agreed, testifying that he was aware of the issues identified by TIGTA in the first

week of May 2012, and that Commissioner Shulman “probably knew shortly after that.”

228

Despite these findings of serious wrongdoing and the awareness of interest from Members of

Congress, the IRS never disclosed the results of its internal review until after Lois Lerner’s

staged apology in May 2013.

In May 2012, the Washington tax law specialists assisted the Cincinnati office in

implementing a new “bucketing” system to process the backlog. Miller initially received weekly

updates on the progress throughout the summer.

229

During this time, both Commissioner

Shulman and Deputy Commissioner Miller testified before Congress.

230

Neither raised the

findings of the internal review in that setting or apologized for the IRS’s inappropriate treatment

of tax-exempt applicants. The full extent of the IRS’s misconduct would not be known for

another year.

May2013:TheIRSfinallyacknowledgesandapologizesforthetargeting

Over three years since the initial Tea Party application was identified and elevated, the

IRS was prepared finally to acknowledge and apologize for its targeting of conservative tax-

exempt applicants. Senior leaders in the agency sought a venue in which to release the

information to a friendly audience as a way to minimize the fallout of the soon-to-be-released

226

Transcribed interview of Steven Miller, in Wash., D.C. (Nov. 13, 2013).

227

Transcribed interview of Holly Paz, Internal Revenue Serv., in Wash., D.C. (May 21, 2013).

228

Transcribed interview of Steven Miller, in Wash., D.C. (Nov. 13, 2013).

229

Id.

230

See, e.g., “IRS: Enforcing ObamaCare’s New Rules and Taxes”: Hearing Before the H. Comm. on Oversight &

Gov’t Reform, 112th Cong. (2012); See “Public Charity Organizational Issues, Unrelated Business Income Tax, and

the Revised Form 990”: Hearing Before the Subcomm. on Oversight of the H. Comm. on Ways & Means, 112th

Cong. (2012).

inspector general report. They ultimately selected an obscure tax-law panel event on Friday

morning, May 10, 2013.

By spring 2013, the Treasury Inspector General for Tax Administration (TIGTA) was

preparing to finalize and issue its audit on the IRS’s evaluation of tax-exempt applications. This

audit had been requested by the Oversight Committee in March 2012. As TIGTA completed its

work, it kept IRS leadership – including Lois Lerner and Holly Paz – fully informed of its

progress, even sending drafts of the audit report to the IRS for comments. This awareness

allowed the IRS to plan its apology to preempt any publicity around TIGTA’s audit report.

In April, Acting Commissioner Steve Miller and his chief of staff, Nikole Flax,

considered various venues for releasing the information. One such venue was an April 25

Georgetown University tax conference at which Lois Lerner was scheduled to speak. Miller and

Flax drafted remarks for Lerner to insert into her speech for that event.

231

The IRS’s planning

went so far as to include sharing these remarks with senior political and public affairs employees

at the Treasury Department.

232

According to Miller, although the Treasury Department “didn’t

have a view that we shouldn’t . . . start the ball rolling,” it vetoed the announcement at that

time.

233

Miller and Flax considered two other possible venues in early May – two congressional

hearings featuring Miller and Lerner, respectively – before settling on an American Bar

Association panel event in early May. On May 7, during a meeting in Miller’s office, Miller

handed Lerner his handwritten talking points for the apology and directed her to make the

apology at the ABA event three days later.

234

Miller also spoke with Mark Patterson, chief of

staff at the Treasury Department, about the planned apology. According to Miller, Patterson told

him: “I’m not against trying to get in front of this, but let me think about this one.”

235

When

Patterson did not object, Miller went forward with the plan.

236

The IRS public affairs team notified selected reporters in advance of Lerner’s apology.

The IRS apparently stressed that the announcement would concern 501(c)(4) groups and political

speech. In an e-mail from one reporter to IRS public affairs officials, he wrote: “Thanks for the

heads-up. . . . My colleague . . . is going to be at the conference tomorrow. He covers campaign

finance issues for us and has written a lot on 501c3 and related issues.”

237

On May 9, in a closed-door meeting with members of the American Bar Association,

Miller and other IRS executives softened the ground for Lerner’s apology. Miller’s handwritten

notes reflect that he provided a “short outline of what happened,” including that the targeting was

231

See E-mail from Nikole Flax, Internal Revenue Serv., to Lois Lerner, Internal Revenue Serv. (Apr. 23, 2013)

[IRSR 189013].

232

Transcribed interview of Steven Miller, in Wash., D.C. (Nov. 13, 2013); E-mail from Nikole Flax, Internal

Revenue Serv., to Adewale Adeyemo, Dep’t of the Treasury (Apr. 22, 2013) [IRSR 466707].

233

Transcribed interview of Steven Miller, in Wash., D.C. (Nov. 13, 2013).

234

Transcribed interview of Sharon Light, in Wash., D.C. (Sept. 5, 2013).

235

Transcribed interview of Steven Miller, in Wash., D.C. (Nov. 13, 2013).

236

Id.

237

E-mail from Richard Rubin, Bloomberg News, to Dean Patterson & Michelle Eldridge, Internal Revenue Serv.

(May 9, 2013) [IRSR 544994].

the result of “not [a] political vendetta by low-level [staff,] but dumb” actions.

238

Miller also tied

the actions back to the Supreme Court’s Citizens United decision, indicating that after the

decision “a wave of cash” “chose a favorable port due to disclosure and unenforced gift tax

rules.”

239

The IRS asked for “how the ABA might help.”

240

On May 10, the IRS made its apology. In response to a planted question from tax

attorney Celia Roady, Lois Lerner told the audience about the IRS’s treatment of Tea Party

applicants. She said:

So our line people in Cincinnati who handled the applications did what we

call centralization of these cases. They centralized work on these in one

particular group. . . . However, in these cases, the way they did the

centralization was not so fine. Instead of referring to the cases as

advocacy cases, they actually used case names on this list. They used

names like Tea Party or Patriots and they selected cases simply because

the applications had those names in the title. That was wrong, that was

absolutely incorrect, insensitive, and inappropriate – that’s not how

we go about selecting cases for further review. We don’t select for

review because they have a particular name.

241

In making these statements, Lerner disclosed details about an audit report prepared by

TIGTA, an independent inspector general, before it was made public by the inspector general.

Inspector General J. Russell George testified to the Committee that he had never seen an IRS

official leak the findings of a TIGTA report before it was made public by the agency.

242

Lerner’s

disclosure occurred even before TIGTA had finished its clearance process for the report.

243

Lerner’s apology on May 10, 2013, did not tell the whole story of the IRS’s misconduct.

As the Committee’s investigation shows, there is far more to how the IRS mistreated

conservative-oriented tax-exempt applicants.

Lessonsfromthetargeting:WhattheCommitteehasfound

abouttheIRS’sinappropriatetreatmentofconservatives

The Committee’s investigation to date has found that the IRS targeted conservative-

leaning organizations applying for tax-exempt status. The investigation has also found that

senior IRS officials knew of the targeting and made false and misleading statements to Congress

in 2012 when asked about allegations of misconduct. The targeting of conservative tax-exempt

applicants and the deliberate efforts to mislead Congress about it directly harmed those

238

Internal Revenue Serv., Handwritten Notes of “ABA Closed Door” (May 9, 2013) [IRSR 505855-58].

239

Id.

240

Id.

241

Rick Hasen, Transcript of Lois Lerner’s Remarks at Tax Meeting Sparking IRS Controversy, ELECTION LAW

BLOG (May 11, 2013, 7:37AM), http://electionlawblog.org/?p=50160 (emphasis added).

242

“The IRS: Targeting Americans for their Political Beliefs”: Hearing Before the H. Comm. on Oversight & Gov’t

Reform, 113th Cong. (2013) (question and answer with Rep. Clay).

243

Id.

applicants and prevented the truth from emerging until a planted question at a Friday morning

tax conference. As a whole, these findings show deep and troubling flaws in how the IRS

evaluates applications for tax-exempt status and how it views itself as a tax administrator.

TheIRStargetedconservativegroups

The Internal Revenue Serve targeted conservative tax-exempt applicants. The IRS

targeting manifested in four distinct ways: (1) the use of inappropriate screening criteria to

identify and set aside applications; (2) the backlog of applications that were held pending

guidance from Washington; (3) the substantial delays in processing these applications; and (4)

the burdensome and inappropriate development letters sent to applications, including questions

asking for donor information. In each of these ways, the IRS treated conservative groups

applying for tax-exempt status in a manner distinct from other groups engaged in similar

activities.

The Committee’s finding supports the independent conclusions reached by the Treasury

Inspector General for Tax Administration in its May 2013 audit report.

244

Documents and

testimony obtained by the Committee disprove the narrative that the IRS did not specifically

target conservative groups. Congressional Democrats and others claimed that the IRS did not

scrutinize § 501(c)(4) applicants based on their political affiliation because some groups with

non-conservative affiliations were affected by the inappropriate screening criteria.

245

This is

false. Documents and testimony show that conservative groups were targeted on the basis of

their political beliefs, unlike liberal groups, whose applications were snared in the targeted

screening process inadvertently.

The IRS’s three “test” cases were all conservative organizations. Only seven applications

in the IRS backlog contained the word “progress” or “progressive,”

246

all of which were then

approved by the IRS,

247

while Tea Party groups received unprecedented review and experienced

years-long delays. While some liberal-oriented groups were singled out for scrutiny, evidence

obtained by the Committee shows these applications were scrutinized for non-political reasons.

A 141-page staff report released in April 2014 contains the Committee’s findings with respect to

the myth that the IRS targeted liberal- and progressive-leaning groups.

248

Additionally,

according to publicly available information, over 80 percent of the 162 applications in the IRS’s

244

See TIGTA Audit Rpt., supra note 20.

245

See Lauren French & Rachael Bade, Democratic Memo: IRS Targeting Was Not Political, POLITICO, July 17,

2013.

246

“The IRS’s Systematic Delay and Scrutiny of Tea Party Applications”: Hearing before the H. Comm. on

Oversight & Gov’t Reform, 113th Cong. (2013) (statement of J. Russell George).

247

Hearing on the Internal Revenue Service’s Exempt Organizations Division Post-TIGTA Audit: Hearing before

the Subcomm. on Oversight of the H. Comm. on Ways & Means, 113th Con. (2013) (opening statement of

Chairman Boustany).

248

H. COMM. ON OVERSIGHT & GOV’T REFORM, DEBUNKING THE MYTH THAT THE IRS TARGETED PROGRESSIVES:

HOW THE IRS AND CONGRESSIONAL DEMOCRATS MISLED AMERICA ABOUT DISPARATE TREATMENT (Apr. 7, 2014).

backlog were readily identifiable as submitted by conservative-leaning organizations.

249

Only 11

total applications were readily identifiable as submitted by liberal-leaning organizations.

250

The Committee also found that the IRS was acutely aware of political pressure from the

Obama Administration, Congressional Democrats, and the media to crack down on conservative

tax-exempt groups engaged in lawful political speech activities. The IRS subsequently treated

conservative-leaning tax-exempt applicants in a manner different from other applications for tax

exemption.

TheIRSwasacutelyawareofpoliticalrhetoricpressingtheIRStoregulate

conservativetax‐exemptgroupsengagedinpoliticalactivity

The Committee’s September 2013 interim update memorandum on the investigation

explained how officials at every level within the IRS were aware of political rhetoric urging the

agency to aggressively pursue conservative groups engaged in political activity. The Committee

explained:

Like any other political actor, the IRS was cognizant of and attentive to

the prevailing rhetoric surrounding the laws and regulations it controls.

As the prevalent political discourse became a sustained assault on the

Supreme Court’s Citizens United opinion and the appropriateness of tax-

exempt status for certain groups, the IRS was not oblivious to this political

sentiment. Material available to the Committee shows that the IRS was

actively cognizant of public calls for the IRS to crack down on secret

money in politics and the rise of conservative-oriented groups opposed by

certain segments of the Administration.

251

Since then, additional documents produced to the Committee confirm the IRS’s keen awareness

of calls from the media and prominent public figures to crack down on conservative-oriented tax-

exempt groups engaged in political activity.

Throughout 2010, President Obama publicly and repeatedly criticized the Citizens United

decision and lamented the “flood of deceptive attack ads sponsored by special interests using

front groups with misleading names.”

252

As the President and his allies publicly attacked

conservative tax-exempt groups engaged in political speech, the IRS received regular media

inquiries about the matter. For example, on August 6, 2010, Michelle Eldridge, an IRS media

relations employee, e-mailed senior IRS officials, including Steve Miller, Sarah Hall Ingram,

249

See Gregory Korte, IRS List Reveals Concerns over Tea Party ‘Propaganda,’ USA TODAY, Sept. 18, 2013.

250

Id.

251

Memorandum from Majority Staff, H. Comm. on Oversight & Gov’t Reform, to Members, H. Comm. on

Oversight & Gov’t Reform, “Interim update on the Committee’s investigation of the Internal Revenue Service’s

inappropriate treatment of certain tax-exempt applicants, (Sept. 17, 2013).

252

See id., at 3-6; HOW POLITICS LED THE IRS TO TARGET CONSERVATIVE TAX-EXEMPT APPLICANTS, supra note 4.

Lois Lerner, and IRS Chief of Staff Jonathan Davis, about a forthcoming Washington Post article

on 501(c)(4) groups engaged in political activity.

253

She wrote:

Washington Post reporter . . . is working on a story that as he explains it, is

about the new importance of IRS regulations covering campaign/election-

related activity for section 501c4 and 527 groups in light of a recent

Supreme Court decision freeing corporations to run campaign ads. The

premise of his story, in his words, is that the IRS has a harder time

regulating money in politics than the FEC because it is primarily a bill

collector and not an enforcement agency.

254

Later in August, Lerner e-mailed Ingram an article that the Democratic Congressional Campaign

Committee had filed a complaint with the IRS about the conservative group, Americans for

Prosperity.

255

Lerner recognized how the prevailing political environment affected the IRS,

opining: “We won’t be able to stay out of this – we need a plan!”

256

Figure 6: E-mail from Lois Lerner to Sarah Hall Ingram, Aug. 31, 2010

In September 2010, as President Obama routinely criticized Citizens United during

campaign stops for Democratic candidates, the New York Times sought to write an article about

“a large upswing in the money donated to 501(c)(4)’s [and] that the IRS has too few resources to

monitor and deal with compliance and enforcement issues in this area.”

257

The IRS allowed the

reporter to speak to Lerner and her team about 501(c)(4) organizations.

258

The article was

published on the front page of the Times on September 21, 2010.

259

In an e-mail that day,

Ingram told her colleagues to expect that the “‘secret donor’ theme will continue – see Obama

salvo and today’s Diane Reehm [sic].”

260

The Diane Rehm Show that aired that day discussed

253

E-mail from Michelle Eldridge, Internal Revenue Serv., to Steven Miller et al., Internal Revenue Serv. (Aug. 6,

2010) [IRSR 452184].

254

Id.

255

E-mail from Lois Lerner, Internal Revenue Serv., to Sarah Hall Ingram, Internal Revenue Serv. (Aug. 31, 2010)

[IRSR 632342].

256

Id.

257

E-mail from Michelle Eldridge, Internal Revenue Serv., to Doug Shulman et al., Internal Revenue Serv. (Sept.

20, 2010) [IRSR 250053].

258

Id.

259

See Michael Luo & Stephanie Strom, Donor Names Remain Secret as Rules Shift, N.Y. TIMES, Sept. 21, 2010.

260

E-mail from Sarah Hall Ingram, Internal Revenue Serv., to Terry Lemons et al., Internal Revenue Serv. (Sept. 21,

2010) [IRSR 508974].

non-profit political speech, and featured an interview with Representative Chris Van Hollen (D-

MD) discussing the shortcomings of Citizens United and campaign finance law.

261

Figure 7: E-mail from Sarah Hall Ingram to Terry Lemons et al., Sept. 21, 2010

Later that month, Steve Pyrek, another IRS media official, circulated a New York Times

article entitled, “Hidden Under Tax-Exempt Cloak, Political Dollars Flow.”

262

The article stated

in part:

With every election cycle comes a shadow army of benignly titled non-

profit groups like Americans for Job Security, devoted to politically

charged “issue advocacy,” much of it negative. But they are now being

heard as never before — in this year of midterm discontent, Tea Party

ferment and the first test of the Supreme Court decision allowing

unlimited, and often anonymous, corporate political spending. Already

they have spent more than $100 million — mostly for Republicans and

more than twice as much as at this point four years ago.

263

The publication of two New York Times articles about the rise of tax-exempt groups engaged in

political speech certainly did not escape the attention of the IRS. The high-profile nature of the

issue – generated by the President’s almost daily stump speeches – ensured that the IRS would

exert special scrutiny on conservative tax-exempt applicants engaged in the political process.

While the IRS assisted reports preparing articles that pushed for IRS action, it apparently

took a different tack with articles critical of the IRS’s actions on politically active tax-exempt

entities. In early October 2010, another IRS media affairs official, Terry Lemons, circulated a

New York Times article entitled, “Republicans See a Political Motive in I.R.S. Audits.”

264

After

Jonathan Davis forwarded the article to Doug Shulman, the former Commissioner’s reply –

“Let’s discuss if we should put out a statement” – suggests that he may have wanted to issue a

261

The Diane Rehm Show (Nat’l Public Radio radio broadcast Sept. 21, 2010), transcript available at

http://thedianerehmshow.org/shows/2010-09-21/campaign-spending/transcript.

262

E-mail from Steve Pyrek, Internal Revenue Serv., to Lois Lerner et al., Internal Revenue Serv. (Sept. 24, 2010)

[IRSR 230887].

263

Mike McIntire, Hidden Under Tax-Exempt Cloak, Political Dollars Flow, N.Y. TIMES, Sept. 23, 2010.

264

E-mail from Terry Lemons, Internal Revenue Serv., to Jonathan Davis et al., Internal Revenue Serv. (Oct. 7,

2010) [IRSR 452205].

statement to rebut the conservative allegations.

265

Similarly, days later, in response to a Wall

Street Journal editorial entitled, “Shutting up Business: Democrats unleash the IRS and Justice

on donors to their political opponents,” Lemons noted that the media affairs team would leave

the editorial out of the IRS daily clips.

266

Other documents show that the Treasury Department also paid close attention to media

interest in Citizens United and 501(c)(4) political speech. In response to one Washington Post

story from August 2010, Ruth Madrigal, an attorney in the Department’s Office of Tax Policy

wrote her supervisor, Jeffrey Van Hove, a summary of the core issues. She wrote:

Before Citizens United, corporations (including c4s) were limited by the

FEC rules re: campaign spending and disclosure and subject to immediate

FEC enforcement action. . . . Now that the FEC cannot prohibit

corporations (including c4s) from making such expenditures . . . , there is

some concern that aggressive c4s will be bolder and multiply, intervening

in campaigns with relative impunity. Also, as discussed, there may be a

risk that temporary shell c4s will be set up for single elections to make

expenditures for undisclosed donors, then shut down after the election.

267

The next month, in September 2010, Madrigal sent to Van Hove an article from CBS News

about anonymous donors to political campaigns. She wrote: “Yet another one – CBS news

picked up the story re: anonymous spending on campaign ads last night – they don’t reference

501c4s specifically, but it seems this is what they are talking about. This one tries to quantify the

spending ($14 MM Republican, $3 MM Democrat in Aug/early Sept on Congressional TV

ads).”

268

This close attention to media interest surrounding non-profit political speech continued

throughout 2013.

269

Media reports during the period even encouraged the IRS to scrutinize

conservative tax-exempt applicants. In February 2012, an IRS line employee e-mailed his

colleagues an article about Democratic attention to a conservative non-profit, writing:

“Crossroads GPS in the news again.”

270

In May 2012, Michelle Eldridge e-mailed Lois Lerner a

USA Today article reporting that an “anonymous donor gave $7 million to the American Action

Network, a conservative group that spent millions to aid Republicans in the 2010 midterm

265

E-mail from Doug Shulman, Internal Revenue Serv., to Jonathan Davis, Internal Revenue Serv. (Oct. 7, 2010)

[IRSR 452205].

266

E-mail from Terry Lemons, Internal Revenue Serv., to Frank Keith et al., Internal Revenue Serv. (Oct. 12, 2010)

[IRSR 452185].

267

E-mail from Ruth Madrigal, U.S. Dep’t of the Treasury, to Jeffrey Van Hove, U.S. Dep’t of the Treasury (Aug.

23, 2010) [OGR 11-7-13 2260].

268

E-mail from Ruth Madrigal, U.S. Dep’t of the Treasury, to Jeffrey Van Hove, U.S. Dep’t of the Treasury (Sept.

22, 2010) [OGR 11-7-13 1840].

269

See, e.g., E-mail from Joseph Urban, Internal Revenue Serv., to Lois Lerner et al., Internal Revenue Serv. (Mar.

10, 2011) (circulating Washington Post article entitled, “Lax Internal Revenue Service rules help groups shield

campaign donor identifies”) [IRSR 350198]; E-mail from Michelle Eldridge, Internal Revenue Serv., to Patricia

Haynes et al., Internal Revenue Serv. (Apr. 9, 2013) (circulating Tax Notes Today article entitled, “The intersection

of the tax code and Citizens United”) [IRSR 349473].

270

E-mail from Joseph Herr, Internal Revenue Serv., to Steven Bowling & Stephen Seok, Internal Revenue Serv.

(Feb. 17, 2012) [IRSR 529987].

congressional elections . . . .”

271

Lerner forwarded the article to Nan Downing, the manager of

the unit within the IRS responsible for auditing tax-exempt groups, writing: “[redaction]. Let’s

talk.”

272

The IRS redacted a portion of Lerner’s response for taxpayer confidentiality purposes

pursuant to § 6103 of the tax code. The fact that the IRS redacted Lerner’s note for taxpayer

confidentiality suggests that Lerner mentioned a particular taxpayer to Downing and sent her the

article for auditing purposes.

Similarly, in June 2012, Lerner received a Mother Jones article in her e-mail entitled,

“How Dark-Money Groups Sneak by the Taxman.”

273

The article described how “dark money in

2012 is being raised and spent by tax-exempt groups that aren’t required to disclose their

financial backers” and listed several conservative-oriented groups, including the American

Action Network, Crossroads GPS, Americans for Prosperity, Freedom Works, and Citizens

United.

274

Lerner forwarded this article to Nan Downing as well.

275

The IRS redacted Lerner’s

message to Downing for taxpayer confidentiality, suggesting again that Lerner referred a

particular taxpayer for examination.

Throughout this time, as documented in the Committee’s June 2014 staff report, the IRS

faced substantial pressure from politicians as well.

276

In September 2010, IRS employee Joseph

Urban alerted senior Exempt Organizations leadership to a press release from the Democratic

Congressional Campaign Committee that urged the IRS to investigate the conservative-leaning

Americans for Prosperity.

277

The next month, in October 2010, Urban circulated a press release

from Senator Dick Durbin (D-IL), entitled “Durbin urges IRS to investigate spending by

Crossroads.”

278

This press release urged the IRS to “quickly investigate the tax status of

Crossroads GPS and other organizations that are directing millions of dollars into political

advertising without disclosing their funding sources.”

279

Senator Max Baucus (D-MT) likewise

urged the IRS to “survey major 501(c)(4), (c)(5) and (c)(6) organizations involved in political

campaign activity to examine whether they are operated for the organization’s intended tax

exempt purpose and to ensure that political campaign activity is not the organization’s primary

activity.”

280

In March 2013, when asked about 501(c)(4) groups, Senator Carl Levin (D-MI)

unabashedly told the New York Times “we’re going to go after them.”

281

271

E-mail from Michelle Eldridge, Internal Revenue Serv., to Lois Lerner et al., Internal Revenue Serv. (May 16,

2012) [IRSR 177205].

272

E-mail from Lois Lerner, Internal Revenue Serv., to Nan Downing, Internal Revenue Serv. (May 16, 2012)

[IRSR 177205].

273

E-mail from Roberta Zarin, Internal Revenue Serv., to Lois Lerner et al., Internal Revenue Serv. (June 13, 2012)

[IRSR 177479].

274

Gavin Aronsen, How Dark-Money Groups Sneak by the Taxman, MOTHER JONES, June 13, 2013.

275

E-mail from Lois Lerner, Internal Revenue Serv., to Nan Downing, Internal Revenue Serv. (June 13, 2012)

[IRSR 177479].

276

See HOW POLITICS LED THE IRS TO TARGET CONSERVATIVE TAX-EXEMPT APPLICANTS, supra note 4.

277

E-mail from Joseph Urban, Internal Revenue Serv., to Sarah Hall Ingram et al., Internal Revenue Serv. (Sept. 1,

2010) [IRSR 487782].

278

E-mail from Joseph Urban, Internal Revenue Serv., to Joseph Urban, Internal Revenue Serv. (Oct. 20, 2010)

[IRS1810]; see also E-mail from Brad McConnell, U.S. Senate, to Jonathan Davis, Internal Revenue Serv. (Oct. 12,

2010) [IRSR 459311].

279

Id.

280

Letter from Max Baucus, S. Comm. on Finance, to Douglas H. Shulman, Internal Revenue Serv. (Sept. 28,

2010).

281

Joe Nocera, The Senate’s Muckraker, N.Y. TIMES, Mar. 18, 2013.

Testimony from senior IRS officials during transcribed interviews with Committee staff

confirms their awareness of this political pressure from public officials and the media. Former

Commissioner Doug Shulman testified:

Q And, sir, were you aware of inquiries from Members of Congress

about the potential illegality or inappropriateness of 501(c) status

for groups engaged in political activities?

A I’m not sure I understand the question.

Q It’s my understanding, sir, that Members of Congress were

advocating for 501(c) status to be exclusive of groups that were

involved in the political process, political campaign intervention.

A Well, so back, you know, around this time, 2012, I was getting lots

of letters, you know, some from Congress, asking, you know, why

are you asking these intrusive questions, and some from Members

of Congress saying, why isn’t the IRS doing more, you know, to

enforce the 501(c)(4) laws.

***

Q [I]t sounds like you were getting inquiries from Members of

Congress that were urging you – some urging you to be less

intrusive, and other urging you to sort of be more intrusive. Is that

sort of a fair characterization?

A That’s my memory, you know, that it felt like.

282

Deputy Commissioner Steve Miller testified:

Q And, sir, you mentioned before you were aware of inquiries from

Members of Congress about the potential inappropriateness of

501(c)(4) status for certain groups engaged in political activities?

A I don’t know that I mentioned that, but there were letters all over

the place. And some of them were about, you know, that there was

too much politics going on in this area, and, you know, it went all

over the place.

Q Sir, were you aware of any public discourse or debate about the

appropriateness of (c)(4) status for certain conservative groups?

***

282

Transcribed interview of Doug Shulman, in Wash., D.C. (Dec. 4, 2013).

A Well, I mean the Politico article that you showed me in the last

hour obviously is one of those and there were other, similar

discussions like that. But that had both sides of the argument on

it.

283

Miller also explained that the IRS “had, you know, Mr. Levin complaining bitterly to us

about – Senator Levin complaining bitterly about our [section 501(c)(4)] regulation . . .

.”

284

Miller’s chief of staff, Nikole Flax, testified:

Q Were you aware of any inquiries from Members of Congress about

the potential illegality or inappropriateness of (c)(4) status for

certain groups engaged in political activity?

A I’m aware of inquiries from Members of Congress where they

asked about the status of particular organizations. I don’t know if

that is answering your question.

Q About particular organizations –

A Yes.

Q By name?

A Yes.

Q Were you ever aware of any public discourse or debate about the

appropriateness of 501(c)(4) status for certain conservative

oriented groups?

A I mean, I have seen, you know, public articles where folks have

talked about that, but just like stuff in the press.

Q Were you ever aware of any requests for the IRS to crack down on

501(c)(4)’s engaged in political activity?

A There were Congressional requests that asked what we were doing

in the area, that kind of thing.

285

Joseph Grant, Acting Commissioner for Tax Exempt and Government Entities, testified:

283

Transcribed interview of Steven Miller, in Wash., D.C. (Nov. 13, 2013).

284

Id.

285

Transcribed interview of Nikole Flax, Internal Revenue Serv., in Wash., D.C. (Oct. 22, 2013).

Q Were you ever aware of any public discourse or debate of the

appropriateness of 501(c)(4) status for certain groups involved in

political advocacy?

***

A Well, I believe that some of the clips that would come across had

Members of Congress talking about it, and there were editorials in

the papers about it, and to the extent that I read newspapers and

look at the comments, I’m aware that there’s a public conversation

going on, yes.

286

Judith Kindell, Lerner’s senior technical advisor, testified:

Q Ms. Kindell, were you ever aware of any public discourse or

debate about the appropriateness of 501(c)(4) status for certain

groups involved in political activity?

A Yes.

Q Were you ever aware of requests for the IRS to crack down on

501(c)(4)s engaged in political activity?

A Yes.

Q Were you ever aware of any public comments from politicians of

the potential illegality of secret money in politics?

A Yes.

287

Lois Lerner, likewise, in explaining American tax-exempt laws to an international

colleague, described the pressure on the IRS to curb political activity of non-profit groups. She

wrote:

Of course we, the USA, have probably made things as complicated as

possible and as a result, there is a lot of screaming going on here about

how many zillions of dollars are going into the political process. Of

course, if you limit it just to charities, we have an absolute ban on political

intervention, but the devil is in the details – what is and what is not

political intervention!

288

286

Transcribed interview of Joseph Grant, in Wash., D.C. (Sept. 25, 2013).

287

Transcribed interview of Judith Kindell, Internal Revenue Serv., in Wash., D.C. (Oct. 29, 2013).

288

E-mail from Lois Lerner, Internal Revenue Serv., to Cathy Hawara, Canada Revenue Agency (Sept. 10, 2012)

(emphasis added) [IRSR 651662].

Evidence uncovered by the Committee in the course of this investigation makes clear that

the IRS was acutely aware of the prevalent political rhetoric pushing for the IRS to rein in

political activities by conservative-leaning tax-exempt groups. As the President and his allies

repeated and forcefully denounced the lawful political activity of conservative-oriented 501(c)(4)

groups, the IRS internalized these calls for reform. The result was the disparate treatment of

conservative applicants for tax-exempt status.

TheIRStreatedconservative‐affiliatedapplicantsdistinctlyfromother

similarlysituatedapplicants

The Committee’s investigation determined that the IRS responded to this political

pressure by treating conservative-oriented tax-exempt applicants in a manner distinct from other

applicants. Although IRS employees interviewed by the Committee deny any intentional

political bias, documentary and testimonial evidence shows political rhetoric led to the IRS

processing tax-exempt applications filed by conservative groups differently from similarly

situated applicants.

The President’s bully pulpit is an indisputably powerful tool of persuasion. It extends not

only to the policymakers in Washington, but also to the employees who implement the policy.

According to one study, “presidential rhetoric can be an effective means for altering how field

agents implement public policy . . . .”

289

The study examined how U.S. Attorneys responded to

presidential rhetoric on the “War on Drugs.”

290

The authors explained their findings:

[T]hese results provide strong and clear evidence for a managerial effect in the

president’s use of rhetoric to send policy signals and set the national agenda. By

going beyond traditional notions of presidential influence on the public agenda,

the media, and Congress, these results reveal a direct mechanism the president

wields in shifting compliance with their desires for public policy, if only because

of their inability to personally oversee the vast majority of agents located

throughout the country and around the world. Rhetoric provides a direct

mechanism for the managerial influence of the president. What may be more

surprising is how powerful this route is actually.

291

They concluded: “Because of the wide discretion bureaucrats wield, rhetoric offers a substantial

– and direct – role for presidential influence on field agencies.”

292

President Obama’s rhetoric against conservative-oriented groups – rhetoric parroted by

Democrats in Congress and the national media – influenced how the IRS engaged with these

groups. From his bully pulpit, the President repeatedly delegitimized the lawful political

activities of conservative-oriented tax-exempt entities, prompting the IRS to view these groups

289

Andrew B. Whitford & Jeff Yates, Policy Signals and Executive Governance: Presidential Rhetoric in the “War

on Drugs,” 65 J.

OF POL. 995, 996 (Nov. 2003).

290

Id.

291

Id. at 1004 (emphasis added).

292

Id.

with skepticism. When a Cincinnati screener identified the first Tea Party application, he wrote

to his supervisor: “Recent media attention to this type of organization indicates to me that this is

a ‘high profile’ case.”

293

As the application continued to be elevated up the IRS, another

employee called it a “potentially politically embarrassing case” and pointed out the “[r]ecent

media attention to this type of organization.”

294

One IRS employee called the Tea Party a “loud

group.”

295

Even Lois Lerner, the head of the Exempt Organization Division, echoed the

President’s view that conservative tax-exempt groups were a threat to democracy, calling the Tea

Party applications “very dangerous.”

296

This rhetoric had a real effect. The manner in which the IRS identified conservative-

leaning groups was distinct from the manner in which it identified groups holding other political

beliefs. From February 2010 until July 2011, the IRS used screening criteria that captured

predominantly conservative-leaning organizations. According to the briefing paper prepared for

Lerner in July 2011, the IRS identified applications and held them if they met any of the

following criteria:

 “Tea Party,” “Patriots” or “9/12 Project” is referenced in the case file

 Issues include government spending, government debt or taxes

 Education of the public by advocacy/lobbying to “make America a better

place to live”

 Statements in the case file criticize how the country is being run . . . .

297

Even after Lerner directed the criteria to be changed, the IRS still targeted only

conservative groups. Lerner viewed the term “Tea Party” to be “too pejorative.”

298

Her change

to the criteria, accordingly, was only cosmetic. Documents produced to the Committee verify

this fact. On a version of a summarized sensitive case report prepared for Lerner in August 2011

– after Lerner ordered the criteria changed – the entry labeled “political advocacy organizations”

still read: “Whether a tea party organization meets the requirements under section 501(c)(3)

and is not involved in political intervention. Whether organization is conducting excessive

political activity to deny exemption under section 501(c)(4).”

299

On other documents, the IRS

merely replaced the phrase “tea party” with the phrase “advocacy organizations” with no

substantive changes to how it approached the applications.

300

293

E-mail from John J. Koester, Internal Revenue Serv., to John Shafer, Internal Revenue Serv. (Feb. 25, 2010)

[Muthert 4-5].

294

E-mail from Sharon Camarillo, Internal Revenue Serv., to Cindy Thomas, Internal Revenue Serv. (Feb. 25, 2010)

[Muthert 3].

295

Transcribed interview of David Fish, Internal Revenue Serv., in Wash., D.C. (Oct. 2, 2014).

296

E-mail from Lois Lerner, Internal Revenue Serv., to Michael Seto, Internal Revenue Serv. (Feb. 1, 2011) [IRSR

161810].

297

Justin Lowe, Internal Revenue Serv., Increase in (c)(3)/(c)(4) Advocacy Org. Applications (2011) [IRSR 2735].

298

Transcribed interview of Carter Hull, Internal Revenue Serv., in Wash., D.C. (June 14, 2013).

299

Internal Revenue Serv., EO Technical Significant Case Report (Aug. 31, 2011) (emphasis added) [IRSR 151653].

300

Compare Internal Revenue Serv., Sensitive Case Report (June 17, 2011) [IRSR 151687-88], with Internal

Revenue Serv., Sensitive Case Report (Sept. 18, 2012) [IRSR 150608-09].

Figure 8: IRS Significant Case Report Summary, August 2011 (enlarged)

The disparate treatment is also seen in significant differences between how the IRS used

the “Be on the Look-Out” (BOLO) lists to screen liberal-leaning groups and conservative-

oriented groups. Entries for “ACORN successors,” which are liberal-leaning groups, appear on

the “Watch List” tab of the BOLO spreadsheet whereas the conservative “Tea Party” criteria

appear on the “Emerging Issues” tab. The Watch List includes potential applications that the

IRS has not yet received, while entries labeled as an emerging issue include issues in

applications received by the IRS arising from “significant current events.”

301

Similarly, notes

from a July 2010 screening group workshop ask employees to merely flag liberal-leaning

applications, while directing them to send Tea Party applicants to a special coordinator.

302

The

implication from these documents is that unlike liberal-leaning applications, the IRS actively

identified and segregated conservative-oriented applications for special treatment. There is also

no evidence that ACORN successors experienced any additional scrutiny as a result of being

screened.

The President’s political rhetoric also affected how applications were evaluated.

According to information available to the Committee, the magnitude of review given to

conservative-oriented applications was inordinate. In February 2011, Lerner directed Michael

Seto, the manager of Exempt Organizations Technical Unit, to conduct a “multi-tier” review of

the Tea Party test applications pending in Washington.

303

Lerner wrote: “This could be the

vehicle to go to court on the issue of whether Citizen’s [sic] United overturning ban on corporate

spending applies to tax exempt rule. Counsel and Judy Kindell need to be in on this one

please.”

304

Carter Hull, a veteran tax law specialist assigned to develop the test applications, testified

that this multi-tier level of review was unusual in his experience with the IRS. He testified:

Q Have you ever sent a case to Ms. Kindell before?

A Not to my knowledge.

301

Internal Revenue Serv., Heightened Awareness Issues [IRSR 6655-72].

302

Internal Revenue Serv., Screening Workshop Notes (July 28, 2010) [IRS 6703-04].

303

Transcribed interview of Michael Seto, Internal Revenue Serv., in Wash., D.C. (July 11, 2013).

304

E-mail from Lois Lerner, Internal Revenue Serv., to Michael Seto, Internal Revenue Serv. (Feb. 1, 2011) [IRSR

161810].

Q This is the only case you remember?

A Uh-huh.

Q Correct?

A This is the only case I remember sending directly to Judy.

***

Q Had you ever sent a case to the Chief Counsel’s office before?

A I can’t recall offhand.

Q You can’t recall. So in your 48 years of experience with the IRS,

you don’t recall sending a case to Ms. Kindell or a case to IRS

Chief Counsel’s office?

A To Ms. Kindell, I don’t recall ever sending a case before. To Chief

Counsel, I am sure some cases went up there, but I can’t give you

those.

Q Sitting here today you don’t remember?

A I don’t remember.

305

Similarly, Elizabeth Hofacre, the Cincinnati-based revenue agent initially assigned to develop

cases, told the Committee during a July 2013 hearing that the involvement of Washington was

“unusual.”

306

She testified:

I never before had to send development letters that I had drafted to EO

Technical for review, and I never before had to send copies of applications

and responses that were assigned to me to EO Technical for review. I was

frustrated because of what I perceived as micromanagement with respect

to these applications.

307

Hofacre’s replacement on the cases, Ron Bell, also told the Committee that it was

“unusual” to have to wait on Washington to move forward with an application.

308

He testified:

305

Transcribed interview of Carter Hull, Internal Revenue Serv., in Wash., D.C. (June 14, 2013).

306

“The IRS’s Systematic Delay and Scrutiny of Tea Party Applications”: Hearing Before the H. Comm. on

Oversight & Gov’t Reform, 113th Cong. (2013) (statement of Elizabeth Hofacre).

307

Id.

308

Transcribed interview of Ronald Bell, Internal Revenue Serv., in Wash., D.C. (June 13, 2013).

Q In your experience, was there anything different about the way that

the Tea Party 501(c)(4) cases were treated that was as opposed to

the previous 501(c)(4) applications that had some level of political

engagement?

A Yes.

Q And what was different?

A Well, they were segregated. They seemed to have been more

scrutinized. I hadn’t interacted with EO technical [in] Washington

on cases really before.

Q You had not?

A Well, not a whole group of cases.

309

Another Cincinnati employee, Stephen Seok, testified that the type of activities that the

conservative applicants conducted made them different from other similar applications he had

worked in the past. He testified:

Q And to your knowledge, the cases that you worked on, was there

anything different or novel about the activities of the Tea Party

cases compared to other (c)(4) cases you had seen before?

***

A Normal (c)(4) cases we must develop the concept of social welfare,

such as the community newspapers, or the poor, that types. These

organizations mostly concentrate on their activities on the limiting

government, limiting government role, or reducing government

size, or paying less tax. I think it[’]s different from the other social

welfare organizations which are (c)(4).

***

Q So the difference between the applications that you just described,

the applications for folks that wanted to limit government, limit the

role of government, the difference between those applications and

the (c)(4) applications with political activity that you had worked

in the past, was the nature of their ideology, or perspective, is that

right?

A Yeah, I think that’s a fair statement. But still, previously, I could

work, I could work this type of organization, applied as a (c)(4),

309

Id.

that’s possible, though. Not exactly Tea Party, or 9-12, but dealing

with the political ideology, that’s possible, yes.

Q So you may have in the past worked on applications from (c)(4),

applicants seeking (c)(4) status that expressed a concern in

ideology, but those applications were not treated or processed the

same way that the Tea Party cases that we have been talking about

today were processed, is that right?

A Right. Because that [was] way before these – these organizations

were put together. So that’s way before. If I worked those cases,

way before this list is on.

310

Cindy Thomas, manager of the Cincinnati office, likewise told the Committee that, unlike

the systematic scrutiny given to the conservative-oriented applications as a result of the BOLO,

liberal cases were never automatically elevated to the Washington office as a whole. She

testified:

Q And were [the liberal] cases sent to Washington?

A I’m not – I don’t know.

Q Not that you are aware?

A I’m not aware of that.

Q As the head of the Cincinnati office you were never aware that

these cases were sent to Washington?

A There could be cases that are transferred to the Washington office

according to, like, our [Internal Revenue Manual] section. I mean,

there’s a lot of cases that are processed, and I don’t know what

happens to every one of them.

Q Sure. But these cases identified as progressive as a whole were

never sent to Washington?

A Not as a whole.

311

The disparate treatment is most evident in the political breakdown of applications caught

in the backlog. As a result of the multi-tier review and the micromanagement from Washington,

an excessive backlog of applications developed in Cincinnati. The applications in this backlog

were predominantly conservative. Internally, the IRS acknowledged in 2012 that at least 75

310

Transcribed interview of Stephen Daejin Seok, Internal Revenue Serv., in Wash., D.C. (June 19, 2013).

311

Transcribed interview of Lucinda Thomas, Internal Revenue Serv., in Wash., D.C. (June 28, 2013).

percent of 501(c)(4) applicants in the backlog were conservative.

312

An independent analysis

conducted by USA Today in 2013 confirmed this conclusion, finding that over 80 percent of the

applications in the backlog were filed by conservative-leaning groups.

313

A separate USA Today

article reported that beginning in February 2010, the IRS approved no applications from Tea

Party groups for 27 months, while “[i]n that time, the IRS approved perhaps dozens of

applications from similar liberal and progressive groups.”

314

Figure 9: E-mail from Judith Kindell to Lois Lerner, July 18, 2012

Testimony from IRS revenue agents supports this conclusion. Hofacre testified that she

worked only Tea Party applications.

315

Bell similarly testified that he handled exclusively Tea

Party applications until the BOLO criteria were broadened in July 2011.

316

Hull also stated that

312

See E-mail from Judith Kindell, Internal Revenue Serv., to Lois Lerner, Internal Revenue Serv. (July 18, 2012)

[IRSR 179406].

313

See Gregory Korte, IRS List Reveals Concerns over Tea Party ‘Propaganda,’ USA TODAY, Sept. 18, 2013.

314

Gregory Korte, IRS Approved Liberal Groups while Tea Party in Limbo, USA TODAY, May 15, 2013.

315

Transcribed interview of Elizabeth Hofacre, Internal Revenue Serv., in Wash., D.C. (May 31, 2013).

316

Transcribed interview of Ronald Bell, Internal Revenue Serv., in Wash., D.C. (June 13, 2013).

the two test cases he worked in the Washington office were both applications filed by Tea Party-

related organizations.

317

Despite efforts to confuse extraordinary scrutiny on Tea Party applications with routine

examination of liberal groups, the facts tell a different story. The IRS treated conservative tax-

exempt applications in a manner different from other groups. There is evidence that the

President’s rhetoric affected the IRS’s treatment of conservative-leaning tax-exempt applicants.

Testimony shows the manner in which the IRS selected, processed, and evaluated these

applications was distinct from other groups. This treatment made it more difficult for

conservative-oriented groups, most of which were formed in opposition to the President’s

policies, to engage in lawful political speech.

SeniorIRSofficialscoveredupandmisledCongressabouttheexistence

andnatureoftheIRS’stargeting

The Committee has found that senior IRS officials – including former Commissioner

Doug Shulman and Exempt Organizations Director Lois Lerner – covered up the existence and

nature of the IRS’s targeting of conservative-oriented tax-exempt applicants and knowingly

misled Congress about the misconduct. Lerner falsely justified the IRS’s actions in two separate

letters to the Oversight Committee and in two informal settings with Committee staff in spring

2012. Shulman, likewise, erroneously gave the Ways and Means Committee “assurances” that

targeting was not occurring in March 2012. He did so despite knowing at the time about the

backlog of applications, delays in processing, and the use of inappropriate development

questions. In addition, Deputy Commissioner Steven Miller withheld relevant and material

information from Congress during congressional testimony.

LernermadefalsestatementstotheCommittee

Beginning in June 2010, the IRS began receiving dozens of inquiries from Members of

Congress asking about the handling of applications for tax-exempt status.

318

One such inquiry

came from Congressman Jim Jordan, Chairman of the Oversight Committee’s Subcommittee on

Regulatory Affairs, Stimulus Oversight, and Government Spending, in February 2012.

319

Later,

Chairman Issa and Chairman Jordan formally requested information from the IRS on March 27,

2012.

320

Over this period, Lerner participated in two briefings with Committee staff and wrote

two letters to Chairman Issa and Chairman Jordan. In the course of these interactions, Lerner

made several false statements.

317

Transcribed interview of Carter Hull, Internal Revenue Serv., in Wash., D.C. (June 14, 2013).

318

See Letter from Kirsten Wielobob, Internal Revenue Serv., to Darrell Issa, H. Comm. on Oversight & Gov’t

Reform (May 21, 2013).

319

See E-mail from Floyd Williams, Internal Revenue Serv., to Steven Miller et al., Internal Revenue Serv. (Feb. 17,

2012) [IRSR 1981-82].

320

Letter from Darrell Issa & Jim Jordan, H. Comm. on Oversight & Gov’t Reform, to Lois Lerner, Internal

Revenue Serv. (Mar. 27, 2012).

During a February 24, 2012, briefing, Committee staff asked Lerner whether the criteria

for evaluating tax-exempt applications had changed at any point. Lerner responded that the

criteria had not changed. In fact, they had. According to TIGTA and the Committee’s own fact-

finding, in summer 2011, Lerner directed that the criteria used to identify applications be

changed.

321

This was the first time Lerner made a false or misleading statement during the

Committee’s investigation.

During another telephonic briefing on April 4, 2012, Lerner told Committee staff that the

information the IRS was requesting in follow-up letters to conservative-leaning groups – which,

in some cases, included a complete list of donors and their respective contributions – was not out

of the ordinary. Similarly, on April 26, 2012, in Lerner’s first written response to the

Committee’s request for information, Lerner wrote that the follow-up letters to conservative

applicants were “in the ordinary course of the application process to obtain the information as the

IRS deems it necessary to make a determination whether the organization meets the legal

requirements for tax-exempt status.”

322

Lerner’s Executive Assistant, Dawn Marx, confirmed

that Lerner prepared and signed this letter.

323

In fact, the scope of the information that EO requested from conservative groups was

extraordinary. At a briefing on May 13, 2013, IRS officials, including Nikole Flax, the IRS

Acting Commissioner’s Chief of Staff, could not identify any other instance in the agency’s

history in which the IRS asked groups for a complete list of donors with corresponding

amounts.

324

These marked the second and third times Lerner made a false or misleading

statement during the Committee’s investigation.

Next, on May 4, 2012, in her second written response to the Committee, Lerner justified

the extraordinary requests for additional information from conservative applicants for tax-exempt

status.

325

Among other things, Lerner stated that IRS’s “requests for information . . . are not

beyond the scope of Form 1024 [the application for recognition under section 501(c)(4)].”

326

Lerner provided justification for 16 questions asked by the IRS of tax-exempt applicants,

including requests for donor information, policy positions on important issues, and

communications with elected representatives.

327

Lerner’s Executive Assistant, Dawn Marx,

testified that Lerner prepared and signed this letter as well.

328

However, by April 25, 2012, the IRS had already identified seven types of information,

including requests for donor information and policy positions, which it had inappropriately

321

Briefing by Internal Revenue Serv. staff to Committee staff (May 13, 2013); TIGTA Audit Rpt., supra note 20.

322

Letter from Lois G. Lerner, Internal Revenue Serv., to Darrell Issa, H. Comm. on Oversight & Gov’t Reform

(Apr. 26, 2012).

323

See Transcribed interview of Dawn Marx, Internal Revenue Serv., in Wash., D.C. (Sept. 30, 2014).

324

Briefing by Internal Revenue Serv. staff to Committee staff (May 13, 2013).

325

Letter from Lois G. Lerner, Internal Revenue Serv., to Darrell Issa, H. Comm. on Oversight & Gov’t Reform

(May 4, 2012).

326

Id. at 1.

327

Id. at 23-25, 30-32, 42-44.

328

See Transcribed interview of Dawn Marx, Internal Revenue Serv., in Wash., D.C. (Sept. 30, 2014).

requested from conservative groups.

329

According to the TIGTA audit report, Lerner had

received a list of these unprecedented questions the same day – more than a week before she sent

a letter to Chairman Issa defending the additional scrutiny applied to certain applicants. In

addition, on April 30, 2012, Lerner acknowledged in an e-mail to Nikole Flax that there was no

“precedent” for the IRS to ask groups about their positions on issues important to them.

330

Lerner’s statement defending the information requests, when she knew they were inappropriate,

was the fourth time she made a false or misleading statement during the Committee’s

investigation.

During a May 10, 2013, American Bar Association tax conference, Lerner revealed,

through a question she planted with an audience member,

331

that the IRS knew that certain

conservative groups had in fact been targeted for additional scrutiny.

332

She blamed the

inappropriate actions of the IRS on “line people” in Cincinnati. She stated:

So our line people in Cincinnati who handled the applications did what we

call centralization of these cases. They centralized work on these in one

particular group. . . . However, in these cases, the way they did the

centralization was not so fine. Instead of referring to the cases as

advocacy cases, they actually used case names on this list. They used

names like Tea Party or Patriots and they selected cases simply because

the applications had those names in the title. That was wrong, that was

absolutely incorrect, insensitive, and inappropriate — that’s not how

we go about selecting cases for further review. We don’t select for

review because they have a particular name.

333

This revelation occurred two days after Members of the House Ways and Means

Subcommittee on Oversight had asked Lerner for an update on the IRS’s internal investigation

into allegations of improper targeting at a hearing.

334

During the hearing, she declined to answer

and directed Members to questionnaires on the IRS website. Lerner’s failure to disclose relevant

information to the House Ways and Means Committee – opting instead to leak the damaging

information during an obscure tax conference – was the final instance of Lerner’s pattern of

obstruction.

329

See E-mail from Judith Kindell, Internal Revenue Serv., to Holly Paz & Sharon Light, Internal Revenue Serv.

(Apr. 25, 2012) [IRSR 13868].

330

E-mail from Lois Lerner, Internal Revenue Serv., to Nikole Flax, Internal Revenue Serv. (Apr. 30, 2012) [IRSR

464416].

331

Hearing on the IRS Targeting Conservative Groups: Hearing Before the H. Comm. on Ways & Means, 113th

Cong. (2013) (question and answer with Rep. Nunes); Bernie Becker, Question that Revealed IRS Scandal was

Planted, Chief Admits, T

HE HILL, May 17, 2013; Abby Phillip, IRS Planted Question About Tax Exempt Groups,

ABC NEWS, May 17, 2013.

332

John D. McKinnon & Corey Boles, IRS Apologizes for Scrutiny of Conservative Groups, WALL ST. J., May 10,

2013; Jonathan Weisman, IRS Apologizes to Tea Party Groups Over Audits of Applications for Tax Exemption, N.Y.

TIMES, May 10, 2013; Abram Brown, IRS, to Tea Party: Sorry We Targeted You & Your Tax Status, FORBES, May

10, 2013.

333

Rick Hasen, Transcript of Lois Lerner’s Remarks at Tax Meeting Sparking IRS Controversy, ELECTION LAW

BLOG (May 11, 2013, 7:37AM), http://electionlawblog.org/?p=50160 (emphasis added).

334

“Hearing on the Oversight of Tax-Exempt Orgs.”: Hearing Before the Subcomm. on Oversight of the H. Comm.

on Ways & Means,, 113th Cong. (2013).

ShulmangavefalsestatementstoCongress

On March 22, 2012, then-IRS Commissioner Doug Shulman testified during a hearing of

the Ways and Means Subcommittee on Oversight. During the hearing, Shulman had an

exchange with Subcommittee Chairman Boustany in which Shulman provided “assurances” that

the IRS was not targeting conservative groups. Shulman testified:

Rep. BOUSTANY. One other question. It’s come to my attention, I’ve gotten a

number of letters, we’ve seen some recent press allegations

that the IRS is targeting certain Tea Party groups [a]cross

the country – requesting owners’ documents requests,

delaying approval for tax-exempt status and that kind of

thing. Can you elaborate on what’s going on with that?

Can you give us assurances that the IRS is not targeting

particular groups based on political leanings?

Mr. SHULMAN Thanks for bringing this up because I think there’s been a

lot of press about this and a lot of moving information, so I

appreciate the opportunity to clarify. First, let me start by

saying, yes, I can give you assurances. As you know, we

pride ourselves on being a non-political, non-partisan

organization. I am the only – me and our chief counsel –

are the only presidential appointees, and I have a five-year

term that runs through presidential elections, just so we will

have none of that kind of political intervention in things

that we do. For 501 (c)(4) organizations, which is what’s

been in the press, organizations do not need to apply for tax

exemption. Organizations can actually hold themselves out

as 501 (c)(4) organizations and then file a 990 with us. The

organizations that have been in the press are all ones that

are in the application process. First of all, I think it’s very

important to emphasize that all of these organizations came

in voluntarily. They did not need to engage the IRS in a

back-and-forth. They could have held themselves out, filed

a 990, and if we had seen an issue, we would have engaged

but otherwise we wouldn’t. The basic rules around 501

(c)(4) organizations are that they need to be primarily

engaged in promoting the common good and general

welfare of their community. They can be involved in

political and campaign activity, but it can’t be their primary

purpose. When people apply for 501 (c)(4) status, what we

do is engage them in a number of questions about making

sure that we understand their primary purpose around this

and other sorts of engagement. And so what’s been

happening has been the normal back-and-forth that happens

with the IRS. None of the alleged taxpayers – and

obviously I can’t talk about individual taxpayers and I’m

not involved in these – are in an examination process.

They’re in an application process which they moved into

voluntarily. There is absolutely no targeting. This is the

kind of back-and-forth that happens when people apply

for 501 (c)(4) status.

335

TIGTA’s subsequent audit report calls into question the veracity of Shulman’s testimony.

TIGTA found that the IRS targeted groups using criteria based on the groups’ names and

political orientations.

336

TIGTA also found that tax-exempt applications experienced

“substantial delays” and that the IRS asked inappropriate and burdensome questions of

applicants.

337

TIGTA’s findings are at odds with Shulman’s unequivocal “assurances” that there

was “absolutely no targeting” and that “this is the kind of back-and-forth that happens when

people apply for 501 (c)(4) status.”

The Committee’s investigation confirms that Shulman knowingly provided false and

incomplete information to the Ways and Means Committee. During a transcribed interview with

Committee staff, Shulman acknowledged that he was aware of the processing delays and the

IRS’s use of inappropriate donor questions at the time to his testimony to Congress.

338

Shulman

testified:

Q And, sir, at the time of this March 2012 hearing before Ways and

Means, you were aware of the congressional inquiries into the IRS

about the treatment of Tea Party groups. Is that right?

A I don’t have a firm command that it was – that members had

written me about Tea Party groups, but I was aware of – for sure, I

remember I was aware of the donor letter. You know, I had seen

the letters that had come in to me. The questions about donors and

the backlog were the things that I had awareness of that I – for

sure.

Q And at the time of the March 2012 hearing before Ways and

Means, were you aware of the delays in processing the cases?

A Yeah. I mean, my – I think – let me just premise, you know, I’m

going to do my best, I want to be forthcoming. I’m going to try to

summon my memory from a long time ago. So, to the best of my

335

“Internal Revenue Service Operations and the 2012 Tax Return Filing Season”: Hearing Before the Subcomm.

on Oversight of the H. Comm. on Ways &Means, 112th Cong. (2012) (question and answer with Chairman

Boustany).

336

TIGTA Audit Rpt., supra note 20.

337

Id.

338

Transcribed interview of Doug Shulman, in Wash., D.C. (Dec. 4, 2013).

memory, you know, I was aware that – I was under the impression

that kind of every case that was, you know, deemed to potentially

need to be looked at for primary activity for political had gotten –

there was a real backlog, you know, kind of across the board in

those cases.

Q And did you understand those cases to be set aside from the other

cases the IRS was processing?

A Yeah. I think by that time, and it was probably subsequent to the

letters, I had an understanding that in order to have consistent

treatment, that there were groupings of cases, and they do this in –

you know, I had learned – probably around that time is when I

learned about the tax-exempt organizations had done this in other

contexts as well, but would group cases for consistency to have

similar – you now, the same people or group of people work the

cases.

339

Although Shulman was aware of these facts prior to this testimony, he failed to divulge them to

the Ways and Means Committee. This information was certainly germane and responsive to

Chairman’s Boustany’s question – indeed, Chairman Boustany specifically mentioned both

development letters and delays – and yet Shulman omitted these facts from his answer.

More troubling, not only did Shulman fail to provide relevant information to Congress,

but he affirmatively gave “assurances” that targeting was not occurring. This statement implied

that he had a basis upon which to guarantee that there was no cause for concern. Committee

staff questioned Shulman about this statement during his transcribed interview. Shulman

testified:

Q With respect, you didn’t just say it’s not happening or I’ll look into

it, you gave assurances to the members that it was not occurring.

How did you have the confidence to provide that assurance to

Congress if you knew that there were backlogs and there were

objectionable letters going out and there were delays in processing

the cases?

A Well, I don’t think anybody was – you know, I didn’t give

assurances that there weren’t backlogs or that people weren’t

worried about the questions they were getting, but I didn’t have the

impression in my mind at that point that there were – you know, I

don’t remember exactly what the questions were, but I think the

questions were targeted – were asking about targeting, and at that

point, you know, I didn’t have a reason to believe that there was

targeting going on.

339

Transcribed interview of Doug Shulman, in Wash., D.C. (Dec. 4, 2013).

Q Sir, you told Congress in March 2012, quote, “There is absolutely

no targeting. This is the kind of back and forth that happens when

people apply for a 501(c)(4) status,” end quote. So there you’re

relating it to the development letters and the back and forth

between the IRS and the applicant. How, if you knew these letters

had been sent asking for donor information, could you say there

was no targeting if you knew they were asking for donor

information?

A You know, again, the things that were in my mind, if you look at

when I said “no targeting,” I said it’s normal back and forth, and so

there’s no targeting, and was relating it to the fact they had come in

voluntarily and I was thinking, you know, of this notion of

reaching out, finding someone, you know, in the sense of targeting.

The other is my understanding was that donor letters weren’t just

being sent to conservative groups. And so that’s – you know, that’s

what was in my mind then and that’s what I said.

340

Shulman’s testimony affirmatively declared that the IRS was not mistreating conservative-

leaning applicants. At the time of his testimony, Shulman knew about the processing delays, the

backlog of applications, and the questions asking for donor information. Yet, Shulman portrayed

the IRS’s actions as part of the normal “back and forth” during the application process. That

Shulman did so with knowledge of the IRS’s misconduct suggests that he knowingly provided

misleading testimony to Congress.

Shulman stated during his transcribed interview that he believed his testimony was

truthful at the time.

341

Even so, by May 2012, Shulman was aware that “there’s a list that was

used in Tax-Exempt Organizations at some point, and . . . that the word ‘Tea Party’ was on the

list at some point.”

342

At that time, Shulman should have known that his testimony to the Ways

and Means Committee in March 2012 was inaccurate. Although he had a duty as IRS

Commissioner to keep Congress fully informed, Shulman testified that the IRS never discussed

amending his testimony.

343

He testified:

Q At that time, sir, in May of 2012 [after the completion of the IRS

internal review], were there any discussions about correcting your

testimony to Congress?

A Not that I remember.

***

340

Transcribed interview of Doug Shulman, in Wash., D.C. (Dec. 4, 2013).

341

Id.

342

Id.

343

Id.

Rep. JORDAN. Okay. After this briefing by Mr. George on May 30th, .

. . did you at that point talk to any of your staff, or did

you in your mind say, you know what, I should

probably go back to Congress and correct what I said at

the March 22nd hearing in front of the Ways and Means

committee.

A I don’t remember having those conversations. . . . I

don’t remember thinking it.

Rep. JORDAN. Okay.

A I just didn’t – wasn’t something that, you know,

occurred to me.

Rep. JORDAN. Did anyone on your staff bring it up and say, hey, we

might want to rethink about, you know, what you said,

normal back and forth, assurances that nothing bad’s

going on here, we might want to rethink in light of the

new information we received.

A I certainly don’t remember that happening. I don’t think

it did.

***

Q Upon learning about the results of TIGTA’s audit when

it came out in May of 2013, did you consider going

back to Congress to amend your previous testimony?

A No, that’s not something I considered.

Q Why not?

A I didn’t think it needed to be amended.

344

A contemporaneous e-mail produced to the Committee suggests that even if Shulman was

not concerned about the accuracy of his testimony, other IRS leaders were. In response to an

Associated Press article about Shulman’s testimony entitled “IRS chief says agency not targeting

tea party groups due to their political views,” an employee in the legislative affairs office wrote

to his colleagues: “This is what the front office and [IRS Chief of Communications and Liaison]

Frank [Keith] are spinning about now.”

345

344

Id.

345

E-mail from William Norton, Internal Revenue Serv., to Floyd Williams & James Glenn, Internal Revenue Serv.

(Mar. 22, 2012) [IRSR 617626].

Shulman’s incomplete and false testimony in March 2012 allowed the IRS’s misconduct

to continue. By affirmatively and categorically denying any targeting, Shulman provided cover

for the IRS through the 2012 election and allowed the targeting to be hidden from public scrutiny

until May 2013. Only then, upon the release of the TIGTA audit report, did Congress discover

the value of Shulman’s “assurances.”

MillerwithheldinformationfromCongressaboutthetargeting

Steven Miller testified before Congress on at least six occasions as Deputy Commissioner

and later Acting Commissioner from May 2012 until May 10, 2013. Although Miller was never

asked as directly as Shulman about the targeting of conservative tax-exempt applicants, Miller

likewise never told Congress about the IRS misconduct. Miller’s multiple missed opportunities

to tell Congress about the targeting continued the IRS’s pattern of failing to inform Congress.

Miller testified during his transcribed interview that he became aware of possible IRS

misconduct in February 2012 when “the press and the congressionals started.”

346

At that time,

Lerner told Miller about the backlog of applications and the delays in processing the

applications. By May 3, 2012, after Nan Marks reported about the findings of her internal

review, Miller was fully aware of the IRS’s targeting, including the use of inappropriate

screening criteria, the objectionable development questions, and the extensive delays.

347

In mid-June 2012, the House Ways and Means Committee notified the IRS that it sought

to conduct a hearing in July 2012 on tax-exempt organizations.

348

As the hearing date

approached, Miller prepared to use the hearing to discuss the targeting publicly. A month before

the hearing, Miller pondered whether he should testify – rather than TEGE Commissioner Sarah

Hall Ingram – to “affirmatively use [the hearing] to put a stake in politics and c4.”

349

Miller’s

chief of staff, Nikole Flax, agreed that the IRS’s treatment of 501(c)(4)s would likely be a topic

of interest, writing that it “[w]ould be silly to think the c4 issues won’t come up.”

350

In early

July, IRS staff even began drafting sample questions for Miller relating to political speech of

501(c)(4) organizations.

351

346

Transcribed interview of Steven Miller, in Wash., D.C. (Nov. 13, 2013).

347

Id.

348

See E-mail from Catherine Barre, Internal Revenue Serv., to Steven Miller et al., Internal Revenue Serv. (June

13, 2012) [IRSR 190774].

349

E-mail from Steven Miller, Internal Revenue Serv., to Nikole Flax & Catherine Barre, Internal Revenue Serv.

(June 18, 2012) [IRSR 465424].

350

E-mail from Nikole Flax, Internal Revenue Serv., to Steven Miller & Catherine Barre, Internal Revenue Serv.

(June 18, 2102) [IRSR 465424].

351

See E-mail from Joseph Urban, Internal Revenue Serv., to Justin Lowe et al., Internal Revenue Serv. (July 6,

2012) [IRSR 462278].

Figure 10: E-mail exchange between Steven Miller & Nikole Flax, June 18, 2012

Miller testified before the Ways and Means Subcommittee on Oversight on July 25,

2012. Despite having relevant information about the IRS’s treatment of tax-exempt applicants

and preparing to address the matter, Miller declined to raise the issue with the Subcommittee.

Miller testified during his transcribed interview:

Q At the time, in June of 2012, you were aware of the backlog of

cases pending in Cincinnati?

A I was.

Q And you were aware of the screening criteria used to identify those

cases?

A I was.

Q And you were aware of the delay those cases had experienced?

A I was.

Q Was there any discussion about making those facts public at this

July 2012 hearing?

A No. We prepared for anything that could happen.

Q Did you expect the issue to come up?

A Thought it might, so we prepared, but no certainty at all.

Q And how did you prepare for it?

A General hearing preparation.

Q So . . . did you assemble material?

A There would have been probably some material, yeah.

Q Did you get involved in data on the cases?

A I got where the cases were and probably a talking-points sheet as to

what happened.

352

Although he prepared to address the issue, Miller stated that there “was no reason for [him] to

sua sponte . . . raise it.”

353

When Congressman Kenny Marchant asked Miller about groups that

“feel like they have been harassed and feel like the IRS is threatening them with some kind of

action or audit,” Miller failed to mention anything about the inappropriate screening criteria or

excessive delays experienced by these groups.

354

Instead, Miller said: “We received an uptick,

an increase in the number of (c)(4) organizations that were advocacy organizations, they were

advocating on various things, which is a fine thing for a 501(c)(4) to do. . . . We continue to

work those cases.”

355

Miller’s answer was incomplete at best.

Lerner, who was apparently away on vacation at the time, also seemed to believe that

questions about the targeting of conservative applicants would be raised during Miller’s

appearance. The morning of the hearing, Lerner e-mailed Joseph Urban, writing:

I sit looking out at the Bay on this lovely morning – a little breeze blowing

and the sun sparkling on the water. I must say, it changes one’s

perspective and all the press about c4 and the hearing sounds a lot like

“blah, blah, blah . . . .” No wonder the country is such a mess.

356

Lerner separately wrote to Miller after the hearing: “Glad it turned out to be far more boring than

it might have been.”

357

352

Transcribed interview of Steven Miller, in Wash., D.C. (Nov. 13, 2013).

353

Id.

354

See “Public Charity Organizational Issues, Unrelated Business Income Tax, and the Revised Form 990”:

Hearing Before the Subcomm. on Oversight of the H. Comm. on Ways & Means, 112th Cong. (2012) (question and

answer with Rep. Marchant).

355

Id.

356

E-mail from Lois Lerner, Internal Revenue Serv., to Joseph Urban, Internal Revenue Serv. (July 25, 2012)

[IRSR 179761].

357

E-mail from Lois Lerner, Internal Revenue Serv., to Steven Miller, Internal Revenue Serv. (July 25, 2012)

[IRSR 179767].

Figure 11: E-mail from Lois Lerner to Joseph Urban, July 25, 2012

During his transcribed interview, Committee staff asked Miller about his decision to not

inform Congress once he learned the extent of the IRS’s misconduct. Miller testified:

Q After you received this information from Ms. Marks about what

she and her team had found in Cincinnati [in May 2012], given the

congressional interest in the treatment of the Tea Party cases, were

there any discussions about sending new or amended responses to

Congress with more information?

A I don’t recall any conversation like that.

Q Sitting here today, do you regret that?

A Probably not, because I didn’t know the facts. I didn’t. And I

knew what – I knew what Nan had found in that 2-week period,

and TIGTA was taking a look. We were sure that the offensive

BOLO was no more. I believed that those cases should have been

in the centralized process and that the real problem was that they

were getting moldy waiting for decisions to be made. And that’s

what I concentrated on. And TIGTA had it.

Q So why not tell the Committee those facts?

A TIGTA was working on it, and I was concentrating on what I knew

to be the problem.

Q As Acting Commissioner, did you feel any sense of being

forthcoming with the Committee when the Committee inquired of

the IRS?

A I wasn’t Acting Commissioner during this time period.

Q As Deputy Commissioner?

A I thought we were fine. We were answering questions truthfully,

and we were working hard to move those cases.

Q So you felt that the information that you had discovered at that

point wasn’t relevant to include in the letters and the responses to

Congress?

A I felt the letters were fine and that we were pursuing the cases and

that TIGTA was working on the issue.

358

Miller’s response is disappointing. An ongoing audit is no basis to withhold information

from Congress, especially when the information is particularly sensitive as to the targeting of

Americans for their political beliefs. The conclusions that Nan Marks presented to Miller on

May 3, 2012, were essentially the same as the findings that TIGTA announced a year later.

Miller’s rationale for not disclosing the targeting in 2012 due to the TIGTA audit rings hollow

because TIGTA was still working on the audit and had not released its final report when the IRS

eventually decided to apologize for the targeting. Miller’s decision to withhold information from

the American people caused the affected taxpayers prolonged pain by keeping the circumstances

of the targeting inside the IRS and away from public scrutiny and congressional oversight.

The Committee’s investigation confirms that senior levels within the IRS knew about the

misconduct and failed to disclose their knowledge to Congress, despite considerable

congressional interest. On separate occasions, Lerner and Shulman informed Congress that the

misconduct was the normal evaluation process for tax-exempt applications. Miller, likewise,

failed to fully inform Congress about the targeting when asked during a hearing in July 2012.

Because of this, Congress and the public did not become aware of the targeting until May 2013.

TheIRS’sfalseclaimthatkeyevidencewaslostordestroyedprolongedthe

investigation

Late on a Friday afternoon, buried on page seven of the third attachment to a letter to the

Senate Finance Committee, the IRS acknowledged that it had destroyed e-mails sent and

received by Lois Lerner between January 2009 and April 2011.

359

The IRS’s acknowledgement

on June 13, 2014, stood in stark contrast to promises made by IRS Commissioner John Koskinen

under oath in March 2014 that he would produce all of Lerner’s e-mails to the Committee.

Commissioner Koskinen made these promises without qualification or limitation. The IRS

subsequently claimed to have lost Lerner’s e-mails from this pivotal period in the targeting

timeline. Then, in November 2014, TIGTA told the Committee that it had found approximately

30,000 of the e-mails that the IRS claimed were permanently missing. This chain of events

undercut public confidence in Commissioner Koskinen and delayed the Committee’s effort to

fully analyze all facets of the IRS targeting program. The issue with Lerner’s missing e-mails

358

Transcribed interview of Steven Miller, in Wash., D.C. (Nov. 13, 2013).

359

Letter from Leonard Oursler, Internal Revenue Serv., to Ron Wyden & Orrin Hatch, S. Comm. on Finance (June

13, 2014).

also spotlights a serious problem within the IRS about record retention and willful efforts to

shield communications to avoid congressional scrutiny.

TheIRSclaimedthatyearsofe‐mailssentandreceivedbyLoisLernerand

otherIRSemployeesweredestroyed

The Committee was advised that e-mails sent and received by Lois Lerner and at least

five other key figures in the IRS’s targeting matter were destroyed during the period under

investigation. The IRS’s inspector general, however, has informed Congress that as many as

eight custodians could have lost e-mails during the same period.

360

The Committee continues to

gather evidence about the destroyed e-mails, approximately 30,000 of which were recovered by

TIGTA as of November 2014.

According to the IRS, Lerner’s laptop computer crashed on June 13, 2011, causing the

data on her hard drive to be deemed “unrecoverable” by computer professionals.

361

Lerner’s

hard drive was examined initially in June 2011 by Aaron Signor, an IRS IT specialist who

provided computer-related assistance to the Exempt Organizations Division.

362

Signor removed

the computer from Lerner’s office and conducted tests to determine that a problem existed with

the computer’s hard drive.

363

Signor attempted unsuccessfully to retrieve data from the hard

drive before discarding the hard drive in a cardboard box containing roughly 30 other crashed

drives.

364

Signor closed the fix-it ticket on June 21, 2011.

365

In July or August 2011, Signor received a phone call from Lillie Wilburn, an IT manager,

asking whether he still had Lerner’s hard drive.

366

She asked Signor to ship the hard drive to

another technician for additional examination.

367

John Minsek, a senior investigative analyst in

the IRS’s Criminal Investigations (CI) unit, eventually received Lerner’s hard drive.

368

Minsek

understood that the hard drive was from “a computer of importance” and that there was a “sense

of urgency” to recover data.

369

Using the CI unit’s digital forensic facilities, Minsek opened the

hard drive and conducted additional tests.

370

Once he opened the hard drive, Minsek noticed

“well-defined scoring creating a concentric circle in the proximity of the center of the disk.”

371

According to Minsek, the scoring covered less than one percent of the surface of the disk.

372

360

Conference call between Treasury Inspector Gen. for Tax Admin. and Congressional Staff (Sept. 4, 2014).

361

Letter from Leonard Oursler, Internal Revenue Serv., to Ron Wyden & Orrin Hatch, S. Comm. on Finance (June

13, 2014).

362

Transcribed interview of Aaron Signor, Internal Revenue Serv., in Wash., D.C. (Aug. 1, 2014).

363

Id.

364

Id.

365

Id.

366

Id.

367

Id.

368

Transcribed interview of John Minsek, Internal Revenue Serv., in Wash., D.C. (July 24, 2014).

369

Id.

370

Id.

371

Id.

372

Id.

Following Minsek’s examination of the hard drive, he returned the drive to the IRS’s IT

team.

373

In a subsequent conversation with IRS IT personnel, Minsek also raised the possibility

that the IRS could send Lerner’s hard drive to data recovery service, believing it was “possible

that they had techniques, methods, perhaps proprietary tools that I did not have.”

374

Instead,

Lerner’s hard drive was sent to an IRS facility and eventually recycled by an outside

contractor.

375

The destruction of Lerner’s e-mails in June 2011 occurred right in the middle of the

IRS’s targeting of conservatives. Just four months earlier, in February 2011, Lerner called the

Tea Party applications “very dangerous” and ordered that the cases undergo an unprecedented

“multi-tier” review.

376

In early June 2011, Lerner requested a copy of the tax-exempt application

filed by the prominent conservative group, Crossroads GPS, for review by her senior technical

advisor.

377

Testimony shows that Lerner maintained a significant amount of information on her

computer’s hard drive. According to Signor, the IT technician who regularly serviced Lerner’s

computer, Lerner maintained a large volume of data on the hard drive of her computer.

378

Signor

recommended that Lerner back up her data on a network server, but he was told that Lerner did

not have the time or responsibility to save her data. Signor testified:

Q Do you recommend your end users to save data onto the [network

shared] drive?

A Yes.

Q That’s something you do in the normal course of your work?

A Yes.

***

Q You stated at the onset of the last round that you would

recommend to end users that they back up their work. Do you

recall that?

A Yes.

Q Did you have occasion to make that recommendation to Ms.

Lerner prior to working on her laptop in the summer of 2011?

373

Id.

374

Id.

375

Transcribed interview of Thomas Kane, Internal Revenue Serv., in Wash., D.C. (July 17, 2014).

376

E-mail from Lois Lerner, Internal Revenue Serv., to Michael Seto, Internal Revenue Serv. (Feb. 1, 2011) [IRSR

161810].

377

E-mail from Holly Paz, Internal Revenue Serv., to Cindy Thomas, Internal Revenue Serv. (June 1, 2011) [IRSR

69914-15].

378

Transcribed interview of Aaron Signor, Internal Revenue Serv., in Wash., D.C. (Aug. 1, 2014).

A Yes.

Q When?

A There were probably several occasions between 2007 and 2011. I

couldn’t say exactly when.

Q Do you know in what context?

A It would have been in the context of another ticket where I was

working on her computer and maybe noticed the volume of data

and suggested it.

Q Do you have reason to know whether she followed your suggestion

or not?

A Yes.

Q What do you know?

A I was told that she didn’t have backups at one point.

***

Q And when you say you told her about backups, what exactly do

you remember telling Ms. Lerner’s assistant about backups?

A There was one day where she and I were in Lois’s office. I can’t

remember if Lois was present or not. But I had said, you know,

“Lois has plenty of data. We really should get backups of her

data.” And her response was, “Well, I don’t think that Lois has the

time to do it, and it’s not her responsibility.” That’s what was said,

something – I’m not quoting exactly, but something like that

would have been said.

379

On September 5, 2014, the IRS notified Congress that it had lost e-mails from five other

custodians.

380

In addition to Lois Lerner, the IRS destroyed e-mails sent and received by Judy

Kindell, Lerner’s senior technical advisor and expert on non-profit political speech; Justin Lowe,

a tax law specialist who briefed Lerner on the Tea Party cases in June 2011; Ronald Shoemaker,

a Washington manager who oversaw work on the applications; and Julie Chen and Nancy

Heagney, two Cincinnati-based Determinations Specialists.

381

Several of the e-mail losses

379

Id.

380

Letter from Leonard Oursler, Internal Revenue Serv., to Dave Camp, H. Comm. on Ways & Means (Sept. 5,

2014) (carbon copy to Darrell Issa, H. Comm. on Oversight & Gov’t Reform).

381

Id.

occurred at significant points during the IRS’s targeting of conservative tax-exempt applicants.

Judy Kindell’s e-mail loss occurred in August 2010, right as the IRS began to receive media

inquiries related to the President’s rhetoric critical of Citizens United and political speech by

conservative non-profit groups. According to the IRS, Kindell was instructed to save old e-mails

on her computer’s hard drive and “when her hard drive failed, she lost e-mail that resided on that

drive.”

382

Justin Lowe’s e-mail loss occurred in June 2011, right as he prepared to brief Lerner

on the details about the “test” Tea Party applications worked in the Washington office. While

the IRS maintains that it has recovered thousands of e-mails sent by these employees, it cannot

guarantee that it has produced all appropriate e-mails to the Committee. It remains to be seen

whether e-mails from these five custodians are among the 30,000 e-mails restored by TIGTA.

The IRS later acknowledged that a total of eighteen employees experienced hard drive

crashes during the period under examination – meaning that some of these additional hard drive

failures may have resulted in e-mail losses.

383

In June 2011, right after Lerner’s e-mails were

destroyed, she wrote to David Fish, who also experienced a hard drive failure. “No one will ever

believe,” she wrote, “that both your hard drive and mine crashed within a week of each other!”

384

Because of the epidemic of hard drive failures and e-mails losses, the Committee’s effort to fully

understand how and why the IRS targeted conservative applicants for tax-exempt status has been

delayed. The 30,000 Lerner e-mails that TIGTA restored will answer some of the outstanding

questions about Lerner’s role in the targeting program.

Figure 12: E-mail from Lois Lerner to David Fish & Nikole Flax, June 29, 2011

IRSCommissionerJohnKoskinenmisledCongressabouttheIRS’sdestruction

ofLoisLerner’se‐mails

The difficulties associated with Lois Lerner’s destroyed e-mails were compounded by

IRS Commissioner John Koskinen’s evolving and misleading statements about the matter. For

several months, Commissioner Koskinen’s unwillingness to present completely accurate and

382

Id.

383

Id.

384

E-mail from Lois Lerner, Internal Revenue Serv., to David Fish & Nikole Flax, Internal Revenue Serv. (June 29,

2011) [IRSR 903314].

straightforward information about the missing e-mails unnecessarily delayed and hindered the

Committee’s fact-finding efforts.

Following Lois Lerner’s staged apology at the ABA conference on May 10, 2013, the

Committee requested relevant material necessary to begin investigating the IRS’s targeting of

conservative tax-exempt applicants.

385

These requests included the production of all

correspondence sent or received by Lois Lerner since January 1, 2009.

386

The IRS was unwilling

to cooperate voluntarily.

387

On August 2, 2013, the Committee issued a subpoena to Treasury

Secretary Jacob Lew, as the custodian of IRS documents, for eight categories of IRS material –

including “[a]ll communications sent or received by Lois Lerner, from January 1, 2009 to August

2, 2013.”

388

After John Koskinen was confirmed as the permanent IRS Commissioner, the

Committee reissued the subpoena on February 14, 2014, to him.

389

On March 26, 2014, Commissioner Koskinen appeared before the Committee to testify

about the IRS’s compliance with congressional subpoenas and document requests.

390

During the

hearing, Commissioner Koskinen was repeatedly asked whether the IRS would commit to

producing all of Lerner’s e-mails. Commissioner Koskinen testified repeatedly that he would.

In an exchange with Representative Jason Chaffetz, Commissioner Koskinen testified:

Rep. CHAFFETZ. Sir, are you or are you not going to provide this

committee all of Lois Lerner’s emails?

Mr. KOSKINEN. We are already starting –

Rep. CHAFFETZ. Yes or –

Mr. KOSKINEN. Yes, we will do that.

391

Additionally, in an exchange with Ranking Member Elijah Cummings, Commissioner Koskinen

testified:

Rep. CUMMINGS. Well, reclaiming just for a second. I just want us to

be clear. I mean, time is precious, money is

precious. Just tell us. I mean, you talk about

385

Letter from Darrell Issa & Jim Jordan, H. Comm. on Oversight & Gov’t Reform, to Lois Lerner, Internal

Revenue Serv. (May 14, 2013); Letter from Darrell Issa & Jim Jordan, H. Comm. on Oversight & Gov’t Reform, to

Daniel Werfel, Internal Revenue Serv. (June 4, 2013).

386

Letter from Darrell Issa & Jim Jordan, H. Comm. on Oversight & Gov’t Reform, to Daniel Werfel, Internal

Revenue Serv. (June 4, 2013).

387

See Letter from Darrell Issa, H. Comm. on Oversight & Gov’t Reform, to Daniel Werfel, Internal Revenue Serv.

(July 30, 2013).

388

H. Comm. on Oversight & Gov’t Reform, Subpoena to Jacob Lew, Sec’y, Dep’t of the Treasury (Aug. 2, 2013).

389

H. Comm. on Oversight & Gov’t Reform, Subpoena to John Koskinen, Comm’r, Internal Revenue Serv. (Feb.

14, 2014).

390

See Memorandum from Majority Staff, H. Comm. on Oversight & Gov’t Reform, to Members, H. Comm. on

Oversight & Gov’t Reform (Mar. 21, 2014).

391

“Examining the IRS Response to the Targeting Scandal”: Hearing Before the H. Comm. on Oversight & Gov’t

Reform, 113th Cong. (2014) (question and answer with Rep. Jason Chaffetz).

relevance. You said if a lawyer were to see this

subpoena, they would have some concerns. I just

want to be clear. I mean, it sounds like, again, I am

saying what I said before, you seem to have an

understanding and we seem to have an

understanding, and they don’t seem to be the same.

So are you going to provide the documents for Lois

Lerner?

Mr. KOSKINEN. Yes.

Rep. CUMMINGS. That were subpoenaed.

Mr. KOSKINEN. Yes.

392

According to testimony later received by the Committee, the IRS knew at the time of

Commissioner Koskinen’s appearance in March 2014 that Lerner’s e-mails had been destroyed.

In particular, the IRS Deputy Associate Chief Counsel, Thomas Kane – who had responsibility

for the IRS’s document production process in response to congressional oversight – testified that

senior IRS leadership became aware of problems with Lerner’s e-mails in early February

2014.

393

Kane testified that on February 2, 2014, Catherine Duval, Counselor to the

Commissioner, noticed a discrepancy in the number e-mails gathered from Lerner’s account.

394

The IRS had gathered 16,000 e-mails from the period after April 2011 and “less than 100” from

the period before April 2011.

395

After becoming aware of the discrepancy in the number of e-mails, Kane asked a

subordinate, Paul Butler, to look into the cause of the discrepancy.

396

Two days later, on

February 4, senior IRS leadership learned that Lerner’s hard drive had crashed in 2011 from her

former administrative assistant, Dawn Marx.

397

Kane testified:

Q And so do you remember precisely when you became aware of the

hard drive crash?

A We were – Paul Butler had talked to someone who worked for Lois

at about the time when the emails had a great discrepancy and was

told by her that there had been a hard drive crash at that particular

point in time.

Q Do you know the name of the person that Mr. Butler spoke with?

392

Id. (question and answer with Ranking Member Elijah E. Cummings).

393

Transcribed interview of Thomas Kane, Internal Revenue Serv., in Wash., D.C. (July 17, 2014).

394

Id.

395

Id.; Letter from Leonard Oursler, Internal Revenue Serv., to Ron Wyden & Orrin Hatch, S. Comm. on Finance

encl. 3 at 6 (June 13, 2014).

396

Transcribed interview of Thomas Kane, Internal Revenue Serv., in Wash., D.C. (July 17, 2014).

397

Id.

A Dawn Marx. Marx with an “x.”

***

Q Do you know, sir, when Ms. Marx informed Mr. Butler about the

hard drive crash?

A February 4th.

Q Of 2014?

A Correct.

Q And why does that date stand out to you in your memory?

A The date stands out to me because we first found out about it on

February 2nd, and it was only 2 days afterwards.

Q So it didn't take long then for you to figure out what happened?

***

A It didn’t take us long to figure out that it was reported that there

was a hard drive crash at or about the time that the discrepancy in

the emails took place.

***

Q And upon learning on February 4th of the hard drive crash, who

did you communicate that to?

A That was relayed to Kate [Duval].

Q By who?

A I would have been the one to do it, yes.

398

Kane also noted that senior IRS leadership became aware in mid-February 2014 that

Lerner’s hard drive had been recycled and that any e-mails on the hard drive were

“unrecoverable.”

399

He testified:

Q And do you recall when Mr. Butler gave you that information, the

hard drive had been recycled?

398

Id.

399

Id.

A I don't recall a specific date or time period, or time, but it certainly

would have been within the period of time when he was actively

interacting with the IT people, in early to mid February.

***

Q Do you have an understanding now as to what that term,

“recycled,” means?

A I do have some knowledge as to what happened to the hard drive.

Q What happened to the hard drive?

A After the CI forensic analysis determined that it was – that the

material on it was unrecoverable, it was returned to the IT people,

who at some point in time degaussed it to make sure that if there

was anything else on it, particularly from a 6103 perspective, that

it would not be recovered. It was then sent to New Carrollton

again. A lot of our IT functions are housed out there, and they have

a recycling function out there where material is eventually recycled

to an outside contractor. And I have no idea what the outside

contractor does with these materials.

400

From mid-February 2014 to April 2014, the IRS attempted to recover some of the

missing Lois Lerner e-mails by other means.

401

However, it is clear from this testimony that the

IRS knew no later than mid-February 2014 that a portion of Ms. Lerner’s e-mails were missing.

In fact, Commissioner Koskinen acknowledged during a July 2014 hearing: “If you told me now

that Tom Kane said he knew in February, I would henceforth say we, as the IRS, knew in

February.”

402

Despite knowing about the missing e-mails, Commissioner Koskinen failed to mention

anything about the e-mail problems during his sworn testimony on March 26, 2014. Instead, he

affirmatively promised the Committee that the IRS would produce all of Lerner’s e-mails. In

addition, Commissioner Koskinen’s chief lawyer, Catherine Duval, and the IRS’s National

Director for Legislative Affairs, Leonard Oursler, failed to mention any problems with Lerner’s

e-mails during a meeting with bipartisan Committee staff on April 4, 2014.

403

Duval requested

this meeting specifically to discuss how the IRS would execute the Commissioner’s promise to

produce the subpoenaed Lerner e-mails. The fact that both Commissioner Koskinen and his

chief lawyer, Catherine Duval, failed to inform the Committee about the problems with Lerner’s

e-mails on separate occasions suggests a deliberate attempt to mislead the Committee.

400

Id.

401

Id.

402

“An Update on the IRS Response to Its Targeting Scandal”: Hearing Before the Subcomm. on Econ. Growth, Job

Creation & Reg. Affairs of the H. Comm. on Oversight & Gov’t Reform, 113th Cong. (2014) (emphasis added).

403

Meeting between Committee staff and Catherine Duval & Leonard Oursler, Internal Revenue Serv. (Apr. 4,

2014).

Even when the IRS finally acknowledged the missing e-mails on June 13, 2014, the

misleading information continued. First, the IRS stated that it “confirmed” that back-up tapes

from the relevant period had been destroyed.

404

Commissioner Koskinen repeated this

information during his sworn testimony to the House Ways and Means Committee on June 20,

2014. He testified:

In light of the hard-drive issue, the IRS took multiple steps over the past

months to assess the situation and produce as much email as possible for

which Ms. Lerner was an author or recipient. We retraced the collection

process for her emails. We located, processed and included email from an

unrelated 2011 data collection for Ms. Lerner. We confirmed that

backup tapes from 2011 no longer existed because they have been

recycled, pursuant to the IRS normal policy. We searched email from

other custodians for material on which Ms. Lerner appears as author or

recipient.

405

During the same hearing, Koskinen also testified that the IRS went to “great lengths” and

made “extraordinary efforts” to recover Lerner’s emails.

406

Subsequently, however, the Committee learned that back-up material may exist, contrary

to Commissioner Koskinen’s assertions. Kane testified during a transcribed interview that

“[t]here is an issue as to whether or not . . . all of the backup recovery tapes were destroyed on

the 6-month retention schedule.”

407

Oursler confirmed this information, testifying during a

transcribed interview that he became aware of the existence of back-up tapes around July 4,

2014.

408

The IRS’s inspector general similarly informed the Committee that as many as nine

back-up tapes that were not overwritten by the IRS.

409

The inspector general also told the

Committee that it located 760 Microsoft Exchange server drives that from the relevant period

that the IRS had not searched because it was under the mistaken belief that the drives had been

destroyed.

410

Apparently, due to budgetary constraints, the drives had not been destroyed.

411

For four months, from February 2014 to June 2014, IRS Commissioner John Koskinen

withheld vital information about the IRS’s ability to comply with the Committee’s subpoena for

all of Lois Lerner’s e-mails. Even after claiming that Lerner’s e-mails were missing, Koskinen

continued to provide incomplete and misleading information about the IRS’s efforts to recover

them. As recently as September 12, 2014, Koskinen insisted that Lerner’s e-mails were

404

Letter from Leonard Oursler, Internal Revenue Serv., to Ron Wyden & Orrin Hatch, S. Comm. on Finance encl.

3 (June 13, 2014).

405

“Recent Developments in the Committee’s Investigation into the Internal Revenue Service’s Use of Inappropriate

Criteria to Process Applications of Tax-Exempt Organizations”: Hearing Before the H. Comm. on Ways & Means,

113th Cong. (2014) (statement of John Koskinen, IRS Commissioner) (emphasis added).

406

Id.

407

Transcribed interview of Thomas Kane, Internal Revenue Service, in Wash., D.C. (July 17, 2014).

408

Transcribed interview of Leonard Oursler, Internal Revenue Serv., in Wash., D.C. (July 22, 2014).

409

Conference call between Treasury Inspector Gen. for Tax Admin. and Congressional Staff (July 29, 2014).

410

Id.

411

Id.

permanently missing. In a letter to Subcommittee on Economic Growth, Job Creation, and

Regulatory Affairs Chairman Jim Jordan regarding whether Lerner’s e-mails might be

recoverable from back-up tapes maintained by the IRS, Koskinen wrote: “We have seen no

indication that any email data from the June 2011 timeline exists or is accessible on these [back-

up] tapes.”

412

Koskinen was wrong. On November 21, 2014, TIGTA notified congressional

investigators that it located approximately 30,000 of Lerner’s “missing” e-mails.

413

TIGTA

found the e-mails among hundreds of “disaster recovery tapes” that were used to back up the IRS

e-mail system.

414

TIGTA is expected to release a report that provides additional detail about

why the e-mails were destroyed, and how they were recovered.

Koskinen’s posture with respect to the Committee’s efforts to obtain Lerner’s e-mails

delayed the Committee’s investigation. Koskinen’s credibility was further damaged when

TIGTA found approximately 30,000 Lerner e-mails that Koskinen had previously claimed were

permanently lost.

IRSemployeesopenlysoughttoavoidcongressionalscrutinybyshieldinge‐

mailcommunications

In the course of the Committee’s investigation, it became apparent that the IRS tacitly

condoned an environment in which IRS employees sought to evade congressional oversight of

their official business. Not only did senior IRS employees regularly utilize their private, non-

official e-mail accounts to conduct official IRS business, but Lois Lerner even warned her

colleagues to “be cautious about what we say in emails.”

415

These actions not only potentially

violate federal law, but they frustrate congressional oversight of the executive branch. Even

worse, the Committee found that IRS employees sent confidential taxpayer information using

non-official e-mail accounts, which potentially compromised the security of this information.

Although the IRS provides senior employees with portable official laptops,

416

the use of non-

official e-mail accounts to conduct official business within the IRS is prevalent and reoccurring.

The Federal Records Act requires the preservation of all communications connected to

official government business, including the use of official e-mail accounts.

417

The IRS maintains

a records-retention policy that specifically prohibits the use of a non-official e-mail account to

conduct official IRS business.

418

The IRS considers e-mails to be official records when “they are

created or received in the transaction of agency business, appropriate for preservation as

412

Letter from John Koskinen, Internal Revenue Serv., to Rep. Jim Jordan, Chairman, Subcomm. on Economic

Growth, Job Creation, and Regulatory Affairs (Sep. 12, 2014).

413

Rachel Bade, Thousands of lost Lois Lerner IRS e-mails found by IG, POLITICO, Nov. 23, 2014.

414

Susan Ferrechio, 30,000 missing e-mails from IRS’ Lerner recovered, WASH. EXAMINER, Nov. 22, 2014.

415

E-mail from Lois Lerner, Internal Revenue Serv., to Maria Hooke, Internal Revenue Serv. (Ap. 9, 2013) [IRSR

726247].

416

See Transcribed interview of Sarah Hall Ingram, Internal Revenue Serv., in Wash., D.C. (Sept. 23, 2013).

417

44 U.S.C. ch. 31.

418

See I.R.M. § 10.8.1.4.6.3.1; see also Letter from Daniel Werfel, Internal Revenue Serv., to Darrell Issa, H.

Comm. on Oversight & Gov’t Reform (Sept. 16, 2013).

evidence of the government’s function and activities, or valuable because of the information they

contain.”

419

The Committee’s investigation has found that several IRS employees – including former

Commissioner Doug Shulman and former Exempt Organizations Director Lois Lerner – sent or

received material relating to official IRS business on their non-official e-mail accounts. For

example, material produced to the Committee included draft IRS documents that Lerner sent to a

non-official msn.com e-mail account from her official IRS account.

420

Lerner’s use of her non-

official e-mail account appears to have been so prevalent as to be saved in her IRS e-mail with

the shorthand label, “Lois Home.”

421

Judith Kindell, Lerner’s former senior technical advisor, also used her non-official e-mail

account to conduct official IRS business.

422

Documents produced to the Committee show that

Kindell transmitted confidential taxpayer information, redacted by the IRS for § 6103 purposes,

from her official e-mail account to her non-official Verizon.net e-mail account and to Lerner’s

non-official msn.com e-mail account.

423

The transmission of this material over unsecure e-mail

channels threatened the security of the information and may have compromised sensitive

taxpayer information.

In August 2013, Chairman Issa wrote to Treasury Secretary Lew to remind him of his

obligation to ensure that all e-mails related to official business are preserved for congressional

oversight.

424

Then-acting IRS Commissioner Daniel Werfel responded, assuring the Committee

that the IRS has taken all “necessary steps to preserve emails” and to evaluate any personnel

actions for the use of non-official e-mail accounts.

425

The Committee, however, is not aware of

any IRS disciplinary action on the violations of federal law and IRS policy uncovered by the

Committee.

The Committee also learned in the course of its investigation that the IRS maintained a

wholly separate instant-messaging communication system that it did not regularly archive.

426

According to one IRS employees, the system – known as “Office Communication Server,” or

OCS – is “not set to automatically save as the standard; however, that functionality exists within

the software.”

427

The fact that the IRS did not automatically archive these messages as a matter

of course speaks loudly to the agency’s disregard of preserving communications records for

congressional oversight or other needs.

419

I.R.M. § 1.10.3.2.3.

420

See Letter from Darrell Issa & Jim Jordan, H. Comm. on Oversight & Gov’t Reform, to Lois G. Lerner, Internal

Revenue Serv. (Aug. 13, 2013).

421

Id.

422

See Letter from Darrell Issa & Jim Jordan, H. Comm. on Oversight & Gov’t Reform, to Judith Kindell, Internal

Revenue Serv. (Sept. 30, 2013).

423

See, e.g., E-mail from Judith Kindell to Lois Lerner (Aug. 23, 2011) [LERNER-OGR205 – 224].

424

Letter from Darrell Issa, H. Comm. on Oversight & Gov’t Reform, to Jacob Lew, U.S. Dep’t of the Treasury

(Aug. 15, 2013).

425

Letter from Daniel Werfel, Internal Revenue Serv., to Darrell Issa, H. Comm. on Oversight & Gov’t Reform

(Sept. 16, 2013).

426

E-mail from Maria Hooke, Internal Revenue Serv., to Lois Lerner, Internal Revenue Serv. (Apr. 9, 2013) [IRSR

726247].

427

Id.

Worse still, evidence obtained by the Committee suggests that Lois Lerner actively

sought to hide information from Congress. In one e-mail, Lerner spoke of counseling her

colleagues to be “cautious” of what they write in e-mail due to congressional oversight interests

in the subject matter. She wrote:

I was cautioning folks about email and how we have had several occasions

where Congress has asked for emails and there has been an electronic

search for responsive emails – so we need to be cautious about what we

say in emails.

428

In the same e-mail, Lerner went on to ask whether the IRS’s internal instant-messaging OCS

system was automatically archived. When told it was not, Lerner responded in one word:

“Perfect.”

429

The IRS clearly has an irresponsibly – and potentially illegally – lax attitude toward

record retention. The Archivist of the United States, David Ferriero, testified to the Committee

that the IRS did not follow the law in retaining Lois Lerner’s destroyed e-mails.

430

The IRS

fostered an atmosphere that allowed senior employees, such as Lerner, to encourage colleagues

to avoid written records for fear of public scrutiny. This work environment allowed employees

to use personal e-mail accounts for official business, including the transmittal of confidential

taxpayer information. The failure of the IRS to properly preserve e-mail and other records,

coupled with its apparent institutional disregard for federal records laws, frustrates congressional

oversight and prevents the American people from learning the full truth about the IRS’s

targeting.

TheIRStargetingandcover‐updirectlyharmedconservativegroups

applyingfortax‐exemptstatus

The misconduct by the IRS had real and appreciable effects on the conservative groups

that applied for tax-exempt status. As explained, the IRS targeted conservative-oriented

applicants based on their names and political beliefs, these groups faced substantial delays, and

the IRS asked these groups burdensome and inappropriate questions. In addition to these

primary harms, conservative-leaning tax-exempt applicants experienced ancillary affects of the

IRS targeting. Most notably, the IRS misconduct and misleading statements to Congress stifled

the constitutional speech of conservative-groups in the 2012 election season. The IRS’s inaction

also caused conservative-oriented groups to receive revocation of their exempt status by

operation of law almost as soon as it was granted.

428

E-mail from Lois Lerner, Internal Revenue Serv., to Maria Hooke, Internal Revenue Serv. (Ap. 9, 2013) [IRSR

726247].

429

E-mail from Lois Lerner, Internal Revenue Serv., to Maria Hooke, Internal Revenue Serv. (Ap. 9, 2013). [IRSR

726247].

430

See “IRS Obstruction: Lois Lerner’s Missing E-mails, Part II”: Hearing Before the H. Comm. on Oversight &

Gov’t Reform, 113th Cong. (2014).

IRSactionssuppressedconservativevoicesduringthe2012election

The IRS’s targeting of conservative-oriented tax-exempt applicants stifled their rights to

constitutional speech during the 2012 presidential election. Two years earlier, some of the very

same conservative groups were active in the 2010 campaign cycle, which resulted in a

Republican-controlled House of Representatives. President Obama called the 2010 election a

“shellacking.”

431

The conservative gains in the House of Representatives in 2010 were widely

attributed to the grass-roots Tea Party movement, which emerged in opposition to the policies of

the Obama Administration.

432

There is no doubt that the nascent Tea Party movement had an appreciable effect on the

2010 midterm election. A November 2013 study suggests that the Tea Party had “an estimated

nationwide effect on the 2010 midterm election corresponding to 3.2 – 5.8 million additional

votes for the Republican Party in the 2010 House elections.”

433

This enormous influence was

widely noted at the time. After the 2012 election, however, with many Tea Party tax-exempt

applications in limbo at the IRS, commentators began speculating whether the Tea Party

movement was “dead.”

434

Exit polling in 2012 showed that only 21 percent supported the Tea

Party, down from 41 percent support in 2010.

435

The IRS’s targeting of conservative applicants had a real effect on their activities. As

conservative-leaning applicants waited for the IRS to make a decision on their tax-exempt

applications, the mounting delays hurt the applicants. Without an IRS determination letter,

donors stopped giving to these groups, interest waned, and some groups suspended their work.

436

Frustrated applicants called revenue agents in Cincinnati, who expressed sympathy but were told

to respond that the applicant was “under review.”

437

Some groups even withdrew their

applications due to the excessive delays, unaware that their applications were under review in

Washington.

438

The IRS’s inaction essentially prevented these groups from operating at full

bore, and from exercising their constitutionally protected rights to free speech and free

association.

Adding insult to injury, senior IRS officials were fully aware of the IRS’s inappropriate

treatment of conservative-leaning tax-exempt applicants before the 2012 election and never

disclosed their findings. Their efforts to keep this information from the American people – and,

indeed, to purposefully not inform Congress – virtually ensured that Tea Party participation in

the 2012 election would be limited. Without sunlight to expose the IRS’s misdeeds, the

applicants continued to feel intimidated by the machinery of the IRS. As groups ceased their

431

The White House, Press Conference by the President (Nov. 3, 2010).

432

Lisa Lerer & Alison Fitzgerald, Tea Party Wins House for Republicans, Wants Rewards in Congress,

BLOOMBERG, Nov. 4, 2010.

433

See Andres Madestam, Daniel Shoag, Stan Veuger, & David Yanagizawa-Drott, Do Political Protests Matter?

Evidence from the Tea Party Movement, 128 Q.J.

OF ECON. 1633, 1666 (Nov. 2013).

434

Chris Cillizza, Is the Tea Party Dead? Or Just Resting?, WASH. POST, Dec. 4, 2012.

435

Id.

436

See Patrick O’Connor, Groups Recount Tax Battle’s Toll, WALL ST. J., May 14, 2013.

437

Transcribed interview of Ronald Bell, Internal Revenue Serv., in Wash., D.C. (June 13, 2013); Transcribed

interview of Stephen Daejin Seok, Internal Revenue Serv., in Wash., D.C. (June 19, 2013).

438

Transcribed interview of Stephen Daejin Seok, Internal Revenue Serv., in Wash., D.C. (June 19, 2013).

operations and donors stopped contributing, the IRS’s targeting suppressed conservative voices

during the 2012 presidential election. Because of the IRS cover-up, millions of Americans went

to the polls in November 2012 with no awareness of the IRS’s inappropriate treatment of

conservative tax-exempt applicants.

IRSdelaysinprocessingapplicationsledtotheauto‐revocationofexempt

status

The excessive delays in processing conservative-oriented applicants for tax exemption

led to the IRS revoking exempt status for some groups almost immediately after it was granted.

The Pension Protection Act of 2006 changed filing requirements for exempt organizations. The

law included a provision requiring the automatic revocation of a group’s tax-exempt status if it

has not filed an annual return or notice for three consecutive years.

439

Lerner’s advisor Sharon

Light explained the provision during her transcribed interview with Committee staff. She

testified: “So many organizations that previously hadn’t had to file tax information returns, 990

series returns, had to file. The act also introduced a penalty for not filing for three consecutive

years – revocations automatically revoked.”

440

For groups that received auto-revocation, it

meant that they would be taxable.

441

The IRS published its first list of revoked organizations in June 2011 – roughly the same

time Lerner became aware of the inappropriate screening criteria.

442

As late as June 2012,

Lerner became aware of several pending applications within the backlog of conservative-

oriented applications that would be subject to automatic revocation. On June 11, Holly Paz e-

mailed Lerner about revenue agents calling applicants in the backlog, telling her that “[w]e are

not calling anyone who appears to fall into auto rev. Cindy’s folks research potential auto rev

cases before calls are made. We are sitting [sic] those aside now pending direction. We are

compiling data for you on these cases.”

443

Days later, Paz informed Lerner that there were

already 14 applications that would be auto-revoked by “operation of law” and that “[t]hey are

mostly [§ 501](c)(4)s and larger orgs.”

444

On June 26, Lerner wrote to Deputy Commissioner

Steve Miller that several § 501(c)(4) applicants “will be auto-revoked as soon as we provide

them with an approval” because of the processing delays.

445

The excessive delays and the resulting auto-revocation also affected some applicants that

should have received a determination in a timely manner. Holly Paz told the Committee that the

use of term “Tea Party” to screen applications resulted in the delay of at least one application

that should have been approved promptly. She testified that at least one application that did not

439

Pub. L. 109-280, § 1223(b), 120 Stat. 780, 1090 (2006).

440

Transcribed interview of Sharon Light, in Wash., D.C. (Sept. 5, 2013).

441

Transcribed interview of David Fish, Internal Revenue Serv., in Wash, D.C. (Oct. 2, 2014).

442

See Transcribed interview of Holly Paz, Internal Revenue Serv., in Wash., D.C. (May 21, 2013).

443

E-mail from Holly Paz, Internal Revenue Serv., to Lois Lerner, Internal Revenue Serv. (June 11, 2012) [IRSR

366415].

444

E-mail from Holly Paz, Internal Revenue Serv., to Lois Lerner, Internal Revenue Serv. (June 14, 2012) [IRSR

352645].

445

E-mail from Lois Lerner, Internal Revenue Serv., to Steven Miller & Sarah Hall Ingram, Internal Revenue Serv.

(June 26, 2012) [IRSR 199331].

have indications of political activity or inconsistencies in its application was caught in the

backlog of about 300 cases because of the IRS’s use of inappropriate screening criteria. She

stated:

Chm. ISSA So at least one of these 300, but 20 or 30 that you

[personally] looked at, should have flown through [the

determinations process] just fine and was tied up with the

word Tea Party or some other buzz word for 2 or 3 years?

A I think yes, there’s probably at least one that falls into that

situation.

446

The delays caused by the IRS’s inappropriate treatment of conservative-oriented tax-

exempt applicants had an appreciable effect on the exempt status of some groups. In addition to

having their political speech suppressed, some organizations that had applied for exempt status

over three years ago became subject to the auto-revocation provisions of the Pension Protection

Act. Their exempt status was automatically revoked almost immediately after it was granted.

For groups that spent over three years waiting for the IRS to process their application, it meant

that they would have to apply for reinstatement. Their long ordeal with the IRS was not over.

ThereisconflictingevidenceonwhethertheTreasuryDepartmentwas

awareoftheIRStargetingin2012

With the demonstrable harm that the IRS targeting caused conservative groups involved

in political speech, an important question is why the targeting was not disclosed until after the

2012 presidential election. Although the most senior levels of the IRS knew of the targeting well

before the election, it has been an open question as to whether other elements of the

Administration were simultaneously aware. On this point, the Committee’s investigation has

uncovered conflicting evidence as to whether the Obama Treasury Department was aware of the

IRS targeting before the 2012 presidential election.

On June 4, 2012, Treasury Inspector General for Tax Administration J. Russell George

met with Christopher Meade, the General Counsel of the Treasury Department.

447

Days earlier,

on May 30, 2012, George had fully briefed IRS Commissioner Doug Shulman about TIGTA’s

audit of the IRS’s treatment of tax-exempt applicants and about preliminary findings that the IRS

had used inappropriate criteria – including the phrase “Tea Party” – to identify and segregate

applicants.

448

George told the Committee that he conveyed similar information to Treasury

General Counsel Meade on June 4, 2012. In a letter to Chairman Jordan, George wrote:

The June 4, 2012, meeting with Mr. Meade was my regular monthly

meeting with him. In fact, between June 2012 and the issuance of the

446

Transcribed interview of Holly Paz, Internal Revenue Serv., in Wash., D.C. (May 21, 2013).

447

U.S. Dep’t of the Treasury, Monthly Meeting w/ GC & TIGTA IG (June 4, 2012) (Microsoft Outline calendar

invitation) [OGR-WM 21].

448

Transcribed interview of Doug Shulman, in Wash., D.C. (Dec. 4, 2013).

audit report on May 14, 2013, I had standing monthly meetings with Mr.

Meade as needed, directly following the Bureau Heads meeting hosted by

the Treasury Secretary. My calendar for June 2012 shows that I had a

scheduled Bureau Heads meeting on June 4, 2012. No one else from

TIGTA attended the June 4, 2012, meeting with me. I did not keep notes

of any of my discussions with Mr. Meade. My recollection, however, is

that at that meeting, which occurred early in the audit process, I

advised him that TIGTA was conducting an audit of the IRS’s

processing of applications for tax-exempt status, and I may have

advised him that we were looking at allegations that the IRS was

using names such as “tea party” to identify tax-exempt applications

for review.

449

(emphasis added).

During his transcribed interview with Committee staff, however, Meade testified that

George talked about the audit at “a high level” and did not provide any specifics about TIGTA’s

preliminary findings.

450

Meade testified:

Q Okay. Now, sir, according to Mr. George’s public testimony, he

met with you on June 4, 2012; is that right?

A I recall meeting with him on June 4th, 2012.

***

Q Let me show you a document that has been produced to the

committee by TIGTA. I’ll mark it as Exhibit 1. . . . This is a

document produced to the committee by TIGTA and prepared by

TIGTA for Mr. George’s use during an earlier briefing on May

30th, 2012, to Commissioner Shulman. Sir, please take as much

time as you would like to review the document and let me know

when you are ready to proceed.

A Okay.

Q Sir, have you seen this document before?

A I did not see it at the time. I believe it was a link to a Washington

Post article sometime last fall.

***

Q Sir, I want to draw your attention to the section labeled “Audit

Status” towards the bottom of the first page. Do you see that?

449

Letter from J. Russell George, Treasury Inspector Gen. for Tax Admin., to Jim Jordan, H. Comm. on Oversight

& Gov’t Reform (Mar. 12, 2014).

450

Transcribed interview of Christopher Meade, U.S. Dep’t of the Treasury, in Wash., D.C. (Feb. 26, 2014).

A I do.

Q The first two sentences read, quote, “Due to the sensitivity of this

issue, we are providing information identified during planning for

this audit. We obtained documentation indicating that certain

organizations’ applications for tax-exempt status were targeted by

the Exempt Organizations Determinations office based on the

organizations’ name or political beliefs.” Do you see that?

A I see that you’re reading from the document.

Q And did I read that correctly?

A Yes.

***

Q I would like to show you one more document. This was produced

to the committee by TIGTA as well. I will mark this as Exhibit 2. .

. . Sir, as you read the document, I will note for the record this is

an email from Michael Phillips of TIGTA to J. Russell George of

TIGTA, dated June 1st, 2012, at 2:37 p.m.

***

Q Sir, have you seen this document before?

A I did not see it at the time. I saw it was linked in a Washington

Post article that was published sometime last fall.

Q Okay, sir, the email reads: “Hi Russell. Mike prepared the

information below related to your request yesterday during the

senior staff meeting for brief details about the three audits

discussed during the Commissioner’s meeting this week. You

asked for this information for the Secretary’s meeting on Monday.”

And underneath that the first bolded item reads: “Applications for

tax-exempt status by section 501(c)(4) social welfare

organizations. We obtained documentation indicating that certain

organizations’ applications for tax-exempt status were targeted by

the Exempt Organizations Determinations office based on the

organizations’ name or political beliefs.” Do you see that?

A Yes.

Q Did I read that correctly?

A Yes. You might want to read the next sentence as well.

Q “Additional audit work is needed to determine the extent, if any, of

inconsistent treatment of these organizations’ applications for

section 501(c)(4) tax-exempt status.” Did I read that correctly?

A Yes.

***

Q This material [was] prepared for Mr. George for his use as of June

4, 2012, did you and Mr. George talk about any of this material in

your discussion on June 4, 2012?

***

A Mr. George did not convey to me the information that you read in

this email.

Q He didn’t convey anything to you about this?

A I can tell you what I recall.

Q What do you recall?

A He stated at a high level that he was beginning an audit relating to

tax-exempt status at the request of Congress. He raised a handful

of other audits at a high level. The rest of the meeting was spent

talking about my predecessor and general getting to know each

other. He did not provide the information that you read in this

document.

***

Q So, Mr. Meade, is it your testimony that Mr. George did not

convey to you anything about the preliminary indications of

TIGTA’s audit?

A Yes, that is my testimony. I can tell you at some much later point

in the first quarter of 2013, he raised to me that there could be

troubling findings from the audit. At that point I recall that as

being significant. I have no recollection and I do not believe he

conveyed anything along those lines when I met with him in June

2012.

451

Id.

Similar to the conflicting evidence about Meade’s awareness of the targeting in 2012,

there is conflicting evidence about the awareness of Mark Patterson, the Treasury Department’s

chief of staff. George informed the Committee that he briefed Patterson about the audit and the

IRS’s use of the phrase “Tea Party” in September 2012. In a letter to Chairman Jordan, George

wrote:

With regard to my meeting with Mr. Patterson on September 14, 2012, I

have checked my calendar and it shows that I was scheduled for a meeting

with him on that day from 2 p.m. to 4 p.m. In addition, I inquired with

Treasury’s Director, Office of Security Programs, and she confirmed to

me that I entered the Main Treasury building on that day at 1:35 p.m. I

also attended that meeting by myself. I did not keep notes of our

discussion, but my recollection is that I advised Mr. Patterson that TIGTA

was conducting an audit of the IRS’s processing of applications for tax-

exempt status, and that I conveyed the general sense that the IRS had

selected applications from certain political groups for additional

scrutiny, including using descriptors such as “tea party” to identify

such applications. However, I do not recall verbatim what I discussed

with Mr. Patterson at that meeting.

452

Like Meade, Patterson denied being aware of TIGTA’s preliminary audit findings in

2012. Patterson also testified that he did not recall a meeting with George in September 2012.

He testified during a transcribed interview:

Rep. JORDAN. Mr. George also told us – you said the first time you

learned of the TIGTA report was early 2013. Mr.

George said he had a meeting with you on

September 4th – excuse me, September 14th, 2012,

where he informed you of what was going on and

the Inspector General’s audit of the targeting. Do

you recall that meeting?

Mr. PATTERSON. I don’t.

Rep. JORDAN. He said he conveyed to you actually that there was

targeting going on and groups were being

scrutinized. He said he conveyed that to you

personally in a personal meeting September 14th,

2012.

Mr. PATTERSON. I don’t remember that meeting, no. I don’t.

***

452

Letter from J. Russell George, Treasury Inspector Gen. for Tax Admin., to Jim Jordan, H. Comm. on Oversight

& Gov’t Reform (Mar. 12, 2014) (emphasis added).

Rep. JORDAN. Mr. Patterson, how many meetings did you have,

just individual meetings, with the Inspector

General?

Mr. PATTERSON. I don’t have any way of counting that,

Congressman. I don’t –

Rep. JORDAN. But was it a handful of times or was it – I mean, you

talked about this group meeting, but Mr. George

told us on September 14th, 2012, it was just the two

of you, it was just him and you.

Mr. PATTERSON. How many times did I meet with him just the two of

us?

Rep. JORDAN. Yeah.

Mr. PATTERSON. I don’t know. I mean, I don’t have a way of

estimating that. I mean, I would say – it would have

to be a guess, okay? Which I know I was instructed

at the beginning, don’t guess if I don’t know the

answers on things. But I met with him it was

periodically. I only met with him, really, at his

initiative, and he would stop by my office.

Sometimes he would stop by my office –

Rep. JORDAN. Would you describe it as frequent or infrequent?

Mr. PATTERSON. I would describe it as infrequent.

Rep. JORDAN. Okay. So when he stopped by, was it – so it’s not

customary, it’s not ordinary. So, obviously –

Mr. PATTERSON. It’s not unusual. As I said, I saw Russell [George]

once a month at the staff meeting. He was a

friendly guy. And, from time to time, he would

post me on things that he was working on. And he

also, from time to time, would post me on things

that were about to come out the next day.

***

Mr. PATTERSON Again, I said I don’t remember him talking to me

about it.

Rep. JORDAN. I understand. You said you don’t recall learning

about this until 2013. Russell George said he told

you September 14th. . . . And it’s not just that, it’s

not, hey, there’s a negative IG report coming, like

all the others. He specifically used these terms.

That’s what we are trying to get at.

Mr. PATTERSON. I understand where you’re coming from. All I can

tell you is what I remember, okay?

Rep. JORDAN. Well, we appreciate that. That’s what we’re here

for. All I know is Russell George remembers it

differently.

453

The Committee’s investigation has uncovered conflicting evidence as to whether senior

executives in the Treasury Department were aware of the IRS targeting in 2012. Certainly, if the

Obama Administration was aware of the IRS’s harassment of Tea Party applicants prior to the

2012 election – as Inspector General J. Russell George indicated in his letter to Chairman Jordan

– then its refusal to notify the public or Congress in a timely manner was a serious dereliction of

its duty and a failure of government.

TheIRSsoughtothermethodstoreininpoliticallyactivenon‐profitsas

earlyas2010

The Committee has uncovered evidence that the IRS sought to use its tremendous power

to unilaterally rein in politically active non-profits soon after Citizens United. From 2010 until

2013, the IRS planned and even attempted several methods of measuring and curbing the

political activities of tax-exempt groups. These plans and attempts went beyond the IRS’s duties

as a neutral administrator of tax law, amounting to the informal regulation of non-profit political

activity. Succumbing to the political pressure it faced, the IRS sought ways to make its actions

public – in essence, to show that it was cracking down on 501(c)(4) groups and deter likeminded

groups from similar political activity. This IRS effort was symptomatic of attempts across the

Obama Administration to stifle conservative political speech.

The IRS has repeatedly explained away the targeting as the result of an “uptick” in tax-

exempt applications in the wake of Citizens United.

454

Documents uncovered during the

investigation eviscerate this excuse. An internal IRS analysis shows that the IRS began

identifying a substantial amount more applications with indications of political activity after

Lerner changed the criteria. Through June 2011, the IRS identified at most 10 applications per

month that it classified as involving “political advocacy.”

455

After Lerner broadened the criteria,

the IRS identified an average of over 35 applications per month until the screening criteria was

453

Transcribed interview of Mark Patterson, in Wash., D.C. (Feb. 4, 2014).

454

Rick Hasen, Transcript of Lois Lerner’s Remarks at Tax Meeting Sparking IRS Controversy, ELECTION LAW

BLOG (May 11, 2013, 7:37AM), http://electionlawblog.org/?p=50160.

455

See Internal Revenue Serv., Receipts of Political Advocacy Cases by Control Date (undated) [IRSR 536645].

changed again.

456

In the crucial period when the IRS first identified and elevated the Tea Party

“test” cases in 2010, however, the IRS received only a handful of applications per month.

457

TheIRSsoughttocurbpoliticallyactivenon‐profits

In the wake of Citizens United, the IRS sought to curb political speech by tax-exempt

groups. This task fell to the Exempt Organizations Division and Lois Lerner, who according to

one IRS employee, believed the decision would cause “questions and work” for the IRS.

458

fall 2010, as the media and Democrats in Congress questioned the legitimacy of conservative-

oriented non-profits engaged in political speech, Lerner wrote to her boss, Sarah Hall Ingram

“we won’t be able to stay out of this – we need a plan!”

459

Lerner proposed a “c4 project” to

examine more closely self-declared non-profits engaged in political activities.

460

Lerner noted

“there is a perception out there” that some 501(c)(4) groups are established only to engage in

political activity.

461

After an advisor assured Lerner that “[i]t’s definitely happening,”

462

Lerner

replied: “We need to have a plan. We need to be cautious so it isn’t a per se political project.

More a c4 project that will look at levels of lobbying and pol. activity along with exempt

activity.”

463

(emphasis added).

Figure 13: E-mail from Lois Lerner to Sarah Hall Ingram, Aug. 31, 2010

456

Id.

457

Id.

458

Transcribed interview of Sarah Hall Ingram, Internal Revenue Serv., in Wash., D.C. (Sept. 23, 2013).

459

E-mail from Lois Lerner, Internal Revenue Serv., to Sarah Hall Ingram, Internal Revenue Serv. (Aug. 31, 2010)

[IRSR 632342].

460

See E-mail from Lois Lerner, Internal Revenue Serv., to Cheryl Chasin, Laurice Ghougasian, & Judith Kindell,

Internal Revenue Serv. (Sept. 15, 2010) [IRSR 191031-32].

461

E-mail from Lois Lerner, Internal Revenue Serv., to Cheryl Chasin, Laurice Ghougasian, & Judith Kindell,

Internal Revenue Serv. (Sept. 15, 2010) [IRSR 191031].

462

E-mail from Cheryl Chasin, Internal Revenue Serv., to Lois Lerner, Judith Kindell, & Laurice Ghougasian,

Internal Revenue Serv. (Sept. 15, 2010) [IRSR 191030].

463

E-mail from Lois Lerner, Internal Revenue Serv., to Cheryl Chasin, Laurice Ghougasian, & Judith Kindell,

Internal Revenue Serv. (Sept. 16, 2010) [IRSR 191030].

Figure 14: E-mail from Lois Lerner to Judith Kindell et al., Sept. 15, 2010

Figure 15: E-mail from Lois Lerner to Cheryl Chasin et al., Sept. 16, 2010

What followed was a prolonged and coordinated project to determine the amount and

type of political activity done by tax-exempt organizations. One aspect of this project was the

creation of a questionnaire to be sent to groups that held themselves out as tax-exempt in the

2010 and 2011 tax years.

464

Former Acting Commissioner Steven Miller explained the “self-

declarer” questionnaire during his transcribed interview with Committee staff. He testified:

Q Do you recall a project related to a questionnaire for (c)(4), (5),

and (6) organizations?

A Yes.

Q Can you explain what that project was?

A So, it was in the Exempt Organizations work plan. . . . That was a

proposed questionnaire to organizations that had not come into the

Internal Revenue Service for the – an exemption letter, and the

thought was that we would go out and find out what they were

doing, and it had political activity as a portion, but it was also

inurement and a batch of other activities, discussions through it.

465

464

See E-mail from Shirley White, Internal Revenue Serv., to Lois Lerner, Internal Revenue Serv. (Mar. 27, 2013)

[IRSR 203136].

465

Transcribed interview of Steven Miller, in Wash., D.C. (Nov. 13, 2013).

The questionnaire included questions about the groups’ political activities, including the amount

of political activity, volunteers used, and percentage of time spent.

466

Recognizing the sensitivity

of the questions, the IRS purposefully delayed sending the questionnaires until after the 2012

presidential election.

467

Lerner cautioned against waiting too long to send the questionnaires,

because, as she wrote to Miller’s chief of staff, “if we don’t move before the end of the year,

all the criticism that we didn’t do anything during the election gets louder.”

468

In addition to asking groups about their political activities in the questionnaire, the IRS

simultaneously scoured public data to determine the level of political activity by non-profits.

Lerner directed one IRS agent to analyze data using OpenSecrets.org, a website run by the

Center for Responsive Politics. In sending him a newsletter from OpenSecrets, Lerner wrote that

the group was “[o]ne org that analyzes money in politics. There are many. You may want to

look at their site to see if there are things there or old issues that could provide you with stuff.”

469

Figure 16: E-mail from Lois Lerner to Christopher Giosa, Nov. 29, 2012

From these data sources, the IRS prepared an explanatory document for Lerner that

presented a hypothesis that Citizens United “has led to increased donations to, and political

activities of non-profit corporations.”

470

The document posed several open questions, such as

“[w]hat are the trends of how many of these organizations affiliate themselves with specific

political parties and specific issues” and “[w]hat are the trends in the number of each type of

exempt organization conducting political activities.”

471

466

See E-mail from Lois Lerner, Internal Revenue Serv., to Stephen Clarke et al., Internal Revenue Serv. (Oct. 21,

2012) [IRSR 184591].

467

See E-mail from Lois Lerner, Internal Revenue Serv., to Nikole Flax, Internal Revenue Serv. (Sept. 18, 2012)

[IRSR 184149]; E-mail from Lois Lerner, Internal Revenue Serv., to Nikole Flax, Internal Revenue Serv. (Sept. 12,

2012) [IRSR 201036].

468

E-mail from Lois Lerner, Internal Revenue Serv., to Nikole Flax, Internal Revenue Serv. (Nov. 14, 2012)

(emphasis added) [IRSR 654057].

469

E-mail from Lois Lerner, Internal Revenue Serv., to Christopher Giosa, Internal Revenue Serv. (Nov. 29, 2012)

[IRSR 656231].

470

Internal Revenue Serv., Trends in Donations to, and the Political Activities of Certain Non-profit Corporations:

Background on What Data May be Available [IRSR 185324-27].

471

Id.

Lerner’s team set out to answer these questions. A subordinate explained the IRS’s

extensive research in one e-mail to Lerner in late-March 2013. He wrote:

Generally, we have looked at the trends in the numbers, revenue, and

expenses . . . of 501(c)(4)s from 2008 – 2011 who have reported political

campaign activity to the IRS and compared them to the overall 501(c)(4)

population. We also have looked in-depth at larger 501(c)(4)s (top 25 or

so) as well as looked for trends of one tax year “pop-ups.” In the past

week, we also assembled data from the FEC online electioneering

communication data to compare spending reported to FEC vs. spending

reported to IRS as political campaign activity . . . . We’re looking forward

to iterating this with you and gaining the benefit of your expertise in

interpreting what we are seeing in the data.

472

By April 2013, the IRS had finished a draft analysis of the trends in 501(c)(4) groups

with indications of political activity.

473

Like the explanatory document, the analysis grounded

the issue in Citizens United, stating: “Since Citizens United (2010) removed the limits on

political spending by corporations and unions, concern has arisen in the public sphere and on

Capitol Hill about the potential misuse of 501(c)(4)s for political campaign activity due to their

tax exempt status and the anonymity they can provide to donors.”

474

Not surprisingly given the

manner in which the IRS framed the problem, the analysis found an increase in the number of

groups engaging in political activities and an increase in the amount of political expenditures.

475

Documents show that Lerner’s team had a special interest in restricting anonymous

donors to 501(c)(4) groups. For example, in July 2012, in response to a news article about

anonymous donors to 501(c)(4)s, Lerner wrote to her team about how to measure donor

anonymity. She wrote: “Have we ever looked at a random sample of donors on c4s? Can we

add that look to the dual tracks to see if there are a lot of anonymous donors reported or a few

anonymous donors who have e [sic] given huge amounts? . . . Please put together a proposal for

how we will do this and keep track.”

476

Two weeks later, an IRS employee circulated a list of

501(c)(4) groups that had received anonymous donations.

477

Simultaneously, Washington-based

tax law specialist Justin Lowe proposed including a disclosure requirement for 501(c)(4) groups

in the Administration’s legislative proposals for fiscal year 2014.

478

472

E-mail from Justin Abold, Internal Revenue Serv., to Lois Lerner, Internal Revenue Serv. (Mar. 22, 2013) [IRSR

556193].

473

See Internal Revenue Serv., Baseline Analysis of 501(c)(4) Form 990 Filers with Schedule C Political Campaign

and Lobbying Activities (Apr. 15, 2013) [IRSR 195642-65].

474

Id. at 3.

475

Id. at 4.

476

E-mail from Lois Lerner, Internal Revenue Serv., to Nanette Downing, Internal Revenue Serv. (July 25, 2012)

[IRSR 496747].

477

See E-mail from Karen Hood, Internal Revenue Serv., to Kathie Averett, Internal Revenue Serv. (Aug. 6, 2012)

[IRSR 497501].

478

E-mail from Justin Lowe, Internal Revenue Serv., to Andy Megosh & David Fish, Internal Revenue Serv. (Aug.

9, 2012) [IRSR 462574].

Separately, the IRS also pursued regulation of politically active non-profit groups through

other means. In late 2010 and early 2011, the IRS initiated audits of five individuals who had

donated to 501(c)(4) organizations.

479

Although the IRS denied any broader attempt to tax gifts

to 501(c)(4) groups,

480

internal documents suggest otherwise. In May 2011, an attorney in the

IRS Chief Counsel’s office wrote to his superiors that the “plan is to elevate the issue of

asserting gift tax on donors to 501(c)(4) organizations to the Chief Counsel and the

Commissioner.”

481

On July 1, 2011, IRS Associate Chief Counsel Curt Wilson issued a

memorandum to Chief Counsel William Wilkins on the gift tax issue.

482

Wilson concluded that

“[b]ecause there is no specific exemption from the gift tax for a contribution to an organization

exempt from income tax under § 501(c)(4), a contribution to such an organization is subject to

gift tax under § 2501.”

483

Lerner, another e-mail shows, supported this conclusion: “[T]o be

clearer, the courts have said specifically that contributions to 527 political organizations are not

subject to the gift tax – nothing that I am aware of about contributions to organizations that are

not political organizations.”

484

Although 501(c)(4) groups are not strictly political organizations, the IRS was very aware

of the constitutional implications of imposing gift-tax consequences on transfers to these groups.

Joseph Urban wrote to Lerner: “There is also a constitutional angle that has been raised –

whether imposing the tax on a contribution for political purposes is an infringement on donors’

First Amendment free speech rights . . . .”

485

Lerner immediately grasped the significance,

replying: “The constitutional issue is the big Citizens United issue. I’m guessing no one wants

that going forward.”

486

Separately the same day, Lerner wrote to another colleague about how

the gift-tax project could result in a court challenge to the IRS’s limits on political speech by

non-profits. She wrote: “This is so ironic. We build a cathedral to avoid getting to [court] on c3

issue and innocently, folks follow the rules and it turns into a big broohaha [sic]. This could be

the issue that gets this to the [Supreme Court] on the IRS piece an[d] it isn’t even ours!”

487

Deputy Commissioner Steve Miller eventually quashed the gift-tax possibility in the

wake of significant congressional concern.

488

However, officials in Exempt Organizations

continued to consider how to rein in politically active non-profits. In fiscal year 2011, Exempt

Organizations started a “redesigned Form 990” project to utilize information in an exempt

479

See John D. McKinnon, Is IRS Eyeing Gift Tax Rules to Rein In Non-profits’ Political Activities?, WALL ST. J.,

May 12, 2011.

480

Id.

481

E-mail from Don Spellmann, Internal Revenue Serv., to Nan Marks & Janine Cook, Internal Revenue Serv. (May

9, 2011) [IRSR 14956].

482

Memorandum from Curt Wilson, Internal Revenue Serv., to William Wilkins, Internal Revenue Serv. (July 1,

2011) [IRSR 463169-79].

483

Id. at 1.

484

E-mail from Lois Lerner, Internal Revenue Serv., to Floyd Williams et al., Internal Revenue Serv. (May 13,

2011) [IRSR 14902].

485

E-mail from Joseph Urban, Internal Revenue Serv., to Lois Lerner, Internal Revenue Serv. (May 17, 2011)

[IRSR 196471].

486

E-mail from Lois Lerner, Internal Revenue Serv., to Joseph Urban, Internal Revenue Serv. (May 17, 2011)

[IRSR 196471].

487

E-mail from Lois Lerner, Internal Revenue Serv., to Roberta Zarin, Internal Revenue Serv. (May 17, 2011)

[IRSR 196468].

488

Transcribed interview of Steven Miller, in Wash., D.C. (Nov. 13, 2013).

organization’s annual filing form to determine whether the group engages in political activity.

489

Judy Kindell explained the resigned Form 990 project during her transcribed interview. She

testified:

As part of our overall project of looking at the redefined form 990, we

were doing data analytics. We were looking at the answers to questions

and trying to come up with triggers for what might be indicators of

potential noncompliance. And so one of our tracks that we eventually

developed in this process was to develop some triggers, some queries that

we could run on the 990 data to see – and test them to see whether they

were in fact indicators of noncompliance.

490

Using certain “triggers” on the redesigned Form 990, the IRS selected certain organizations for

compliance audits.

491

IRS personnel also utilized this information to develop a report for Lerner

in August 2011 about the number of groups engaged in political activity.

492

In addition to using the redesigned Form 990, Lerner’s team pursued allegations of

political activity in the media or referred to the IRS by a third party. The IRS called this process

the “dual track” approach.

493

Documents demonstrate that the IRS used this process to examine

conservative groups. In one e-mail, in response to a news article about anonymous donors to

conservative tax-exempt groups, Lerner wrote: “Have we ever looked at a random sample of

donors on c4s? Can we add that look to the dual tracks to see if there are a lot of anonymous

donors . . .?”

494

Another e-mail indicated that the IRS was examining the American Legislative

Exchange Council, a conservative group referred to the IRS for additional scrutiny by the liberal

group Common Cause.

495

Where the voluntary nature of IRS filings prevented the agency from verifying

allegations of excessive political activity, Lerner sought other methods of reining in politically

active non-profits. In a June 2012 e-mail entitled “May I pick your brain?,” Lerner posed a

question to IRS veteran Nan Marks about how the IRS could better regulate politically active

non-profits. She wrote:

We have received several referrals on orgs that have not applied for

exemption and have not yet filed a [form] 990. Some of the allegations

are that the org is just a political committee in c4 clothing and that once

the election is over, it will go away without ever filing. I’m thinking if we

can go back and look at when they received their [employer identification

number], we may have a way to move a bit faster. So, for example, if an

489

See Internal Revenue Serv., Redesigned Form 990 Project (Aug. 19, 2011) [IRSR 197270-88].

490

Transcribed interview of Judith Kindell, Internal Revenue Serv., in Wash., D.C. (Oct. 29, 2013).

491

Id.

492

See Internal Revenue Serv., Redesigned Form 990 Project (Aug. 19, 2011) [IRSR 197270-88].

493

Internal Revenue Serv., Dual Track Approach [IRSR 184699].

494

E-mail from Lois Lerner, Internal Revenue Serv., to Nanette Downing et al., Internal Revenue Serv. (July 25,

2012) [IRSR 183812-13].

495

E-mail from Nanette Downing, Internal Revenue Serv., to Lois Lerner, Internal Revenue Serv. (Apr. 27, 2012)

[IRSR 314120].

org. received its EIN over a year and a half ago, but has not applied or

filed, but our internet research shows it is active, is there any reason we

couldn’t send them a compliance check saying, we noticed you haven’t

filed and it looks like you may owe us a return, so either file or explain

why you don’t have to? So long as we are only looking at the filing piece,

I don’t see why not. Otherwise, there is truly a way for an org to be out

there doing stuff forever (or at least 3 years), so long as it doesn’t file.

496

Two days later, Urban circulated a New York Times article entitled, “Obama’s Lawyer

Demands Information on Group’s Donors,” to several IRS employees, including Lois Lerner.

497

The article reported: “The lawyer for President Obama demanded on Tuesday that Crossroads

GPS disclose its donors, saying in a complaint to the Federal Election Commission that the group

is plainly a ‘political committee’ subject to federal reporting requirements.”

498

The article also

noted:

So far this year, Democrats have been severely out-raised by groups like

Crossroads GPS, which have tapped millionaires and billionaires to build

war chests for the coming Congressional and presidential campaigns. . . .

Those organizations can raise unlimited sums from wealthy individuals

without ever disclosing where the money came from. It is information

from those groups that Mr. Obama’s campaign is hoping to pry open with

the complaint.

499

Lerner responded to the article with support, writing: “Makes total sense. They don’t need to

wait for a [form] 990.”

500

Departing from its role as a neutral tax administrator, the IRS affirmatively sought a way

to measure and depress otherwise lawful political speech by tax-exempt groups. As a result of

Citizens United, the IRS instituted and carried out a coordinated effort to assess, examine, and

discourage political speech by non-profits.

TheIRSsoughttodenytax‐exemptapplicantsengagedinpoliticalspeech

Evidence before the Committee suggests that the IRS sought to deny tax-exempt

applicants engaged in political speech. As a prime example, veteran IRS tax law specialist

Carter Hull recommended approving the tax-exempt application filed by the Albuquerque Tea

496

E-mail from Lois Lerner, Internal Revenue Serv., to Nancy Marks, Internal Revenue Serv. (June 18, 2012)

[IRSR 178003].

497

E-mail from Joseph Urban, Internal Revenue Serv., to Sarah Hall Ingram et al., Internal Revenue Serv. (June 20,

2012) [IRSR 315438].

498

Michael D. Shear, Obama’s Lawyer Demands Information on Group’s Donors, N.Y. TIMES, June 19, 2012.

499

Id.

500

E-mail from Lois Lerner, Internal Revenue Serv., to Joseph Urban et al., Internal Revenue Serv. (June 20, 2012)

[IRSR 315438].

Party.

501

However, after the IRS Chief Counsel’s office and Lois Lerner’s senior technical

advisor reviewed the application, the decision was made to recommend a denial of the

application.

502

The only significant change, according to Hull, was the IRS’s “position” on the

Tea Party applications.

503

The IRS’s institutional disapproval of non-profit political speech is evident in other

material produced to the Committee. For example, one IRS agent in Cincinnati e-mailed tax law

specialist Hilary Goehausen in April 2013 with a question about a tax-exempt applicant engaged

in political speech.

504

The agent wrote: “It appears that the org is funneling money to other orgs

for political purposes. However, I’m not sure we can deny them because, technically, I don’t

know that I can deny them simply for donating to another 501(c)(4). . . . Any thoughts or

feedback would be greatly appreciated.”

505

Goehausen replied in part: “I think there may be a

number of ways to deny them. Let me talk to Sharon [Light] tomorrow about it and get some

ideas from her as well. . . . This sounds like a bad org. :/ . . . This org gives me an icky

feeling.”

506

(emphases added).

501

Transcribed interview of Carter Hull, Internal Revenue Serv., in Wash., D.C. (June 14, 2013); Internal Revenue

Serv., Timeline from the 3 exemption applications that were referred to EOT from EOD [IRSR 58346-49].

502

Internal Revenue Serv., Timeline from the 3 exemption applications that were referred to EOT from EOD [IRSR

58346-49].

503

“The IRS’s Systematic Delay and Scrutiny of Tea Party Applications”: Hearing Before the H. Comm. on

Oversight & Gov’t Reform, 113th Cong. (2013) (question and answer with Rep. James Lankford).

504

E-mail from Jodi Garuccio, Internal Revenue Serv., to Hilary Goehausen, Internal Revenue Serv. (Apr. 22, 2013)

[IRSR 547115].

505

Id.

506

E-mail from Hilary Goehausen, Internal Revenue Serv., to Jodi Garuccio, Internal Revenue Serv. (Apr. 22, 2013)

[IRSR 547116].

Figure 17: E-mail from Hilary Goehausen to Jodi Garuccio, Apr. 22, 2013

Another e-mail from the same period confirms the IRS’s position. In response to a

question from Joseph Herr, a Cincinnati IRS agent, about a “high profile” application,

Washington-based IRS official Sharon Light wrote: “Holly [Paz] is going to elevate their

response, but in the meantime, with what they’ve given us, do you think we have enough to deny

them? We’d rather deny than close FTE [failure to establish].”

507

TheIRSsoughttopublicizethatitwastakingactionontax‐exemptgroups

engagedinpoliticalspeech

By late March 2013, the Exempt Organization Division was poised to issue its first letter

denying exempt status to an applicant involved in political speech. By law, however, complete

denial letters are not made public; names, addresses, and other identifying information are

redacted.

508

For the IRS, which desperately wanted to show that it was cracking down on

politically active tax-exempt groups, the private nature of the denial letters prevented any public

showcase of its actions. Lerner sought a work-around.

507

E-mail from Sharon Light, Internal Revenue Serv., to Joseph Herr, Internal Revenue Serv. (Apr. 12, 2013)

[IRSR 549953].

508

See I.R.C. § 6110(c).

In an e-mail exchange with her senior staff, Lerner brainstormed how to make the IRS’s

work public. She suggested designating the denials of conservative-oriented applicants for

litigation, meaning the cases would bypass the IRS’s normal administrative appeal procedure and

would proceed directly to court.

509

Lerner assumed that the applicants “all want to go to court –

so we figured, why not get there sooner and save Appeals some time – they will be dying with

these cases.”

510

When a colleague doubted Lerner’s assumption, Lerner responded tartly:

“Sorry. These guys are itching for a Constitutional challenge. Not you[r] father’s [Exempt

Organizations].”

511

Figure 18: E-mail exchange between Lois Lerner & Nancy Marks, Apr. 1, 2013

509

See E-mail from Lois Lerner, Internal Revenue Serv., to Nikole Flax, Internal Revenue Serv. (Mar. 29, 2013)

[IRSR 466650].

510

E-mail from Lois Lerner, Internal Revenue Serv., to Nancy Marks et al., Internal Revenue Serv. (Mar. 29, 2013)

[IRSR 188429].

511

E-mail from Lois Lerner, Internal Revenue Serv., to Nancy Marks et al., Internal Revenue Serv. (Apr. 1, 2013)

[IRSR 188429].

In fact, other documents confirm that Lerner expected the IRS’s denials of conservative

tax-exempt applications to be appealed by the applicants. In an earlier e-mail to Christopher

Wagner, Chief of the IRS Office of Appeals, Lerner detailed her quarterly meeting with the

appeals team. She noted to Wagner that “in the next few months we believe [the Office of

Appeals] will get a lot of business from our [taxpayers] regarding denials on 501(c)(4)

applications.”

512

Calling the issue “very sensitive and visible,” Lerner explained the reason for

the new “business” as “a new issue driven by a recent Supreme Court case expanding spending

in elections to corporations, and a desire of some to make the expenditures without having their

names show up on Federal Election Reports.”

513

She cautioned Wagner: “If I were you, this is

definitely something I’d want to be aware of and have a high level person overseeing and

reporting regularly to me. You were in TEGE long enough to understand how dangerous what

we do can be.”

514

512

E-mail from Lois Lerner, Internal Revenue Serv., to Christopher Wagner, Internal Revenue Serv. (Jan. 31, 2013)

[IRSR 122863].

513

Id.

514

Id.

Figure 19: E-mail from Lois Lerner to Christopher Wagner, Jan. 31, 2013

By designating the conservative tax-exempt cases for litigation, the IRS hoped to make

its actions public. David Fish, a senior official in the IRS’s Exempt Organizations Division,

explained how litigation would publicize the IRS’s work. He wrote to Lerner and others:

If you designate a case for litigation, the redacted denial [letter] will still

be public, won’t it?

Even redacted, you still will get a flavor for the activity conducted, the

proximity to an election, and the presence (or more important, absence) of

vote for or against. The mere fact that we are doing anything at all in

100

this area will be huge. I have only seen one denial in passing, but I

would not presume that redaction would make it completely

unhelpful.

515

Fish’s e-mail is illuminating on the IRS’s thinking. Notably, it mirrored that of Lois Lerner, who

wrote in a separate e-mail around the same time that “one IRS prosecution would make an

impact and they [501(c)(4) groups] wouldn’t feel so comfortable doing the stuff.”

516

Lerner also

prodded Holly Paz to expedite the IRS’s denial process, writing: “[N]eed to move c4 denials

along – really need to get one out of here.”

517

During a transcribed interview with Committee staff, Fish elaborated about the

importance of the IRS publicly demonstrating its action on tax-exempt groups engaged in

political speech. He testified:

Q Sir, if I could turn your attention back to your email on page one of

Exhibit 5. In the second paragraph, the second sentence, you

wrote, quote, "The mere fact that we are doing anything at all in

this area will be huge." What area are you referring to?

A Political activity of (c)(4)s.

Q What would be huge about the mere fact that the IRS is doing

anything in the area of political activity of (c)(4)s?

A It tells people we're doing something, because people might have

thought we were just neglecting and not doing anything.

Q And why is that important, to tell people the IRS is doing

something on the political activity of (c)(4)s?

A Because there are legitimate concerns about whether and how

much they're supposed to be doing.

518

As Fish and Lerner articulated, the “mere fact” that the IRS was “doing anything” would

be “huge” to showing that the agency was taking action on politically active 501(c)(4)

organizations and those groups would not “feel so comfortable” engaging in political speech.

Publicized IRS action would also assuage the prominent Democratic politicians and media

voices who had forcefully lobbied the IRS to crack down on 501(c)(4)s groups engaged in

political speech.

515

E-mail from David Fish, Internal Revenue Serv., to Nancy Marks et al., Internal Revenue Serv. (Apr. 1, 2013)

(emphasis added) [IRSR 188427].

516

E-mail from Lois Lerner, Internal Revenue Serv., to Nikole Flax et al., Internal Revenue Serv. (Mar. 27, 2013)

[IRSR 188329].

517

E-mail from Lois Lerner, Internal Revenue Serv., to Holly Paz, Internal Revenue Serv. (Mar. 27, 2013) [IRSR

659092].

518

Transcribed interview of David Fish, Internal Revenue Serv., in Wash., D.C. (Oct. 2, 2014).

101

Figure 20: E-mail from Lois Lerner to Nikole Flax et al., Mar. 27, 2013

On another level, publicizing the “flavor for the activities conducted” would be helpful

for the IRS in preventing other likeminded groups from engaging in similar political speech. In

this way, any publicity given to the IRS’s denial letters would set a precedent and serve to deter

other groups from engaging in political speech. The IRS would, in effect, regulate the amount

and type of political speech by tax-exempt groups through the agency’s enforcement mechanism

rather than by public notice-and-comment rulemaking.

By early May 2013, the IRS was prepared to issue its first denial. Lerner had taken the

unusual step of requesting a briefing on the denial, according to her senior technical advisor,

because “these were very important cases in her area. . . . [T]here had been a lot of effort put into

this project, and this was the first denial to be going out.”

519

The draft denial letter was vetted by

Lerner personally, in addition to senior IRS official Nan Marks and attorneys from the IRS Chief

Counsel’s office.

520

Holly Paz asked EO Determinations Quality Assurance – the office

responsible for vetting final denial letters – to make the denial its “top priority,” reminding the

office “this case and the denial letter have been heavily vetted so we are hopeful that that will

allow Quality [Assurance] to conduct a focused and quick review.”

521

It is unclear, however,

whether the IRS ever issued the denial letter in the wake of Lerner’s apology just days later.

519

Transcribed interview of Sharon Light, in Wash., D.C. (Sept. 5, 2013).

520

See E-mail from Sharon Light, Internal Revenue Serv., to Holly Paz, Internal Revenue Serv. (Apr. 30, 2013)

[IRSR 554695].

521

E-mail from Holly Paz, Internal Revenue Serv., to Donna Abner, Internal Revenue Serv. (May 1, 2013) [IRSR

562176].

102

TheIRSsoughttoregulatepoliticallyactivesocial‐welfaregroups

As early as 2009, the IRS began internal discussions about defining the exemption

standard – that is, the level of permissible exempt activities – as it relates to 501(c)(4)

organizations.

522

The exemption standard, according to one undated IRS document, was the

“topic of perennial discussion within the IRS.”

523

The same document specifically cited outside

proposals from the American Bar Association and Democracy 21 to limit political speech of

501(c)(4) groups to as little as five percent of total expenditures.

524

With these proposals and

“perennial” internal IRS deliberations, it is apparent that the IRS seriously pursued regulations

on politically active social-welfare groups.

By 2011, internal IRS discussions about 501(c)(4) regulations continued. In spring 2011,

attorneys from the IRS chief counsel’s office initiated a meeting with Exempt Organizations

personnel to discuss the “primarily” versus “exclusively” standards.

525

Senior counsel Don

Spellmann, who attended the meeting, explained the purpose of the meeting during his

transcribed interview. He testified:

We initiated the discussion because we became aware that the Service had

a compliance program at the exam level under (4)s, (5)s, and (6)s. And so

we said, since you’ve got this compliance program starting up, this would

seem like a good time, before we don’t have any actual cases, to see if we

can’t reach a common understanding on what the standard is on

primarily/exclusively. We did not have any details about that plan. We just

knew that it was in Exempt Organizations’ business plan, and that was one

thing we wanted to ask about in the meeting, of what the scope of that

exam program was.

526

Following the meeting, tax law specialist Justin Lowe prepared a document outlining the various

authorities.

527

The Chief Counsel’s office even prepared a draft memorandum for the

Commissioner of Tax Exempt and Government Entities interpreting the 501(c)(4) standard. The

memo was not finalized.

528

By 2012, the Administration considered further regulation of social-welfare groups. In

June, Ruth Madrigal in the Treasury Department’s Office of Tax Policy wrote to IRS Division

Counsel Victoria Judson and others about “addressing” 501(c)(4) organizations “off-plan” in

2013.

529

By working on 501(c)(4) regulations “off-plan,” the Treasury Department and the IRS

could keep the work secret and off of the Department’s official published guidance plan. In July,

IRS Chief Counsel William Wilkins, along with Judson and Nancy Marks, met with staff

522

See Transcribed interview of Don Spellmann, Internal Revenue Serv., in Wash., D.C. (July 12, 2013).

523

Internal Revenue Serv., Proposals to Alter the 501(c)(4) Regulations (undated) [IRSR 505762-63].

524

Id.

525

Transcribed interview of Don Spellmann, Internal Revenue Serv., in Wash., D.C. (July 12, 2013).

526

Id.

527

Id.

528

Id.

529

E-mail from Ruth Madrigal, Dep’t of the Treasury, to Victoria Judson et al., Internal Revenue Serv. (June 14,

2012) [IRSR 305906].

103

members for several Democratic Senators to discuss regulations relating to 501(c)(4) groups. In

a memorandum prepared for Treasury Secretary Timothy Geithner, the meeting was described as

“an overview of the law for 501(c)(4)s, the process for changing regulations, and process for

priority guidance plan.”

530

By early 2013, the IRS had identified potential regulations on 501(c)(4) groups as “far

and away the most important” guidance proposal.

531

Another IRS Chief Counsel office

document from May 2013 called regulations on 501(c)(4) groups “EO’s priority #1.”

532

elaborated: “Significant congressional and public interest. Last year, suggested guidance on

meaning of ‘operated exclusively’ in context of 501(c)(4) and the decision was made to work

off-plan.”

533

The IRS attributed the need for new regulations to “changing times,” finding that

“[t]he regulations are getting a lot of public attention today for reasons the original drafters could

not have anticipated.”

534

Figure 21: TEGE (EO) New Projects Proposed for FY 2013-2014 PGP

By May 2013, the IRS initiated discussions with the American Bar Association about

potential regulatory action on the political speech of 501(c)(4) organizations. In a closed-door

meeting with representatives of the ABA on May 9 – the day before Lerner’s apology – Acting

Commissioner Miller and other senior IRS officials convened a discussion of the “current

conundrum” of the IRS’s regulation of 501(c)(4) organizations and political speech.

535

The

meeting referenced “a wave of cash unleashed” by the Citizens United decision, “and that cash

chose a favorable port due to disclosure and underenforced gift tax rules.”

536

Miller’s

handwritten notes indicated that his “little hope of peace was dashed” by the decision: “I can

now have a c4 – 100% of which is political and close to the line education issue ads . . . So I

530

Memorandum from Frank Keith, Internal Revenue Serv., “Information Memorandum for Secretary Geithner”

(July 3, 2012) [IRSR 415870-72].

531

E-mail from David Fish, Internal Revenue Serv., to Nancy Marks et al., Internal Revenue Serv. (Mar. 29, 2013)

[IRSR 190599].

532

Internal Revenue Serv., TEGE (EO) New Projects Proposed for FY 2013-2014 PGP – 5-03-13 [IRSR 547444].

533

Id.

534

Internal Revenue Serv., Background document on regulations of 501(c)(4) organizations [IRSR 459073-76].

535

Internal Revenue Serv., Handwritten notes of “ABA Closed Door” (May 9, 2013) [IRSR 505855-58].

536

Id.

“Amend 501(c)(4) regulations to state that an

organization will not be described in (501)(c)(4)

if more than an insubstantial part of its activities

is not in furtherance of its exempt purpose

(consistent with regulations and court decisions

regarding 501(c)(3)”

“EO priority #1. The nature and extent of this project

remains TBD. Significant congressional and public

interest. Last year suggested guidance on meaning of

‘operated exclusively’ in context of 501(c)(4) and the

decision was made to work off-plan.”

104

would prefer a legislative fix – disclosure would be best but open to looking at

regulation.”

537

The meeting considered different options for reform, including “better

definitions”; a study sponsored by the ABA; and a “push for disclosure of c4s and gift tax.”

538

Given the information available to the Committee, it is clear that the IRS began seriously

considering regulating the political speech of 501(c)(4) organizations well before the public

release of the IRS targeting. The IRS continued this process up to the day before Lois Lerner’s

public apology. It is clear that the IRS’s goal was to quell the “wave of cash” flowing to

501(c)(4) organizations as a result of the Supreme Court’s affirmation of free political speech.

TheIRS’splansmirroredAdministration‐wideattemptstostiflefreepolitical

speech

The IRS’s attempts to reign in politically active non-profits did not occur in a vacuum.

These efforts mirrored similar attempts by agencies across the Obama Administration to compel

disclosure and thereby identify, isolate, and marginalize individuals who oppose the

Administration’s favored policies. From the Securities and Exchange Commission to the Federal

Communications Commission, the Administration is systematically attempting to stifle free

political speech.

The Committee has documented previously how Democratic elected officials and special

interest groups pressured the SEC to develop a political disclosure rule.

539

In early 2012, the

SEC considered whether to publish its intention to propose a rule that would require public

companies to disclose the use of corporate resources for political activities.

540

The SEC

ultimately voted to publish its regulatory agenda without the political disclosure rule included.

Subsequently, elected officials and others began to lobby the SEC to change its mind. In

July 2012, a staff member for then-Congressman Barney Frank, the Ranking Member of the

House Financial Services Committee, wrote to the SEC Office of Legislative and

Intergovernmental Affairs about the SEC’s authority to compel disclosure of corporate

contributions. The staff member specifically framed the issue in terms of § 501(c)(4)

organizations, writing:

We have gotten a question from [House Democratic] leadership about

SEC authority to require disclosure on corporate charitiable [sic]

contributions There is particular interest in what the authority is for

disclosure of 501(c)(4) contributions (political contributions).

541

The legislative affairs official forwarded the e-mail to other senior SEC officials, writing:

537

Id.

538

Id.

539

See Memorandum from Majority Staff, H. Comm. on Oversight & Gov’t Reform, to Members, H. Comm. on

Oversight & Gov’t Reform, “The SEC and Political Speech” (July 22, 2013).

540

Id.

541

Id. (emphasis added).

105

Please see inquiry below from Barney Frank’s staff. Can you please

provide a response? I suspect the answer to the actual question is

relatively easy, but I’m including all of you on the email so you’ll be

aware that House Democratic Leadership is interested.

542

An SEC employee in the Division of Corporate Finance responded that the focus on § 501(c)(4)

groups was unusual for corporate governance. He wrote:

I have not heard the request framed as precisely as [the staff member]

frames it – 501(c)(4) contributions. Typically one hears it in terms of

political contributions more broadly with some folks wanting to know

about contributions to organizations/groups that may then in turn use that

money for political contributions.

543

The SEC also received considerable pressure from Public Citizen to promulgate a regulation

compelling disclosure of corporate contributions to § 501(c)(4) groups and § 501(c)(6) groups.

544

The political pressure exerted by Democratic elected officials and their special interest

allies initially succeeded. Contrary to the opinion of SEC career professional staff, the SEC

included the proposed political disclosure rule in a draft regulatory agenda prepared in

September 2012.

545

The SEC provided no explanation for the change. After public outcry about

the SEC’s drastic departure from its core mission, the Commission ultimately dropped its plans

in November 2013.

546

Like the SEC and the IRS, other federal agencies have considered efforts to compel

disclosure relating to political activities. The FCC, for example, promulgated a rule in 2012

requiring television stations to submit detailed records about political advertising sold by the

stations.

547

This initiative was just the beginning for FCC disclosure efforts. More recently,

Democratic Members in the House have pressured the FCC to require political advertisers to

disclose their contributors.

548

New FCC Chairman Tom Wheeler has resisted this political

pressure, vowing not to compel disclosure of contributors during his confirmation process.

549

The Supreme Court has recognized the need for citizens to make political speech

anonymously, without fear of repercussion or harassment.

550

The Administration’s campaign of

compelled political disclosure, however, violates this fundamental right. This disclosure

campaign – though presented in terms of transparency – is an effort to identify and intimidate

542

Id. (emphasis added).

543

Id.

544

Id.

545

Id.

546

See Dina El Boghdady, SEC drops disclosure of corporate political spending from its priority list, WASH. POST,

Nov. 30, 2013.

547

T.W. Farnam, FCC to require more disclosure about political ads, WASH. POST, Apr. 27, 2012.

548

See Brendan Sasso, Democrats turn to FCC to unveil secret donors behind political ads, THE HILL, Mar. 2, 2013.

549

Edward Wyatt, New chief of the F.C.C. is confirmed, N.Y. TIMES, Oct. 29, 2013.

550

See, e.g., NAACP v. Alabama, 357 U.S. 449 (1958).

106

vocal citizens who oppose the Administration’s policies. Already, some prominent conservative

figures face harassment and even death threats due to their right-leaning political beliefs.

551

The

Administration’s efforts – of which the IRS is only one symptom – threaten to discourage open

political participation and stifle free political speech.

TheIRStargetingisapretextfortheAdministration’sproposed 

regulationonpoliticalspeechofsocialwelfareorganizations

On November 29, 2013, the IRS and the Treasury Department issued a proposed

regulation related to the political speech of tax-exempt groups organized under section 501(c)(4)

of the tax code. Purportedly, the Administration’s regulation is intended to clarify the tax-

exemption determinations process and resolve problems identified in TIGTA’s audit report of the

IRS targeting.

552

In reality, however, the IRS and the Treasury Department’s interest in

regulating in this area arose long before the release of the TIGTA audit report and the public

awareness of the targeting. Moreover, the regulation, as written, will stifle free speech and may

be used to legitimize the targeting of organizations whose views are at odds with those of the

Administration.

Section 501(c)(4) of the federal tax code explicitly recognizes as non-profit any “[c]ivic

leagues or organizations not organized for profit but operated exclusively for the promotion of

social welfare.”

553

Under current law, a § 501(c)(4) group may engage in political speech as

long as its primary purpose promotes social welfare. The Administration’s proposal, however,

broadens the exclusion of political speech well beyond any reasonable interpretation of the

statutory text. The proposal prohibits any “candidate related political activity,” including the

distribution of voter guides and the hosting of elected officials near an election.

554

The

indiscriminate breadth of this proposal threatens the free political speech rights of non-profit

organizations.

Also troubling, the Administration has used the controversy surrounding the IRS

targeting of conservative tax-exempt applicants to wrongly justify the need for this regulation.

Contrary to the Administration’s assertion, TIGTA did not recommend that the IRS issue

regulations narrowing the type of permissible political speech by § 501(c)(4) organizations.

Instead, TIGTA recommended that the IRS consider proposals to clarify the amount of

permissible political speech – not the type of permissible political speech, as this proposal

does.

555

551

Matea Gold, Koch-backed political coalition, designed to shield donors, raised $400 million in 2012, WASH.

POST, Jan. 5, 2014.

552

Guidance for Tax-Exempt Social Welfare Organizations on Candidate-Related Political Activities, 78 Fed. Reg.

71,535 (proposed Nov. 29, 2013) (to be codified at 26 C.F.R. pt. 1) (quoting the “Charting a Path Forward at the

IRS: Initial Assessment and Plan of Action” report) [hereinafter “Proposed Regulation”].

553

I.R.C. § 501(c)(4).

554

Proposed Regulation, supra note 552.

555

TIGTA Audit Rpt., supra note 20.

107

Moreover, the Committee’s investigation has uncovered evidence that the Administration

considered regulating § 501(c)(4) organizations well before the publication of the TIGTA audit.

Indeed, in June 2012, Ruth Madrigal of the Treasury Department’s Office of Tax Policy wrote to

several IRS leaders about potential § 501(c)(4) regulations. She wrote: “Don’t know who in

your organization is keeping tabs on c4s, but since we mentioned potentially addressing them

(off-plan) in 2013, I’ve got my radar up and this seemed interesting.”

556

Madrigal forwarded a

short article about a court decision with “potentially major ramifications for politically active

section 501(c)(4) organizations.”

557

Figure 22: E-mail from Ruth Madrigal to Victoria Judson et al., June 14, 2012

In a transcribed interview with Committee staff, Madrigal discussed her e-mail. She

explained that the Department worked with Lerner and her IRS colleagues to develop the §

501(c)(4) regulation “off-plan.” She testified:

Q And ma’am, you wrote, “potentially addressing them.” Do you

know what you meant by, quote, “potentially addressing them?”

A Well, at this time, we would have gotten the request to do guidance

of general applicability relating to (c)(4)s. And while I can’t – I

don’t know exactly what was in my mind at the time I wrote this,

the “them” seems to refer back to the (c)(4)s. And the

communications between our offices would have had to do with

guidance of general applicability.

Q So, sitting here today, you take the phrase, “potentially addressing

them” to mean issuing guidance of general applicability of

501(c)(4)s?

A I don’t know exactly what was in my head at the time when I wrote

this, but to the extent that my office collaborates with the IRS, it’s

on guidance of general applicability.

Q And the recipients of this email, Ms. Judson and Ms. Cook are in

the Chief Counsel’s Office, is that correct?

556

E-mail from Ruth Madrigal, Dep’t of the Treasury, to Victoria Judson, Internal Revenue Serv. (June 14, 2012)

[IRSR 305906].

557

Id.

108

A That’s correct.

Q And Ms. Lerner and Ms. Marks are from the Commissioner side of

the IRS?

A At the time of this email, I believe that Nan Marks was on the

Commissioner’s side, and Ms. Lerner would have been as well,

yes.

Q So those are the two entities involved in rulemaking process or the

guidance process for tax exempt organizations, is that right?

A Correct.

***

Q What did the term “off plan” mean in your email?

A Again, I don’t have a recollection of doing – of writing this email

at the time. I can’t say with certainty what was meant at the time.

Q Sitting here today, what do you take the term “off plan” to mean?

A Generally speaking, off plan would refer to guidance that is not on

– or the plan that is mentioned there would refer to the priority

guidance plan. And so off plan would be not on the priority

guidance plan.

Q And had you had discussions with the IRS about issuing guidance

on 501(c)(4)s that was not placed on the priority guidance plan?

A In 2012, we – yes, in 2012, there were conversations between my

office, Office of Tax Policy, and the IRS regarding guidance

relating to qualifications for tax exemption under (c)(4).

Q And this guidance was in response to requests from outside parties

to issue guidance?

A Yes. Generally speaking, our priority guidance plan process starts

with – includes gathering suggestions from the public and

evaluating suggestions from the public regarding guidance,

potential guidance topics, and by this point, to the best of my

recollection, we had had requests to do guidance on this topic.

558

Transcribed interview of Ruth Madrigal, U.S. Dep’t of the Treasury, in Wash., D.C. (Feb. 3, 2014).

109

Former Acting IRS Commissioner Steve Miller clarified that the internal discussions on

political regulations resulted from political pressure placed on the IRS by congressional

Democrats. He testified that after reading an article entitled “The IRS’s ‘Feeble’ Grip on Big

Political Cash,” he brainstormed ideas with his chief of staff, Nikole Flax, and IRS Legislative

Affairs Director, Catherine Barre, to “level the playing field” between § 501(c)(4) groups and §

527 organizations. He testified:

Q Why did you want to discuss this article with Ms. Flax and Ms.

Barre?

A So, I was interested in thinking about what we might be able to do

into the future in the area.

Q What do you mean by “the area”?

A The area of what constitutes political activity for a 501(c)(4)

organization. That’s my recollection, anyway.

Q And what kind of ideas did you have in mind?

A So, there were issues around the regulation and the definition of

“exclusively” as “primarily” in the regulation. And there were

other things gone on. I don’t even know what else. It actually was

a brainstorming session, is my suspicion.

Q Okay. But refining the regulation was one idea that you were

brainstorming?

A That had been on – that had been thought about. But I’m not sure

we were brainstorming specifically on that.

***

Q What were the other ideas that you brainstormed, to your

recollection?

A I think what could be done in terms of, if anything, in terms of a

legislative disclosure rule. That’s a recollection. I may be wrong

on that, but that’s the only other one that I can remember right

now.

Q And, sir, what do you mean by “legislative disclosure rule”?

A So, under the rules – and, you know, this is a long piece. But

under the rules, 501(c)(4) donors are not disclosed to the public.

And there is an argument made here and elsewhere that that’s a

110

reason why money is flowing into those organizations for political

purposes – for purposes of spending on politics. I’m sorry. I’ll be

more precise.

Q And so you wanted to implement a disclosure rule that would take

away that advantage for (c)(4)s?

A Did I want to do that? No. But in terms of brainstorming things

that would level the playing field between 527 organizations and

501(c)(4) organizations, that was one thing that was talked about.

559

These discussions, according to Miller, arose as a result of political pressure from Democratic

elected officials. He testified:

Q And, sir, what did you see as the problem that needed to be

addressed through either a regulatory change or a legislative

change?

A So I’m not sure there was a problem, right? I mean, I think we

were – we had, you know, Mr. Levin complaining bitterly to us

about – Senator Levin complaining bitterly about our

regulation that was older than me, where we had read

“exclusively” to mean “primarily” in the 501(c)(4) context.

And, you know, we were being asked to take a look at that.

And so we were thinking about what things could be done.

560

The Administration’s proposal has attracted significant negative feedback from all

corners of the country and both ends of the political spectrum. New IRS Commissioner John

Koskinen has said that the rule has generated over 150,000 public comments, elaborating: “I’m

told if you take all the comments on all the Treasury and IRS regulations for the last seven years,

double that number, you are close to the number of comments that we have on this single

regulation.”

561

The widespread backlash to the Administration’s proposal led Commissioner

Koskinen to announce on April 14, 2014 – just over a month after the comment period closed –

that the IRS would reissue a redrafted rule to address deficiencies in the current proposal.

562

The Economic Growth Subcommittee convened a hearing about the proposed rule on

February 27, 2014.

563

This hearing featured testimony from a diverse swath of citizens –

including the Tea Party, the American Civil Liberties Union, the American Motorcyclist

Association, and the Home School Legal Defense Association – all in opposition to the

559

Transcribed interview of Steven Miller, in Wash., D.C. (Nov. 13, 2013) (emphasis added).

560

Id.

561

The IRS Reconsiders, WALL ST. J., Apr. 7, 2014.

562

See Susan Page, IRS chief: New rule on the way for tax-exempt groups, USA TODAY, Apr. 14, 2014.

563

“The Administration’s Proposed Restrictions on Political Speech: Doubling Down on IRS Targeting”: Hearing

Before the Subcomm. on Economic Growth, Job Creation, & Regulatory Affairs of the H. Comm. on Oversight &

Gov’t Reform, 113th Cong. (2014).

111

proposal.

564

One witness, Allen Dickerson of the Center for Competitive Politics, elegantly

explained why the Administration’s proposal was so misguided. He testified:

And I think it is important to deal with the elephant in the room, which is

disclosure. The fact, as I said earlier, is that there is no revenue purpose

to this rule. It is about the disclosure of people’s donors. And I want

to tackle that head on. The reason 501(c)(4)s do not disclose their donors

is because Congress said so. When the Internal Revenue Code was

passed, it creates criminal penalties for the unauthorized disclosure of the

donors to these organizations. And the reason for that is that it has always

been understood that 501(c)(4)s are the beating heart of civil society.

These are the organizations, like the NRA and the Sierra Club, which

go out there and take unpopular positions and move the national

debate and make this a vibrant and functioning democracy.

Requiring unpopular organizations to give up their donor list to

public scrutiny is not only contrary to Congress’s intention in the

Internal Revenue Code, it is also contrary to constitutional law.

565

The Administration’s proposed regulation of social welfare organizations is precisely the

action that President Obama and Congressional Democrats sought when they implored the IRS

to crack-down on 501(c)(4) groups engaged in political speech. The regulation is the

culmination of a concerted effort to muzzle conservative tax-exempt groups and force the

disclosure of their donors for harassment and intimidation. The Administration’s regulation is

not responsive to, and it does not address, the IRS’s misconduct. The fact that the

Administration is using the IRS’s targeting of conservative tax-exempt applicants as a pretext for

this proposed rule adds further insult to the injuries these groups experienced. The regulation

effectively continues the IRS’s targeting program.

MismanagementbyseniorIRSleadershipfailedtoeffectivelypreventand

latertostopthetargetingofconservative‐orientedgroups

The Committee’s investigation has found that serious leadership and management

failures contributed to the IRS’s inability to prevent and, subsequently, to stop the targeting of

conservative-oriented groups. From the very top of the IRS on down, bad judgment,

inexperience, and bureaucratic rigidity contributed to a perfect storm of mismanagement. The

Committee has identified eight senior leaders who were in a position to prevent or to stop the

IRS’s targeting of conservative applicants. Each of these leaders could have and should have

done more to prevent the IRS’s targeting of conservative tax-exempt applicants.

564

Id.

565

Id. (statement of Allen Dickerson, Center for Competitive Politics) (emphases added).

112

DougShulman,formerCommissioner

Doug Shulman served as IRS Commissioner during the majority of the IRS’s targeting of

conservative tax-exempt applicants. On this basis alone, Shulman deserves a substantial portion

of the responsibility for what occurred. Yet, in public testimony after the scandal broke in May

2013, Shulman disclaimed responsibility, stating: “I don’t accept responsibility for . . . putting a

name on a list with inappropriate criteria.”

566

The Committee’s investigation has found that

Shulman was aware of the targeting in 2012 and failed to do anything. As the leader of the IRS,

he should have done much more.

Shulman became IRS Commissioner in March 2008. Nominated by President Bush in

late 2007 and confirmed by the Democratic-controlled Senate, Shulman is a Democratic

donor.

567

During his transcribed interview with Committee staff, Shulman discussed how he

approached his role as IRS Commissioner. He testified:

Here is how I thought about the position and think about leadership

positions in general, which is to set the direction of the agency, make sure

the right team is in place to execute on those, focus on the priorities that

will drive the agency forward, engage with the team in ensuring they are

managing the operation well, as well as pushing major initiatives forward,

and then having good relationships and engagement with all of the

stakeholders in the IRS, whether it is Congress, the administration, the

taxpayer community, et cetera.

568

Tragically, in this instance, Shulman failed to deliver on each of these points. He failed to put

the right team in place to prevent the targeting. He failed to engage with the team as it responded

to the targeting. He failed to engage with Congress about the targeting despite knowing first-

hand of significant congressional interest in the matter.

Most seriously, Shulman failed to fully inform Congress about the IRS’s inappropriate

treatment of conservative-oriented tax-exempt applications, despite his awareness of

inappropriate treatment. Shulman testified that in early 2012 he became aware that the IRS had a

backlog of tax-exempt applications, “that applications had been sitting there for a long time,” and

that the IRS had sent out letters requesting donor information.

569

Nonetheless, in March 2012,

Shulman testified before the House Ways and Means Subcommittee on Oversight, during which

he provided “assurances” to Congress that the IRS was not targeting conservative groups.

570

his transcribed interview with Committee staff, Shulman attempted to explain his assurances. He

testified:

566

“The IRS: Targeting Americans for their Political Beliefs”: Hearing Before the H. Comm. on Oversight & Gov’t

Reform, 113th Cong. (2013) (question and answer with Rep. Massie).

567

Transcribed interview of Doug Shulman, in Wash., D.C. (Dec. 4, 2013).

568

Id.

569

Transcribed interview of Doug Shulman, in Wash., D.C. (Dec. 4, 2013).

570

“Internal Revenue Service Operations and the 2012 Tax Return Filing Season”: Hearing Before the Subcomm.

on Oversight of the H. Comm. on Ways & Means, 112th Cong. (2012) (question and answer with Chairman

Boustany).