Wyden Floor Statement on Finance Committee Investigation of IRS Handling of Applications for Tax-Exempt Status
As Prepared for Delivery
Earlier today, the Senate Finance Committee submitted, to the full Senate, our bipartisan report on, to use the official title, “The Internal Revenue Service’s Processing of 501(c)(3) and 501(c)(4) Applications for Tax-Exempt Status Submitted by “Political Advocacy” Organizations From 2010-2013.”
The Finance Committee’s report today is the first bipartisan report conducted by any congressional committee on this issue. I want to thank the distinguished Chairman from Utah as members will see from the views that I’m going to articulate, we have some strong differences about how the facts of the report ought to be interpreted. But we worked very, very closely together to ensure that there would be one bipartisan compilation of the underlying facts.
The two of us certainly agree that there is evidence of vast bureaucratic bumbling at the I.R.S. I will also say that a review of 1.5 million pages of emails and documents and interviews with more than 30 I.R.S. officials doesn't point to a single shred of political interference.
Set aside for a moment the majority views and the minority views. The facts of the report show that no order -- no order -- was ever given to target political groups. Now, I’m very pleased that we now have a bipartisan report conducted here in the Congress, and that's why the bipartisan findings are especially important. And as I’ve stated, the findings contain absolutely no evidence to support the narrative that's been advanced by other committees and some in the media that tea party groups were targeted by the I.R.S. because of their political views. My own view is that groups on the progressive side, groups on the conservative side, both of them were handled in a fashion that was unacceptable. They both were handled badly.
This report, I believe, was a very thorough and professional effort conducted to get out the facts.Let me start by setting the stage. Under our federal tax laws, people can establish various types of tax-exempt organizations, and there are different rules for each type. Under section 501c4, an organization can be established as a “social welfare” organization. One of the rules for 501c4 social welfare organizations is that they must be operated “exclusively” for social welfare purposes. This has been interpreted, since 1959, to mean, among other things, that the organization can engage in some political campaign activity, but that cannot be its “primary” activity. There is no precise meaning of “primary” for this purpose, and exactly what constitutes “political campaign activity” is similarly unclear.
Another type of tax-exempt organization can be established under section 527. A 527 organization can engage in an unlimited amount of political campaign activity. But there’s an important distinction, because a 527 organization is required to disclose the identities of its donors. Finally, the type of tax-exempt entity Americans are most familiar with, 501c3s, are not allowed to engage in any political campaign activity.
With that legal background, let’s turn to the events covered in the report. In February 2010, the IRS Exempt Organizations Determinations Office, which is located in Cincinnati, began processing the first applications for 501c4 status from a Tea Party organization. Before long, the office was, as one IRS employee is quoted as saying in the report, “inundated” with applications from Tea Party groups, other conservative groups, and some progressive or left-leaning groups. The Additional Republican Views estimates that, of the total of 547 applications that were the focus of the Committee’s investigation, 65 percent were from Tea Party or conservative groups, and 19 percent were from left-leaning groups. To the IRS employees in the Tax Exempt Organizations Division, these applications raised questions about whether the organizations were planning to engage in more political campaign activity than the 501c4 law allowed.
What was the cause of the surge in applications? Nobody is really sure. It may have been related to the Supreme Court’s Citizens United decision, in January 2010, which knocked down some of the key limits on political campaign spending. It also may have been related to the rise in citizen activism embodied in the Tea Party and the Occupy movements. In any event, a surge in applications occurred.
Fast forward to May 2013. At the conclusion of her remarks at an American Bar Association conference, the Director of the IRS Tax Exempt Organizations Division, Lois Lerner, disclosed that IRS employees had selected 501c4 applications by groups with terms like Tea Party and Patriots in their names for further review, and that the IRS employees had done so “simply because the applications had those names in the title.” Lerner described this process of selecting cases for review because of a particular name as “wrong, insensitive, and inappropriate.”
A few days later, Treasury Inspector General for Tax Administration, known as “TIGTA,” released a report finding that the IRS “used inappropriate criteria that identified for review Tea Party and other organizations applying for tax-exempt status based on their names or policy positions instead of indications of potential political campaign intervention.”
At the time of these disclosures from the IRS and TIGTA, there was a very serious concern that the singling out of conservative organizations by name may have been a consequence of political bias or motivation on the part of IRS employees, possibly at the direction of political appointees at the IRS, the Treasury Department, or the White House.
Although the TIGTA report found no evidence of political bias or “targeting” by the IRS, given the serious nature of this matter, the then-Chairman of the Finance Committee, Senator Baucus, and the then-Ranking Member of the Committee, Senator Hatch, began an in-depth bipartisan investigation to determine the facts. The investigation continued after I became Chairman last year and under Chairman Hatch this year. So the bipartisan investigation has been underway for more than two years. In the course of the investigation, the bipartisan committee staff has reviewed more than 1.5 million pages of documents and interviewed 32 witnesses. TIGTA, at the Committee’s request, has undertaken several related but separate investigations.
The results of the investigations are in the report the Finance Committee submitted to the Senate today, which consists of a Bipartisan Report prepared by the committee staff and representing the views of Chairman Hatch and myself, Additional Views of Senator Hatch, prepared by the Majority staff, which I will refer to as the Additional Republican Views, and my Additional Views, prepared by the Minority staff and which I will refer to as the Additional Democratic Views. In total, the principal parts of the report are 318 pages long, plus a 90-page chronology of events and another 5,000 or so pages of attached exhibits.
This report will, I hope, clear away some of the smoke and cut through some of the rhetoric, helping us to understand what really happened. The report also makes a series of recommendations, including bipartisan recommendations, about how to improve things going forward.
Let me describe the main conclusions that I draw from the report.
First and foremost, the IRS’s handling of this matter was, to put it bluntly, an unmitigated bureaucratic disaster. Granted, there were some extenuating circumstances. The Citizens United decision had opened the floodgates to millions of dollars flowing into political activities, with 501c4 organizations seeming to be one of the favored vehicles for this activity. As a result, the IRS was facing a dramatic increase in the number and complexity of applications for 501c4 status. At the same time, the IRS was working with vague regulatory standards that have not been updated since 1959. So the staff at the IRS Exempt Organizations Division had a tough job. They were racing against a late model Mustang in a 1959 jalopy.
Even taking this into account, though, the IRS handled the situation badly. Essentially, the IRS froze. The Bipartisan Report shows that, for more than two years, officials in the Exempt Organizations Division, in both Cincinnati and Washington, failed to develop a good system for processing 501c4 applications that seemed to present issues about the groups’ potential involvement in political campaign activity. During that time, the IRS staff and managers tried a variety of different approaches. They asked one of their experts on tax-exempt organization law to focus on two test cases, as models. That took more than eight months, and nothing really came of it. Then they set up task forces, and they tried the infamous “BOLO,” or “Be On the Look Out,” list. They tried to get more information from applicants, by asking a long list of detailed questions. This approach actually backfired, because of the volume and inappropriate nature of the questions. The bumbling and the bureaucratic paralysis went on and on. By my count, there were seven different efforts, over more than two years, to figure out how to handle these applications, and the first six all failed. By December 2011, a total of 290 applications for 501c4 status had been set aside for further review. Two of these applications had been successfully resolved. Not two hundred. Two.
It wasn’t until the late spring of 2012, more than 26 months after the first Tea Party application had arrived in Cincinnati, that the IRS finally started to get its act together, setting up a “triage” group that was able to work through the backlog of applications relatively quickly.
This process could—and should—have been handled much better. Senior IRS leadership should have recognized or been made aware of the problem and should have stepped in much earlier to develop a system that provided fair and expeditious processing of these applications.
In light of all this, the Bipartisan Report concludes that “between 2010 and 2013, the IRS failed to fulfill its obligation to administer the tax law with integrity and fairness to all.” At a time of rising political activity, and under increased political scrutiny and pressure after the Citizens United decision, “senior IRS executives, including Lerner, failed to properly manage political advocacy cases with the sensitivity and promptness that the applicants deserved. Other employees in the IRS failed to handle the cases with a proper level of urgency, which was symptomatic of the overall culture within the IRS where customer service was not prioritized.”
Further, and I want to make this clear, most of the applications caught up in this mismanagement were Tea Party or other conservative groups, including in some cases small and relatively unsophisticated groups that did not have the resources to engage in a protracted review by the IRS. Make no mistake about it. These groups deserved much better treatment from their government.
If there is any good news in all this, the Democratic Views notes that there have been some positive steps. Four key employees in the IRS who failed to manage properly have been removed from their jobs. And the backlog of applications has largely been eliminated, with, at this point, all but ten of the applications having been resolved.
The Bipartisan Report recommends several further steps that should be taken. It makes 16 recommendations, including such things as promulgating objective criteria to trigger special review, prohibiting requests for donor lists, creating a position in the Taxpayer Advocate Service dedicated to assisting applicants for tax-exempt status, and improving the system for tracking the resolution of pending applications, with the target of resolving applications within 270 days.
Beyond the indisputable gross mismanagement, there was, of course, another important focus of our investigation. When the original TIGTA report was issued in 2013, there was a concern that it looked like most of the groups that were caught up in all of this were conservative-leaning groups, such as those with “Tea Party” in their names. In light of this, there was concern that we might be looking at something much worse than bureaucratic bungling. The concern was that there may have been an attempt to exert inappropriate political influence over the process of reviewing applications for tax-exempt status, by disfavoring certain applicants because of their perceived political views. That would constitute a grave and completely legitimate concern. Not just for Republicans or conservatives, but for every American. Among the fundamental principles underpinning our system of government are equal treatment for all and an inviolate right to freedom of speech and expression. Both of these principles are particularly important when it comes to the IRS, which has great power that must be exercised even-handedly. Of perhaps equal importance to the even-handed exercise of its authority, it is incumbent upon the IRS to take great care to insure against any perception that it is acting because of bias—political or otherwise.
In the Committee’s investigation, over the course of more than two years, the bipartisan staff carefully reviewed the evidence. And in contrast to the bipartisan analysis and recommendations I’ve just described, in this instance, the Democratic and Republican Views have come to different conclusions. The Additional Democratic Views concludes that there is absolutely no evidence that there was any attempt to exert political influence. The Additional Republican Views, in contrast, spend 120 pages trying to make the case that there somehow must have been some political interference involved, but without identifying any direct evidence—documentary or otherwise—to support their case.
Let me explain how I see it, first by laying out the basic facts, then by responding to the main points in the Additional Republican Views.
First, the facts. According to the report, the staff found no evidence of involvement by the White House or by Treasury Department political officials. None. The staff found no evidence that any political appointee in the Obama Administration was involved in the review of applications or in the establishment of standards for their review. None. As a side note, during most of the relevant period, the IRS Commissioner was Douglas Shulman, who was appointed by President Bush. And the principal official responsible for the management of the relevant IRS activities, Lois Lerner, was a career civil servant who was named to her position as Director of the Tax Exempt Organizations Division by IRS Commissioner Mark Everson, who also was appointed by President Bush.
In addition to finding no emails, memos, or other documents indicating that there was an attempt to exert political influence, the report indicates that the staff asked every IRS employee who was directly involved in the review of the applications whether there had been any attempt to exert political influence over their handling of applications, or whether they saw anyone else processing applications in a politically biased way. The staff asked 25 people. Every one of them said that there was no political bias.
In addition, the TIGTA audit that spurred this investigation also found no evidence of targeting or political bias. Let me repeat that, because there have been some misconceptions. The 2013 TIGTA audit found no evidence of political bias in 501c4 processing. This is discussed further in the Committee’s report, including an email from the Deputy Inspector General at TIGTA stating, “There was no indication that pulling these applications was politically motivated.” There is an email from the TIGTA Chief Counsel stating that the Tea Party was not targeted. The TIGTA Inspector General himself testified, before the Finance Committee, that no political motivation was found, and his office further stated that no relevant communications were found coming from the White House or Treasury.
Further, although more conservative-leaning than progressive-leaning groups were affected, several progressive groups were subjected to the same kinds of gross mismanagement, long delays, and inappropriate information requests experienced by conservative groups. The Bipartisan Report notes that Terms like “Progressive” and “ACORN,” as well as terms intended to capture Occupy Wall Street groups, were included along with “Tea Party” and “9/12” on the IRS BOLO list. Again, “progressive” appeared on the same list as “Tea Party” from day one. The report also shows that left-leaning groups were subjected to mismanagement, delays, and intrusive questions from the IRS.
Notwithstanding the plain fact that there is no evidence of any attempt to exert political influence over the process, the Additional Republican Views strives, over the course of 120 pages, to make the case that there must have been something sinister going on. They do this though a combination of innuendo, speculation, and unjustified inference.
The Additional Republican Views makes much of the fact that the head of the Tax Exempt Organizations Division and the principal person responsible for the management issues involved here, Lois Lerner, appears to have been a Democrat with liberal views about some issues. They also make much of the fact that the President and some Congressional Democrats wanted to impose tighter restrictions on campaign spending. Put these two facts together, the Republicans argue, and it becomes clear, in their view, that the fix was in.
However, the actual evidence to support this theory is non-existent. For example, the Republican Views quotes an email from Ms. Lerner’s husband in which, on Election Day, he told her that he had written in the names of socialist-labor candidates on his ballot. They quote an email Lerner wrote celebrating Maryland’s approval of same-sex marriage. And they note what they apparently consider to be the particularly suspicious fact that, in the 1.5 million pages of documents, the Republican staff found no instances in which Ms. Lerner, members of her family, or her friends “expressed positive sentiments about the Republican Party, a specific Republican candidate, or the Tea Party.”
So, Ms. Lerner’s husband voted for socialists, she is a Democrat, she supports same-sex marriage, and she apparently doesn’t have a lot of Republican supporters among her family or friends. What is all of this supposed to prove?
Granted, the Republican Views also quotes various other emails, in which Ms. Lerner expresses support for President Obama or is critical, sometimes harshly so, of the Republican Party and specific Republican officials.
To my mind, all this amounts to nothing more than irrelevant gossip. It’s coffee shop talk. Locker room talk. As the Democratic Views puts it, “There is no evidence that Lois Lerner allowed her political beliefs to affect how she carried out her duties as a manager of the Exempt Organizations office.”
The Republican Views also highlights Ms. Lerner’s views about the Supreme Court’s Citizens United decision. Apparently, she didn’t like it. She thought that it threatened to unleash a flood of unregulated money into federal campaigns. The Republican Views even suggests that it was somehow nefarious that Ms. Lerner closely followed the Citizens United decision.
All of this tells us nothing. Ms. Lerner was the head of the IRS division responsible for applying the law regarding the appropriate level of political campaign activity undertaken by 501c4 organizations. It would be odd if she were not closely following Citizens United, which was an important decision with major implications for the political campaign spending. Further, it is not particularly surprising that she didn’t like the decision. Eighty percent of Americans felt the same way, including me.
The Republicans also are exercised that President Obama, various Congressional Democrats, and the Democratic Party in general opposed the Citizens United decision and supported tighter limits on campaign spending. This of course is true. But the Republican Views makes a remarkable leap. They say, “Overall, it is apparent that the need for an explicit Presidential directive to target the Tea Party and conservative organizations was rendered unnecessary by the White House’s frequent public statements condemning political spending. Government agencies were acutely aware of the President’s wishes and responded accordingly.”
Think about that. The President wanted to limit campaign spending. So, the Republicans would have us conclude, various relatively low-level career government officials, without any direct intervention whatsoever from the White House, from the Treasury Department, or from anybody else in a position of political authority, sprang into action and engaged in a conspiracy to harass conservative groups. It was, apparently, conspiracy by osmosis.
I find these extraordinary leaps to defy logic. Federal civil servants are allowed to have political views, and the President of the United States and members of Congress are allowed to express views about the campaign finance system. Certainly, some of Ms. Lerner’s personal emails were in poor taste, and it may have been bad judgment for someone in her position to be sending emails to her friends, on her office computer, expressing political opinions. But the only pertinent question is whether the political views of Ms. Lerner, or of other officials, influenced the even-handed administration of the law, and although the Republicans point to numerous embarrassing emails from Lerner, they are unable to point to even a single one where she directed or encouraged employees to exercise political bias.
The Republican Views also makes another argument. It asserts that significantly more conservative- than progressive-leaning groups were affected by the dysfunction at the IRS, and that this, in and of itself, proves that there was a bias against conservatives.
This is a more serious argument. But, upon close examination, it, too, falls short.
As I said before, although it appears from the report that most of the groups that were affected were conservative, progressive groups were affected too. The Bipartisan Report indicates that “Progressive” was on the BOLO list, along with “ACORN” and other terms like “occupy” that were considered to indicate progressive or Democratic-leaning political engagement. The report also shows that IRS also conducted workshops directing employees to look for terms like “Progressive” and “Emerge” as well as “Tea Party.” Again, these groups suffered from the same sorts of delays and intrusive questions that Tea Party and other conservative groups suffered from.
Nevertheless, the Republicans insist that the fact that more conservative than progressive groups were caught up in the IRS dysfunction necessarily means that there was bias. However, this inference can only be drawn if there were equal volumes of applications coming into the IRS from conservative and progressive groups. There is simply no evidence that this was the case. Moreover, there is good reason to believe that, in the wake of Citizens United, the increasing volume of applications, particularly applications that raised serious issues about involvement in political campaign activity, came primarily from conservative-leaning groups. Independent watchdogs have determined that 80% of political campaign spending by 501c4s supported conservatives, and IRS staff said they were “inundated” with Tea Party applications. If that’s the case, it would be unsurprising that the most of the delays and other problems involved conservative groups. They were mostly the ones who were applying. Again, I am not in any way justifying the poor treatment received by conservative groups. But the report found no evidence that the average conservative application was any more likely to be mistreated than the average progressive application, and without such evidence, it is inappropriate to infer that there was bias.
A third argument that the Republican Views asserts, which also falls short, is that there was a double standard between, on one hand, the treatment of the conservative groups caught up in the 501c4 dysfunction, and, on the other hand, the treatment of some non-profit groups supported by Democratic Senators. The Republican Views cites three cases in which Democratic Senators asked that the review of applications for tax-exempt status be expedited, and where that apparently was done. They contrast the relatively quick resolution of these cases to the delays experienced by Tea Party and other conservative applicants for 501c4 status.
On the face of it, the facts of the three cases relied on do not support the Republican’s inference that there was a double standard. In the first place, according to the information in the report, the three groups supported by Democratic Senators had applied for 501c3 status, under which they cannot engage in any political activity. Further, in two of the three cases, there is nothing in the report indicating that the cases were particularly difficult or controversial.
In the Democratic Views, it is noted that the third case was a request for the expeditious consideration of an application for tax-exempt status by the One Boston Foundation, in order to facilitate fundraising and assistance to the victims of the Boston Marathon terrorist attacks in April, 2013. In that case, it appears from public reporting that there was an unusual legal issue, and that, in part at the request of various public officials, the IRS did in fact cut through some red tape and resolve the issue, so that the organization could get up and running quickly.
As far as I know, there are no allegations that the One Boston Foundation was anything remotely like a political organization, and I am not aware of any partisan or other controversy surrounding it. I am surprised that the Republicans apparently think that it was inappropriate or unfair for public officials to encourage the IRS to help get the organization up and running quickly, or that the IRS did anything wrong by handling this case well. To put it more pointedly, I am surprised the Republicans think this case has anything whatsoever to do with our investigation.
As the Bipartisan Report makes clear, the IRS took far too long to review 501c4 applications from Tea Party and other advocacy groups, and it subjected many of the groups to unnecessary delay and inappropriate questioning. But the fact that the IRS was able to handle a few very different cases reasonably well does not show a double standard. In this respect, the Republican Views compares apples and oranges.
Before closing, I want to briefly address some additional matters covered in our report.
The first is the crash of Lois Lerner’s hard drive, in 2011, which resulted in the loss of some emails that may have been relevant to our investigation.
Senator Hatch and I learned about the hard drive crash in June 2014, just before we were originally planning to release the Committee’s report. We immediately asked TIGTA to investigate, to determine whether there was evidence of intentional wrongdoing and whether any of the lost emails could be recovered from other sources.
TIGTA conducted a thorough investigation, taking more than a year. Here’s what TIGTA found, as explained in the report. Although we don’t know why Ms. Lerner’s hard drive crashed, there is no evidence that it was crashed intentionally. TIGTA was able to recover about 1300 additional emails. And TIGTA found that some potentially relevant backup tapes had been unintentionally mishandled and then destroyed, contrary to the document retention policy that the IRS put in place after our investigation began. These findings have led to a crescendo of criticism against the current IRS Commissioner, John Koskinen.
Let me make a couple of points in response to the criticism of Commissioner Koskinen.
First, it’s important to remember that the principal problems that we have been talking about, regarding the IRS handling of applications for section 501c4 status, all occurred before Mr. Koskinen came on board as IRS Commissioner in December, 2013. In fact, during the entire period covered by the original 2013 TIGTA investigation, the IRS Commissioner was Doug Schulman, who was appointed by President Bush. Although Mr. Koskinen inherited these problems, he didn’t create them.
Second, looking at how the IRS handled the hard drive crash, I do think Mr. Koskinen waited too long to inform the Finance Committee, and that the senior IRS leadership could have done a better job keeping track of the back-up tapes.
That said, there is zero evidence that these mistakes were politically motivated. And there is no reason to believe that the potential loss of some Ms. Lerner’s emails compromised our investigation. We recovered thousands of emails, covering this period, from the relevant people corresponding with Ms. Lerner. And, even taking the potential loss of some emails into account, the Bipartisan Report concludec, “the large volume of information we have reviewed gives us a high degree of confidence in the accuracy of the conclusions reached during our investigation.”
Looking forward, Commission Koskinen is a skilled and experienced leader. I am confident that he will work closely and cooperatively with Chairman Hatch and with me, to continue to improve the operations of the IRS Exempt Organizations Division.
We also asked TIGTA to investigate four other cases in which there have been allegations of political motivation by the IRS. One involved a White House official who referred to a specific company when criticizing the use of tax loopholes. The question was whether he had received inside information from the IRS, which would be a serious violation of the law. The other cases involved conservative groups who, unfortunately, had some of their confidential tax information inappropriately made public.
These cases have generated intense Congressional interest and even lawsuits. The underlying concern, similar to the concern about the handling of the 501c4 applications, was the serious and legitimate worry as to whether there had been an effort to exert political influence over the IRS, in order to use the IRS as a weapon against conservatives.
Here, based on the information in the report, the TIGTA investigations have led to clear conclusions. The TIGTA investigation of the White House official found that he did not receive any confidential information from the IRS. He apparently was just shooting from the hip, which may be bad judgment but is not a crime. And, in the three cases where confidential taxpayer information was inappropriately disclosed, it was because of unintentional mistakes by low-level IRS employees, some of whom have been subject to administrative discipline.
These mistakes were unfortunate, and the staff has made bipartisan recommendations to prevent such mistakes from recurring. But the bottom line is, in each of the cases, there was no effort to exert political pressure.
Our report tells a regrettable story. Many applicants for tax-exempt status were treated badly. They deserved better service from their government. .
But, in the end, this is a story about gross bureaucratic dysfunction, not about an attempt to exert political influence over or inject political bias into how the IRS does its job. Further, the main culprits are gone, the system has been improved, and the Committee has made a series of bipartisan recommendations to improve it further, so that nothing like this ever happens again.
Let me add one thing more. We here in the Senate have further work to do. We have to continue to think hard about one of the underlying issues, which is the issue of money in politics, including in the context of tax-exempt organizations that are not supposed to be engaged primarily in political activity.
As part of this, although I respect the views of Chairman Hatch and others who disagree, Congress should try to come up with better standards. We should overhaul the 1959 regulatory jalopy, to establish reasonable rules-of-the-road that fully respect First Amendment rights but also give groups better guidance about what they can and cannot do given their tax-exempt status.
Finally, and importantly, when it comes to money and politics, it continues to be my strong view that we need more transparency, not less.
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