Late yesterday afternoon, the Treasury Inspector General for Tax Administration released its eagerly awaited report on its investigation into the IRS’s use of inappropriate criteria for screening tax-exempt applications (“IG Report”). The Inspector General initiated its investigation after members of Congress raised concerns during the 2012 election cycle that the IRS was selectively enforcing the law against conservative organizations.  (As we previously noted, Lois Lerner, Director of Exempt Organizations at the Internal Revenue Service, publicly apologized last Friday for “inappropriately” targeting exemption applications submitted by organizations with “tea party” or “patriot” in their name for additional scrutiny.)

Although the trouble appeared to start in the Determinations Unit (a group of Exempt Organizations specialists based in Cincinnati), the report repeatedly lays blame on IRS management.  The problematic criteria were initially developed and used because of “insufficient oversight provided by management.”  (IG Report at 7.)  The Determinations Unit “requested irrelevant (unnecessary) information because of a lack of managerial review[.]”  (Id. at 12.)  The report concludes that, even today, management’s responses to the IG’s recommendations are insufficient.  (Id. at 11 & 17.)

Poor management notwithstanding, the Determinations Unit itself comes across poorly.  Multiple times the IG Report observes that the Determinations Unit did not understand what activities are permissible exempt-function activities for 501(c)(3) and 501(c)(4) organizations.  (E.g., id. at 7 (“[T]he criteria developed showed a lack of knowledge in the Determinations Unit of what activities are allowed by I.R.C. § 501(c)(4) and I.R.C. § 501(c)(4) organizations.”) & 12 (“We also believe that Determinations Unit specialists lacked knowledge of what activities are allowed by I.R.C. § 501(c)(3) and I.R.C. § 501(c)(4) tax-exempt organizations.”).)

As if it were not disturbing enough that those entrusted with enforcing the law did not understand what the law was, the timeline also shows that the Determinations Unit, when left to itself, repeatedly developed inappropriate criteria.  In July 2011, the IRS management corrected the Determinations Unit original inappropriate criteria, which targeted “tea party” organizations, and developed more neutral criteria.  (Id. at 7.)  But in January 2012, the Determinations Unit changed the new criteria without executive approval, “again focus[ing] on the policy positions of organizations instead tax-exempt laws and Treasury Regulations.”  (Id at 7.)   Those policy positions included “political action type organizations involved in limiting/expanding Government, educating on the Constitution and Bill of Rights, social economic reform/movement.”  (Id. at 38.)  By using this criteria, the Determinations Unit essentially selected organizations with specific policy views for additional and unwarranted scrutiny.  This amounts to a content-based test.

According to the IG Report, the net effect of these actions was to delay and burden exempt organization applicants and undermine public confidence in the IRS’s ability to enforce the law impartially.

Lingering off stage for the moment is a critical First Amendment issue that will, without doubt, come to the fore publicly in hearings we now expect throughout the summer on Capitol Hill.  As the D.C. Circuit court noted in Big Mama Rag, Inc. v. United States, the standards used by the IRS in processing applications for recognition of exemption “may not be so imprecise that they afford latitude to individual IRS officials to pass judgment on the content and quality of an applicant’s views and goals and therefore to discriminate against those engaged in protected First Amendment activities.”  631 F.2d 1030, 1040 (D.C. Cir. 1980).