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An IRS office stuck in morass

How a bureaucracy in Cincinnati, scrambling for guidelines on new rules, set off a firestorm.

WASHINGTON - In early 2010, an Internal Revenue Service team in Cincinnati began noticing a stream of applications from groups with political-sounding names, setting in motion a dragnet aimed at separating legitimate tax-exempt groups from those working to get candidates elected.

The IRS officials decided to single out one type of political group for particular scrutiny. "These cases involve various local organizations in the tea party movement," read one internal IRS e-mail sent at the time.

A few hours north in Fremont, Ohio, the owners of a drainage-supply shop, Tom and Marion Bower, were wondering why it was taking so long to get a tax exemption for their new tea party group.

"I didn't think any of us thought we'd be targeted," said Marion Bower of American Patriots Against Government Excess. "We started the group because we wanted to learn about our country and educate people. Now, I'm becoming a little paranoid. If they can do this, what else can they do?"

The Bowers' group was among more than a hundred conservative organizations singled out for extra screening by the IRS, part of an attempt to identify politically active groups not eligible for tax exemptions. The revelations, described in detail last week by the IRS watchdog, have caused a political earthquake - prompting the resignations of two top IRS officials, a criminal investigation, and multiple congressional probes, including hearings scheduled for this week.

The story of the IRS' policy of targeting right-leaning groups, which played out over several years in Cincinnati, Washington, and dozens of other cities and towns, was one of a bureaucracy caught in a morass of uncertainty and outside pressure. The actions also confirmed the suspicions of many conservatives after they had complained for years of harassment by the tax agency.

According to the inspector general's report, as IRS officials in Cincinnati tried to decide what to do about the groups - political advocacy organizations seeking what is known as 501 (c)(4) status - they sent out intrusive questionnaires seeking donor lists, copies of meeting minutes, and reams of other documents. Applications sat around for months, sometimes years; some organizations ended up folding while awaiting answers that never came.

IRS officials in Cincinnati were ignorant of the law and did not recognize that they should not scrutinize groups solely based on terms such as tea party, patriots, and other conservative-sounding descriptions in their names, the inspector general's report said. Many liberal-leaning and nonpolitical groups were also caught up in the effort.

At the same time, the IRS faced growing criticism from the outside that it was not doing enough to examine an increasing number of politically active groups seeking tax-exempt status.

"You had a lot of pressure on the IRS to figure out who and what should be a (c)(4) and complaints being filed by groups saying they had erred in granting (c)(4) status," said Trevor Potter, president of the Campaign Legal Center and a former Federal Elections Commission chairman. "You had (c)(4)s on both the Democratic and Republican side spending a lot on politics. That's the background of how we got here."

The desire by the Bowers to form a nonprofit group reflected two broader trends in American politics. One was the rise of the tea party movement - hundreds of local organizations, frustrated by spending in Washington and the growing national debt, whose power would soon be seen in local, state, and, in 2010, congressional elections.

But campaign finance laws were also changing. In January 2010, the Supreme Court ruled in Citizens United v. Federal Elections Commission that corporations and unions could spend unlimited funds on elections, setting off a tidal wave of political spending that would wash over the next two election cycles.

Nonprofit groups that do not have to pay taxes are supposed to ensure that political activity is not their primary purpose, so evidence that some of the new organizations seeking tax-exempt status were fronts for campaign organizations drew bipartisan interest. Good-government groups started pressuring the IRS to more closely scrutinize applicants. One such group, Democracy 21, wrote a series of letters to the IRS arguing that many of the groups should not receive favored tax status.

"In all of these cases, the groups were claiming (c)(4) status basically for the purpose of hiding their donors," said Democracy 21 President Fred Wertheimer.

"Unless there is a higher-up push to get something done and get guidance done, it doesn't happen," said Louisiana State University law professor Philip Hackney, who worked in the chief counsel's office of the IRS from 2006 to 2011.

As the Bowers' case dragged on, the IRS determinations unit was stuck in bureaucratic sludge. In June 2011, the Washington official who oversees the unit, Lois Lerner, organized a meeting to discuss its work on political advocacy groups. She expressed concerns about the broad reach of the BOLO list.

At the end of February 2012, Lerner stopped the letters. But it was too late. Throughout 2012, she and other officials were quietly trying to devise new policies for examining nonprofits. Higher-level officials, including then-IRS Commissioner Douglas Shulman and his deputy, Steven Miller, became aware of the problems. But the IRS did not tell the public or Congress about what was going on.

On May 9 this year, Lerner called a member of the IRS's tax-exempt advisory council. The next morning, she responded to the planted question, acknowledging that the IRS had improperly scrutinized conservative groups. By Wednesday, Obama had demanded and received Miller's resignation and appointed a new acting IRS commissioner, Daniel Werfel.

On Friday, Miller was testifying on Capitol Hill, saying that the IRS was guilty of "horrible customer service," but that its motives were not political.

Marion Bower was in the audience. "I really didn't want to come," she said. "But what they did was wrong. I felt it was time for me to speak up."