Politics & Policy

Conservative Group Uncovers New Roots of the IRS Scandal

A group of lawyers who have been investigating the origins of the IRS scandal for the past year-and-a-half say they’ve uncovered the real roots of the IRS scandal — and they’ll surprise both liberals and conservatives alike.

The group, Cause of Action, which has subpoenaed thousands of pages of documents from the agency and is still embroiled in litigation with it, says the targeting of conservative groups resulted as much from IRS personnel merely following the instructions laid out in their employee handbook, the Internal Revenue Manual, as from any political bias at the top.

When the scandal broke nearly two years ago, the IRS and the Obama administration pointed the finger at a few bad apples in the agency’s Cincinnati office. The agency’s inspector general blamed the inappropriate targeting of tea-party groups on the “ineffective management” of top bureaucrats. Many reporters, particularly on the right, including here at National Review, concluded that top D.C. official Lois Lerner and her colleagues in the IRS’s Exempt Organizations office had orchestrated events from the outset.

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Dan Epstein, executive director of Cause of Action, is a former attorney and investigator for the House Oversight Committee. He and his team, a group of 13 attorneys funded by the Koch brothers’ sprawling network of donors, say none of these stories fully explain what happened at the IRS between 2010 and 2014 and that, in fact, the targeting was baked in the cake. That is, the Internal Revenue Manual, the handbook by which IRS employees are required to abide, mandates the sort of scrutiny that delayed the processing of the applications of hundreds of conservative nonprofit organizations. Cause of Action has laid out its case in a confidential, 35-page memo obtained by National Review. They concluded that many of the IRS officials involved in the scandal were just following the rules.

Cause of Action concluded that the IRS officials involved in the scandal were just following the rules.

The targeting of tea-party groups traces back to February of 2010 when a low-level employee in the IRS’s Cincinnati office flagged a single file for his superior. In an e-mail written on February 25, 2010, Jack Koester, a revenue agent, told his boss, John Shafer, that “recent media attention” made the application at hand a “high-profile” case. In doing so, he was following the Internal Revenue Manual’s directive to agency personnel to elevate to senior managers cases that fall into several categories, including those “that are newsworthy, or that have the potential to become newsworthy.”

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That single e-mail from Koester ricocheted through the agency and eventually wound up in the Washington, D.C., office: Koester’s supervisor, Shafer, elevated the issue to the top official at the IRS office in Cincinnati, Cindy Thomas. Thomas in turn forwarded it to Holly Paz, the manager of the Exempt Organizations Technical Unit in Washington. Paz told Thomas that alerting Washington of the issue was wise due to the “potential for media interest.” By the next day, February 26, 2010, Thomas asked that the application be transferred to Washington and thanked Koester for “elevating” the case. Two weeks later, Paz asked that an additional tea-party case be sent from Cincinnati to Washington, and that Cincinnati hold the rest of the tea-party cases until Washington determined how to handle them.

Once in Washington, the applications landed with a group of attorneys known in the IRS as tax-law specialists. The Internal Revenue Manual directs tax-law specialists to create what is known as a “sensitive-case report” if, among other possible criteria, the application “is likely to attract media or Congressional attention.”

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That’s exactly what happened. On April 5, 2010, e-mails show that Holly Paz’s replacement, Steven Grodnitzky, asked a deputy to “assign the cases to one person and start [a sensitive-case report] for this month on the cases.” Cindy Thomas, in the Cincinnati office, was again instructed to hold the rest of the tea-party applications until Washington had resolved how they would be processed. All of this occurred, the Cause of Action report notes, “solely based on the determination by two IRS employees that the tea-party cases were newsworthy and the subject of media attention.”

#related#According to the inspector general’s report on the scandal, it wasn’t until May of 2010 that the IRS began developing the spreadsheet that eventually became the infamous “Be On the Lookout List,” which instructed IRS personnel to look out for tea-party cases. Cause of Action argues that, while the BOLO lists have been cited as the means of the targeting, the targeting had already been underway for seven months before the first BOLO list was circulated.“This is not to say that high-ranking IRS officials did not later take politically-motivated actions to delay the resolution of conservative-group applications,” the memo says. “The facts indicate that they likely did.” However, the memo notes, “it cannot be overlooked that the tea-party applications were flagged for extra scrutiny ten months before the use of any ‘Be On the Lookout’ list identified conservative groups by name and at least three months before Lois Lerner became involved.”

Disgraced IRS official Lois Lerner didn’t become involved with the tea-party cases until May 13, 2010, when she received the sensitive-case report created by tax-law specialists in Washington. Then, in early 2011, Lerner ordered that the cases go through a “multi-tiered review” process, called the tea-party cases “very dangerous,” and reiterated, “Cincy should probably NOT have these cases.”

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What followed was a series of events that those who followed the IRS scandal closely will remember well: Lerner demanded that the tax-law specialists working the cases coordinate with the chief counsel’s office, subsequently asked that tea-party cases be reclassified as “advocacy cases,” and worked to orchestrate a cover-up of those orders when she learned that an inspector general’s report was set to come to light in May of 2013.

Epstein’s and his team’s conclusion: The Internal Revenue Manual must be fundamentally reformed in order to prevent future targeting.

Epstein’s team at Cause of Action is adamant that most of the IRS personnel involved in the scandal executed their duties properly. “Clearly, Jack Koester, John Shafer, and Cindy Thomas executed their employee obligations precisely,” their report says. “Indeed, in the course of merely two business days, the employees in the Exempt Organizations group accurately elevated this Tea Party issue as ‘newsworthy’ or having the ‘potential to become newsworthy.’”

The team’s conclusion: The Internal Revenue Manual must be fundamentally reformed in order to prevent future targeting. “While there are certainly complex or new issues that would warrant or even require an employee to elevate the issue to a manager, the IRS’s desire to be portrayed in a positive light by the media is certainly not one of those issues,” they say.

RELATED: The Out-of-Control IRS, Rewriting Laws

Tax-law experts agree. Craig Engle, the founder of the bipartisan political-law group at the Washington law firm Arent Fox, says that allowing IRS personnel, ultimately at the national level, to determine what issues are newsworthy creates a sort of self-fulfilling prophecy.

The Internal Revenue Manual as it stands now virtually “requires the national office to do something” about cases it deems newsworthy, Engle says. As a result, he says, the IRS “created a task for itself that it would be impossible to administer evenhandedly, let alone on a bipartisan basis. It’s no wonder they got caught.” 

— Eliana Johnson is Washington editor of National Review.

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