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22–724—PDF 2016

S. HRG. 114–456 

THE INTERNAL REVENUE SERVICE’S RESPONSE 

TO COMMITTEE RECOMMENDATIONS 

CONTAINED IN ITS AUGUST 5, 2015 REPORT 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

OCTOBER 27, 2015 

( 

Printed for the use of the Committee on Finance 

COMMITTEE ON FINANCE 

ORRIN G. HATCH, Utah, Chairman 

CHUCK GRASSLEY, Iowa 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

JOHN THUNE, South Dakota 

RICHARD BURR, North Carolina 

JOHNNY ISAKSON, Georgia 

ROB PORTMAN, Ohio 

PATRICK J. TOOMEY, Pennsylvania 

DANIEL COATS, Indiana 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

RON WYDEN, Oregon 

CHARLES E. SCHUMER, New York 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

BENJAMIN L. CARDIN, Maryland 

SHERROD BROWN, Ohio 

MICHAEL F. BENNET, Colorado 

ROBERT P. CASEY, Jr., Pennsylvania 

MARK R. WARNER, Virginia 

CHRIS CAMPBELL, Staff Director 

JOSHUA SHEINKMAN, Democratic Staff Director 

(II) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Hatch, Hon. Orrin G., a U.S. Senator from Utah, chairman, Committee on 

Finance .................................................................................................................. 1 

Wyden, Hon. Ron, a U.S. Senator from Oregon .................................................... 3 

WITNESS 

Koskinen, Hon. John A., Commissioner, Internal Revenue Service, Washington, DC ............................................................................................................. 5 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Hatch, Hon. Orrin G.: 

Opening statement ........................................................................................... 1 

Prepared statement .......................................................................................... 41 

Koskinen, Hon. John A.: 

Testimony .......................................................................................................... 5 

Prepared statement with attachments ........................................................... 43 

Responses to questions from committee members ......................................... 77 

Wyden, Hon. Ron: 

Opening statement ........................................................................................... 3 

Prepared statement with attachment ............................................................. 81 

COMMUNICATION

Common Cause ........................................................................................................ 89 

(III) 

(1) 

THE INTERNAL REVENUE SERVICE’S 

RESPONSE TO COMMITTEE 

RECOMMENDATIONS CONTAINED IN ITS 

AUGUST 5, 2015 REPORT 

TUESDAY, OCTOBER 27, 2015 

U.S. SENATE, 

COMMITTEE ON FINANCE, 

Washington, DC. 

The hearing was convened, pursuant to notice, at 9:04 a.m., in 

room SD–215, Dirksen Senate Office Building, Hon. Orrin G. Hatch 

(chairman of the committee) presiding. 

Present: Senators Grassley, Roberts, Enzi, Thune, Isakson, Portman, Coats, Heller, Scott, Wyden, Nelson, Carper, Cardin, Brown, 

Bennet, and Casey. 

Also present: Republican Staff: Kimberly Brandt, Chief Healthcare Investigative Counsel; Chris Armstrong, Deputy Chief Oversight Counsel; Mark Prater, Deputy Staff Director and Chief Tax 

Counsel; and Justin Coon, Detailee. Democratic Staff: Joshua 

Sheinkman, Staff Director; Michael Evans, General Counsel; Daniel Goshorn, Investigative Counsel; and Doug Calidas, Legislative 

Fellow. 

OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. 

SENATOR FROM UTAH, CHAIRMAN, COMMITTEE ON FINANCE 

The CHAIRMAN. The committee will come to order, and I want to 

welcome everyone to this morning’s hearing and thank those who 

are here today. 

In May 2013, the Treasury Inspector General for Tax Administration revealed that, in the run-up to the 2010 and 2012 elections, 

the Internal Revenue Service had targeted certain organizations 

applying for tax-exempt status for extra and undue scrutiny based 

on the groups’ names and political views. 

Needless to say, we took this matter very seriously. Indeed, at 

the time, both Republicans and Democrats condemned the agency’s 

actions. And as the Senate committee with exclusive legislative and 

oversight jurisdiction over the IRS, the Finance Committee 

launched a bipartisan investigation into the matter. In fact, our investigation was the most thorough and the only bipartisan investigation conducted with regard to these events. 

On August 5th of this year, after more than 2 years of investigation, we released a 375-page bipartisan investigative committee report that included approximately 4,700 pages of exhibits. This reVerDate Mar 15 2010 15:40 Dec 01, 2016 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 R:\DOCS\22724.000 TIMD
2 

port is, I believe, the definitive record of what occurred at the IRS 

and why. 

As we all know, last week, the Department of Justice stated publicly that they would not be pressing criminal charges with regard 

to these events at the IRS. This has led some to argue that the 

Justice Department is corrupt or biased in some way. Others have 

said that this decision proves that nothing scandalous occurred at 

the IRS. 

I believe the committee’s report speaks for itself on this matter. 

And, in my opinion, rather than fueling the echo chamber, we 

would do better to focus on what we know actually happened and 

what changes need to take place to make sure it does not happen 

again. 

That is why we are here today. 

The committee’s report included ten major findings that formed 

the basis of various recommendations for changes that we believe 

the agency should make to ensure the IRS’s actions remain aboveboard. The purpose of today’s hearing is to hear directly from the 

IRS about their response to our report and their progress in adopting our recommendations. Toward that end, I want to thank Commissioner Koskinen for being here today and for the agency’s 

thoughtful response to our recommendations. 

In that response, the IRS indicated that they have implemented 

all of the bipartisan recommendations from the report that are 

within the agency’s control, as well as the separate majority and 

minority recommendations. 

Our overall goal here should be to restore the credibility of the 

IRS and ensure that this very powerful agency treats all American 

taxpayers fairly. 

While I want to commend the IRS for the efforts they have made 

thus far, it my understanding that, up to now, most of the changes 

they have made have been procedural in nature, and very little has 

been done to begin work on the needed structural changes at the 

agency. Today, I hope to hear more details as to why these types 

of changes are being delayed. 

At the same time, I believe the Finance Committee should be 

considering statutory changes that will improve upon the status 

quo. For example, there was bipartisan agreement in the report on 

the need to update the Hatch Act to ensure that, with regard to 

political activities, IRS employees receive the same considerations 

as employees of other highly sensitive agencies, like the Federal 

Election Commission and the Federal Bureau of Investigation. 

In addition, as the Majority Views in the report noted, and as I 

have stated publicly on multiple occasions, I have serious concerns 

about the influence of labor union activity at the IRS. While I am 

not anti-union and while I do not oppose collective bargaining in 

general, we know that two-thirds of IRS workers are represented 

by a union organization that is very politically active and that a 

fair number of IRS employees work full-time for the benefit of that 

union. I do not think it is much of a stretch to argue that such a 

strong union presence could have contributed to a politicized environment at the IRS. 

While current law allows Federal Government employees to be 

represented by unions, Congress has a made a number of excepVerDate Mar 15 2010 15:40 Dec 01, 2016 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 R:\DOCS\22724.000 TIMD
3 

tions to this policy, generally with agencies that have important 

law enforcement obligations or perform other highly sensitive work. 

And, while I expect there to be some resistance to this idea, I think 

it is only reasonable that we take the time to consider whether the 

IRS should be placed in a similar category. 

I hope that today we can have a good discussion and get Commissioner Koskinen’s views on these and other legislative proposals. Ultimately, the theme that I want to stress most today is 

accountability. 

Our report clearly shows that political targeting at the IRS resulted from a number of bad decisions made by a number of different officials. However, as of yet, very few of these individuals 

have been held accountable, while others have since received bonuses and even promotions. While I am concerned about this apparent lack of individual accountability, I am more concerned that 

the IRS lacks the necessary structural and procedural mechanisms 

to ensure that, as an agency, it remains accountable. 

The recommendations we included in our report were designed to 

provide this type of accountability, and I look forward to discussing 

our ideas in more detail today. 

Before I conclude, I just want to briefly comment on the ongoing 

effort at the IRS to enact new regulations regarding the political 

activities of 501(c)(4) organizations. Obviously, this is an issue that 

deeply concerns a number of people throughout the country, including members of this committee. 

As we know, regulations proposed in 2013 were criticized by people and organizations across the political spectrum and were subsequently withdrawn. That poorly drafted proposal would have created nonsensical rules and constitutionally dubious speech restrictions. Oddly enough, it would have created stricter standards for 

501(c)(4) organizations than exist for public charities, which would 

be a perverse reversal of roles for these types of organizations. 

While this issue is not directly related to the committee’s report 

on the IRS’s political targeting, I think it is fair to say that the 

agency still carries with it a cloud of perceived political bias. Therefore, I would caution Commissioner Koskinen and others in the administration that have made this regulation a priority to focus instead on actions to restore the IRS’s credibility and to abandon any 

effort to inject more rules and restrictions into the political process. 

I expect that members of the committee will want to discuss this 

matter today as well because, once again, it is an issue that is on 

the minds of many people. 

With that, I will turn to our distinguished ranking member, Senator Wyden, for his opening remarks. 

[The prepared statement of Chairman Hatch appears in the appendix.] 

OPENING STATEMENT OF HON. RON WYDEN, 

A U.S. SENATOR FROM OREGON 

Senator WYDEN. Thank you very much, Mr. Chairman. 

In early August, the Finance Committee released the final report 

on the bipartisan inquiry we undertook to examine the IRS’s processing of applications for tax-exempt status. Our investigation 

looked back at the period between 2010 and 2013. The committee 

4 

reviewed 1.5 million pages of e-mails and documents and conducted 

interviews with more than 30 IRS officials. 

The Finance Committee inquiry, colleagues, was the only bipartisan inquiry on either side of Capitol Hill. What we found on a bipartisan basis was alarming bureaucratic dysfunction. Many applicants for tax-exempt status were treated badly and deserved much 

better service from their government. For example, between 2010 

and late 2011, a total of 290 applications for tax-exempt status had 

been set aside for review. Only two applications had been resolved 

successfully. Not 200—two. That was unacceptable mismanagement. The investigation, however, did not find any evidence of 

criminal wrongdoing. 

Chairman Hatch and I both took time to speak about our views 

on the Senate floor when the report was issued. The focus of today’s hearing, however, is what the IRS is doing to guarantee, once 

and for all, that this type of deeply troubling mismanagement 

never happens again. 

The Finance Committee’s report included 36 recommendations— 

18 were bipartisan, 12 were Democratic, and 6 were Republican. 

Among them: 

• Set minimum training standards for managers in the exempt 

organization office to ensure that these employees can adequately perform their duties. 

• Institute a standard policy that employees must reach a decision on all tax-exempt applications within 270 days of when 

they are filed. 

• Create a position with the Taxpayer Advocate’s office dedicated 

solely to helping organizations applying for tax-exempt status, 

and several others. 

I would like to thank the Commissioner for responding to those 

recommendations in a letter that he sent last month to the chairman and me. My takeaway from the letter is that it is the Commissioner’s view that there has been genuine progress made to clean 

up the mess, and I look forward to hearing his assessment in further detail this morning. 

While the Commissioner is here, I also want to address the problem that occurred in Martinsburg, WV. Several IRS employees in 

Martinsburg deleted backup tapes that likely contained e-mails 

that were within the scope of the committee’s inquiry while it was 

ongoing. 

That mistake was completely unacceptable, and it was inexcusable. There are also several reports that there was some lying 

afterward. Commissioner, that just cannot happen again. I want to 

hear what the IRS is doing this morning to fix it. 

Finally, on Friday the committee received a detailed letter from 

the Department of Justice concerning their investigation into this 

matter, and I ask unanimous consent that that be entered into the 

record. 

The CHAIRMAN. Without objection. 

[The letter appears in the appendix on p. 82.] 

Senator WYDEN. One last point. The chairman mentioned this 

question of the 501(c)(4) groups, and I want to be clear on this 

point. 

5 

The vast majority of Americans want disclosure in political 

spending. They want all sides to be more open and more straightforward on these issues. The American people overwhelmingly disapprove of the Citizens United decision that knocked down some of 

the key limits on political campaign spending. If there is no oversight of who receives 501(c)(4) status, meaning anybody could get 

it and hide their donor list, then political spending will be hidden 

even deeper in the shadows. 

So my request to you on this point, Mr. Commissioner, is that 

you all work with this committee, Democrats and Republicans, in 

a bipartisan fashion, to get this right. 

Thank you very much, Mr. Chairman. 

The CHAIRMAN. Well, thank you, Senator Wyden. 

[The prepared statement of Senator Wyden appears in the appendix.] 

The CHAIRMAN. Today’s witness is the Honorable John Koskinen, 

the 48th Commissioner of the Internal Revenue Service. Commissioner Koskinen was confirmed to this position in December 2013. 

Prior to his appointment to lead the IRS, he served for 4 years at 

Freddie Mac, where he served for a period as the Acting Chief Executive Officer. Before that time, Commissioner Koskinen held various high-profile positions in public service, including President of 

the U.S. Soccer Foundation, Deputy Mayor of the District of Columbia, Deputy Director for Management at the Office of Management and Budget, and President Clinton’s Chair of the President’s 

Council on Year 2000 Conversion. 

The Commissioner also spent more than 2 decades in the private 

sector, including time as CEO and chairman of The Palmieri Company. Commissioner Koskinen has a law degree from Yale University School of Law and a bachelor’s degree from Duke University. 

We welcome you back to the Senate Finance Committee, Commissioner Koskinen, and we want to thank you once again for 

being here today. So you can proceed with your opening remarks, 

and I would ask you, if you can, to limit your opening statement 

to 5 minutes. 

STATEMENT OF HON. JOHN A. KOSKINEN, COMMISSIONER, 

INTERNAL REVENUE SERVICE, WASHINGTON, DC 

Commissioner KOSKINEN. Chairman Hatch, Ranking Member 

Wyden, and members of the committee, thank you for the opportunity to discuss the work the IRS has been doing to correct the 

mistakes associated with the determination process for tax-exempt 

status 2 years ago. 

Let me reiterate my belief that the IRS must continue to do everything possible to make sure all individuals and organizations 

can be confident that they will be treated fairly in their dealings 

with this agency. They need to know they will receive fair, unbiased treatment, regardless of their political affiliation, their position on political issues, or whom they supported in the last election. 

And when someone hears from us regarding their tax return, they 

need to understand it is only because of something that is or 

should be on their return and not other factors. And if someone 

else has the same issue regarding their return, they will hear from 

us as well, within the limits of our budget resources. 

6 

It is important because, even with our declining resources, the 

IRS will still audit over 1 million taxpayers this year, and they 

need to be confident they are going to be treated fairly and in an 

objective manner. 

The situation described by the Inspector General in his May 2013 

report should never have happened, and we are doing everything 

possible to ensure that the mistakes referenced in the IG’s report 

and reflected in the committee’s bipartisan report do not happen 

again. As part of our work to move forward, we have implemented 

all of the recommendations from the IG’s report. The IG noted our 

efforts in a follow-up report issued in March of this year. 

As to the Finance Committee’s own investigation, I am pleased 

to report, as noted, that the IRS has accepted all of the recommendations in the committee’s report that are within our control, and that includes recommendations in the majority report and 

the minority report. And we have already made significant progress 

in implementing those recommendations. Let me briefly summarize 

the actions we have taken thus far. 

We have taken steps to ensure the determination process for taxexempt status is transparent and the public can easily obtain information on the procedures necessary to obtain a determination. 

We have reduced the processing times for applications for taxexempt status, and we are committed to resolving all cases within 

270 days, as the committee has recommended. And in fact, the 

cycle time right now as a result of the work we have undertaken 

over the last 2 years is down to 112 days. 

We continue to develop new training and workshops for employees on a number of critical issues connected with the application 

process for tax-exempt status. 

We have established procedures to ensure applications undergo 

a neutral review process. These include training employees on the 

proper way to request additional information when it is needed to 

complete action on an application. 

In addition, Treasury and the IRS, as noted, are drafting guidance on social welfare and non-social welfare activities of 501(c)(4) 

organizations as recommended by the Inspector General. Our goal 

is to provide guidance that is clear, fair to everyone, and easy to 

administer. 

To ensure accountability in the determination process, the IRS 

has done a number of things, including requiring managers to conduct periodic workload reviews with their employees. Information 

on the average amount of time it takes to complete cases is regularly shared up the chain of command with me and other IRS leaders. 

Our efforts to improve accountability also included centralizing 

exempt organization workforces so leaders now work in the same 

location as employees who process applications for tax-exempt status. 

We have also taken actions to ensure risks are managed more effectively in the exempt organization area and throughout the IRS. 

We now have an agency-wide enterprise risk management program, providing for the regular identification and analysis of risks 

to be eliminated or managed across the agency. 

7 

To ensure we properly respond to requests under the Freedom of 

Information Act, we are developing standard procedures for employees to use when they search for information, and we will provide training to those employees on those procedures. 

As recommended by both the committee and the GAO, we are 

tightening internal controls for the process we use to select taxexempt organizations for audit once they are certified. Although 

the GAO recently found no evidence of unfair or biased audit selections, we agree with them that tightening the controls will reduce 

the risk that any unfair selections would occur in the future. 

Another issue is the need for us to improve our records retention 

process. We have initiated a process to secure the e-mail records 

of all senior officials of the agency. In addition, we are taking steps 

to ensure that employees preserve official records created when 

they send messages using our Office Communicator System. 

While we continue working to implement the committee’s recommendations, we also appreciate the committee’s bipartisan efforts on other critical issues. For example, the committee is considering identity theft legislation containing several provisions that 

would improve tax administration. These include accelerating due 

dates for information returns, allowing the IRS to require minimum qualifications for paid tax return preparers, and reinstating 

streamlined critical pay authority. 

I would also urge the committee to consider two other important 

legislative changes: giving the IRS correctable error authority in 

limited cases and amending the Tax Equity and Fiscal Responsibility Act statute to simplify audits of large partnerships. 

This concludes my opening statement, and I would be happy to 

take your questions. 

[The prepared statement of Commissioner Koskinen appears in 

the appendix.] 

The CHAIRMAN. Well, thank you, Mr. Commissioner. Again, I appreciate the way your agency has worked with this committee on 

our recommendations, but I also want to emphasize that there remain several open issues stemming from the targeting of conservative groups, and I want to get your response on two of those 

issues. 

The first is, I understand that there is at least one group caught 

up in the targeting that is still waiting on a determination. Can 

you commit that your agency is moving with all appropriate expediency to resolve any remaining open applications? 

Commissioner KOSKINEN. Yes, we will do that. I cannot, obviously, talk about any application, but we are down to just a handful. Several of those are in litigation. In some cases, we are still 

waiting for responses. But as I noted, we have reduced the backlog, 

and a new application today will get processed on average in that 

112 days. 

The CHAIRMAN. Okay. Secondly, in my opening statement, I mentioned the IRS and Treasury Department’s 2013 proposal to restrict 

the free speech of certain groups of Americans by rewriting 56- 

year-old rules governing the activity of 501(c)(4) social welfare organizations. Now, the IRS subsequently withdrew them after widespread bipartisan opposition. I know we disagree on the need for 

changes to the rules governing (c)(4) organizations, and I know that 

8 

you have committed that no new rules will take effect before 2017. 

But this leaves open the possibility that the IRS will make proposals this year or next year, creating confusion and uncertainty 

regarding the free speech of certain groups and their ability to engage in civic activities like nonpartisan voter registration or candidate forums. 

Can you tell the committee whether any new proposals will be 

released before 2017 and, if so, when you expect that to happen? 

Commissioner KOSKINEN. We are, as I noted, following up on a 

recommendation of the Inspector General, who said that the ‘‘facts 

and circumstances’’ standard, which has been used for the last 

number of years, is confusing and was part of the problem employees had in interpreting the applications of determination from (c)(4) 

organizations across the spectrum. As you noted just before my 

confirmation hearing, draft regulations went out that generated 

160,000 comments, all of them suggesting changes, many of them 

agreeing that, for instance, restricting the use of bipartisan/nonpartisan get-out-the-vote campaigns, candidate forums, things that 

had been done for years, should not be done, and we are taking 

those into consideration. 

But it is clear to us that, in fact, what we are trying to do is not 

change the rules of the game. What we are trying to do is make 

them clearer for IRS employees and to have a clearer set of guidelines for those organizing these organizations and, most importantly, for those operating them. We think that, when you are running one of these organizations, you ought to be able to be confident that you know what the rules are, that nobody is going to 

come in afterwards and second-guess you on the basis of what their 

interpretation of the facts and circumstances are. 

So I do think that the IG was right, that it would be important 

to clarify—not change but clarify—the rules under which organizations operate, and that is our goal and intent. 

The CHAIRMAN. Can you tell the committee whether any new 

proposals will be released before 2017 and, if so, when you expect 

that to be? 

Commissioner KOSKINEN. We do not have a timeline. We are continuing to finish our review of all those comments and continue to 

review the total statutory framework the Congress has set up. We 

have made it clear that we have no intention of influencing the 

next election. On the other hand, when we reissue the proposals in 

the new format that we think will be much more acceptable to people, they will be then open to public comment for 90 days. We have 

committed we will have a public hearing about it. We have committed we will keep the committees updated on the progress. 

At this point, we do not have a timeline. We would hope that we 

would be able to provide these proposed new rules early enough 

next year so that the work on them could be completed well in advance of the election, so there would not be any confusion. But I 

would stress that the work that we are doing now is focused on 

clarifying—not changing, but clarifying—the rules under which organizations operate. So I think once we get those out, people will, 

in fact, on all sides understand much better what it is that we are 

talking about within the existing standards of operation. I think 

that clarity will benefit everyone. 

9 

The CHAIRMAN. Well, with the IRS unable to meet its basic duties of answering taxpayer phone calls and better protecting 

against tax fraud, I strongly encourage you to stop spending agency 

time on such controversial and counterproductive proposals. 

Commissioner Koskinen, today you have mentioned several ways 

the IRS has adjusted its operations to serve taxpayers better and 

even more fairly. One area in which the IRS needs to continue to 

strive to do better is in protecting taxpayers’ identifying information and the vast amount of financial and other information that 

the IRS maintains about taxpayers. The IRS also needs to do better 

in preventing Stolen Identity Refund Fraud. 

You mentioned the regulation of paid tax return preparers, but 

I know there is concern that providing such authority could lead 

to more bureaucracy and potential harm to taxpayers. 

Just one last question. Will you commit today that if the IRS 

were to be provided authority to regulate paid tax return preparers, the IRS will utilize the Circular 230 framework that is already in place and not create another new regulatory regime? And 

will you also commit to fully cooperating with this committee in its 

oversight role over the regulation of paid tax return preparers? 

Commissioner KOSKINEN. I am happy to commit to both of those 

positions. We fully intend to use the 230 regulatory framework, 

and, in fact, if we were given the authority to require minimum 

qualifications for preparers, we would run it the same way we ran 

the program when we set it up in 2010, which was under section 

230, the regulation 230. So we have no intention of expanding that, 

changing it. That program started off and looked like it was doing 

well until the courts ruled that we did not have the statutory authority. So the legislation you are talking about would simply make 

clear we have the authority to run the program as it was originally 

set up. So there will be no surprises. People will know exactly what 

it looks like, because that is what we did for almost a year. 

The CHAIRMAN. Well, thank you. 

Senator Wyden? 

Senator WYDEN. Thank you very much, Mr. Chairman, and I appreciate your pointing out this question of the tax preparers, because this is another area that you and I have worked on in a bipartisan fashion with all of our colleagues. 

On the question, however, of the 501(c)(4) rules, because this is 

an area where there has been, let us say, spirited debate, I think 

it is very much in the public interest that the agency clarify the 

rules for Americans to follow in elections. And I would urge you, 

as I did in my opening statement, to work with us on a bipartisan 

basis—you have heard me say that a couple of times this morning; 

that is what is so important—if you are going to come up with an 

approach that is substantively right and sustainable. So I urge you 

to do that and to work closely with us. 

Chairman Grassley and I, Commissioner Koskinen, have been 

following these news reports about the question of the IRS cell 

phone tracking, and the press reported yesterday that the IRS obtained and received training for a Hailstorm cell-site simulator, a 

device which works by mimicking a cell phone tower in order to collect metadata from phones that connect to it. This comes on the 

heels of other news reports that many companies have taken to 

10 

tracking their employees’ movements through cell phone trackers 

in order to avoid triggering a taxable presence in foreign countries. 

Now, obviously the IRS has an important role to play in combating money laundering and drug trafficking and international 

tax dodging. My view, however, is that enforcement and protection 

of personal privacy must not be mutually exclusive. We have to 

have both. 

So, Commissioner, what can you tell us this morning in an open 

session about the IRS’s use of cell-site simulators? 

Commissioner KOSKINEN. The use of that is restricted. It is our 

Criminal Investigation Division that uses that technique. It is only 

used in criminal investigations. It can only be used with a court 

order. It can only be used based on probable cause of criminal activity. What it does is primarily allow you to see point to point 

where communications are taking place. It does not allow you to 

overhear—the technique does not—voice communications. You may 

pick up texting, but I would stress it follows the Justice Department rules. It requires a court order, and it requires probable cause 

with regard to criminal investigations. It is not used in civil matters at all. It is not used by other employees of the IRS. 

Senator WYDEN. How frequently have these investigations gone 

forward? In other words, how frequently are IRS criminal investigators obtaining location data about the people they investigate? 

Commissioner KOSKINEN. I will have to get you that information. 

I do not know how frequent it is. I just know that it is used, as 

you note, primarily in cases of money laundering, terrorism, and 

organized crime. 

Senator WYDEN. Can I have that answer within 30 days? 

Commissioner KOSKINEN. You certainly can. 

Senator WYDEN. Very good. 

[The information appears in the appendix on p. 77.] 

Senator WYDEN. On the recommendations that we are talking 

about this morning, I have tried to make clear that I believe the 

way the IRS handled the 501(c)(4) applications was an unmitigated 

disaster, using, in effect, ham-fisted methods for screening applications that basically let them just pile up for what seemed like eternity, and virtually none were processed. And certainly the agency 

made unacceptable mistakes in its response to congressional inquiries, particularly taking months to inform the committee when 

it discovered that Lois Lerner’s hard drive had failed. 

So I think I would like to start this morning—because I appreciated the letter that you sent to Chairman Hatch and me. In your 

view, what is the most important change that you have made in 

terms of responding to our bipartisan recommendations? What is 

the most important change and why? 

Commissioner KOSKINEN. I think the most important change— 

and it is a combination of many of the recommendations—is to encourage and, in fact, require the free flow of information from the 

bottom of the organization to the top. What we are trying to ensure 

is, if there is a problem anywhere in the organization about anything, that employees feel empowered, in fact, feel responsible to 

note that problem, report it to their managers, and, if they feel that 

is not appropriate or they are concerned about that, to report it up 

through the organization. Our enterprise risk organization has its 

11 

own independent line of communication any employee can use. I 

have now talked to almost 17,000 IRS employees, telling them I 

want them all to view themselves as individual risk managers. I 

have an e-mail box that I have gotten about 1,000 suggestions from 

employees in. I have tried to get them to understand they should 

feel comfortable sending me problems, concerns, or suggestions. 

I think if you look back at the problem, one of the problems that 

led to that inordinate and unacceptable delay was that the problem 

never moved all the way up the chain of command. It was, in fact, 

stuck in the middle. And also, the chairman mentioned structural 

change; it was because there were people in Cincinnati and people 

in Washington who did not have very good communication. 

So if the communication works better, if there are regular reports 

of where the problems are, if there are issues where we know that 

applications are stuck, that information should be shared, not hidden. 

Senator WYDEN. One last question for you, Commissioner, and it 

deals with the records and recordkeeping. Obviously, backup tapes 

were erased that should not have been, and though there is no evidence that the tapes were deliberately destroyed to hide evidence, 

now there have been some reports that employees did not own up 

to their mistakes when investigators came knocking. 

What is the IRS doing to ensure that its employees in the future 

keep e-mails and records safe? 

Commissioner KOSKINEN. Again, it is several things. 

First of all, we discovered that it was, you know, a mistake that 

should not have happened, and it obviously did not help our response to the investigation. What we need to do is, when we have 

a document protection and retention request—what we learned is, 

you cannot rely on sending it out from the top in a large organization, 85,000 employees, and assume that it will automatically be 

transmitted accurately through to the bottom. So we have made it 

clear that, going forward, those retention requests will go individually through the chain of command. 

Secondly, we are training our employees as to what it means to 

retain all media within a particular area. But the broader issue 

that we are dealing with is, we should not be depending upon individual hard drives and disaster recovery tapes as a backup system. 

Three years ago, the agency, because of budget constraints, made 

a decision not to upgrade our e-mail system. We are now actually 

doing that. We should have a standard—not, you know, some fancy 

thing—a standard e-mail system that retains the records automatically, that is easily searchable. We should not have to spend $20 

million in a year responding to legitimate congressional inquiries 

for information. So we need, in the short run, to make sure, whenever there is a document retention request, it goes throughout the 

organization and we are satisfied it goes down to the front-line 

managers and they understand what it means. 

We also will provide training for the first time in terms of, for 

all the IT people, exactly the media that should be retained. In this 

particular case, again, it should not have happened, but the people 

on the front lines, the two employees involved—as the IG in his report noted, (A) nobody purposely did this, but, (B) this was viewed 

as junk. It was found in a closet. What we need to make sure is 

12 

that everybody understands, when we retain media, it is all media, 

wherever you find it, however old it is or however unusable it is. 

And so we think going forward that will work, but the better solution in the long run is not to rely on backup disaster recovery 

tapes and not to rely on individual hard drives, but to, in fact, have 

a readily searchable backup system of all e-mail records of the 

agency. 

Senator WYDEN. Thank you, Mr. Chairman. 

The CHAIRMAN. Senator Grassley will defer until after Senator 

Brown completes his questioning. Go ahead, Senator Brown. 

Senator BROWN. Thank you, Mr. Chairman. 

Commissioner, thank you for joining us today. I would like to 

shift the focus to something this committee had an opportunity to 

address last month but chose not to because of partisan infighting 

and the influence of interest groups in this town. It is the IRS’s 

ability to regulate paid tax preparers. Congress has repeatedly 

been instructed that, in order to protect our constituents from identity theft, we must ensure that paid tax preparers perform due diligence, especially important and crucial for credits that assist lowincome families, such as the Earned Income Tax Credit and Child 

Tax Credit principally. 

As you mentioned in previous testimony, 57 percent of EITC returns come from paid preparers, three-fifths of whom receive no 

oversight from IRS. These preparers are not required to register 

with your agency. There are no qualification requirements that 

they must meet before assisting this group of taxpayers. It leaves 

an enormous hole within our tax enforcement infrastructure. IRS 

has estimated that 68 percent of EITC claimants turn to these paid 

preparers to help file their returns, likely because of the very complex eligibility requirements already placed within the tax code. 

Paid preparers who do not enroll with IRS have an up to 40 percent higher chance of submitting an improper EITC return—not 

fraud, but an improper return. 

Despite what some of my colleagues here might say about the 

IRS’s inaction on this issue, the agency tried in 2010 to bring these 

preparers in line with minimum qualification standards. As you 

know, the DC Circuit Court overturned the effort and instructed 

Congress that it is actually our responsibility to provide your agency with the authority to do this. 

Last month, when attempting to correct this problem, some of my 

colleagues balked at the idea of granting your agency this crucial 

authority, and here is my question—or a couple of questions. 

Walk us through, if you would, why it is so important for Congress to take action and to help improve tax enforcement for this 

group of taxpayers. And I know, since 2010, you have taken steps 

to increase compliance and reduce error rates. So if you would, as 

you walk us through the whole idea of why it is important for Congress to take action, integrate into your comments what you have 

done since 2010 and the steps you have taken. 

Commissioner KOSKINEN. Well, as I advised the chairman, what 

we are talking about, as you note, is just requiring minimum qualifications of preparers. We are not talking about any massive regulatory regime. It is simply that people ought to demonstrate a minimum capacity to understand the tax code. It is particularly imporVerDate Mar 15 2010 15:40 Dec 01, 2016 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 R:\DOCS\22724.000 TIMD
13 

tant in low-income and immigrant areas where a lot of times people are hanging out shingles saying, ‘‘Come with me, I will get you 

a bigger refund.’’ 

I would stress the vast majority of tax preparers are honest and 

try to do a good job. And, in fact, we do tax forums; we handled 

over 10,000 return preparers who came and spent several days 

with us updating themselves. 

So what we are proposing is simply, again, what we started to 

do and ran for almost a year, which is requiring just minimum continuing education, minimum qualifications for tax preparers, particularly in areas like the EITC where, as you note, the majority 

of EITC returns come from preparers, and a significant number of 

those are erroneous simply because the preparers do not have a 

real understanding, have had no education, about how the program 

and how various credits work. 

So we think it would be a significant step forward and provide 

greater protection to taxpayers, especially in low-income areas, to 

have some level of confidence that when they pay a preparer to 

prepare that return, the preparer has some knowledge of the tax 

code rather than is just somebody who hung out a shingle, somebody’s brother-in-law, somebody at a community center, who says, 

‘‘I will fill out your returns for you.’’ Some of them are unethical. 

Some are crooks who say, ‘‘Come with me, I will get you a big refund.’’ Sometimes some of them are actually collecting the refunds 

themselves. 

Now, we are not going to get crooks out of the world, but basically if people take the time to become educated to some extent 

about what the tax law is about, it is a better indication that they 

are serious about doing it well. 

The EITC rate of improper payments and the volume of improper 

payments is the single most intractable problem we deal with. We 

have a significant problem with identity theft, but we have just created a new partnership with the private sector and State tax commissioners, and we are making progress on identity theft. But we 

need more tools. I appreciate the committee’s support for getting 

W–2s earlier so that we could, in fact, match the W–2s with the 

returns that we are getting. We need access to the new hires database, which this committee would provide us with. 

It is a complicated problem. Ultimately, it goes to, as you point 

out, the complexity of the eligibility requirements in the statute, 

and, while the statutory framework is not my domain, if it were 

simpler, that also would help. 

Senator BROWN. Thank you. And, Mr. Chairman, thank you, and 

especially again, thanks to Senator Grassley. 

One really quick comment. In Senator Portman’s and my State, 

United Way has played a major role in staffing and running Volunteer Income Tax Assistance sites, which have made a difference. 

Just one last really brief question, and you can pretty much answer ‘‘yes’’ or ‘‘no.’’ If we were to take some of these actions that 

you asked for, I assume you could say with some certainty that improper payments—some would call it fraud; it is clearly not fraud, 

but improper payments—the rate of them would be reduced. 

Commissioner KOSKINEN. Yes. What I did when I started was, 

knowing this was a problem, I said I wanted everybody in this 

14 

agency who knows about this problem and has been working on it, 

to sit down and say why is it we have not made more progress over 

the last 10 years. It is not for want of trying. We have tried a range 

of things. And I said I wanted it to be a blank slate. Just tell me 

what would we need. And what came out was, what we needed 

would be to have the ability to require minimum qualifications; we 

would need W–2s earlier; we would need access to databases that 

would allow us to double-check what goes on; and the final piece 

which I asked the committee to consider is, we need limited correctable error authority. We can see in returns when somebody has 

claimed erroneously a child, but we cannot correct that. Under the 

statutes, we have to send a notice, we have to audit those people, 

and there is a limit to our ability to do that. We can do math error 

corrections, and the correctable error authority would simply allow 

us to—in educational tax credits, for instance, if you went to a university not on the list, if we see that, we either have to hold the 

return and deny you the credit and audit it, or we have to let it 

go through. And we do not have enough resources ever to audit our 

way out of this problem alone. 

So that package was what I was told a year and a half ago, and 

that is why we have been working with and appreciate the support 

from the committee on all of those areas. If we had those, we think 

we would make a significant dent in the improper payment rate, 

a significant dent in the volume of improper payments that are 

made under, not only the EITC, but the educational tax credit and 

the additional child tax credits. 

Senator BROWN. Commissioner, thank you. And I hope, Mr. 

Chairman, we can work together on that as we negotiate tax issues 

and extenders and all that is ahead. Thank you so much. 

The CHAIRMAN. Senator Grassley? 

Senator GRASSLEY. Thank you very much for holding this very 

important hearing. It is evident from the report that, at the very 

least, a dysfunctional culture and poor management led to the mistreatment of groups with a conservative philosophy applying for 

tax-exempt status. It is clear to me from the report that political 

biases and poor management went hand in hand with politically 

motivated behavior continuing unchecked. 

The targeting scandal, coupled with poor customer service and 

general mismanagement, has shaken what confidence taxpayers 

had in the IRS. To move beyond this, Congress and the IRS are 

going to have to work together to make the necessary changes to 

ensure similar abuses can never happen again. 

So I think the time is right to once again revisit the issue of taxpayers’ rights and IRS structural reforms. The bipartisan report 

has a number of good recommendations, and, in addition, I want 

to remind my colleagues that Senator Thune and I introduced the 

Taxpayer Bill of Rights Enhancement Act to further beef it up. 

I have three short questions. Mr. Commissioner, for taxpayers to 

move beyond the targeting scandal, they need to know that those 

who allowed it to occur have been held accountable. My understanding is few, if any, disciplinary actions were taken against midlevel managers who were directly involved in the improper targeting. The bipartisan report details one such manager who was 

15 

not only never disciplined, but received a bonus and has been promoted. 

So my question: how can taxpayers applying for tax-exempt status feel confident they will be treated fairly when individuals who 

oversaw the targeting remain in place, were never disciplined, and 

in some instances even promoted? 

Commissioner KOSKINEN. I would note a couple things, Senator. 

First, as I noted in my testimony, the chain of command, starting 

with the Commissioner down five levels, all those are new. All of 

those have been changed as a result of this. 

Secondly, as the Justice Department noted, they interviewed 100 

employees and found no evidence that any employee actually acted 

with regard to political bias or discrimination. So there is not a 

finding in the recommendations in any of the reports that an individual exercised political bias in selecting applications for review. 

Nonetheless, as I have stated from the start, it is a situation that 

should not happen. People should not wait 2 years. The categorization was erroneous. But in terms of discipline, as I say, the chain 

of command all the way down has changed. There are new people 

who have gone through, and we have pursued appropriate disciplinary review as needed. But I would note—and I think it is important for the public to note—that the Justice Department, as I say, 

talked to 100 individuals, some of whom identified themselves as 

conservatives and Republicans. None of them indicated that anyone 

had done anything based on political bias. 

Senator GRASSLEY. Okay. A follow-up then to something that 

Senator Wyden discussed with you about the cell-site simulators. 

The follow-up would be: in the past 2 months, both the Justice Department and the Department of Homeland Security have publicly 

issued policies that require greater Fourth Amendment protections 

and greater transparency when these devices are used. So my question is whether or not you could commit to issuing such a policy 

statement by a date certain. 

Commissioner KOSKINEN. We actually follow—as a regular matter, our criminal investigators follow the Justice Department policies, and if they are updated, we follow those. And I am happy to 

commit that we will follow that Justice policy. 

Senator GRASSLEY. Okay. My last question: this bipartisan report 

that we have referred to was significantly hampered by poor electronic record retention. My understanding is that the IRS has been 

working with the National Archives and Records Administration to 

implement a record management approach known as ‘‘Capstone’’ 

and come into compliance with an executive directive mandating emails be managed in an accessible electronic format at least by December 31, 2016. 

Two questions. Does the IRS expect to be in full compliance with 

the executive directive and Capstone procedures by December 31st 

next year? If not, why not? And what procedures does the IRS have 

in place presently to ensure that what happened with Lois Lerner’s 

e-mails does not happen again in the meantime? 

Commissioner KOSKINEN. We will be in compliance. In fact, we 

are almost there now. We have the top 350, 400 senior executives, 

their e-mails are all now separately catalogued and preserved. As 

I noted, our goal is to, in fact, not depend upon hard drives and 

16 

individual computers, not depend upon disaster recovery tapes as 

a backup system, but to automate our e-mail system, upgrade it to 

what everybody else is using, so that we have not only a backup 

system separate from the normal e-mail systems, but also one that 

is easily searchable and readily searchable. And we are moving in 

that direction. As noted, we have a plan that we have worked with 

NARA on, and we are in compliance with that plan and the 

timeline. And by the end of next year, we hope not only to beat the 

Capstone issues but to be moving even with limited resources toward upgrading our e-mail systems so that we never have this 

problem again. 

Senator GRASSLEY. Thank you very much. 

Senator Wyden [presiding]. Senator Scott is next. 

Senator SCOTT. Thank you, Mr. Ranking Member. Good morning. 

Commissioner KOSKINEN. Good morning. 

Senator SCOTT. Earlier, Senator Wyden asked you a question 

about the most consequential change you have made at the IRS in 

response to our report. I think your answer was, your employees 

can now e-mail you in a new special e-mail box that was just created. That was the most consequential thing you have done based 

on the report? 

Commissioner KOSKINEN. I think what I said was, the most consequential thing I have done is tried to get every employee to view 

themselves as a risk manager. If they see any problem they have 

any issue with about any question, they should immediately report 

it to their managers. If they have any concern that it is not going 

up the chain of command, they should report it either directly to 

our risk management office, or they should report it directly to me. 

So they have an open line of communication. 

We have done a whole range of things. My testimony is full of 

those that we have adopted. I do think that ultimately for us to 

avoid these kind of problems, we need to have a situation where 

no problem gets hidden—— 

Senator SCOTT. Got you. 

Commissioner KOSKINEN [continuing]. No problem gets ignored, 

no problem moves up—— 

Senator SCOTT. I am going to move on to my questions, but I do 

believe, as I listened carefully to your answer, the answer that you 

gave, though your testimony is filled with recommendations and 

suggestions, based on your limited ability to move forward without 

legislative action, the most consequential change you have made is 

that there is a new e-mail system in place where your employees 

can directly e-mail you. 

Commissioner KOSKINEN. I think that is an improper characterization. 

Senator SCOTT. Okay. Good enough for you. 

Here is a question for you. Why are we here? I think it is very 

important for us to remember why we are here having this conversation or having this hearing. It is because in the IRS, an agency in the Federal Government with amazing power of intimidation, 

there was, has been, and hopefully no longer is, a culture of discrimination, a culture of discrimination that focused and targeted 

conservative organizations, Tea Party and other conservative 

groups, 300-plus, and in addition to that, also audited individuals 

17 

who were making conservative contributions. So we are here today 

not to have a conversation about simple structural change. We are 

actually here today because there was a culture of discrimination 

in the agency that has the power of intimidation in a way that no 

other agency in the Federal Government has, and it used that 

power of intimidation against conservative organizations, and then 

there was a cover-up of that intimidation. That is why we are having this hearing today. 

If you think about the fact that those conservative organizations 

cumulatively waited nearly 600 years—600 years—to receive an 

IRS determination, we should seriously consider what actions are 

necessary for us to make sure that culture never again exists. 

You were brought in as a turnaround man, to turn this around. 

And as Senator Grassley asked, who has been fired? What are the 

disciplinary measures that you have taken? Do you have the power 

to fire the employees who were involved? Because we know that we 

have the power to promote some of the employees because, obviously, some have been promoted, as Senator Roberts has clearly 

stated earlier. I am concerned, as a taxpayer, with the breaches 

that we have had, that the new culture is a culture that is still as 

inconsistent with the right direction as the old culture. And my 

concern for the 8,000 South Carolinians who have had their information exposed because of the breach is just on top of the concern 

that I have for this culture that seems to target individuals based 

on this notion that America is a Nation of free speech, and if they 

do not like it, there is someone in the IRS who can tamp it down. 

That is a problem from my perspective that we should pay close attention to. 

And then, Mr. Koskinen, you mentioned in your opening statement that there are limited resources. My question is: if there are 

limited resources, as the turnaround guy, should you ask for the 

ability to take the employees, the 200-plus employees who are 

working full-time on union activities, should you take the 600,000 

hours—the 600,000 hours—invested yearly on only union activities, 

should you redirect, if you had the power, the $27 million of taxpayer resources in a different direction so as to meet the obligation 

of the IRS as it relates to actually dealing with taxpayers? And, if 

you do not have that authority, and I am sure you do not have all 

the authority, should a part of your response be asking for the authority? Because perhaps we need the legislation that would empower you to complete the job as the turnaround guru that I am 

sure you could be. And, if you need that legislative action, tell us 

what it is so that we can work with you in making sure that the 

IRS is the premier agency within the Federal Government that 

emboldens people to have great confidence in the outcome and in 

the process. I would love to partner with you in that journey. 

Commissioner KOSKINEN. If I could respond—— 

Senator WYDEN. Briefly, Mr. Commissioner. Senator Roberts is 

next. 

Commissioner KOSKINEN. Can I respond to—— 

Senator WYDEN. Sure; of course. 

Commissioner KOSKINEN. First, I appreciate the offer of support. 

It is important to ensure the public has confidence. 

18 

You mentioned, as a fact, the culture of discrimination. There is 

no evidence that supports that there was any culture of discrimination. As noted, the Department of Justice interviewed 100 different 

employees of the IRS, some who identified themselves as conservatives, some as Republicans. None of them said that political bias 

had entered into any decision. 

In terms of individual audit selection, anyone who has claimed 

to be targeted, the Inspector General has looked at over 100 of 

those cases and has found not one where anyone was ‘‘targeted’’ because of their political activity. So we need to deal with the problem, but we need to characterize it appropriately. 

The committee in a bipartisan way listed a set of recommendations they thought would deal with this problem. We have committed to implementing all of those recommendations within our 

control. We remain committed to making sure that the situation 

does not happen again. Groups should not have to wait for 250 or 

500 days to get certifications. And, in fact, it should be noted, 

which we sometimes forget, you can set up a (c)(4) organization and 

go into operation without the approval of the IRS, so that anyone 

who wants to set up tomorrow morning or wanted to over the last 

several years to become a (c)(4) could do that on their own without 

our approval. 

Part of the reason they need or seek our approval is because the 

rules are complicated in terms of what the facts and circumstances 

are, and they want to be able to have us review that in terms of 

facts and circumstances, which is why I think, if we could clarify 

and not rely on ‘‘facts and circumstances,’’ it would be much easier 

for those interested in becoming (c)(4) organizations to set up and 

operate with confidence that the rules are clear and that nobody 

is going to second-guess them. 

Senator WYDEN. Thank you, Commissioner. 

Senator SCOTT. Mr. Chairman, I do need to respond to what he 

said, if you do not mind giving me 30 seconds. I would appreciate 

it very much. 

Senator WYDEN. Very briefly. 

Senator SCOTT. In a document cited at the top of page 153, Lois 

Lerner compares the approach that led to getting Al Capone to 

using audits to intimidate tax-exempt organizations. Lerner’s improper intervention into the audit process is described in section 

II(C)(5)(b) of the Republican views. Examples include how Lerner 

may have directed audits of Crossroads GPS, a group affiliated 

with Ms. Palin. 

Thank you, Mr. Ranking Member. 

Senator WYDEN. Okay. Senator Thune? 

Senator THUNE. Thank you, Mr. Chairman, and I want to thank 

you and Senator Hatch for holding this very important hearing. It 

has been, as has already been noted, 21⁄2 years almost since the Finance Committee opened its bipartisan investigation into the IRS’s 

targeting of social welfare groups based on their conservative political views. I think the question we have to ask at this point is, 

‘‘What have we learned?’’ Well, certainly that the IRS was guilty 

of gross mismanagement or, in the words of our ranking member, 

‘‘vast bureaucratic dysfunction.’’ But I believe we do the American 

people a disservice if we attribute the inexcusable behavior of IRS 

19 

employees simply to incompetence. To do so would ignore the fundamental problem at hand: the fact that the culture at the IRS allowed employees to believe that they could let their personal political views guide how they treated taxpayers, and that there would 

be no repercussions whatsoever for doing so. 

Simply put, we need a cultural change at the IRS. American taxpayers should expect at the very least a culture of accountability, 

a fairness, an impartiality. No taxpayer ever again should fear that 

they will be discriminated against based on their political or ideological beliefs. 

And so, while I appreciate the changes the IRS is attempting to 

implement on their own, I believe that more needs to be done. And 

earlier this year, Senator Grassley and I introduced the Taxpayer 

Bill of Rights Enhancement Act of 2015, which is a series of measures to hold the IRS accountable to American taxpayers. Unfortunately, the IRS has lost the trust of the American people, and it 

does not have the credibility to make the necessary reforms on its 

own. And I believe that the Congress needs to act to ensure that 

taxpayers’ rights are protected and that there are real consequences when they are abused. And I hope that this committee 

can count on the support and cooperation of you, Mr. Commissioner, and other high-ranking officials at the IRS and Treasury as 

Congress considers new taxpayer protections. 

And with that, what I would like to do is get your views on a 

few of what I think are the common-sense proposals that Senator 

Grassley and I have in our legislation to make the IRS once again 

accountable to the American taxpayers. And I am going to read 

through these and ask you to hold off on commenting until I get 

to the end. And if you cannot address these, you can answer them 

for the record. But I want to get these questions in. 

The first one is that last year the IRS proposed its own Taxpayer 

Bill of Rights, and the question is: would you support legislation to 

codify these rights and to make it the official duty of the IRS Commissioner to ensure that IRS employees are familiar with these 

rights? So that is question number one. 

Second is, the Ten Deadly Sins created by the IRS restructuring 

commission in 1998 require mandatory termination of an employee 

who threatens to audit a taxpayer for personal gain. Would you 

support amending the Ten Deadly Sins to include threatening to 

audit or failing to perform an official action for political purposes? 

So that is question number two. 

Number three, in your recent letter to the committee, you stated 

that the IRS failure to preserve electronic records such as e-mails 

is clearly unacceptable, and you noted that the IRS is implementing records management improvements. Do you support legislation that would ban IRS employees from conducting official business over personal e-mail, a measure that passed the House by a 

voice vote earlier this year? And also, do you support legislation 

that would codify the deadline by which the National Archives has 

required the IRS to put updated document retention policies in 

place? 

Finally, and the fourth question, keeping in mind that some conservative groups were stuck in limbo for up to 5 years on their applications, would you support granting 501(c)(4)s the ability to file 

20 

for declaratory judgment on their application if the IRS has not 

acted upon it after 270 days? And as you know, that is something 

that 501(c)(3)s already possess and access as a remedy. 

All of the measures I just mentioned are included in the 

Grassley-Thune Taxpayer Bill of Rights, and, as I stated earlier, I 

hope that we can count on your cooperation on these measures and 

others that the committee might consider to restore the credibility 

and the integrity of your agency. 

So I say all that, ask those questions, and you maybe can keep 

track of all that, but to the degree that you can, comment on those, 

Commissioner, and then if you cannot, we will certainly welcome 

that for the record. 

Commissioner KOSKINEN. I would note, when you note the 

changes on our own, the changes on our own are the changes in 

response to the recommendations of the bipartisan report as well 

as recommendations in the majority and minority reports. So these 

are not ideas that we have just by ourselves. We have said we will 

implement all of the recommendations we have control over that 

this committee has recommended in its report are necessary to 

make sure that the delays do not happen again. So it is not just 

us. We are actually doing everything you asked us to do. 

With regard to the Bill of Rights, as you noted, we pulled together the Taxpayer Bill of Rights over a year ago. We spent a lot 

of time trying to make sure taxpayers and employees are aware of 

those. They are already codified in statute. That is why we pulled 

them together, so that they would be in one place. And we do think 

it is important for those to be—we provide training on them for the 

employees. We think it is important for taxpayers as well as employees to know what those are. Codifying those and saying those 

are a Bill of Rights would be codifying the rights that exist 

throughout various statutes. We would be delighted to support that 

those become an important part of the statutory framework, because they already are. What we have done is be able to make it 

easier for taxpayers to find them. 

With regard to official business on personal computers, that is a 

policy we already have. You are not supposed to do that. In fact, 

when I first started, I sent testimony home one day to my home 

computer so I could edit it, and then the next morning I got a note 

saying, ‘‘You are not supposed to do that.’’ Somebody came to my 

office and said, ‘‘We assume you are editing testimony.’’ I said, 

‘‘That is right.’’ The next thing I got was an office computer for 

home so I would not, in fact, send anything to my home computer. 

So that is a policy that we have and enforce very stringently. It has 

security issues associated with it. It is a policy. If you wanted to 

put it in legislation, we would be happy to have you do that. I am 

not sure we need a lot of new rules for those things. 

Otherwise, I would be delighted to get back to you. I think that 

clearly it is impermissible for anyone to use their political beliefs 

in doing any business at the IRS. I do not know what most people’s 

political beliefs are at the IRS. And I would simply note again— 

I know Senator Scott feels strongly about this—that the Justice Department talked to 100 IRS employees, several of whom selfidentified themselves as conservatives and Republicans. No one 

identified a single instance in which they were instructed to or in 

21 

which they knew of anyone who took an action because of their political beliefs. Lois Lerner clearly had very public beliefs. Those beliefs she is welcome to have in her personal life. They have no place 

and no role in the operations of the IRS. And I do not know of any 

other situation or indication. And even people who did not like Lois 

Lerner and did not approve of her management talent, according 

to the Department of Justice, did not feel that those views had influenced the decision—— 

Senator WYDEN. Colleagues, we are going to have to move on. 

Senator Roberts? 

Senator ROBERTS. I want to thank Chairman Hatch and Ranking 

Member Wyden, and thank you for this hearing and our committee’s report on the IRS actions. 

With regard, as stated by others, to the suppression of electoral 

activities of groups whose views do not coincide with those of the 

White House, having gone over the report, it is clear this was a 

massive effort. And I remain deeply concerned and, worse, have no 

confidence that we will have all of the information we need to 

make a final determination on the IRS activities, and more important, safeguards to protect these groups’ First Amendment rights. 

It is very clear, as has been said by Senator Wyden, from the report that there was gross mismanagement of the exemption application process for these targeted groups. In fact, the committee 

agrees that, at a minimum, there was a heightened scrutiny of applications from certain organizations and that this scrutiny resulted in significant delays in processing applications, which in 

some cases caused the applicants to simply cease operation. 

The committee also found by a bipartisan agreement that the 

agency functioned in a politicized environment and that this environment allowed for the improper processing of applications from 

the targeted organizations. 

The agency looks to have dropped any pretense of impartial tax 

enforcement, actively worked against conservative groups, and coordinated with the White House and other Federal agencies, including the Department of Justice and the Federal Election Commission, to suppress electoral activities of groups whose views do 

not coincide with those of the White House. 

In my reading of the factual information presented in the report, 

there was a systematic suppression of free speech rights of these 

organizations which I think is, sadly, ongoing. The end result has 

been an egregious loss of faith in the agency, as has been pointed 

out by Senator Scott, Senator Thune, and others. This is an abhorrent situation compounded by the agency’s half-hearted efforts to 

locate and preserve records relevant to the committee’s investigation. In fact, the IRS saw fit to mislead the committee about the 

existence of backup data and sat on the information about computer crashes and lost backup tapes for weeks. 

Now, Mr. Koskinen, you have been on board in this decay of the 

reputation and standing of the IRS. You bear a direct responsibility, which you obviously have said, particularly in your lessthan-cooperative approach in responding to the oversight requests 

of this committee. 

Now, to be fair, as you have said, I know you have taken a number of steps to address some of the issues and recommendations 

22 

identified in our report. These appear process-oriented and very 

technical. At least we have this. You are talking about delays. We 

are talking about targeting. But, without question, there is much 

more that we can do. There are some very common-sense structural 

changes we should consider. Chairman Hatch, Ranking Member 

Wyden, Senator Grassley, and others have given us a full legislative prescription. 

Now, we have a number of other sound ideas that have been offered by committee members, including legislation by Senator 

Coats to provide a legal right of action when (c)(4) applications are 

delayed; Senators Grassley and Portman’s Taxpayer Bill of Rights; 

Senator Portman’s on gifts to (c)(4)s; Senator Cornyn’s small business protection proposal; and my legislation with Senator Flake to 

put a stop to further action on the (c)(4) regulation rewrite. I would 

like to see a real rewrite that could take care of the politics part 

of this as opposed to what might be ongoing. 

These are all good first steps in reorienting the IRS away from 

a political posture. I look forward to working with my colleagues 

and you, sir, as indicated by Senator Scott, through the committee 

as expeditiously as possible. 

You have just stated that the Justice Department interviewed 

100 folks from whom there was some suspicion of targeting groups 

on a political basis, and not one—not one—was involved in any politics. Senator Scott just alluded to this in South Carolina and in 

Kansas. I find this incredulous, because the people I talk with have 

been targeted, and targeted for years, and it is without question a 

situation where politics was involved. 

So, given the remarks of Senator Scott and given the remarks of 

others—and you have gone over a disciplined review effort at the 

IRS—and given that American citizens were targeted for extra 

scrutiny in the exemption application process, thereby denying 

them the First Amendment right, as so eloquently stated by Senator Scott, a tactic that I think is comparable to what is seen in 

a totalitarian country, take your pick—take your pick—has anyone 

involved in this targeting been fired, fined, reprimanded, denied a 

bonus, slapped on the wrist, or even talked to in a stern manner? 

Commissioner KOSKINEN. As I said in response to Senator Scott, 

I respectfully would disagree with the characterization of what the 

situation at the IRS is. The IG, the Department of Justice, and 

GAO have all looked for instances of political bias actually targeting anyone, and none of those reviews has come up with a single 

case. 

Clearly, I do not mean to minimize at all the delays, the mismanagement that took place from the start. We have apologized to 

people for those delays. It should not happen. But continuing to 

characterize it as if there is a politicized atmosphere and that is 

causing a lack of public confidence—if we say that enough, there 

will be a lack of public confidence. The independent investigations 

that have looked at that have not found a single instance of that. 

It does not mean we do not need to take the actions. You have 

a bipartisan report after 21⁄2 long years, which is, I think, terrific. 

We responded quickly. We think the recommendations you recommended to us that we have control over are important and 

thoughtful, and we are going to implement them. And our hope is 

23 

that our response positively to the committee will, in fact, restore 

whatever confidence has been lost. But I would say that, again, 

just reiterating, I think it is important for the public to understand 

that, while people may feel they were targeted, there has been no 

objective review that has found that to be true. 

I do think it is corrosive to the tax compliance system if people 

feel that way. We are doing everything we can to try to assure taxpayers that when they hear from us, it is because of an issue in 

their tax return or their application—— 

Senator ROBERTS. Well, I thank you for that—— 

Commissioner KOSKINEN [continuing]. And it has nothing to do 

with who they are. 

Senator ROBERTS. Excuse me. My time has run out. But I thank 

you for your very optimistic take on this, and I think I probably 

would agree that, with the people I have talked to who are very 

irate about this, it tends to be anecdotal evidence. And you have 

stated that the GAO, the Justice Department, and Lord knows how 

many other people, have investigated this with over 100 folks and 

found absolutely nothing wrong. That is just not the case with regards to people whom I know in Kansas who have been targeted 

and—not only targeted, but also audited. I just find that rather incredulous that these two things do not match up. 

Commissioner KOSKINEN. Well, let me just make one point, if I 

could, Mr. Chairman, because I think it is important. As I noted, 

even with limited resources, we will do a million audits this year. 

We will audit Democrats. We will audit Republicans. We will audit 

independents. We will audit conservatives. We will audit people 

who go to church, people who do not go to church. 

Senator ROBERTS. You will probably audit some members here. 

Commissioner KOSKINEN. Right. And all of those people will be 

selected by objective criteria. The GAO has reviewed that with us. 

All of them need to feel that the only reason they are hearing from 

us is because of an issue in their return. 

Senator ROBERTS. But that was not the case with Lois Lerner. 

It just was not. It just was not. And now she has been cleared, and 

she is just collecting a pension, which gets back to my question. 

Has anybody involved in this been fired, fined, reprimanded, denied a bonus, slapped on the wrist, or even talked to in a stern 

manner? 

Commissioner KOSKINEN. The entire—— 

Senator ROBERTS. You are just saying everything is fine—— 

Commissioner KOSKINEN. I am not saying everything—— 

Senator ROBERTS [continuing]. And it is not fine. 

Commissioner KOSKINEN. It is not fine, but it is not the problem 

of political targeting. It is a problem of, in fact, the recommendations you make and the recommendations we are implementing. 

We need to have a better operation to ensure it does not happen 

again. 

Lois Lerner had political views that she had a right to. She had 

no right to have them expressed during her working hours. The 

Justice Department talked to, as I say, 100 employees—— 

Senator ROBERTS. All right. I have heard that. 

Commissioner KOSKINEN [continuing]. And found no case 

where—— 

24 

Senator ROBERTS. I have heard that. 

Commissioner KOSKINEN [continuing]. They were influenced by 

her views, and I think it is important for us to understand what 

the facts are. I would not minimize the inconvenience, the impossible, the unacceptable way that the applications were delayed. 

There is no reason for that. We are committed to lowering that 

cycle time. We are down to 112 days. We are comfortable with the 

270-day—— 

Senator ROBERTS. Mr. Koskinen, my time is up, and that means 

your time is up right now. I admire your tenacity, and I admire 

your position. There is a great organization that you ought to take 

part in here in Washington that is called the ‘‘Flat Earth Society’’ 

with regards to whether there was any politics in this or not. 

Senator WYDEN. Mr. Chairman, several colleagues have now 

made the point about targeting and political bias, and just with 

your indulgence, colleagues, I want to just very briefly respond. 

The Inspector General’s audit that spurred our inquiry found 

zero evidence of targeting or political bias. So what we did, because 

we thought it was important to be bipartisan, we sent our investigators to ask every IRS employee directly involved in the review 

of applications whether there had been any attempt to do this targeting to exert partisan influence. Not one employee—not one— 

said there was any political bias. You all have heard me characterize this whole effort as one involving massive bureaucratic dysfunction. But there is no evidence of political bias. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Well, I think you would have to be nuts to read 

this and not conclude there was political bias. My gosh, Lois Lerner 

herself—Lois Lerner herself—I do not care what the left says about 

it. We all know there was political bias. 

Senator WYDEN. Mr. Chairman—— 

The CHAIRMAN. We all find fault with Lois Lerner, and we ought 

to find fault with her. 

Now, was it criminal work? I do not know. They say ‘‘no.’’ I accept that. 

Senator Heller? 

Senator WYDEN. Mr. Chairman, just before we go to Senator 

Heller, our investigators, our bipartisan investigators—this is not 

somebody else; this is our people—talked to every employee, and 

they said ‘‘no political bias.’’ 

The CHAIRMAN. I do not think our side said that. 

Senator Heller? 

Senator HELLER. Mr. Chairman, thank you, and to the ranking 

member also, thank you very much for holding this hearing. I want 

to thank the ranking member also for following up on this cell 

phone tracking issue of the IRS and hope that you do not take today’s response as an answer. I would anticipate they would have 

one rogue member of that IRS group who could take an issue like 

this and expand it far beyond the scope of what it was initially intended for. 

But having said that, Mr. Chairman, Commissioner, thank you 

very much for being here, and thanks for taking your time. I know 

some of these are pretty strong comments, and they are not going 

25 

to stop with me. But I do also understand that this is the purpose 

of this hearing today. So we will continue that. 

With the report on the IRS targeting certain conservative groups 

and the recommendations from this committee, there is a lot of concern that I am hearing from people back in my State, and I believe 

we have an obligation to the American people, also to Nevada taxpayers, to ensure that the IRS lives up to its mission of providing, 

I think as you defined it, top-quality service and also enforcing the 

laws with integrity and fairness to all. I know you do not disagree 

with that and live by that as much as you can, but right now, the 

way I see it, the IRS is not living by those particular standards. 

To say that I am disappointed with Friday’s political decision 

that the Justice Department would not seek criminal charges 

against Lois Lerner or anyone else for the IRS controversy is an 

understatement. It is unacceptable that a government agency has 

yet to take action against mid-level managers and an administration that refuses to hold accountable employees who use their political influence to impact daily operations of the IRS. 

Commissioner, you have been there for several years now—actually 2 years in December. Congratulations. 

Commissioner KOSKINEN. It seems like longer. 

Senator HELLER. I bet it does. And I know you do believe that 

you are ultimately responsible and accountable for these actions. 

So I have a couple questions for you. 

I will start by saying that the public trust, I think we would 

agree, is critical to the IRS’s success. In my home State, I continually hear from Nevadans questioning why they should have faith 

in your agency and, frankly, the Federal Government period. You 

have made statements in the past about your agency. This is a new 

day. This is not the IRS of 2010, 2011, or 2012. And I find it hard 

to explain why Nevadans should trust the IRS when the agency, 

former Commissioners, and yourself have continually misled both 

Houses of Congress about whether it targeted conservative organizations. 

Your agency has also stonewalled Congress’s investigation by repeatedly failing to preserve and locate records, made inaccurate 

statements about the existence of backup data, and failed to disclose to Congress the fact that records were missing. 

As I said, I believe you do feel you have a personal responsibility 

for these failures. Do you feel that way? 

Commissioner KOSKINEN. I certainly am responsible for everything that goes on in the organization. I have told employees that 

if there is a problem, it is my problem; if somebody has made a 

mistake, it is my mistake; and I am comfortable, being in charge, 

with that. 

I think the issue has been raised about the delay in disclosure 

about the hard drive crash of Lois Lerner. At the time, when I was 

advised in April of 2014 that there was a crash, it seemed to me 

the appropriate thing to do was to determine what e-mails had 

been lost and what e-mails we could find. We found 24,000, and we 

reported that to the committee. But people have been concerned 

about the fact that I knew in April and we did not provide the full 

report until June, which I thought was the right thing to do. But 

since then, we have taken the position that if there is an issue like 

26 

that while we are investigating it, we will advise the committee 

and the public. We did that with the Get Transcript breach. We did 

not know the full sweep of it, but we immediately let the chairman 

know and the ranking member know that we had a problem, we 

told them what we knew about it, and we continue—— 

Senator HELLER. Do you believe the IRS broke any laws in not 

backing up her e-mails, Lois Lerner’s e-mails? 

Commissioner KOSKINEN. I do not think we broke any laws. We 

had an antiquated system. There is no reason to rely on individual 

hard drives, no reason to rely on backup recovery tapes as your 

backup system. We had an antiquated system, and a decision was 

made in 2012, for budgetary purposes, not to upgrade it. We should 

have done that even with budget constraints. We would have avoided a lot of these problems. 

Senator HELLER. Let me ask a question for the third time. I 

know Senator Scott asked this question and Senator Roberts asked 

this question. It has not been answered yet. Have there been any 

staffers directly involved in the tax-exempt targeting scandals who 

have been fired? 

Commissioner KOSKINEN. I cannot talk to you about individual 

cases. I can—we will be happy to talk to you in private. We are 

just not allowed publicly to talk about it. But what I can say publicly is, the entire chain of command, five levels of supervisors from 

the Commissioner on down, are no longer there. 

Senator HELLER. No longer with the agency or no longer in their 

current positions? 

Commissioner KOSKINEN. They are no longer with the agency. 

They have all been—they have all left, and I can give you the details of how that happened, but not in public. 

Senator HELLER. Thank you. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Senator Coats? 

Senator COATS. Thank you, Mr. Chairman and Ranking Member. 

Mr. Koskinen, obviously you have heard about the continued 

frustration that many of us have had. It is no secret there has been 

a loss of trust in government. It is not just your agency, but it is 

many agencies. It is the function of government and its leadership. 

It is reflected in the primaries on both sides. People are just disgusted and fed up with our dysfunction. You have talked about 

massive dysfunction within an agency that people fear the most, 

that has the most power over individuals. It is not going away. And 

so, whether it is just incompetence or total dysfunction or the fact 

that government has just grown to the point where it simply cannot handle the issues that it needs to handle and gain the trust 

of the American people, my colleagues have stated that—and I certainly think—there is no other agency that more fed into that narrative than what happened at the IRS. 

There is no trust in the Department of Justice either. The former 

Attorney General appeared to be nothing more than a private counsel to the President of the United States, and the decisions that 

came out of there did nothing to restore that trust. 

Having said that, I want to go to a specific issue here. An Indianapolis investigative reporter brought this to my attention. We followed up on it, and I want to see if you can address this issue or 

27 

are in the process of addressing this issue so that it does not happen again. 

My understanding of this is that, while the IRS takes identity 

theft seriously when it involves significant tax fraud, it does not do 

so when names and Social Security numbers are stolen in order for 

an undocumented worker to get a job. A live example of this, and 

there are other examples, happened to someone in my State, and 

it was brought to my attention by this investigative reporter. 

An undocumented worker might submit a tax return using his 

own Taxpayer Identification Number, but attach a W–2 form to it 

with someone else’s name and Social Security number. And when 

the IRS discovers this, as you should, the legitimate taxpayer’s account gets an identity theft indicator put on it. But the return that 

has been filed with false information is still processed, and the perpetrator suffers no ill consequences. 

In the meantime, it can cause a nightmare for the legitimate taxpayer who might get harassed with IRS letters accusing them of 

not reporting income. They may even lose income-related benefits. 

And as I said, one taxpayer could not get health insurance for his 

children for several months because he was a victim of this kind 

of identity theft. 

The question I have is this. Is the IRS aware of this issue? Is 

it taking steps to address this issue? If it is prohibited by law from 

taking actions to stop this fraud, we need to know that so we can 

modify that law. But the issue is that the IRS discovers employment-related identity theft and still processes the tax return that 

used the false information and sends any refund to the perpetrator, 

it does not link the account of the filer who submitted false information with the account of the victimized taxpayer, nor does it 

mark the account of the perpetrator in any way. The IRS does not 

inform the employer that the worker submitted a false name and 

Social Security number. It does not notify law enforcement that the 

filer submitted false information in order to obtain employment. 

And my question is, can we fix this, if you are aware of it? And 

if you are not, can we work together to fix this? 

Commissioner KOSKINEN. It is an important and complicated situation, as you can imagine. As a general matter, the use of Social 

Security numbers for employment purposes, the INS and Social Security pursue. Our role as tax collectors is—there are a lot of immigrants here, whether they are illegal or they are just not documented, undocumented immigrants who work, and they also all 

want—not all—many of them want to pay taxes because, if there 

is ever an amnesty, they have to demonstrate they have paid them. 

So they actually get an ITIN, which they use to file, and for us that 

is sufficient, and they file, and we do fine with it. 

The use of—sometimes it is relatives’, sometimes it is borrowed, 

sometimes it is stolen—Social Security numbers to get the job so 

that an employer actually does a W–2 is a process that, again, the 

INS and Social Security pursue. Our job is, if somebody wants to 

pay taxes, if they want to be compliant with their tax obligations, 

even though they have citizenship challenges, our job is to collect 

those revenues. And we collect a fairly significant amount, and 

there are ITINs out there. 

28 

There are sometimes refunds, but generally, because they are not 

eligible for most refund programs, generally what we are doing is 

collecting appropriate taxes from those who are working, even if 

they are here in an undocumented status. And we try to work with 

taxpayers. As I say, a significant number of those Social Security 

numbers are borrowed or used from relatives or someone else. But 

again, we do not know where they have come from or why, and our 

view is if we start—and we talked with INS about this, and Social 

Security. If we start pursuing employers and undocumented aliens, 

then nobody is going to file their taxes because that will be another 

exposure point. And the decision was made so long before I got 

here that it was in the government’s interest for undocumented 

citizens to pay taxes to the extent that they want to and want to 

provide support for the services they receive. 

Senator COATS. Well, should it not be in the government’s interest also to care for the victim and put something in place that will 

give the victims official notification that their Social Security number has been stolen or their Tax Identification Number has been 

stolen and used for false purposes and, therefore, they are not sitting in front of an employer saying, there has been fraud here? Because it has an impact on individuals who have been the victims, 

and whether or not the IRS should pursue this, some function of 

government should pursue this. So can we try to set up something, 

some process, whereby it can be moved to the agency that can do 

that, if you cannot do that, or something put in place at the IRS 

so that it can accomplish that and address the victim’s problem? 

Commissioner KOSKINEN. You raise many of the facets of this 

problem. We would be delighted to talk with you further about it 

and figure out how we can deal with both aspects of it—allowing 

people to pay taxes so that when, sometime later on, it becomes an 

issue in their potential citizenship, they will have a record of having paid taxes without discouraging that, but at the same time protecting taxpayers, because protecting taxpayers is an important 

issue for us. So we would be delighted to talk with you further. 

Senator COATS. Good. I appreciate you saying that because, if 

you need authority to do it, Mr. Chairman, that is something we 

should pursue. If the decision is made that another agency should 

do that or another function of government should do that, there 

ought to be something in place that protects the victim as well as 

going after the perpetrator. 

Commissioner KOSKINEN. I would be delighted to talk with you 

further about it. 

Senator COATS. Thank you. I hope we can move on that, Mr. 

Chairman, because one way or another, we not only have to think 

about prosecuting the person who stole the numbers or falsely used 

the numbers, but the person who has been hacked or the victim of 

all this needs to have some ability to clear his name and not be 

denied job opportunities or other opportunities because of this situation. 

The CHAIRMAN. Thank you. 

Senator Portman? 

Senator PORTMAN. Thank you, Mr. Chairman. And, Commissioner, we thank you for being here today. As you know, this is an 

issue of particular concern to me because it is of particular concern 

29 

to a lot of Ohioans. In fact, Senator Hatch and I were the first people to raise this issue when Ohio’s 501(c)(4)s were being asked inappropriate things by the IRS. The document requests did not 

seem to make sense. We sent the first letter on this back in March 

of 2012, and, unfortunately, it continues today. There is an Ohiobased (c)(4) group called ‘‘Unite for Action’’ that still has not received the determination on its tax-exempt request that it first 

sought in 2012. So, you know, just to remind us why we are here, 

the IG report and our bipartisan report—I am not talking about, 

you know, a Republican report—all said the same thing, which is 

that there were words used to screen 501(c)(4) applications like 

‘‘patriot,’’ like ‘‘9/12,’’ like ‘‘Tea Party.’’ Seventy percent of the cases 

tagged for additional review—70 percent—were Tea Party cases. 

And to quote our report, and, again, consistent with what the IG 

said, ‘‘Such groups were disproportionately impacted.’’ No question 

about it. 

So just to remind everybody why we are here, that is the issue. 

And of course, there is distrust when that sort of thing happens. 

And of course, there should have been consequences. 

So I am going to focus a little on fostering this sense of accountability you talked about in your testimony. I could not agree with 

you more. And real accountability comes, of course, from consequences. 

I am one of those people, as you know, on this committee who 

believes that my constituents are suffering because of a lack of 

funding at the IRS. I think taxpayer service is important, and I 

would like to see us increase the funding for taxpayer service. But 

it is very difficult to have any kind of increased funding for anything at the IRS as long as there is this lack of accountability and 

lack of the sense that there will be consequences for actions. 

So let me be specific with you. You talked about fostering a sense 

of accountability. You talked about the fact that we need to ensure 

that this happens all through the system. You answered a question 

today saying you sense that IRS employees now feel more comfort 

in being able to talk to you and go up through the command. 

Let me ask you this question. For those who were involved in the 

mismanagement, shall we say, of the conservative group taxexempt filings, were there any consequences? Any consequences. 

Commissioner KOSKINEN. As I said, the entire chain of command, 

starting with the Commissioner or the then-Acting Commissioner 

down five levels, are all no longer with the agency. 

Senator PORTMAN. They have all retired with full pensions or 

they have been reassigned? 

Commissioner KOSKINEN. Well, I can talk to you in private. I 

cannot talk about individual cases. 

Senator PORTMAN. Okay. Well, that is what the public information indicates. Let me give you an example. In December of last 

year, the Treasury Inspector General found that between 2010 and 

2013—before your time, a lot of this—323 former employees were 

rehired by the IRS for whom records show performance and conduct issues associated with their previous employment, resulting in 

them leaving through formal removal or separation or termination, 

or leaving during an ongoing investigation. 

30 

Commissioner KOSKINEN. Those are primarily temporary and 

seasonal employees, and we have changed that policy to make sure 

that that does not happen in the future. 

Senator PORTMAN. Okay. This goes to accountability. I am glad 

to see you have changed that policy. 

As you know, under the Restructuring and Reform Act, which I 

was a co-author of, the IRS is allowed to terminate employees who 

willfully violate tax law unless the penalty is mitigated by the 

Commissioner. In April, the IG found that between 2004 and 2013 

almost 1,600 employees had willfully violated tax law; 61 percent 

were handed lesser suspensions, such as reprimands or counseling; 

worse, a number of these employees received promotions and 

awards within a year of their willful noncompliance with tax law. 

So again, this sense of accountability has to have consequences. 

Commissioner KOSKINEN. And the response to that is, again, it 

reflects prior practices. We have made it clear that there will be 

no promotions and awards made in the year in which there is an 

inability to comply with the procedures and policies. So if there are 

disciplinary actions, there will not be promotions, there will not be 

awards. 

Senator PORTMAN. That is good. Still, you know, 1,600 employees 

willfully violate, 61 percent receive lesser suspensions. So, accountability. 

Commissioner KOSKINEN. And the other 40 percent actually were 

either suspended or dismissed. We actually dismiss a substantial 

number of people every year for violations of the rules, and I would 

be delighted to get you that detail. 

Senator PORTMAN. That would be helpful. 

Section 2(c) of the bipartisan report goes into some detail about 

the destruction of the 422 tapes that served as a backup to Lois 

Lerner’s destroyed hard drive. You know all about this. We have 

talked about it today. These backup tapes were destroyed sometime 

in early 2014. At the time, they were the subject of a litigation 

hold. Your Chief Technology Officer, Terence Milholland, has actually called the destruction of these backup tapes ‘‘more significant 

than the loss of Lois Lerner’s hard drive.’’ 

Can you tell us today how the employees who disregarded the 

litigation hold were held accountable for the destruction of this information relevant to the committee’s investigation? 

Commissioner KOSKINEN. As the Justice Department notes, there 

is further activity going on, and, again, I will be delighted to keep 

the committee advised in terms of what happens beyond that. But, 

again, those are two individual cases. As I say, as a general matter, 

both the IG in their year-long investigation and Justice found that 

no one purposely destroyed those tapes, the employees involved, 

trying to obstruct anybody’s investigation. They thought of them as 

junk, and they did not understand the litigation or document retention program. But that has been thoroughly investigated by both 

the IG and the Department of Justice, and both of them found that 

the employees thought they were doing the right thing. 

Senator PORTMAN. Again our understanding is, there have been 

no consequences for not honoring that litigation hold. The bipartisan report also talks about the failure of the IRS to produce responsive documents to a 2010 FOIA request. If that FOIA request 

31 

had been responded to properly, it is my belief we could have 

avoided a lot of this, maybe all of it. It was not responded to properly. Our bipartisan report found that these documents could have, 

again, kept this scandal from happening and that the search was 

deficient. The IRS’s narrow reading was to exclude responsive documents. 

Again, since our report has been released, has there been any attempt to impose consequences on those who did not properly respond to this FOIA request that could have stopped this whole 

thing in the first place? 

Commissioner KOSKINEN. That was some time ago, and I would 

be happy to get you that information. 

But I would note that you are exactly right. My sense of this, before I even started, was if somebody in 2012 had said, you know, 

we have a problem, we are trying to learn how to process all of 

these issues, and that had gone up the chain of command and had 

become public then, we would have avoided a lot of unnecessary expense. 

Senator PORTMAN. Mr. Chairman, I just have two more quick 

questions. One, our report goes into multiple mistakes made by 

various employees on the be-on-the-lookout list, the so-called BOLO 

list. Have any mid-level managers been reprimanded for their role 

in these mistakes? 

Commissioner KOSKINEN. Again—— 

Senator WYDEN. And briefly, Commissioner, because Senator 

Casey was passed over, and he has been waiting a long time. He 

was before—— 

Commissioner KOSKINEN. I would just note again that both the 

IG and the Department of Justice found that no employee behaved 

improperly in the sense of political bias or doing something that 

was out of the ordinary. 

Senator PORTMAN. Again, our report, our bipartisan report, cites 

multiple mistakes. We understand that not only have there been 

no consequences, but, in fact, based on page 101 of our bipartisan 

report, some involved were actually promoted. So again, a culture 

of accountability needs to be in place for us to be able to begin this 

process of regaining the trust of my constituents and the American 

people. 

Thank you, Mr. Commissioner. 

The CHAIRMAN. I do apologize to Senator Casey. I was led to believe that Senator Portman was ahead of you. But we will call on 

you now. Please forgive us. 

Senator CASEY. Mr. Chairman, thank you. I thank you and the 

ranking member for the hearing. 

Commissioner, I want to thank you as well for your work today 

and your public service. You have a hard job in a difficult time. 

I want to focus on the question of resources, and this happens 

on a pretty regular basis in this town, where folks in Congress will 

say the IRS or any other agency has to do X, Y, and Z, sometimes 

pointing the accusatory finger, but not providing the follow-up and 

the resources that are essential. And as you know, in midSeptember, I and four other members of the Senate sent a letter 

to Secretary Lew talking about this issue. And I will not read the 

whole letter, but in a pertinent part, we talk about the conVerDate Mar 15 2010 15:40 Dec 01, 2016 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 R:\DOCS\22724.000 TIMD
32 

sequences of ‘‘shortsighted budget cuts to the IRS,’’ and then we 

give examples of the impact. The examples are taken from the 

Treasury Inspector General, and I am quoting here from part of the 

letter: ‘‘During the 2015 filing season, only 38.5 percent of callers 

received assistance compared to about 75 percent the year before,’’ 

and the problem is with not having the resources. 

So, whether it is addressing the tax gap, whether it is improving 

taxpayer services, implementing data mining procedures to identify 

errors, whether it is combating identity theft, addressing improper 

payments, all of that depends upon resources. It has been my experience in State government and the Federal Government that you 

cannot improve a service by magic. You have to have the tools and 

the resources. So the focus that we were bringing in that letter was 

the result of getting the resources that the President has recommended for fiscal year 2016. 

So can you walk through some of the impacts of those resource 

constraints and how they impact your ability to fulfill your responsibilities, and then, secondly, steps you are taking to prevent identity theft and improve taxpayer services? 

Commissioner KOSKINEN. Well, the short answer is, it is a critical problem. I testified at my confirmation hearing 2 years ago 

that it was the most critical problem facing the agency, and since 

then the agency’s budget has been cut further. 

If you look at the information, basically the thing to understand 

is, the OECD just put out a report—it does it every 2 years—looking at the costs of tax administration. The IRS spends almost 

half—or slightly more than half—of what the average of the OECD 

developed countries do to collect a dollar of taxes. If you look at 

Germany, France, England, Canada, and Australia, they spend two 

to three times what we spend to collect taxes. So the first point to 

understand is, we are already the most efficient tax agency in 

terms of collection of any agency of the major developed countries 

of the world. 

Secondly, since 2010, the budget has been cut by over $1 billion. 

At the same time, we have 6 or 7 million more taxpayers. We have 

been given ‘‘unfunded mandates,’’ as we call them: the Affordable 

Care Act, the Foreign Account Tax Compliance Act. Last year, 

shortly after our budget was cut, as the only major agency with a 

budget cut, we were asked to implement the ABLE Act and the 

Professional Employees Act. Since then, we have been asked to implement the Health Coverage Tax Credit Program, again, with no 

additional funding. 

The net impact is, we get funded and we spend money on enforcement, on taxpayer service, on information technology, including cyber-protection and identity theft, and general operations and 

maintenance. As our budget has been cut every year over 5 years, 

the money has to come from somewhere. So on taxpayer service, as 

you know, we had an abysmal level of service last year. In terms 

of enforcement, the numbers show that we are losing over $4 billion a year in collections compared to what we used to collect because we have 3,000 fewer revenue agents. Those revenue agents 

collect over $1 billion a year. So actually, to save $1 billion in funding, we are losing over $4 billion a year in tax revenue collections. 

33 

So it is costing the government four times the amount of savings 

in the budget cuts. 

In terms of information technology, we are dealing with cybercriminals around the world, organized, highly sophisticated, wellfunded. Our systems are attacked millions of times—not thousands, millions of times—by people trying to breach. We have been 

fortunate not to have a cyber-breach. We have been unfortunate 

that identity theft has gotten more and more sophisticated, so forget our Get Transcript unauthorized access. It was by a set of very 

sophisticated criminals who already had significant detailed information about taxpayers so they could masquerade more effectively 

as the taxpayer. 

To protect against all of that, as you say, takes resources. If the 

budget is just flat, nothing will get better. And, in fact, at flat, we 

need between $100 and $200 million just to pay for the pay raises 

and inflation, and we no longer have any give. You know, no one 

cares more about the poor level of taxpayer service than our employees who provide that service. They believe their mission is to 

help people; when they answer a call, they feel good about solving 

a problem. They are the ones who feel as badly as the taxpayers 

about the fact that the lack of funding has meant that we have not 

had enough people to answer the calls. 

Ultimately, as I have said, we do not want to go backwards and 

hire the 15,000 people we have lost. What we need to do is stabilize 

and go forward to provide better service digitally. It costs us $43 

to answer a phone call, $52 to deal with someone when they walk 

into our offices, and 15 to 25 cents if we can answer the issue online digitally. And we need to move in that direction as we go. 

With regard to identity theft, it is a complicated, growing problem. What we have done, the most significant step we have taken 

is, we brought in the CEOs, in March, of the tax preparers, the 

software developers, payroll providers, and the tax revenue administrators, and created a partnership. As I told them at the time, the 

purpose was not to tell them what to do. It was to create a partnership where the private sector, the States, and the IRS would work 

jointly together. We have announced—we just announced this last 

week—that we have implemented significant improvements across 

the tax system to deal with and fight identity theft this year. But 

going forward, again, for our systems to continue to keep up, we 

have to invest in them. If our budget continues to be cut, we do 

not have the money that we are going to need to do that, and taxpayers are going to suffer, revenues will suffer, and the agency will 

suffer. 

Senator CASEY. Commissioner, thank you for that, and, if we are 

going to ask you to do a lot more, we cannot continue to give you 

a lot less. So we are grateful for that answer. 

Mr. Chairman, thank you very much. 

The CHAIRMAN. Thank you. 

Senator Nelson? 

Senator NELSON. Mr. Chairman, a lot of this discussion about 

whether or not there was intimidation could be obviated if we 

would just go back on the 501(c)(4)s and administer to them what 

the original statute said, which is civic leagues or organizations not 

organized for profit but operated exclusively for the promotion of 

34 

social welfare. Along in 1959 came a regulation to implement that 

statute, but they changed the word ‘‘exclusively’’ to ‘‘primarily.’’ So 

the regulation said an organization is operated exclusively for the 

promotion of social welfare if it is primarily engaged in promoting 

in some way the social welfare. 

And so all of this flap that we are going through is unnecessary 

if the IRS would follow the statute that these social welfare organizations, 501(c)(4)s, would be exclusively for social welfare. But, of 

course, it is interpreted differently, and that is why we have the 

chaos that we have today in our campaign finance system where 

all of this—and it is now termed ‘‘dark money’’—comes in to influence elections, dark because it does not have to be reported who is 

giving the money. 

Now, the whole idea of McCain-Feingold was—and this is the 

campaign finance reform from about a decade ago. The whole idea 

was to open up the process and let the people know who is influencing elections because they would know who is giving the money. 

But now we see that it is nothing that a candidate for President 

is raising over $100 million through 501(c)(4)s and the public does 

not know who is financing that, and that money is not being used, 

as the statute requires, for a social welfare purpose but is being 

used to influence an election. 

We could change this whole thing, Mr. Commissioner. What do 

you think about all this? 

Commissioner KOSKINEN. I think it is a complicated situation. 

We have felt that at a minimum, as I have said—and I do not 

know; the chairman thinks everything is clear enough as it is—but 

at a minimum I think we need to clarify what the standards are. 

One of the issues is, is ‘‘primarily’’ the right standard? To understand that, again, we do not think we have the ability to change 

the statutory framework that has been established. Our job is to 

try to figure out how to rationalize it and make it sensible. 

Senator NELSON. Okay. And I agree with you, but the statutory 

framework says ‘‘exclusively’’ for social welfare purposes. 

Now, I understand you are going through trying to figure out 

some kind of guidance on this. So what are you doing in issuing 

the guidance? 

Commissioner KOSKINEN. What we are doing is looking—as I 

say, we have three questions that we have asked for comments on. 

One is, what is the definition of ‘‘political activity’’? The second is, 

how much of it can you do? And the third part of it is, to which 

(c) organization should the standard apply? And how much of it 

you can do is the ‘‘exclusively’’ or ‘‘primarily’’ question. The definition, as I say, we think should not include nonpartisan voter registration, candidate forums, get-out-the-vote campaigns, which the 

previous draft did include, so that will get simplified. 

And then the question of to which organization should they 

apply, we think you have to look at the (c)(3)s, (4)s, (5)s, (6)s, and 

the 527s as a group to see what—as I say, ultimately it should be 

up to an organization to pick which of those categories it wants to 

be in. We should not be driving that by our determinations. 

But I would say that ‘‘primarily’’ is the standard used for (5)s, 

(6)s, and 527s, and the 527 statute was passed in the 1970s in the 

context of recognizing that ‘‘primarily’’ was already the standard. 

35 

So there are limitations on what we can do looking at only one 

statute. We have to look at all of the statutes in that framework. 

Senator NELSON. Okay. Now, you said ‘‘primarily’’ was—and you 

listed all those statutes. But you did not say the 501(c)(4)s do not 

have to disclose. So what are you doing in issuing guidance with 

regard to that? 

Commissioner KOSKINEN. What we are doing is looking at that 

history and looking at the fact that some of those statutory provisions by Congress were passed using ‘‘primarily’’ as the standard 

in a context in which ‘‘primarily’’ was the standard since, as you 

note, 1959. So the question is to rationalize that in light of what 

the congressional activity is and what the framework is. We are reviewing all the comments. We are actually taking a very close look 

at this. But it is not a slam-dunk to change the way the process 

goes. As I say, as a general matter, I do not think we are going 

to change the rules of the game. I know the chairman disagrees 

with me. But I do think it is important to clarify the rules of the 

game. 

Senator NELSON. I do not understand what you just said. 

Commissioner KOSKINEN. Maybe the better way to say it is, we 

are still reviewing all of this, trying to make sure that when we 

come up with the next draft, it is understandable, sustainable, is 

fair to everybody, and it is not an easy answer. 

Senator NELSON. Do you agree that things have gotten out of 

control with regard to the interpretation of the rule ‘‘primarily used 

for a social purpose’’? 

Commissioner KOSKINEN. I think what I would agree—and our 

concern is—is that the facts and circumstances of how you fit into 

that category, what you are doing, what is primarily social welfare 

and what is not, so primarily political activity, should be designed 

and studied and assessed on facts, and the circumstances could not 

be less clear. 

Senator NELSON. Okay. 

Commissioner KOSKINEN. And so we need to clarify what is in 

one pocket and what is in the other. 

Senator NELSON. Right. So—— 

Commissioner KOSKINEN. The question of how much you can do 

of either is a separate question, but the lack of clarity in terms of 

facts and circumstances, I think goes to the heart of the problem. 

It is what the IG said. The IG found—its last recommendation was 

that we should provide clarity. As I say, we should make clearer 

what the rules of the game are, even if we are not able to change 

the rules. 

Senator NELSON. If you will just do this, then I think you will 

be doing your constitutional duty. When you look at ‘‘primarily a 

social purpose,’’ those words, and you stack that up against a commercial, paid TV advertisement that advocates for the election of 

a candidate or against a candidate, then you would understand 

that that is not primarily a social purpose. That is a political purpose. And it is there that the whole statute has been bastardized. 

Commissioner KOSKINEN. And our view is that someone running 

one of these organizations or setting it up ought to clearly understand what is political activity, political intervention, and what is 

social welfare. And the facts and circumstances do not adequately 

36 

do that. And people say, ‘‘Well, it has been around a long time,’’ 

facts and circumstances. But the issue of active political engagement by (c)(4)s is a relatively recent occurrence, and it has demonstrated that, in fact, greater clarity, we think, is needed. The IG 

agreed with that. It is why we think that everyone would be better 

off if, as you note, when you ran an ad, when you took an action, 

it would be clear which side of the line it fell on. Right now, when 

you do whatever you are going to do, you are subject to our interpretation and attempt to try to be fair under a facts and circumstances standard, which I don’t think provides any clarity at 

all. It does, in fact, lead to, just as you say, the complexity of trying 

to figure out who is on which side of the event. 

So I think the dividing line of how much you can do is important, 

but the definition of what you are doing is also equally important 

if you are going to provide clarity and be fair to everybody. 

Senator NELSON. When is that clarity coming? 

Commissioner KOSKINEN. Well, notwithstanding the encouragement never to show up with it, we would like to try to make sure 

that we could introduce the suggestion, hold the 90 days of public 

comment, get the public hearing held, and have that all done before the next election. So I think the chairman is right, so there 

is not a lot of confusion but it will be clear, because everybody has 

to have time to adjust, we have made it clear from the start it will 

not influence or be effective during the election. It would be effective next year. But I think to be effective next year, it has to actually be started sometime early this year, and, again, our goal would 

be to do it at a time frame outside of the active presidential campaign, certainly after next September. 

Senator NELSON. So when you decide it, it would be effective for 

the following election cycle, not the election cycle of 2016? 

Commissioner KOSKINEN. Right. And so what we are stuck with, 

and a thing to remember, is we are stuck right now implementing 

a regulation that talks about facts and circumstances. There is a 

misunderstanding that somehow we are not pursuing our statutory 

responsibilities. We are still processing applications. We do it much 

faster. We are trying to get them through. People do not actually 

have to come to us if they do not want to. But we are trying to provide standards. But to the extent that, in the ordinary course, we 

will be auditing organizations as to whether they are performing 

appropriately as a 501(c)(3), the standard we have to use is facts 

and circumstances. It is not that we are not in the game. We are 

playing according to the rules there. What we are trying to say is, 

as I say, we are not going to change the rules, we would just like 

to make them clearer. 

Senator NELSON. Mr. Chairman, I would just conclude by saying 

that I think that the American people are going to be so fed up by 

the time this presidential election is over with the amount of dark 

money, undisclosed, unlimited money that comes into the political 

system, that they are going to be readily accepting of a clarifying 

change in the IRS statute. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Well, thank you. And let me just say that it is 

always interesting to me how our friends on the other side who 

have benefitted from hundreds of billions of dollars over the years 

37 

from the union movement that are never reported are finding fault 

with something that people have to report with regard to 

501(c)(4)s. There is no use kidding. Political purposes can sometimes be social purposes, and that is why the IRS has allowed at 

least 50 percent to be used for political purposes, if I understand 

it correctly. 

Senator NELSON. Mr. Chairman, I believe that all of it ought to 

be disclosed. 

The CHAIRMAN. Well, I see you do, Senator, but then all of the 

union money ought to be disclosed too, and—— 

Senator NELSON. I agree. 

The CHAIRMAN [continuing]. It amounts to hundreds of millions 

of dollars. 

Senator NELSON. I agree. 

The CHAIRMAN. Well, it is never going to be, because the Democrats are not going to allow that to happen. And all I can say is, 

these groups have to disclose to the IRS what they are doing, and 

the IRS can make some determinations as to whether they are 

doing it properly or not. 

Senator NELSON. See, it is this kind—if the chairman would, respectfully this Senator asks that you would yield for me just to 

make a comment. It is this kind of back-and-forth that the American people are so sick and tired of, and then all this money comes 

in from whatever source. I would agree with you. Disclosure ought 

to be across the board. 

The CHAIRMAN. Yes, but that is not going to happen. You know 

it and I know it. And he cannot just make laws at the IRS. 

Secondly, it is so one-sided in favor of Democrats that I really do 

not understand what the argument is all about. All I can say—— 

Senator NELSON. Mr. Chairman—— 

The CHAIRMAN. All I can say is, it would be wonderful if everybody could disclose what they are doing and what it is for. That 

is not going to happen. We do not have, on either side, enough political fortitude to be able to resolve those problems. 

Senator NELSON. Mr. Chairman? 

The CHAIRMAN. All I can say is, you are asking Mr. Koskinen to 

unilaterally, on his own accord, straighten out how ‘‘social purposes’’ should be interpreted when they are already interpreted the 

way they are. 

Senator NELSON. Mr. Chairman, I would just humbly say that 

the system is not in order. It is in chaos. In my last reelection, having to go around and comply with the laws, that I am limited to 

personal money, and all of it, every dime of it, has to be disclosed, 

and then having the disadvantage in my last reelection, which was 

3 years ago, the disadvantage that all of this avalanche of unlimited and undisclosed ‘‘where is it coming from?’’ money comes in 

against me to try to defeat me, that is not a fair system. 

The CHAIRMAN. It may not be, Senator, but all I can say is that 

the laws have been interpreted this way, and I have to say that 

many on your side will never agree that the unions should have— 

and I am not saying many. A universally large percentage on your 

side would say that the unions do not—— 

Senator NELSON. Well, let us—— 

38 

The CHAIRMAN. You and I might agree, because you say that 

they ought to disclose too. Well, they do disclose hard money. It is 

the soft money that they do not disclose. 

Now, at least these 501(c)(4)s have to disclose hard money, and, 

you know, there is a reason why they do not require people, whether it is on the Democrat side or the Republican side, to necessarily 

disclose who runs these organizations, because we know that there 

will be people who will deliberately go after the people who donate—— 

Senator NELSON. Would the chairman yield for a question? 

The CHAIRMAN [continuing]. And do it in a very unfair way, and 

so this is something that is not as easy to discuss as I think you 

are making it. 

Senator NELSON. Would the distinguished chairman yield for a 

question? 

The CHAIRMAN. Sure. 

Senator NELSON. And he knows that I believe that he is distinguished and a fair-minded individual. 

The CHAIRMAN. Well, likewise. 

Senator NELSON. Thank you. Well, the present system is out of 

kilter. It is, in effect, no campaign finance law, the way you can 

do things now. 

Now, would you not think that we needed some kind of order in 

the system? 

The CHAIRMAN. Well, we do have an order in the system. I do 

not like the system myself, but the fact of the matter is that we— 

I think one reason why the Supreme Court ruled the way it did is 

because one side had a decided advantage of soft money that the 

other side did not have, meaning the Republicans did not have. 

Now, whether that is right or wrong, neither side should have an 

advantage over the other, and, unfortunately, that continues today. 

Senator NELSON. Well, the chairman will have the last word in 

this hearing, but I think that the chairman and I can at least agree 

that the present system, the American people are getting fed up 

with it. And we had better start to find a more equitable way to 

finance our elections. 

The CHAIRMAN. Well, I think everybody would probably agree 

with that generalization. I do not think there is any question about 

that. 

On the other hand, it is hard for me to see why Democrats can 

complain when they have been benefitting from a whole raft of 

money that is never reported and is used consistently against Republicans throughout the country. I know. I have been a target of 

some of this money. And it is not just some. It is big-time dollars. 

And I suspect that is one reason why the Supreme Court made the 

ruling that it did to try to even things up. But even 501(c)(4) 

groups, they have to disclose how they use their money, and they 

have certain obligations that exist in law today. 

Look, we are not going to solve that here. All I can say is, the 

system is not fair—the Republicans think it is disastrously not fair. 

Democrats are thinking, now that you have 501(c)(4) organizations 

that can spend money on politics without disclosing the names of 

their people that—well, let us just go back to one of the original 

cases, the NAACP. Where does it get its money? And Democrat arVerDate Mar 15 2010 15:40 Dec 01, 2016 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 R:\DOCS\22724.000 TIMD
39 

guments were, you should not have to disclose who puts the money 

up for politics in the NAACP because it could be used to discriminate against the people who put the money up. 

You know, these are not simple issues, but all I can say is that 

I do not see how Democrats can complain when they have had a 

decided advantage all these years through the unions and other organizations that really do not ever have to report what they are 

really doing at all. 

Senator NELSON. Well, Mr. Chairman, this Democrat is complaining, and the reason I am complaining is, I am sure that the 

fair-minded chairman of this committee does not believe that one 

wrong should be corrected with another wrong. 

The CHAIRMAN. I am with you. I am with you on that. All I am 

pointing out is that your side will never give up the decided advantage it has. It is just that simple. And if you could do that, we 

could do business. We could really do business, and we could solve 

these problems overnight. But you will never be able to get them 

to fully disclose all the soft money they get from unions and so 

many other groups that I could name. 

Let me just say that we have appreciated your patience here 

today, Mr. Koskinen. I do not think anybody can whitewash what 

happened. I am glad you are making changes that hopefully will 

ensure that some of this bias will never happen again. And I do 

not see how anybody can say that, you know, these are just mistakes. If you look at what Lois Lerner did and a raft of others who 

were with her, it was a lot more than just mistakes. It was wrong, 

and it was deliberately wrong. And I do not care how much you try 

to whitewash it. You cannot do that. 

But to make a long story short, I am very appreciative that you 

are at least trying to right these wrongs and trying to do what you 

should do. I have a high opinion of you, and I will get in trouble 

with the House by saying this, but I have a high opinion of you and 

basically think that you are trying to put things in order. And I am 

going to count on your doing that. 

Thank you so much for your patience throughout this hearing. 

Commissioner KOSKINEN. Thank you, Mr. Chairman. 

The CHAIRMAN. With that, we will—and let me just say this. Let 

me just thank everyone who attended and participated in today’s 

hearing. I thought this was a thoughtful and useful discussion 

today that will hopefully help us in our future efforts to improve 

the functioning of the IRS. I want to thank you again, Mr. Koskinen, for agreeing to be here and for your agency’s response and 

cooperation with regard to the committee’s report and recommendations. 

As always, any member of the committee should feel free to submit written questions for the record. I am going to set the deadline 

for written questions at 2 weeks from today. That would be Tuesday, November 10th, and with that, this hearing is now adjourned. 

Thanks so much. 

Commissioner KOSKINEN. Thank you. 

[Whereupon, at 11:10 p.m., the hearing was concluded.] 

(41) 

A P P E N D I X 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

PREPARED STATEMENT OF HON. ORRIN G. HATCH, 

A U.S. SENATOR FROM UTAH

WASHINGTON—Senate Finance Committee Chairman Orrin Hatch (R–Utah) today 

delivered the following opening statement at a Committee hearing to examine the 

Internal Revenue Service’s (IRS) response to the Committee’s bipartisan report that 

detailed their investigation into the IRS’s treatment of organizations applying for 

tax-exempt status. 

In May 2013, the Treasury Inspector General for Tax Administration revealed 

that, in the run-up to the 2010 and 2012 elections, the Internal Revenue Service 

had targeted certain organizations applying for tax-exempt status for extra and 

undue scrutiny based on the groups’ names and political views. 

Needless to say, we took this matter very seriously. Indeed, at the time, both Republicans and Democrats condemned the agency’s actions. And, as the Senate committee with exclusive legislative and oversight jurisdiction over the IRS, the Finance 

Committee launched a bipartisan investigation into the matter. 

In fact, our investigation was the most thorough and the only bipartisan investigation conducted with regard to these events. 

On August 5th of this year, after more than 2 years of investigation, we released 

a 375-page bipartisan investigative committee report that included approximately 

4,500 pages of exhibits. This report is, I believe, the definitive record of what occurred at the IRS and why. 

As we all know, last week, the Department of Justice stated publicly that they 

would not be pressing criminal charges with regard to these events at the IRS. This 

has led some to argue that the Justice Department is corrupt or biased in some way. 

Others have said that this decision proves that nothing scandalous occurred at the 

IRS. 

I believe the committee’s report speaks for itself on this matter. And, in my opinion, rather than fueling the echo chamber, we would do better to focus on what we 

know actually happened and what changes need to take place to make sure it 

doesn’t happen again. 

That’s why we are here today. 

The committee’s report included 10 major findings that formed the basis of various recommendations for changes that we believe the agency should make to ensure the IRS’s actions remain above board. 

The purpose of today’s hearing is to hear directly from the IRS about their response to our report and their progress in adopting our recommendations. Toward 

that end, I want to thank Commissioner Koskinen for being here today and for the 

agency’s thoughtful response to our recommendations. 

In that response, the IRS indicated that they have implemented all of the bipartisan recommendations from the report that are within the agency’s control, as well 

as the separate Majority and Minority recommendations. 

Our overall goal here should be to restore the credibility of the IRS and ensure 

that this very powerful agency treats all American taxpayers fairly. 

42 

While I want to commend the IRS for the efforts they have made thus far, it my 

understanding that, up to now, most of the changes they’ve made have been procedural in nature and very little has been done to begin work on the needed structural 

changes at the agency. Today, I hope to hear more details as to why these types 

of changes are being delayed. 

At the same time, I believe the Finance Committee should be considering statutory changes that will improve upon the status quo. For example, there was bipartisan agreement in the report on the need to update the Hatch Act to ensure that, 

with regard to political activities, IRS employees receive the same considerations as 

employees of other highly-sensitive agencies, like the Federal Election Commission 

and the Federal Bureau of Investigation. 

In addition, as the Majority Views in the report noted, and as I have stated publicly on multiple occasions, I have serious concerns about the influence of labor 

union activity at the IRS. While I am not anti-union and while I do not oppose collective bargaining in general, we know that two-thirds of IRS workers are represented by a union organization that is very politically active and that a fair number of IRS employees work full-time for the benefit of that union. I don’t think it’s 

much of a stretch to argue that such a strong union presence could have contributed 

to a politicized environment at the IRS. 

While current law allows Federal Government employees to be represented by 

unions, Congress has a made a number of exceptions to this policy, generally with 

agencies that have important law enforcement obligations or perform other highly 

sensitive work. And, while I expect there to be some resistance to this idea, I think 

it is only reasonable that we take the time to consider whether the IRS should be 

placed in a similar category. 

I hope that today we can have a good discussion and get Commissioner Koskinen’s 

views on these and other legislative proposals. 

Ultimately, the theme that I want to stress most today is accountability. 

Our report clearly shows that political targeting at the IRS resulted from a number of bad decisions made by a number of different officials. However, as of yet, very 

few of these individuals have been held accountable, while others have since received bonuses and even promotions. While I am concerned about this apparent lack 

of individual accountability, I am more concerned that the IRS lacks the necessary 

structural and procedural mechanisms to ensure that, as an agency, it remains accountable. 

The recommendations we included in our report were designed to provide this 

type of accountability and I look forward to discussing our ideas in more detail 

today. 

Before I conclude, I just want to briefly comment on the ongoing effort at the IRS 

to enact new regulations regarding the political activities of 501(c)(4) organizations. 

Obviously, this is an issue that deeply concerns a number of people throughout the 

country, including members of this committee. 

As we know, regulations proposed in 2013 were criticized by people and organizations across the political spectrum, and were subsequently withdrawn. That poorly 

drafted proposal would have created nonsensical rules and constitutionally dubious 

speech restrictions. Oddly enough, it would have created stricter standards for 

501(c)(4) organizations than exist for public charities, which would be a perverse reversal of roles for these types of organizations. 

While this issue is not directly related to the committee’s report on the IRS’s political targeting, I think it’s fair to say that agency still carries with it a cloud of perceived political bias. Therefore, I would caution Commissioner Koskinen and others 

in the administration that have made this regulation a priority to focus instead on 

actions to restore the IRS’s credibility and to abandon any effort to inject more rules 

and restrictions into the political process. 

I expect that members of the committee will want to discuss this matter today 

as well as, once again, it is an issue that is on the minds of many people. 

43 

PREPARED STATEMENT OF HON. JOHN A. KOSKINEN, COMMISSIONER, 

INTERNAL REVENUE SERVICE

INTRODUCTION

Chairman Hatch, Ranking Member Wyden, and members of the committee, thank 

you for the opportunity to discuss the IRS’s response to the committee’s report on 

its investigation into the processing of applications for tax-exempt status under section 501(c) of the Internal Revenue Code. The committee’s investigation followed a 

report issued in May 2013 by the Treasury Inspector General for Tax Administration (TIGTA) on the IRS’s use of improper criteria in the determination process for 

501(c)(4) applications. 

Let me begin by reiterating what I have said earlier in my tenure as IRS Commissioner. The situation described in the Inspector General’s 2013 report should never 

have happened, and the IRS is doing everything possible to ensure that the mistakes referenced in the Inspector General’s report do not happen again. Every taxpayer, whether an individual or an organization, needs to be confident that they will 

be treated fairly by the IRS, no matter what their political affiliation, their position 

on contentious political issues, or whom they supported in the last election. 

Even with our declining resources, we will still audit over 1 million taxpayers this 

year. And when someone hears from us regarding their tax return—by letter, I 

should add, in light of the recent proliferation of IRS impersonation telephone 

scams—they need to understand that it is only because of something that is or 

should be in their tax return, and not other factors. And, if someone else has the 

same issue in regard to their return, they will hear from us as well, within the limits of our budget resources. 

A shared belief in the fairness of our tax system and its administration is fundamental to the voluntary compliance by our citizens with the requirements of our tax 

laws. This compliance provides the vast majority of the over $3 trillion in revenue 

that we collect for the nation every year. We are the stewards of this system and 

take our responsibility seriously. 

As part of our work to move forward, we have implemented all of the recommendations made by the Inspector General in his May 2013 report. The changes 

we made in response to those recommendations include: eliminating the use of inappropriate criteria; expediting the processing of section 501(c)(4) applications; establishing a new process for documenting the reasons why applications are chosen for 

further review; developing guidelines for specialists in the IRS’s Exempt Organizations (EO) division on how to process requests for tax-exempt status involving organizations engaging in potentially significant political campaign intervention; and 

creating a formal, documented process for EO determinations personnel to request 

assistance from technical experts. EO is committed to providing annual training for 

employees on political campaign intervention. 

The Inspector General reviewed our actions and issued a follow-up report in 

March of this year, noting that the IRS had taken ‘‘significant actions’’ to address 

his recommendations. 

RESPONDING TO THE COMMITTEE REPORT

We appreciate the enormous amount of hard work done and time spent by the 

committee and its staff in investigating this matter and developing the report that 

is the subject of today’s hearing. By its thorough and detailed nature, the committee’s report provides a full account of the IRS’s section 501(c)(4) processing issues. 

It is important to note that the IRS cooperated fully with the committee’s investigation and the investigations conducted by other congressional committees, the Inspector General and the Department of Justice. Our efforts resulted in the production of more than 1.3 million pages of unredacted documents to this committee and 

the House Ways and Means Committee, including approximately 80,000 e-mails 

sent or received by former Director of Exempt Organizations Lois Lerner. More than 

250 IRS employees spent more than 160,000 hours working directly on complying 

with the investigations, at a cost to the agency of approximately $20 million. 

I am pleased to report, as I advised the chairman and the ranking member by 

letter earlier, that the IRS has accepted all the recommendations in the committee’s 

report that are within our control—those that did not involve tax policy matters or 

legislative action. They include 15 of the report’s 18 bipartisan recommendations 

and also 6 of the recommendations in the separate sections prepared by the MajorVerDate Mar 15 2010 15:40 Dec 01, 2016 Jkt 000000 PO 00000 Frm 00047 Fmt 6601 Sfmt 6621 R:\DOCS\22724.000 TIMD
44 

ity and Minority. I have attached a copy of my letter to this testimony for inclusion 

in the record. 

The IRS has already made significant progress in implementing the committee’s 

recommendations within our control. In part, this is because a number of the committee’s recommendations overlap with the recommendations of the May 2013 Inspector General’s report noted above. In addition, we have been working diligently 

over the last 3 months to implement those recommendations made by the committee 

that do not overlap with those of the Inspector General. 

IMPROVING PROCESSES IN THE EXEMPT ORGANIZATIONS AREA

Following is an overview of the significant actions that we have already taken or 

are taking in response to the committee’s recommendations. For the sake of brevity, 

we have grouped our actions into 10 broad categories that reflect the committee’s 

major concerns in relation to the processing of applications for tax-exempt status. 

The categories are as follows: 

Promoting Transparency and Accessibility in the Exempt Organizations 

Determination Process. The IRS has taken a number of actions to ensure that the 

determination process for organizations applying for tax-exempt status is transparent, and that the public can easily obtain information on our procedures. For example, since the release of the Inspector General’s May 2013 report, EO has made 

significant progress in facilitating public access to relevant materials through substantive updates to the Internal Revenue Manual (IRM) sections and revenue procedures that relate to the application process. These resources continue to be available 

to the public via the IRS website, IRS.gov. Moving forward, EO will review the instructions for the IRS forms that organizations use when applying for tax-exempt 

status, and will add references to the resources available on IRS.gov as needed. 

Streamlining the Exempt Organizations Determination Process to Ensure 

Timely Processing and Reduce Delay. EO is committed to processing applications for tax-exempt status in a timely manner and resolving all determination 

cases within 270 days as recommended by the committee. The IRS has taken a 

number of actions since the beginning of the committee’s investigation that have 

been designed to reduce processing times and eliminate any backlog. For example, 

in 2014 EO began tracking cases once they became 90 days old to ensure that potential barriers to resolution were addressed early on. This action and others complemented measures already adopted in response to the Inspector General’s 2013 report, including the ‘‘Optional Expedited Process’’ for 501(c)(4) organizations with potential political campaign intervention activities. As a result of our actions, the average age of the application inventory has been significantly reduced. From April 2014 

to July 2015, applications submitted on Forms 1023—which are used by organizations applying for 501(c)(3) status and make up the majority of the EO application 

inventory—dropped from an average age of 256 days to 107 days. Applications submitted on Forms 1024—which are used by organizations applying for tax-exempt 

status under section 501(c)(4) and other Code sections—went from an average age 

of 256 days to 112 days. The IRS will continue its efforts to further reduce any overage inventory among applications for tax-exempt status. 

Realigning Organizational Functions for Improved Service. One of the concerns raised in the committee’s report in regard to the management problems at the 

IRS in 2013 involved the decentralization of EO leadership and employees. The IRS 

has made several notable structural changes to enable performance improvements. 

For example, the positions of EO Director and EO Director of Rulings and Agreements were relocated from Washington, DC to Cincinnati, Ohio, so the EO leadership is now located with most EO employees who process applications for taxexempt status. Additionally, the Tax Exempt/Government Entities Division (TE/GE) 

worked closely with the Office of Chief Counsel to move functions performing legal 

analysis from TE/GE to Chief Counsel. As a result, there is now a clear separation 

of duties, as well as well-defined procedures and improved lines of communication 

between TE/GE leaders and their counterparts in the Office of Chief Counsel. 

Fostering a Culture of Accountability. The IRS has taken a number of steps 

to ensure that TE/GE employees, managers and leadership operate in an environment of accountability in regard to the processing of applications for tax-exempt status. For example, all TE/GE managers are now required to conduct regular workload reviews with their employees. In addition, the results of these reviews are 

shared with the senior leadership of each function, and the TE/GE Commissioner 

holds monthly Operational Reviews with each functional director. Information on 

the amount of time it takes to process cases is provided on a regular basis up the 

45 

management chain, not only to TE/GE leadership but also to the IRS Commissioner 

and the Deputy Commissioner for Services and Enforcement. We believe this focus 

on case processing oversight directly contributes to, and ensures, improved processing times and reduced inventory. I would also note that the entire leadership 

chain of command, starting with the Commissioner’s office and running down to the 

Director of Exempt Organizations and her direct reports, was replaced over 2 years 

ago. 

Strengthening Risk Management Through Improved Communication. The 

IRS has worked to ensure risks are managed more effectively throughout the organization, and within TE/GE in particular. In 2014, the IRS established an agencywide enterprise risk management program, creating risk management liaisons in 

each area of our operations and providing for the regular identification and analysis 

of risks to be eliminated or managed across the agency. We are working to create 

a culture where employees are encouraged to think of themselves as risk managers 

and to report any issues or problems that occur. We are encouraging the further 

flow of information from front-line employees up through the organization as well 

as out to the front line from senior managers. As part of this program, TE/GE and 

the other IRS business divisions each established a new Risk Management Process 

to enable certain issues to be elevated to the executive leadership for review and 

discussion. This new and expansive process further mitigates the risk that sensitive 

issues may not be elevated in a timely manner. 

Bolstering Employee Training. In response to the Inspector General’s 2013 report, EO began developing new training and workshops for employees on a number 

of critical issues connected with the application process for tax-exempt status, including the difference between issue advocacy and political campaign intervention, 

and the proper way, under current law, to identify applications that require review 

of potentially significant political campaign intervention. EO is continuing to develop new ways of delivering and sharing training materials and technical expertise. 

For example, to respond to the committee’s interest in this area, EO conducted 

training this fall for determination specialists on quality standards, including standards for timely case processing. TE/GE is also implementing a ‘‘knowledge management’’ network which, when completed, will provide TE/GE employees with easy access to information on a wide range of technical issues, such as those involving unrelated business income tax, private foundations and employee plans. 

Ensuring Neutral Review Processes. The IRS has taken a number of actions 

to ensure that a neutral review process exists for organizations applying for taxexempt status. For example, in response to the Inspector General’s 2013 report, the 

IRS provided guidance to EO employees on the proper way to process applications 

for tax-exempt status when an organization does not provide the IRS with sufficient 

information to reach a conclusion about the application. In 2014, the IRS implemented new procedures to ensure that requests for additional information in cases 

involving potential political campaign intervention activities are appropriate in 

scope and scale. These include the development of a template letter, Letter 1312, 

‘‘Request for Additional Information,’’ to better standardize such requests. In addition, the Department of the Treasury and the IRS are in the process of developing 

guidance on social welfare and non-social welfare activities of 501(c)(4) organizations. Our efforts to develop this guidance have been greatly informed by the more 

than 160,000 public comments received in response to the 2013 proposed regulations. We asked for, and received, comments on several issues, including three major 

ones: the proposed definition of political campaign activity; to which organizations 

that definition should apply; and the amount of political activity an organization can 

engage in consistent with a particular tax-exempt status. Our goal is to provide 

guidance that is clear, fair to everyone, and easy to administer. I am attaching for 

the record a summary of the comments received on these three major issues. 

Improving Procedures Under the Freedom of Information Act. The IRS is 

taking several actions in response to the concern expressed by the committee in its 

report that IRS employees did not properly respond to certain FOIA requests, including requests regarding groups applying for tax-exempt status. To ensure that 

employees responsible for responding to FOIA requests have the tools they need to 

conduct robust searches for such requests, which are increasingly complex in scope 

and volume, the IRS’s Disclosure Office is preparing guidance in the form of written 

standard search procedures. This guidance will focus on many of the more frequently requested categories of information, and will include contact lists. Employees processing FOIA requests will be trained in those procedures by the end of 2015. 

Additionally, EO in May 2015 released new procedures for handling FOIA requests 

involving the Exempt Organizations area, which will help ensure searches are apVerDate Mar 15 2010 15:40 Dec 01, 2016 Jkt 000000 PO 00000 Frm 00049 Fmt 6601 Sfmt 6621 R:\DOCS\22724.000 TIMD
46 

propriately conducted across all components of the EO function, as recommended by 

the committee. 

Reviewing the Use of the Office Communicator System. In its report, the 

committee raised important questions about records retention, as well as questions 

regarding IRS employees’ use of the Office Communicator System (OCS). Similar to 

an internal instant messaging system, OCS enables IRS employees to hold virtual 

meetings and virtual training events involving large numbers of employees and offices. Employees also use OCS as an informal means of communication. Currently, 

the IRM advises employees who create Federal records using informal means of documentation or communication, including OCS, to convert those records to a more 

structured format to facilitate records management and enable appropriate retention. The IRS is working with the National Archives and Records Administration 

(NARA) on these issues and plans to improve this guidance by adding more specific 

instructions and clarifying examples. 

Responding to Government Accountability Office (GAO) Recommendations. 

In June 2015, the GAO released a report on the criteria the IRS uses to select exempt organizations for audit. In this report, the GAO found no evidence of organizations being selected in an unfair or biased manner. At the same time, the GAO also 

identified areas where EO’s system of internal controls for the audit selection process could be improved in order to reduce the risk of returns being selected for audit 

in an unfair or biased manner. When the report was released, the IRS agreed with 

the GAO’s recommendations, and stated that it was in the process of implementing 

them. The committee has also recommended that the IRS implement the GAO’s recommendations, and we are continuing to do so, tightening the internal controls for 

the audit selection process. 

ENHANCING RECORDS RETENTION PROCEDURES

The investigations into the determination process for tax-exempt status also 

raised another issue that we have been working to address, and that is the need 

to ensure that electronic media containing important records are preserved and protected. This issue was brought into focus with the Inspector General’s release of a 

report on June 30, 2015, on the IRS’s production of e-mails relevant to the investigations by the committee, the Inspector General and others into the issues surrounding the processing of applications for tax-exempt status. 

The Inspector General’s June 2015 report described difficulties encountered in 

searching for e-mails and retrieving them from the IRS’s outdated system for electronic records retention. This included the erasure in March 2014 of 422 disaster 

recovery tapes associated with a decommissioned IRS e-mail server, which occurred 

despite instructions issued to agency employees in May 2013 to preserve these types 

of records. 

The Inspector General’s June 2015 report stated the IG had uncovered ‘‘no evidence that the IRS employees involved intended to destroy data on the tapes or 

hard drives in order to keep this information from the Congress, the DOJ or 

TIGTA.’’ Nonetheless, the IRS’s failure to ensure employees followed the document 

preservation instructions is clearly unacceptable. 

With the benefit of the Inspector General’s report, the IRS has been making significant progress in implementing records management improvements. Specifically, 

we have initiated a process to secure the e-mail records of all senior officials in the 

agency, including having all files archived to the network rather than relying on individual hard drives. We are also implementing records management improvements 

based on recommendations from NARA. 

Additionally, we have worked to increase training of front-line information technology (IT) employees on document preservation issues, to exert greater control over 

the management of our e-mail server backups, and to continue the preservation of 

all disaster recovery tapes. Collectively, these steps have helped the IRS create better policies and procedures to minimize the risk of future data loss incidents. 

ADDRESSING OTHER CRITICAL TAX ADMINISTRATION ISSUES

While the IRS is working to complete the implementation of the committee’s recommendations in regard to the processing of applications for tax-exempt status, we 

also appreciate the bipartisan efforts being made by the committee on other issues 

critical to taxpayers and tax administration. 

One important issue involves pending legislation to extend a group of tax provisions that expired at the end of 2014. The uncertainty we face over the timing of 

47 

the extenders legislation raises operational and compliance risks for the IRS’s delivery of the upcoming tax filing season beginning in January and for everyone involved in tax administration. We are grateful for the committee’s efforts to ensure 

that Congress makes a decision, one way or another, on this legislation in a timely 

manner. 

If the uncertainty over this legislation persists into December, the IRS could be 

forced to postpone the opening of the 2016 filing season. This would delay the start 

of processing of tax refunds for millions of taxpayers. In order to ensure there are 

no disruptions to the upcoming filing season, we believe it is critical for Congress 

to make a decision on the extenders legislation no later than the end of November. 

It will also be important to know whether any such legislation will be passed with 

or without substantive changes to the tax provisions. Minimal changes to the provisions will simplify changes to IRS systems and aid the IRS in starting the tax filing 

season on time. 

In addition to its efforts on tax extenders, the committee has also been considering identity theft legislation. This legislation contains a number of provisions that 

would assist the IRS in its fight against stolen identity refund fraud and also improve tax administration generally. They include: 

• Acceleration of information return filing due dates. Under current law, 

most information returns, including Forms 1099 and 1098, must be filed with 

the IRS by February 28th of the year following the year for which the information is being reported, while Form W–2 must be filed with the Social Security 

Administration (SSA) by the last day of February. The due date for filing information returns with the IRS or SSA is generally extended until March 31 if the 

returns are filed electronically. The proposed legislation would require these information returns to be filed earlier, which would assist the IRS in identifying 

fraudulent returns and reduce refund fraud, including refund fraud related to 

identity theft. 

• Authority to require minimum qualifications for return preparers. The 

proposed legislation would provide the agency with explicit authority to require 

all paid preparers to have a minimum knowledge of the tax code. Requiring all 

paid preparers to keep up with changes in the code would help promote high 

quality services from tax return preparers, improve voluntary compliance, and 

foster taxpayer confidence in the fairness of the tax system. It would help the 

IRS to focus resources on the truly fraudulent returns. 

• Expanded access to National Directory of New Hires. Under current law, 

the IRS is permitted to access the Department of Health and Human Services’ 

National Directory of New Hires for purposes of enforcing the Earned Income 

Tax Credit and verifying employment reported on a tax return. The proposed 

legislation would allow IRS access to the directory for broader tax administration purposes, which would assist the agency in preventing stolen identity refund fraud. 

• Masking Social Security Numbers (SSN). Under current law, the Form W– 

2 furnished to an employee must include the employee’s SSN. The proposed legislation would allow truncated SSNs on the copy of the Form W–2 furnished 

to employees. This change would make it more difficult for identity thieves to 

steal SSNs. 

• Streamlined critical pay authority. The IRS Restructuring and Reform Act 

of 1998 increased the IRS’s ability to recruit and retain a small number of key 

executive-level staff by providing the agency with streamlined critical pay authority. This allowed the IRS, with approval from Treasury, to hire wellqualified individuals to fill positions deemed critical to the agency’s success in 

areas such as international tax, IT, cybersecurity, online services and analytics 

support. This authority, which ran effectively for 14 years, expired at the end 

of fiscal year (FY) 2013. The loss of streamlined critical pay authority has created major challenges to our ability to retain employees with the necessary 

high-caliber expertise in the areas mentioned above. The proposed legislation 

would reinstate this authority. 

The IRS has also discussed with the committee a number of other proposals that 

would improve tax administration, and I encourage the committee to approve these 

provisions as well. They include: 

• Correctible error authority. The IRS has authority in limited circumstances 

to identify certain computation mistakes or other irregularities on returns and 

48 

automatically adjust the return for a taxpayer, colloquially known as ‘‘math 

error authority.’’ At various times, Congress has expanded this limited authority on a case-by-case basis to cover specific, newly enacted tax code amendments. The IRS would be able to significantly improve tax administration—including reducing improper payments and cutting down on the need for costly 

audits—if Congress were to enact a proposal contained in the President’s FY 

2016 budget request to replace the existing specific grants of this authority with 

more general authority covering computation errors and incorrect use of IRS tables. Congress could also help in this regard by creating a new category of ‘‘correctable errors,’’ allowing the IRS to fix errors where the IRS has reliable information that a taxpayer has an error on his/her return. 

• Simplification of partnership audits. Auditing of large partnerships has become very challenging for the IRS, in part because of the way the agency must 

apply the partnership audit rules contained in the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). These rules were designed to improve tax administration by making it possible for the IRS to conduct audits at the partnership level, instead of auditing each individual partner. But TEFRA was enacted 

when partnerships generally were smaller than they are today, and before they 

had complicated tiered structures as they do now. The TEFRA rules generally 

require the IRS to notify each partner at the start of an audit and to push any 

resulting adjustment down through the partnership to each partner. Thus, a 

single audit can generate thousands of adjustments. One proposal that has been 

offered by the Administration would mandate certain streamlined audit and adjustment procedures for any partnership that has 100 or more direct partners, 

or that has at least one direct partner that is a pass-through entity. Under the 

streamlined procedures, only direct partners would receive audit adjustments, 

and any direct partner that was itself a pass-through entity would be responsible for paying the resulting tax. 

Chairman Hatch, Ranking Member Wyden, and members of the committee, this 

concludes my testimony. I would be happy to take your questions. 

Public Comments on Key Issues for Guidance for Tax-Exempt Organizations on Political Campaign Intervention (REG–134417–13) 10/27/15 

In a May 2013 report, the Treasury Inspector General for Tax Administration 

(TIGTA) noted that one cause of the substantial delays in processing applications 

for tax-exempt status, including applications potentially involving significant political campaign intervention, was confusion due to the lack of specific guidance on 

how to determine whether the promotion of social welfare is the ‘‘primary’’ activity 

of a section 501(c)(4) organization. As a first step in providing such guidance, the 

Treasury Department and the IRS published a notice of proposed rulemaking in the 

Federal Register in November 2013 (2013 proposed regulations). That proposal, regarding section 501(c)(4) organizations, identified political activities related to candidates that would not be considered to promote social welfare. More than 160,000 

written comments were received in response to the 2013 proposed regulations. 

This document provides an overview of public comments received on three key 

and interrelated issues on which the Treasury Department and the IRS solicited 

public comment in the 2013 proposed regulations: 

(1) Whether to retain or modify the ‘‘primarily’’ standard under section 501(c)(4); 

(2) The appropriate scope of the definition of nonexempt political campaign activity under section 501(c)(4); and 

(3) The potential application of a uniform definition of political campaign intervention to all section 501(c) tax-exempt organizations. 

It is important to note that this overview does not cover all of the comments received or all of the potential issues being considered. Any future guidance on these 

issues will be introduced in the form of proposed regulations to provide the public 

with ample, additional opportunity to provide input, both in the form of written 

comments and at a future public hearing. 

RETENTION OR MODIFICATION OF THE ‘‘PRIMARILY’’ STANDARD UNDER SECTION 501(C)(4)

The exemption from Federal income tax provided in section 501(c)(4) to ‘‘[c]ivic 

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

promotion of social welfare’’ dates back to the enactment of the Federal income tax 

in 1913. For over 55 years, the current section 501(c)(4) regulations have provided 

49 

that an organization is ‘‘operated exclusively’’ for the promotion of social welfare 

within the meaning of section 501(c)(4) if it is ‘‘primarily engaged’’ in promoting in 

some way the common good and general welfare of the people of the community. 

Under the 1959 regulations, a section 501(c)(4) organization may engage in some political campaign intervention, so long as the organization is operated primarily for 

the promotion of social welfare. This ‘‘primarily’’ standard applies to all section 

501(c)(4) organizations, including the numerous section 501(c)(4) organizations that 

do not engage in political campaign intervention but, for example, may engage in 

other nonexempt activities, such as facilitating social activities for the benefit, pleasure, or recreation of its members, or engaging in some unrelated business activity. 

Given the potential impact of any change in the ‘‘primarily’’ standard on the tax status of organizations currently described in section 501(c)(4), the Treasury Department and the IRS solicited comments from the public on what proportion of an organization’s activities must promote social welfare for an organization to qualify under 

section 501(c)(4) and whether additional limits should be imposed on any or all activities that do not further social welfare. The Treasury Department and the IRS 

also requested comments on how to measure the activities of organizations seeking 

to qualify as section 501(c)(4) organizations for these purposes. 

Over 3,000 commenters expressed opinions regarding whether the ‘‘primarily’’ 

standard should be retained or modified. Many of these commenters generally supported retention of the current ‘‘primarily’’ standard, which some interpreted as allowing up to 49 percent of an organization’s activities to further nonexempt purposes. Some of the commenters who supported retention of the current ‘‘primarily’’ 

standard expressed the view that there is no reason or justification for adopting a 

more narrow regulatory standard because, unlike section 501(c)(3) organizations, 

section 501(c)(4) organizations are not subject to a statutory prohibition on political 

campaign intervention activities and cannot receive tax-deductible contributions. 

Other commenters suggested more restrictive standards. Some commenters suggested restricting section 501(c)(4) organizations to insubstantial amounts of nonexempt activity, with several suggesting that such a standard would more closely 

mirror the limit Congress has imposed on lobbying activities by section 501(c)(3) organizations. Numerous commenters supported replacing the ‘‘primarily’’ standard 

with a strict interpretation of ‘‘exclusively,’’ emphasizing the statutory language of 

section 501(c)(4) requiring such organizations to be operated ‘‘exclusively’’ for the 

promotion of social welfare. Several of these commenters maintained that adopting 

a strict ‘‘exclusively’’ standard would substantially reduce the need for fact-intensive 

analysis; that is, although the IRS would still need to determine whether a specific 

activity constitutes nonexempt political activity, the need for fact-intensive analysis 

to determine the amount of such activity would be minimized. However, other commenters noted that defining ‘‘exclusively’’ under section 501(c)(4) to allow no or only 

de minimis nonexempt activity would effectively ban political campaign intervention 

under section 501(c)(4) through regulations alone, whereas the ban on political campaign intervention under section 501(c)(3) is statutory. Moreover, a few commenters 

noted that the adoption of a strict interpretation of ‘‘exclusively’’ could disrupt existing section 501(c)(4) organizations that do not engage in political campaign intervention but do, for example, engage in nonexempt business or social activities. 

Finally, some commenters advocated for guidance that would provide a clear percentage limit on either nonexempt activity generally or political campaign intervention activities specifically, although the suggested limits varied widely, ranging from 

2 percent up to 49.9 percent. 

Measurement of the Chosen Standard Under Section 501(c)(4) 

A question related to the amount of social welfare activity in which a section 

501(c)(4) organization must engage is how activities of an organization should be 

measured under the standard that is chosen. Most commenters expressing a view 

on how to measure activities of organizations seeking to qualify as section 501(c)(4) 

organizations supported measuring an organization’s activities in terms of its expenditures. Some commenters expressly opposed the inclusion of volunteer hours in 

the measurement of an organization’s activities, emphasizing the lack of guidance 

regarding how to count, allocate, and quantify volunteer hours as well as the burden 

placed on organizations, particularly those with thousands of volunteers, to track 

volunteer hours in light of this uncertainty. 

Interaction of the Chosen Standard Under Section 501(c)(4) With Section 527 

Despite their varied views, commenters tended to agree that the appropriate 

amount of nonexempt activity in which a section 501(c)(4) organization may engage 

is also informed by Congress’ later enactment of section 527. Congress enacted secVerDate Mar 15 2010 15:40 Dec 01, 2016 Jkt 000000 PO 00000 Frm 00053 Fmt 6601 Sfmt 6621 R:\DOCS\22724.000 TIMD
50 

1S. Rept. No. 93–1357, 93d Cong., 2d Sess. (December 16, 1974), at 29. 

tion 527 in 1975 to govern the tax treatment of political organizations ‘‘primarily’’ 

engaged in accepting contributions or making expenditures for activities that influence or attempt to influence elections, as well as appointments and nominations, to 

public office. In addition, Congress expressly acknowledged in the legislative history 

accompanying enactment of section 527 that certain tax-exempt organizations, including section 501(c)(4) organizations, may engage in some political campaign activities.1 The statute taxes such activity through section 527(f), which imposes a tax 

on the lesser of a section 501(c) organization’s aggregate expenditures during any 

taxable year for a section 527 exempt function or its net investment income in that 

taxable year. The statute also permits a tax-exempt organization to avoid application of the section 527(f) tax by establishing a separate segregated fund that is 

treated as a section 527 political organization (and, therefore, subject to the notice 

and reporting requirements imposed by sections 527(i) and (j) on section 527 organizations generally in amendments enacted in 2000 and 2002). 

The availability of separate segregated funds was emphasized by commenters who 

suggested the more restrictive standards of either mirroring the ‘‘no substantial 

part’’ limit on lobbying activities in section 501(c)(3) or strictly interpreting ‘‘exclusively’’ under section 501(c)(4), as these separate segregated funds would provide a 

transparent vehicle through which a section 501(c)(4) organization may engage in 

political campaign activity without jeopardizing its tax-exempt status. However, 

other commenters argued that Congress ratified the ‘‘primarily’’ standard under section 501(c)(4) in enacting section 527; that is, Congress chose to address substantial 

political activity by section 501(c)(4) organizations by imposing the section 527(f) tax 

on section 527 exempt function activities by such organizations, rather than by 

amending the existing ‘‘primarily’’ standard under the 1959 regulations. 

SCOPE OF THE DEFINITION OF NONEXEMPT POLITICAL CAMPAIGN ACTIVITY

UNDER SECTION 501(C)(4)

Over the years, the IRS has stated that whether an organization is engaged in 

political campaign intervention depends upon all of the facts and circumstances of 

each case. The Treasury Department and the IRS recognize that more definitive 

rules with respect to political activities relating to candidates—rather than the existing fact-intensive analysis—would be helpful in applying the rules regarding 

qualification for tax-exempt status under section 501(c)(4). Therefore, the 2013 proposed regulations provided a specific definition of candidate-related political activity, 

and proposed to expand the definition of ‘‘candidate’’ to include individuals seeking 

appointment or nomination to public office as a way to link the definition of nonexempt political activity under section 501(c) with section 527’s broader exempt 

function. As discussed further in this section, many commenters objected to this proposed approach. Instead, those commenters supported a more limited definition of 

nonexempt political campaign activity under section 501(c)(4) that would exclude activities related to nominees or appointees for public office, and that would exclude 

issue advocacy and voter education and outreach activities conducted in a nonpartisan manner and grants to section 501(c) organizations for non-political purposes. 

Definition of ‘‘Candidate’’ 

Traditionally, the scope of political campaign intervention under section 501(c) 

has been limited to intervention in campaigns for elective public office. In defining 

nonexempt candidate-related political activity for purposes of section 501(c)(4), the 

2013 proposed regulations would have expanded the definition of ‘‘candidate’’ beyond 

an individual who publicly offers himself, or is proposed by another, for elective public office to encompass the appointment or confirmation of executive branch officials 

and judicial nominees (as well as the selection of officers in a political organization, 

among others). In this way, the definition of candidate-related political activity in 

the 2013 proposed regulations reflected the broader scope of section 527 (and the 

activities to which Congress intended the section 527(f) tax to apply). 

Commenters almost universally recognized the difficulty in reconciling section 

527’s broad definition of exempt function, which includes activities related to elections, appointments, and nominations to public office, with political campaign intervention under section 501(c), which traditionally has described only activities related to campaigns for elective public office. Yet, of the more than 200 commenters 

specifically addressing the scope of ‘‘candidate,’’ the majority generally opposed the 

proposed inclusion of individuals who are proposed as nominees or appointees for 

51 

public office in the definition of candidate-related political activity as the means by 

which to reconcile these two standards. Some of these commenters noted that the 

IRS historically has treated a section 501(c)(3) organization’s support for, or opposition to, Senate confirmation of a nominee as permissible (albeit restricted) lobbying 

activity, and therefore reason that section 501(c)(4) organizations should be accorded 

the same treatment. See Notice 88–76 (1988–2 CB 392) (holding that attempts to 

influence the Senate’s confirmation of a Federal judicial nominee did not constitute 

political campaign intervention for purposes of section 501(c)(3)). Some commenters 

emphasized the fundamental distinction between appointive positions and elective 

offices, noting that the decision of legislators to confirm or deny a nominee is more 

akin to a vote on proposed legislation than to the decision of voters in an election. 

Additional commenters expressed concern that restricting the lobbying activities of 

section 501(c)(4) organizations in this manner would constitute an unconstitutional 

restriction of free speech, both for section 501(c)(4) organizations as well as for section 501(c)(3) organizations engaged in lobbying activities through a section 

501(c)(4) affiliate, as contemplated in Regan v. Taxation with Representation, 461 

U.S. 540 (1983). Other commenters argued that, if Congress had intended the term 

‘‘candidate’’ within the context of section 501(c) to include nominees and appointees, 

Congress could have amended section 501(c)(3) in 1975 when it enacted section 527. 

Issue Advocacy 

The proximity of a communication about a candidate to the election in which that 

candidate seeks office has long been a factor tending to indicate that the communication is political campaign intervention under section 501(c) and/or section 527 

exempt function activity. See Rev. Rul. 2007–41 and Rev. Rul. 2004–6. Accordingly, 

the 2013 proposed regulations provided that candidate-related political activity 

would include any public communication within 30 days of a primary election or 60 

days of a general election that refers to one or more clearly identified candidates 

in that election or, in the case of a general election, refers to one or more political 

parties represented in that election. In the preamble to the 2013 proposed regulations, the Treasury Department and the IRS explained that the proposed regulations drew from provisions of Federal election campaign laws that treat certain communications that are close in time to an election and that refer to a clearly identified candidate as electioneering communications. In addition, the Treasury Department and the IRS noted that the proposed approach would avoid the need to consider potential mitigating or aggravating circumstances in particular cases (such as 

whether an issue-oriented communication is ‘‘neutral’’ or ‘‘biased’’ with respect to a 

candidate). The Treasury Department and the IRS requested comments on whether 

there are particular communications that (regardless of timing) should be excluded 

from the definition of candidate-related political activity because they can be presumed to neither influence nor constitute an attempt to influence the outcome of 

an election and stated that any comments should specifically address how the proposed exclusion is consistent with the goal of providing clear rules that avoid factintensive determinations. 

Many commenters expressed concern that the proposed provision would inappropriately capture, for a substantial portion of any year in which Federal and State 

elections occur, routine legislative and issue advocacy, grassroots lobbying, and communications to or about public officials, including old publications on the Internet, 

educational materials, and news gathering and reporting—communications and activities traditionally permitted under section 501(c)(4). In addition, numerous commenters expressed concern that the proposed provision would limit the ability of section 501(c)(4) organizations to educate the public or comment on key policy issues 

during the period in which citizens are most engaged and public officials are most 

responsive. 

Commenters also generally emphasized that any time frames necessarily are arbitrary, in that the same communication may be considered candidate-related political 

activity on day 30 or 60, but not on day 31 or 61. Commenters also emphasized that 

timeframes are both over- and under-inclusive, in that they would be ineffective at 

limiting politically motivated communications prior to the relevant pre-election period, while simultaneously limiting the ability of groups to do legitimate policy advocacy inside it. Some commenters stated that the proposed provision would inappropriately expand the existing election law concept of ‘‘electioneering communication’’ 

from which the timeframes are drawn—a concept limited to broadcast, cable, or satellite communications that are directed at more than 50,000 persons in the relevant 

electorate. Other commenters emphasized that the proposed approach of defining 

public communication as any communication directed at 500 persons (rather than 

50,000 persons in the relevant electorate) would inappropriately capture e-mails to 

52 

internal listservs and other communications with members who actively and affirmatively ask to receive information or to be associated with an organization, thereby 

failing to distinguish such communications from, for example, a mass media advertisement aired during a large, televised sporting event that is aimed at members 

of the general public who have no say in whether they receive it. A few commenters 

expressed the concern that application of the timeframes to State and local elections, in addition to the Federal elections already regulated by the FEC, would 

greatly increase the complexity of tracking the timeframes and candidates potentially subject to the rule. 

Some commenters supported the approach of the proposed regulations, with a few 

commenters positing that communications directed to the general public that mention the name of a candidate close in time to an election are in fact motivated by 

electoral politics. A few commenters argued that the proposed provision is supported 

by the IRS’s (and the public’s) interest in clarity and precision in standards for determining tax-exempt status, and noted that expenditures for candidate-related 

communications close in time to an election could be made by a section 527 affiliate 

or a separate segregated fund subject to the section 527(j) reporting provisions. 

Regardless of whether they opposed or supported the proposed provision, some 

commenters suggested exceptions for certain types of communications, in particular 

for issue advocacy, in the event that a rule treating candidate-related communications made during a specified timeframe (in addition to those containing express advocacy) as nonexempt political campaign activity is retained. 

Voter Education and Outreach Activity 

The 2013 proposed regulations would have defined candidate-related political activity to include certain specified election-related activities, such as the conduct of 

any voter registration or get-out-the-vote drive; the preparation or distribution of 

any voter guide that refers to one or more clearly identified candidates or, in the 

case of a general election, to one or more political parties (including material accompanying the voter guide); and hosting or conducting an event within 30 days of a 

primary election or 60 days of a general election at which one or more candidates 

in such election appear as part of the program. In acknowledgement that these proposed provisions may capture activities conducted in a nonpartisan and unbiased 

manner, the Treasury Department and the IRS requested comments on whether any 

particular election-related activities should be excepted from the definition of candidate-related political activity as voter education activity. If so, the Treasury Department and the IRS requested a description of how the proposed exception would 

both ensure that excepted activities are conducted in a nonpartisan and unbiased 

manner and still avoid a fact-intensive analysis. 

Commenters overwhelmingly opposed the proposed inclusion of voter education 

and outreach activities in the definition of candidate-related political activity without regard to whether such activities are conducted in a partisan or nonpartisan 

manner. More than 20,000 commenters stated that classifying nonpartisan voter 

education and outreach activity in this manner would have an adverse effect on section 501(c)(4) organizations. Many commenters stated that such activities promote 

social welfare, reasoning that nonpartisan voter education and outreach encourages 

civic participation and educates and engages the voting public. Furthermore, commenters asserted that nonpartisan voter registration and get-out-the-vote drives, 

voter guides, and candidate events are constitutionally protected activities, and that 

burdening such activities raises First Amendment concerns. 

Grantmaking to Other Section 501(c) Organizations 

The 2013 proposed regulations would have defined candidate-related political activity to include a contribution to any organization described in section 501(c) that 

engages in candidate-related political activity (within the meaning of the 2013 proposed regulations), unless accompanied by a written representation that the recipient does not engage in any such activity and made subject to a written restriction 

preventing the use of the contribution for such activity. 

Many commenters opposed the proposed approach to contributions. Some commenters stated that a contribution should not be considered candidate-related political activity if it is simply earmarked for non-political purposes. Other commenters 

argued that the proposed provision, combined with the already broad definition of 

candidate-related political activity, would unduly limit the ability of section 501(c)(4) 

organizations to promote social welfare through grantmaking and particularly disadvantage section 501(c)(3) organizations that rely on section 501(c)(4) organizations 

for funding, as their section 501(c)(3) activities may be irreconcilable with, for examVerDate Mar 15 2010 15:40 Dec 01, 2016 Jkt 000000 PO 00000 Frm 00056 Fmt 6601 Sfmt 6621 R:\DOCS\22724.000 TIMD
53 

ple, the inclusion of all voter registration drives within the broad proposed definition 

of candidate-related political activity. In addition, many commenters specifically opposed any need for a good-faith, written representation that the recipient organization does not engage in candidate-related political activity, reasoning that recipient 

section 501(c) organizations would be reluctant to make this certification because recipients may not want to restrict their future activities. Finally, many commenters 

expressed concern that, under the proposed provision, the full amount of a contribution would be considered candidate-related political activity, regardless of how little 

candidate-related political activity the recipient organization engages in. 

On the other hand, many commenters supported the proposed provision, reasoning that it is reasonable to presume that a section 501(c) organization that engages in campaign-related spending would use contributions for that purpose. Some 

of these commenters expressed concern in particular about the ‘‘increasingly prevalent use’’ of grants by section 501(c)(4) organizations to other section 501(c) organizations for ‘‘general support’’ that the grantor claims as social welfare expenditures. 

These commenters stated that such grants enable the recipient organization, in 

turn, to pass along the grant to another section 501(c) organization and/or expend 

some (or all) of the grant on political campaign activity. As evidence of such transfers, a few commenters noted that recipients of general support grants from section 

501(c)(4) organizations have reported millions in campaign spending to the FEC. 

POTENTIAL APPLICATION OF A UNIFORM DEFINITION OF POLITICAL CAMPAIGN

INTERVENTION ACROSS SECTION 501(C)

In the preamble to the 2013 proposed regulations, the Treasury Department and 

the IRS solicited comments regarding whether the same or similar approach to defining candidate-related political activity under section 501(c)(4) should be adopted 

in addressing the nonexempt political campaign activities of other section 501(c) organizations. The Treasury Department and the IRS noted with respect to section 

501(c)(3) charitable organizations, 501(c)(5) labor organizations, and 501(c)(6) business leagues in particular that any change would be introduced in the form of proposed regulations to allow an additional opportunity for public comment. 

Several commenters expressed the opinion that political campaign activity by section 501(c)(4), 501(c)(5), or 501(c)(6) organizations should be an exempt activity, 

given the absence of an express statutory prohibition on such activities (as exists 

in section 501(c)(3)). In the context of section 501(c)(4), several commenters reasoned 

that any political campaign activity should be considered to promote social welfare 

because, in a democracy, it is difficult to promote ‘‘civic betterment and social improvements’’ or effectuate changes in public policy without promoting the election 

of like-minded candidates. In the context of section 501(c)(5) and 501(c)(6) organizations, a few commenters similarly noted that these organizations’ unique exempt 

purposes of furthering the shared labor or business interests of their members and 

industry may be best supported through the election of legislators that will further 

those interests. 

More than 7,000 commenters expressed general opposition to the 2013 proposed 

regulations because those regulations did not apply to other tax-exempt organizations, such as section 501(c)(5) and 501(c)(6) organizations, reasoning that such an 

approach is inequitable. Approximately 2,500 commenters expressed general support 

for defining nonexempt political campaign activity by section 501(c)(4) organizations 

and stated that any such definition, although not necessarily the definition of ‘‘candidate-related political activity’’ in the 2013 proposed regulations, should apply to 

other tax-exempt organizations as well. Such commenters argued that section 

501(c)(4), 501(c)(5), and 501(c)(6) organizations are often prominent and competing 

players in the same advocacy space, such that application of the definition of candidate-related political activity to section 501(c)(4) organizations alone would create 

an uneven political playing field and encourage the shifting of funds toward section 

501(c)(5) and 501(c)(6) organizations. 

Some commenters who support adopting the same or similar approach to defining 

nonexempt political activities across section 501(c)(4), 501(c)(5), and 501(c)(6) expressed more hesitation with respect to a uniform standard across section 501(c)(3) 

and 501(c)(4), reasoning that the statutory prohibition on political campaign intervention activities by section 501(c)(3) organizations indicates that additional modifications to the definition of nonexempt political activity may be necessary to exclude historically permissible issue advocacy and voter education and outreach activities conducted in a nonpartisan manner—modifications also suggested with respect to any definition of nonexempt political campaign activity applicable under 

54 

section 501(c)(4) alone. Other commenters, however, emphasized the potential burden that different definitions would impose on section 501(c)(3) organizations with 

section 501(c)(4) affiliates that may share staff, office space, and other resources, as 

these organizations would need to train their staff to understand the distinctions 

between the traditional facts-and-circumstances inquiry that would still apply under 

section 501(c)(3) and the definition of candidate-related political activity in the 2013 

proposed regulations that would apply under section 501(c)(4) in order to accurately 

classify and track their time and activities. Moreover, commenters argued that applying different definitions may have a chilling effect on speech because, for example, section 501(c)(3) organizations may be reluctant to engage in activities that 

would be considered candidate-related political activity if conducted by a section 

501(c)(4) affiliate, even if those activities are permitted under section 501(c)(3). 

Commenters cautioned that the potential confusion caused by multiple standards 

and this chilling effect would be more acute for small or mid-sized section 501(c)(3) 

organizations that may not have the means to retain legal counsel. 

Additional commenters suggested that the enactment of section 527 supports the 

application of a uniform definition of nonexempt political campaign activity across 

section 501(c). Commenters asserted that every category of section 501(c) organization potentially is subject to the section 527(f) tax, indicating that section 527 exempt function activities (which include efforts to influence both electoral and nonelectoral selection events) do not constitute tax-exempt activity when conducted by 

an organization other than a section 527 political organization (which includes a section 527(f)(3) separate segregated fund established by a section 501(c) organization). 

These commenters suggested applying a single definition of political campaign intervention (limited to attempts to influence campaigns for elective public office) across 

section 501(c) and addressing the interaction with the section 527(f) tax by clarifying that the section 527(f) tax would apply to (among other expenditures) any expenditures for political campaign intervention as defined for purposes of section 

501(c). 

CONCLUSION

This information is provided to the Committee to give insight into the range of 

comments received on a few of the key issues under consideration. We continue to 

consider all the comments received on these and other issues. 

DEPARTMENT OF THE TREASURY 

INTERNAL REVENUE SERVICE 

WASHINGTON, DC 20224 

September 10, 2015 

The Honorable Orrin G. Hatch 

The Honorable Ron Wyden 

Committee on Finance 

U.S. Senate 

Washington, DC 20510 

Dear Chairman and Ranking Member: 

Thank you for your committee’s bipartisan report on its investigation into the IRS’s 

processing of section 501(c)(3) and section 501(c)(4) applications for tax-exempt status submitted from 2010–2013 by organizations seeking to engage in political advocacy. 

As I have testified, I believe that oversight is a critically important management 

tool. The bipartisan report reflects the depth and seriousness of this exercise of your 

congressional oversight authority, as well as the enormous amount of hard work and 

time spent by your committee and staff on the investigation. By its thorough and 

detailed nature, the report provides the definitive account of the IRS’s section 

501(c)(4) processing issues. 

The IRS will implement all of the report’s findings and recommendations within its 

control. I am enclosing a responsive report that describes the actions the IRS has 

taken, and will continue to take, that relate to each recommendation. In some cases, 

these actions have already produced positive results. For example, as a result of several new initiatives, the IRS has dramatically reduced the inventory of tax-exempt 

organization applications aged 270 days or older from 32,713 applications in April 

2014, to 487 applications as of August 2015. The IRS will continue its efforts to furVerDate Mar 15 2010 15:40 Dec 01, 2016 Jkt 000000 PO 00000 Frm 00058 Fmt 6601 Sfmt 6621 R:\DOCS\22724.000 TIMD
55 

ther reduce or eliminate the remaining over-age inventory, while also working towards achieving similar improvements with respect to the other problems identified 

in the report. 

Another issue to note is the IRS’s progress in ensuring that electronic media containing important records are preserved and protected. In the last year, the IRS has 

taken significant measures in this regard and is incorporating learnings from past 

events. While investigating the degaussing of disaster recovery tapes, the Treasury 

Inspector General for Tax Administration (TIGTA) uncovered ‘‘no evidence that the 

IRS employees involved intended to destroy data on the tapes or hard drives in 

order to keep this information from the Congress, the DOJ or TIGTA.’’ (TIGTA, Exempt Organization Data Loss, Report of Investigation, 54–1406–008–1, June 30, 

2015 (reproduced at page 4041 et seq. of the Report Appendix)). However, the IRS’s 

failure to ensure complete implementation of its litigation hold is clearly unacceptable. With the benefit of TIGTA’s report, which meticulously documents the communications breakdown among our records management personnel in March of 2014, 

the IRS is implementing records management improvements. Specifically, we have 

initiated a process to secure the e-mail records of all senior officials in the agency, 

including having all files archived to the network rather than on individual hard 

drives. We are also implementing a plan to preserve official records based on recommendations from a study conducted by the National Archives and Records Administration (NARA). In addition, we have taken significant measures to increase 

training of front-line IT employees on document preservation issues, to exert greater 

control over the management of our e-mail server backups, and to continue the preservation of all disaster recovery tapes. Collectively, these steps have helped the IRS 

create better policies and procedures to ensure this incident will not happen again. 

I hope the information in the enclosed report is helpful, and that the actions described in this report demonstrate the IRS’s commitment to address and fix the 

problems with its processing of tax-exempt applications. As I have testified on several occasions, the problems confronting organizations seeking to become social welfare organizations should never have happened and we have apologized for the difficulties experienced. We are dedicated to doing everything we can to ensure the 

public has confidence that every taxpayer will be treated fairly and in an unbiased 

manner by the IRS, no matter what their political or religious beliefs, who they 

voted for in the last election, or which organizations they belong to or support. The 

IRS looks forward to seeing its actions in this area translate into top quality service 

for America’s exempt organizations. 

If you have any questions, please contact me or have your staff contact Leonard 

Oursler, Director, Legislative Affairs, at (202) 317–6985. 

Sincerely 

John A. Koskinen 

Enclosure 

Internal Revenue Service 

Report Response to: 

The Senate Finance Committee’s Report on the processing of sections 501(c)(3) and 

501(c)(4) applications for tax-exempt status submitted by ‘‘political advocacy’’ organizations from 2010–2013 (114–119) (August 5, 2015) 

September 10, 2015 

Introduction 

On May 20, 2013, the Senate Finance Committee initiated a bipartisan investigation into allegations of potential targeting of certain tax-exempt organizations by the 

Internal Revenue Service. On August 5, 2015, the Finance Committee released a 

thorough and detailed bipartisan report on the IRS’s processing of section 501(c)(3) 

and section 501(c)(4) applications for tax-exempt status submitted by ‘‘political advocacy’’ organizations from 2010–2013. The Finance Committee Report contains a 

number of specific and focused bipartisan findings and related bipartisan recommendations. The Report also contains additional recommendations prepared by 

the Majority and Minority staffs. The IRS plans to implement each and every one 

56 

1The IRS also plans to address several implicit findings and recommendations contained in 

the Finance Committee Report. 2 ‘‘Inappropriate Criteria Were Used to Identify Tax-Exempt Applications for Review,’’ TIGTA 

Audit Report No. 2013–10–053 (May 13, 2013); see also ‘‘Status of Actions Taken to Improve 

the Processing of Tax-Exempt Applications Involving Political Campaign Intervention’’ (Reference Number: 2015–10–025) (March 27, 2015). The IRS continues to respond to the TIGTA 

Report, as well as to two reports of the GAO. ‘‘Tax-Exempt Organizations: Better Compliance 

Indicators and Data, and More Collaboration with State Regulators Would Strengthen Oversight 

of Charitable Organizations’’ (GAO–15–164) (December 2014); ‘‘IRS Examination Selection Internal Controls for Exempt Organization Selection Should Be Strengthened’’ (GAO–15–514) (July 

2015). 3This discussion relates to the Finance Committee’s bipartisan Finding #1 and the related bipartisan Recommendation #1. See Appendix A, Finding B1, Recommendation B1.1. 

of the Report’s bipartisan findings and recommendations within its control, as well 

as all the recommendations prepared by both the Majority and Minority staffs.1

Prior to the Finance Committee initiating its investigation, the Treasury Inspector 

General for Tax Administration, in May 2013, released its report (2013 TIGTA Report) on the IRS’s processing of applications for tax-exempt status.2 The TIGTA report described numerous problems associated with the IRS’s process for determining 

applicants’ tax-exempt status. 

In response to the many questions posed by the Finance Committee during its investigation and the recommendations in the 2013 TIGTA Report, the IRS took significant actions to address the problems identified. Due to the interrelatedness of 

the Finance Committee and TIGTA recommendations, rather than addressing each 

recommendation in numeric order, the framework of this report is organized topically based on the main concerns of the findings and related recommendations, as 

follows: 

1. Promoting Transparency and Accessibility in the Exempt Organization Determination Process 

2. Streamlining the Exempt Organizations Determination Process to Ensure 

Timely Processing and Reduce Delay 

3. Realigning Organizational Functions for Improved Service 

4. Fostering a Culture of Accountability 

5. Strengthening Risk Management through Improved Communication 

6. Bolstering Employee Training 

7. Ensuring Neutral Review Processes 

8. Reviewing the Use of the Office Communicator System 

9. Improving Procedures under the Freedom of Information Act (FOIA) 

10. Responding to Government Accountability Office Recommendations 

11. Recommendations outside IRS Jurisdiction or that Require Legislative 

Changes 

This report describes IRS actions in each of these areas that are either completed 

or already underway, and identifies areas for ongoing progress and improvement. 

These steps started in the summer of 2013 and continue today. Highlights of the 

IRS’s structural, substantive, and corrective actions include: (1) installing a new 

management team in the Tax Exempt/Government Entities (TE/GE) Division; (2) 

developing new training programs and conducting workshops on critical issues, including the difference between issue advocacy and political campaign intervention, 

and the proper way to identify applications that require review of political campaign 

intervention activities; (3) issuing guidelines for Exempt Organizations (EO) specialists on how to process requests for tax-exempt status involving potentially significant political campaign intervention; (4) creating a formal, documented process for 

EO Determinations personnel to request assistance from technical experts; and (5) 

reducing the over-age case inventory of EO Determinations applications by over 98% 

from April 2014. The IRS is also committed to following through on key initiatives, 

such as continuing its thorough review and consideration of over 160,000 public 

comments and suggestions for the development of clear, fair, and easy-to-administer 

guidance relating to the measurement of political campaign activities under section 

501(c)(4), and taking further responsive actions, as necessary. 

Promoting Transparency and Accessibility in the Exempt Organizations 

Determination Process 3

Some of the Finance Committee’s recommendations raise concerns regarding transparency in the EO determination process. The IRS is committed to increasing transparency and accessibility to generate more public trust in the process. Since the release of the 2013 TIGTA Report, the EO function has made significant progress in 

57 

4 IRM 7.1.2, 7.20.1, 7.20.2, 7.20.3, 7.20.6. 

5 Rev. Proc. 2015–4, 2015–5, 2015–8, 2015–9, 2015–10, and 2014–11. 

6www.irs.gov/Charities-&-Non-Profits/Applying-for-Tax-Exempt-Status. 

7www.irs.gov/Charities-&-Non-Profits/Applying-for-Tax-Exempt-Status. 

8This discussion relates to bipartisan Finding #2 and the related bipartisan Recommendations, as well as bipartisan Finding #3 and the related Recommendation #2. See Appendix A, 

Finding B2, Recommendations B2.1, B2.2, and B2.3; Finding B3, Recommendation B3.2. It also 

relates to Majority Recommendation #4, p. 267. See Appendix A, Recommendation Maj4. 9 Interim Guidance Memorandum, TE/GE–07–0315–0006 (March 12, 2015). 

10Per the 1023 EZ eligibility worksheet, smaller organizations are defined as ones (1) not hav- ing gross receipts exceeding $50,000 in any of the past 3 years and (2) with total assets not 

exceeding $250,000. Additionally, a Lean Six Sigma study in 2013 for purposes of improving the 

efficiency of the EO Determination process led to the ultimate creation of the EZ form. See 

http://www.irs.gov/pub/irs-pdf/i1023ez.pdf. 11 ‘‘Status of Actions Taken to Improve the Processing of Tax-Exempt Applications Involving 

Political Campaign Intervention,’’ TIGTA Ref. No. 2015–10–025 (March 27, 2015), p.16. 12This discussion relates Minority Recommendation #3, p. 314. See Appendix A, Recommendation Min12. 13These new procedures were developed in response to a recommendation contained in the 

2013 TIGTA Report. Interim Guidance Memorandum, TE/GE–07–0713–11 (July 15, 2013); incorporated into IRM 7.1.2 (9–22–14). 14 ‘‘Status of Actions Taken to Improve the Processing of Tax-Exempt Applications Involving 

Political Campaign Intervention,’’ TIGTA Ref. No. 2015–10–025 (March 27, 2015), p. 13. 

facilitating public access to relevant materials through substantive updates to the 

Internal Revenue Manual (IRM) sections 4 and revenue procedures 5 that relate to 

the application process. These resources continue to be available to the public via 

the IRS website.6 The EO function has also made new tools available to exempt organizations, including the online, interactive Form 1023i.7 Moving forward, the EO 

function will review the current instructions for Form 1023 and Form 1024 to determine whether references to any of the resources available on the IRS’s website need 

to be added. If additional references are needed, the IRS will ensure that all such 

references are included when the instructions to the forms are updated in fiscal year 

(FY) 2016. 

Streamlining the Exempt Organizations Determination Process to Ensure 

Timely Processing and Reduce Delay 8

Several of the Finance Committee Report’s findings and recommendations center on 

improving the timeliness of the EO determination process. The EO function is committed to resolving all determination cases within 270 days. Overall, actions taken 

by the IRS to reduce cycle times and eliminate the application backlog, since the 

beginning of the Finance Committee’s investigation, have proven extremely successful. In 2014, the EO function modified its internal processes and began tracking 

cases once they became 90-days old to ensure that potential barriers to resolution 

were identified and addressed early on. Additionally, the EO function works 

proactively with tax-exempt organizations on their applications even though, in 

some instances, doing so may result in longer processing times. 

In FY 2014, the EO function conducted a thorough review of workflow processes, 

aimed at reducing cycle times and eliminating a significant backlog of applications. 

As a result of this review, the EO function modified several case processing procedures for all applications, including those with potential political campaign intervention activities. For instance, the EO function adopted ‘‘Streamlined Case Processing’’ 9 and introduced Form 1023–EZ to simplify the process for smaller applicants.10 These actions complemented measures already adopted in response to the 

2013 TIGTA Report, including the ‘‘Optional Expedited Process’’ for 501(c)(4) organizations with potential political campaign intervention activities. In fact, this new 

process was so effective that TIGTA recently recommended expanding to section 

501(c)(5) and section 501(c)(6) applicants.11, 12

The EO function also focused on revising procedures for technical assistance requests, which must be completed within established timeframes.13 In 2013, for example, the EO function initiated a new procedure pursuant to which specialists 

have 60 days to complete responsive memorandums. In 2015, when TIGTA conducted a follow-up audit of these new procedures, it found that the EO Technical 

Unit exceeded this goal by providing responses within 40 days.14

These process changes have proven effective in improving timeliness and reducing 

inventory. From April 2014 to July 2015, applications submitted on Forms 1023 

(which make up the majority of the EO Determinations inventory) dropped from an 

average age of 256 days to 107 days, while applications submitted on Forms 1024 

went from 256 days to 112 days. For those cases that were 270 days or older, the 

58 

15When an organization does not respond to a request for additional information, EO follows 

the process contained in IRM 7.20.2. EO will give the organization time to respond to an initial 

letter, attempt to call the organization to secure a response, and in some instances give an extension of time to respond when requested by the organization. 16This discussion relates to bipartisan Finding #5 and the related bipartisan Recommendation. See Appendix A, Finding B5, Recommendation B5.1. 17See Appendix B, ‘‘Before and After Structures of the EO Division.’’ 18This discussion relates to bipartisan Finding #2 and the related bipartisan Recommendations, as well as bipartisan Finding #3 and the related Recommendation #1. See Appendix A, 

Finding B2, Recommendations B2.1, B2.2, and B2.3; Finding B3, Recommendation B3.1. 

EO function dramatically reduced its inventory from 32,713 applications as of April 

2014 to 487 applications as of August 2015. Of the 487 remaining over-age cases, 

almost half are currently in ‘‘Group Suspense’’ status, meaning the EO function cannot take action, either because the cases are in litigation and under the jurisdiction 

of the Office of Chief Counsel or the Department of Justice, or because of taxpayer 

delays in responding to information requests.15 The EO function will continue working toward further reducing or eliminating the remaining over-age inventory. 

Realigning Organizational Functions for Improved Service 16

After 2013, the IRS evaluated whether current organizational structures and workplace locations were inhibiting performance. As a result of this evaluation, the IRS 

has made several notable structural changes aimed at enabling performance improvements.17 For instance, the EO Director and the EO Director of Rulings and 

Agreements positions have been physically relocated from Washington, DC to Cincinnati, OH, so that the EO leadership is now physically co-located with most EO 

function employees working on determination applications. Additionally, as a result 

of Streamlined Case Processing and the introduction of the Form 1023–EZ, the efficiency in EO Determinations increased significantly. Therefore, after conducting a 

workload analysis, approximately 40 EO Determinations employees in El Monte, 

Sacramento, and Baltimore will be shifted to EO Examinations in October 2015. Not 

only does this realignment enable the EO function to provide much-needed resources to EO Examinations, it will also result in the majority of the remaining EO 

Determinations employees being co-located with their leadership in Cincinnati. 

The Tax Exempt/Government Entities Division (TE/GE) also recognized the importance of timely and useful guidance from its legal counsel. To help achieve that result, in early 2015, TE/GE worked closely with the Office of Chief Counsel to realign 

functions that perform legal analysis, previously housed within TE/GE, to the Office 

of Chief Counsel. Additionally, the new stand-alone office of Tax Exempt and Government Entities Division Counsel in the Office of Chief Counsel was established, 

which now has responsibility for providing advice and assistance on determinations, 

enforcement, and compliance issues to the TE/GE Division, which includes EO. As 

a result of these actions, there is now a clear separation of duties, as well as welldefined procedures and improved lines of communication between TE/GE leaders 

and their counterparts in the Office of Chief Counsel. 

Fostering a Culture of Accountability 18

To support and enable a successful transition to the new organizational structure 

in the EO function, the IRS is ensuring that employees, managers, and leadership 

are engaged in an environment of accountability. Beginning in FY 2015, all TE/GE 

managers have a managerial commitment in their performance plans to conduct 

regular workload reviews with their direct reports. In EO, these workload reviews 

include a proactive inventory review by managers to ensure that employees are completing work in a timely fashion. While these reviews are initiated between the 

frontline managers and their employees, the case cycle time results and any other 

issues are shared with upper-level managers and executives in the EO Division and 

TE/GE through monthly Operational Reviews. 

In addition to the workload reviews, managers in all TE/GE functions, including 

EO, conduct monthly Operational Reviews. These reviews ensure that managers are 

properly overseeing the work of their employees, regardless of the employees’ place 

of duty or telework agreement. In 2014, TE/GE and EO leadership re-emphasized 

the need for managers in EO Determinations to conduct regular monthly meetings 

with employees to review over-age cases. Today, they continue to discuss the results 

of those inventory reviews with their Director. Cycle time information was, and continues to be, provided on a monthly basis to the EO Director and TE/GE Commissioner. Finally, cycle time data, including the number of over-age cases, are reported 

to the TE/GE Commissioner and the IRS Deputy Commissioner for Services and Enforcement quarterly, via the Business Performance Review process. The IRS ComVerDate Mar 15 2010 15:40 Dec 01, 2016 Jkt 000000 PO 00000 Frm 00062 Fmt 6601 Sfmt 6621 R:\DOCS\22724.000 TIMD
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19This discussion relates to bipartisan Finding #4 and the related bipartisan Recommendation. See Appendix A, Finding B4, Recommendation B4.1. 20 IRM 1.54.1, ‘‘TE/GE Roles and Responsibilities.’’ 21This discussion relates to bipartisan Finding #6 and the related bipartisan Recommendation. See Appendix A, Finding B6, Recommendations B6.1. 

missioner is informed of the number of over-age cases through regular updates provided every 6 weeks. As demonstrated by the data cited above, TE/GE leadership 

believes that the managerial commitment and focus on case processing oversight directly contributes to, and ensures, improved processing times and reduced inventory. If an employee or manager is not meeting performance timeliness standards, 

those issues will also be addressed through employee appraisals. The Critical Job 

Elements for TE/GE employees reference established IRM time frames for action. 

If employees fail to meet performance timeliness standards, management will address the issues in a manner consistent with the negotiated contract between IRS 

Management and the National Treasury Employees Union. Similarly, if managers 

fail to meet performance standards, senior management will address the issues in 

a manner consistent with the manager’s performance agreement. 

Strengthening Risk Management Through Improved Communication19

Changes in processes and organization structure, along with a greater emphasis on 

more regular communication, have strengthened TE/GE’s ability to manage risk effectively. More opportunities exist for interaction between managers and employees 

with the implementation of regular operational reviews, inventory reviews, and regular town hall meetings. Furthermore, a new Risk Management Process established 

in TE/GE this fiscal year as part of the IRS’s development of an agency-wide risk 

management program beginning in FY 2014, is a mechanism that enables certain 

issues to be elevated from the group level to the executive leadership for review and 

discussion. This new and expansive process further mitigates the risk that sensitive 

issues may not be timely elevated within the organization. 

During the Finance Committee’s investigation, the EO function looked closely at its 

Sensitive Case Report (SCR) procedures. It has since made several revisions to 

strengthen the process to increase communication and mitigate potential risks. The 

EO function revised several IRM provisions to clarify the definitions of SCR issues, 

when and why to elevate issues, and the difference between elevating issues to inform managers and executives versus to obtain a decision. Issues are now elevated 

during monthly management updates, and SCRs are sent to executives who conduct 

a comprehensive review, ask necessary follow-up questions, request further briefings 

when appropriate, and determine potential next steps when needed.20

The TE/GE Division, including the EO function, is also in the process of implementing a new knowledge management process that will increase communication by 

disseminating information on technical topics. Core knowledge management teams 

will be made up of representatives from diverse backgrounds, such as determinations, examinations, and technical. 

Bolstering Employee Training 21

Providing appropriate, current, and timely training for employees is essential to ensure revised processes and procedures are carried out as intended. Across the IRS, 

annual training expenditures were significantly reduced across the board between 

FY 2010 and FY 2014, as a result of ongoing cuts in the IRS budget. Nevertheless, 

following the release of the 2013 TIGTA Report, the EO function conducted substantial employee training. Today, the EO function puts a continuing emphasis on costeffective training, and is developing new ways of delivering and sharing training 

materials and technical expertise. For example, EO provides a training class on the 

proper use of the Letter 1312, ‘‘Request for Additional Information,’’ which is used 

when additional information is needed to make a determination on an EO application. This class will continue to focus employees and managers on the letter’s proper 

use in potential political campaign intervention activity cases, and will educate and 

reinforce understanding of both appropriate and inappropriate questions regarding 

donors. 

In response to three recommendations contained in the 2013 TIGTA Report, during 

the summer of 2014 the EO function held mandatory training for all EO function 

employees on political campaign intervention activities. This training comprised 

written materials, virtual e-Learning sessions, and face-to-face, small-group, technical workshops. In 2014, the EO function began holding quarterly continuing professional education (CPE) sessions and Interim Guidance Awareness training. The 

60 

22This discussion relates to bipartisan Finding #2, and the related bipartisan Recommendation, #1, as well as bipartisan Finding #7, and the related bipartisan Recommendation #1. See 

Appendix A, Findings B2 and B7, Recommendations B2.1, and B7.1. 23 Interim Guidance Memorandum, TE/GE–07–1014–0027 (October 24, 2014). 24 Interim Guidance Memoranda, TE/GE–07–1214–0030 (December 10, 2014) and TE/GE–07– 

1214–0032 December 23, 2014). 25www.irs.gov/Charities-%26-Non-Profits/Charitable-Organizations/Exempt-OrganizationSample-Questions. 26See the Finance Committee Report at pp. 128–29. 

content of the CPE sessions varies, but typically focuses on EO tax law topics. Refresher training on Interim Guidance is a refresher course/update, delivered virtually, on the content of prior pieces of interim guidance such as roll-out of the 

Emerging Issues Committee and coverage of IRS Counsel-approved case development questions. 

Looking ahead and responsive to the Finance Committee’s interest, as part of its 

continuing effort to further reduce its inventory of over-age cases, the EO function 

has scheduled October 2015 training for determinations specialists on quality standards, including timely case processing standards. 

While the use of virtual e-Learning tools enables employees to receive training from 

subject matter experts at reduced costs, the IRS is aware of the need to ensure that 

technical content is delivered successfully and that attendance is monitored carefully. To that end, the IRS is using a refined and improved methodology to verify 

virtual training attendance. The EO Program Management Office (PMO) now coordinates training events for the EO function and tracks and reports on training attendance. Employees are required to retake all training sessions they fail to complete. If an employee, including a manager, fails to attend a required training session, PMO notifies both the employee and the employee’s manager to ensure attendance in the near future. Further, the failure of an employee, or manager, to attend 

mandatory training sessions will be documented in their performance evaluations. 

In addition to the new technical assistance procedures, the EO function is currently 

implementing a knowledge management (KM) network which, when completed, will 

provide EO function employees with easy access to information on a wide range of 

technical issues, including, for example, unrelated business income tax and private 

foundations. The information will highlight the relevant law, applicable revenue rulings and guidance, and frequently encountered issues. Employees will also have access to KM subject-matter experts for additional guidance and assistance. This process will increase information sharing across the EO function while improving consistency in how employees approach technical issues. The EO function has begun 

to deliver periodic training events focused on its new knowledge management processes, including their purpose, benefits, and how to access KM services for all employees through the new KM system. 

Ensuring Neutral Review Processes 22

The EO function has taken definitive steps to ensure a neutral review process for 

organizations applying for tax-exempt status. First, the EO function has focused on 

preventing improper requests for donor identities at the application stage. Following 

the release of the 2013 TIGTA Report, the IRS provided guidance to EO function 

employees on processing applications for tax-exempt status when an organization 

provides information on Forms 1023 or 1024 that is insufficient for the IRS to reach 

a conclusion regarding exempt status.23 As of 2014, the IRS has implemented new 

procedures to ensure that requests for additional information in cases involving potential political campaign intervention activities are appropriate in scope and 

scale.24 A template letter, Letter 1312, ‘‘Request for Additional Information,’’ was 

developed through careful coordination among the Office of Chief Counsel, the Office 

of Taxpayer Correspondence, and the Taxpayer Advocate Service’s (TAS) Office, and 

it does not contain any questions relating to names of donors. EO Determination 

specialists are now instructed to use Letter 1312 in developing all such cases, and 

specialists must submit all development letters to their group manager for review 

and approval prior to issuance to an organization. The categories of questions that 

are contained in the template Letter 1312 have been made available to the public 

on the IRS website since January 2014,25 and are updated as necessary. 

Additionally, the IRS will continue to review and improve its EO examination case 

selection internal control system, an issue which was the subject of a detailed discussion in the Finance Committee’s bipartisan report.26 Following the recommendaVerDate Mar 15 2010 15:40 Dec 01, 2016 Jkt 000000 PO 00000 Frm 00064 Fmt 6601 Sfmt 6621 R:\DOCS\22724.000 TIMD
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27 ‘‘IRS Examination Selection Internal Controls for Exempt Organization Selection Should Be 

Strengthened’’ (GAO–15–514) (July 2015). 28 Interim Guidance Memorandum TE/GE–04–0715–0018 (July 16, 2015). See Appendix C. 29This discussion relates to Majority Recommendation #5, p. 267, as well as Minority Recommendation #2, p. 314. See Appendix A, Recommendations Maj5 and Min11. 30Per IRM 1.54.1.9.1 (updated 12–20–2013), the IRS has a general practice of not involving 

political appointees (viz., the Commissioner of Internal Revenue and the IRS Chief Counsel) in 

the handling of specific taxpayer matters. 31This discussion relates to bipartisan Findings #8 and #9, and the related bipartisan Recommendations. See Appendix A, Findings B8 and B9, Recommendations B8.1, B9.1, and B9.2. 32Generally, the IRS keeps records in files, e.g., exam files, collection files, and regulation 

files. When a FOIA request is vague or describes a broad program or process, it can be much 

more difficult to locate custodians and responsive records. See IRM 11.3.13.5.5(6) and IRM 

11.3.13.6.2(10); (08–14–2013). 33 IRM 11.3.13.6.2 and 11.3.13.6.3(13); (08–14–2013). 

tions contained in the July 2015 GAO Audit report,27 the EO function issued revised 

procedures for the composition and operation of the Political Activity Referral Committee.28 Pursuant to the revised procedures, the committee will consist of three EO 

managers, selected at random. The managers will receive appropriate training and 

serve on the committee for 2 years. These procedures will ensure the committee will 

review and recommend referrals for audit in an impartial and unbiased manner. 

The committee must identify and document in the case file that the referral and 

associated publicly available records establish that an organization, and any relevant persons associated with that organization, may not be in compliance with 

Federal tax laws. The EO function has moved quickly to implement the new procedures. The first three committee members under this new procedure were selected 

in the beginning of August 2015. EO is committed to conducting regular reviews to 

ensure that committee members operate in accordance with all aspects of the Interim Guidance. 

The Department of the Treasury and the IRS have also begun the process of developing guidance under section 501(c)(4) on how to measure social welfare and nonsocial welfare activities.29 The goal of this guidance project is to move the EO determination process away from a subjective ‘‘facts and circumstances’’ analysis and toward more objective standards. This effort has been greatly informed by the more 

than 160,000 public comments received in response to the 2013 proposed regulations. Treasury and the IRS asked for, and received, comments on several issues, 

including three major issues: the proposed definition of political campaign activity; 

to which organizations that definition should apply; and the amount of political activity an organization can engage in consistent with a particular tax-exempt status. 

Ultimately, Treasury and the IRS strive to develop guidance that is clear, fair to 

everyone, and easy to administer. 

Finally, the IRS has always maintained a general practice of not involving political 

appointees in the handling of specific taxpayer matters.30 Instead, for EO taxpayers, 

such matters should be resolved by the TE/GE Commissioner or the Deputy Commissioner, Services and Enforcement. The EO function provides SCRs to the TE/GE 

Commissioner, and those SCRs are reviewed by the TE/GE Commissioner and forwarded to the Deputy Commissioner, Services and Enforcement, as needed. 

Improving Procedures Under the Freedom of Information Act 31

It is important to distinguish FOIA requests, which are worked by the IRS Disclosure Office, from other types of requests for IRS records. Similar to requests for administrative case files, which are worked by the IRS business units, requests seeking copies of tax exempt applications under section 6104 are worked by EO’s Rulings and Agreements Processing Section, Correspondence Unit, and not processed 

as FOIA requests by the Disclosure Office. 

Regarding FOIA requests, the IRS Disclosure Office uses an established network of 

contacts in each of the various business units to serve as subject-matter experts and 

coordinate searches within their organizations. The Disclosure Office relies on the 

business unit contacts to identify the existence and location of responsive documents, and to coordinate with the custodian offices.32 The Disclosure Office and the 

business unit contacts maintain open lines of communication, and follow-up with 

FOIA requestors to better define the scope of their requests whenever there are 

questions.33 This approach is intended to maximize public access to agency records. 

Similarly, IRS guidance describes opportunities to extend the search to records created after the date of the request if the search effort is drawn out or was not timely 

initiated in an effort to provide the requester with access to as many responsive 

62 

34 IRM 11.3.13.8(3) and (9); (08–14–2013). 35 IRM 11.3.13.6.3 (8–14–2013). 36TIGTA report 2014–30–064 (9–17–2014); See 

https://www.treasury.gov/tigta/auditreports/2014reports/201430064fr.pdf. 

37This discussion relates to bipartisan Finding #10 and the related bipartisan Recommendation. See Appendix A, Finding B10, Recommendations B10.1. 38The Federal Records Act requires that the agency maintain agency records, i.e., records created, compiled or received in the course of agency business. The IRS policy on e-mails is that 

all e-mails that relate to agency business should be printed and kept with the file, and that 

work-related e-mails are subject to FOIA and discovery. IRM 1.10.3.2.4; IRM 1.10.3.3.5 (03–06– 

2015). 39This discussion relates to bipartisan Finding #7, and the related bipartisan Recommendation #2. See Appendix A, Finding B7, Recommendation B7.2. 

records as possible. In all cases, the IRS’s search efforts must be documented, 

whether or not responsive records exist. 

To ensure that Disclosure Office employees at all experience levels have the tools 

they need to conduct robust searches for FOIA requests, which are increasingly complex in scope and volume, the Disclosure Office is preparing guidance in the form 

of written standard search procedures. This guidance will focus on many of the more 

frequently requested categories of information and include contact lists. Employees 

processing FOIA requests will be trained in those procedures by the end of 2015. 

The Disclosure Office’s existing FOIA procedures require secondary review of all 

FOIA documents when records are denied in part or in full for the proper application of the FOIA exemptions before release.34 The Office of Disclosure also has an 

embedded quality review process pursuant to which a sample of all FOIA releases 

are reviewed against quality standards, including a measure of technical accuracy 

of the records released. The Disclosure Office will issue a directive by September 

30, 2015 emphasizing the importance of continuing to focus on the adequacy of each 

search effort, emphasizing the IRM requirements and stressing the need to document where deficiencies exist.35 Additionally, TIGTA conducts periodic reviews of 

the IRS’s compliance with FOIA. In some instances, TIGTA has noted incidences of 

improper disclosures.36 The IRS responded to those reports by conducting additional 

training for FOIA caseworkers. 

In May 2015, the EO function released new procedures for handling FOIA requests. 

These procedures were shared with the EO Functional Directors and will be incorporated into Interim Guidance. Under the new procedures, all FOIA requests will 

be coordinated through the EO Program Management Office. That office will document and track all requests, verify whether the request relates to efforts by other 

IRS business functions, coordinate with the Disclosure Office to determine the appropriate scope of the request, and reach out to the appropriate EO points of contact 

contained within each EO function. These new procedures will assist in ensuring 

that searches are appropriately conducted across all components of the EO function, 

as recommended by the Finance Committee. 

Reviewing the Use of the Office Communicator System 37

The Finance Committee’s Findings and Recommendations raise important questions 

about records retention, as well as questions regarding IRS employee use of the Office Communicator System (OCS). Similar to an internal instant messaging system, 

OCS enables IRS employees to hold virtual meetings, as well as virtual training 

events involving large numbers of employees and offices. These functionalities reduce expenses for travel and meeting space. In December 2014, the IRS conducted 

a review of employee use of OCS, and found that, in addition to its business uses, 

it is most often used as an informal means of communication. To address the need 

to maintain and safeguard Federal records that may be created in OCS, the IRS, 

in coordination with National Archives and Records Administration, is developing 

policies and practices that are consistent with Federal recordkeeping requirements. 

Currently, the IRM advises employees who create Federal records using informal 

means of documentation or communication, including OCS, to convert those records 

to a more structured format to facilitate records management and enable appropriate retention.38 The IRS plans to improve this guidance by adding more specific 

instructions and clarifying examples. 

Responding to Government Accountability Office Recommendations 39

The GAO’s July 2015 report made 10 recommendations addressing a range of issues, 

including: the substance and currency of the IRM; EO case selection controls; EO 

examination criteria, approval and oversight, additional controls, and database 

63 

40TE/GE–04–0715–0018 (July 16, 2015). 41This discussion relates to bipartisan Finding #1 and the related bipartisan Recommendation 

#3. See Appendix A, Finding B1, Recommendation B1.3. 42This discussion relates to bipartisan Finding #1 and the related bipartisan Recommendation 

#2. See Appendix A, Finding B1, Recommendation B1.2. 43This discussion relates to Majority Recommendation #2, p. 267. See Appendix A, Recommendation Maj2. 44This discussion relates to Majority Recommendation #3, p. 267. See Appendix A, Recommendation Maj3. 45This discussion relates to Majority Recommendation, p. 258. See Appendix A, Recommendation Maj6. 46This discussion relates to bipartisan Finding #7 and the related bipartisan Recommendation 

#3. See Appendix A, Finding B7, Recommendation B7.3. 

maintenance; referral training and referral controls; and closed file tracking and 

maintenance. 

The IRS generally agrees with the GAO’s recommendations. The EO function has 

already begun developing action plans to address each of them, and it is making 

progress towards doing so. For example, the GAO recommended that the IRS ensure 

that referral committee members rotate every 12 months by soliciting volunteers, 

and suggested the EO function should revise the IRM to require an alternative rotation schedule if 12 months is not appropriate. As explained above, the EO function 

released interim guidance 40 in July 2015, announcing new procedures for the Political Action Referral Committee that are consistent with the GAO recommendations. 

In response to other GAO recommendations, the EO function has already set FY 

2016 target dates for completion of IRM updates and operational reviews. 

The EO function will continue addressing all 10 GAO recommendations, as quickly 

as it can, and the IRS will report to Congress on its progress in Fall 2015. 

Recommendations Outside IRS Jurisdiction or That Require Legislative 

Changes 

The Finance Committee Report contains several recommendations that are outside 

the jurisdiction of the IRS. One recommendation suggested the creation of a position 

within the Taxpayer Advocate Service (TAS) dedicated solely to assisting organizations applying for non-profit tax-exempt status.41 TAS is preparing a separate response to the Finance Committee. However, it is our understanding that TAS has 

already begun to address this recommendation. Thus far, TAS has recently created 

several positions relating to exempt entities: a Revenue Agent Technical Advisor 

with specific exempt organization expertise to assist all of TAS’s Local Taxpayer Advocate offices with complex EO cases; and a Systemic Advocacy Analyst with EO 

background and expertise who reviews and identifies systemic problems relating to 

EOs. TAS also has two attorney-advisors who work EO legal issues and EO cases 

referred to TAS, one of whom reports directly to the National Taxpayer Advocate. 

Additionally, TAS plans to hire a mid-level Advocacy Specialist in the Washington, 

DC, Local Taxpayer Advocate office, who will focus on the most complex and disputed EO cases. The Advocacy Specialist will spend half the time working on cases 

in a particular area of expertise and the other half on systemic issues such as: handling of cases, training, the Annual Report to Congress, and serving on IRS teams, 

with respect to EO. TAS is working on drafting a full description of the Advocacy 

Specialist position and will announce it in the near future. 

Another bipartisan recommendation focused on revisions to the Hatch Act.42 The 

proposal would require legislative action and accordingly, the IRS has not taken action responsive to this recommendation. Similarly, the Majority and the Minority 

each prepared lists of several recommendations calling for legislative changes. These 

recommendations included, for example, amending the Federal Service LaborManagement Relations statute to designate the IRS as exempt from labor organization and collective bargaining requirements,43 amending section 7428 to provide for 

declaratory judgment actions by applicants for tax-exempt status under section 

501(c)(4), (5), and (6),44 and amending several other Internal Revenue Code provisions relating to exempt organizations.45

In addition, the Committee recommended that TIGTA conduct a review of the revised EO Examination procedures, no later than July 1, 2017.46 The IRS is ready 

and willing to cooperate with any future TIGTA review. 

Finally, both the Majority and Minority sections of the Report address the possibility of removing the IRS from under the authority of the Department of the TreasVerDate Mar 15 2010 15:40 Dec 01, 2016 Jkt 000000 PO 00000 Frm 00067 Fmt 6601 Sfmt 6621 R:\DOCS\22724.000 TIMD
64 

47This discussion relates to Majority Recommendation #1, p. 267. See Appendix A, Recommendation MAj1. 

ury and establishing it as an independent, stand-alone agency.47 This recommendation raises numerous legal and policy issues, and is outside the jurisdiction of the 

IRS. Accordingly, the IRS does not intend to take any action responsive to this recommendation. 

Conclusion 

The Finance Committee’s extensive investigation of the IRS’s processing of applications for tax exempt status submitted by ‘‘political advocacy’’ organizations from 

2010–2013 spanned the full breadth of the IRS’s EO operations. The Finance Committee’s thorough, detailed, and balanced bipartisan report chronicles many problems with those operations, including but not limited to: the IRS’s interactions with 

applicants; its handling of their applications; management oversight of the EO process; IRS organizational structures; manager and employee training; and taxpayer 

confidentiality and access to records. The Finance Committee’s report also shows the 

path forward, however, by laying down a series of specific findings and recommendations. 

Throughout the Finance Committee’s investigation, and continuing today, the IRS 

has been working hard to move along that path towards its goal of providing top 

quality service to America’s exempt organizations. To that end, the IRS will continue to address the Report’s bipartisan findings and recommendations, as well as 

all the recommendations prepared by the Majority and Minority staffs. As discussed 

in this report, the IRS has already taken significant and important actions to address the problems identified by the Finance Committee, and those actions are resulting in substantive improvements. 

65 

Appendix A—Finance Committee Findings and Recommendations 

1. Bipartisan (B) Findings and Recommendations 

Finding Description Recommendation Description 

Finance 

Committee 

Report Page # 

IRS Report Subheading (Page #) 

B1 The IRS’s handling of applications from advocacy 

organizations may affect public confidence in the IRS. To avoid any concerns that may exist that IRS decisions about particular taxpayers are influenced by politics, the following recommendations are made. 

B1.1 Publish in the instructions to all relevant application forms objective criteria that may trigger additional review of applications 

for tax-exempt status and the procedures IRS specialists use to process applications involving political campaign activity. Prohibit the IRS from requesting individual donor identities at the application stage, although generalized donor questions should continue to be allowed, as well as requests for representations that, e.g., there will be no private inurement. 

8 Promoting Transparency and Accessibility in the EO Determination Process (2) 

B1.2 Revise the Hatch Act to designate all IRS, Treasury and Chief 

Counsel employees who handle exempt organization matters as ‘‘further restricted.’’ ‘‘Further restricted’’ employees are held to stricter rules than most government employees and are precluded from active participation in political management or partisan campaigns, even while off-duty. By designating those employees as ‘‘further restricted,’’ the public can be assured that any impermissible political activity by an IRS employee that is detected will result in serious penalties, including removal from Federal employment. 

8 Recommendations outside IRS 

Jurisdiction or that Require Legislative Changes (11) 

B1.3 Create a position within the Taxpayer Advocate Service dedicated 

solely to assisting organizations applying for non-profit taxexempt status. 

8 Recommendations outside IRS 

Jurisdiction or that Require Legislative Changes (11) 

B2 The IRS systematically screened incoming applications for tax-exempt status from more than 

500 organizations and implemented procedures that resulted in lengthy delays. Until early 2012, certain top-level management was unaware that these applications were being processed in this manner. 

B2.1 The Exempt Organizations division should track the age and cycle 

time of all of its cases, including those referred to EO Technical, so that it can detect backlogs early in the process and conduct periodic reviews of over-aged cases to identify the cause of the delays. A list of over-aged cases should be sent to the Commissioner of the Internal Revenue Service quarterly. 

9 Streamlining the EO Determination Process to Ensure Timely 

Processing and Reduce Delay (3) 

Fostering a Culture of Accountability (5) Ensuring Neutral Review Processes (8) 

66 

Appendix A—Finance Committee Findings and Recommendations—Continued 

1. Bipartisan (B) Findings and Recommendations 

Finding Description Recommendation Description 

Finance 

Committee 

Report Page # 

IRS Report Subheading (Page #) 

B2.2 The Exempt Organizations division should track requests for guidance or assistance from the EO Technical Unit so that management can assess the timeliness and quality of the guidance and assistance it provides to both Determinations Unit 

employees and the public. 

9 Streamlining the EO Determination Process to Ensure Timely 

Processing and Reduce Delay (3) 

Fostering a Culture of Accountability (5) 

B2.3 The Exempt Organizations division should track requests for guidance or assistance from the Office of Chief Counsel so that 

management can assess the timeliness and quality of the guidance and assistance it provides to both the Determinations Unit employees and the public. Any requests for guidance or assistance from the Office of Chief Counsel that have not been responded to on a timely basis should be promptly reported to the Commissioner of the Internal Revenue Service. 

9 Streamlining the EO Determination Process to Ensure Timely 

Processing and Reduce Delay (3) 

Fostering a Culture of Accountability (5) 

B3 The IRS took as long as 5 years to come to a decision on applications for tax-exempt status 

submitted by Tea Party and other applicants potentially involved in political advocacy. The IRS lacked an adequate sense of customer service and displayed very little concern for resolving these cases. 

B3.1 The Internal Revenue Manual contains standards for timely processing of cases. Enforce these existing standards and discipline employees who fail to follow them. Managers should 

also be held accountable if their subordinates fail to follow these standards. 

9 Fostering a Culture of Accountability (5) 

B3.2 For all types of tax-exempt applicants, IRS guidelines should direct employees to come to a decision on whether or not it will 

approve an application for tax-exempt status within 270 days of when an application is filed. 

9 Streamlining the EO Determination Process to Ensure Timely 

Processing and Reduce Delay (3) 

67 

B4 Important issues were not elevated within the 

IRS. Some Sensitive Case Reports containing information about Tea Party applications were sent to top IRS managers in 2010, but the managers did not read them. 

B4.1 Revise the Sensitive Case Report process or develop a more effective way to elevate important issues within the organization 

other than the Sensitive Case Reports system. Require the senior recipient of each Sensitive Case Report within the Division (a member of the Senior Executive Service) to memorialize specific actions taken in relation to each issue raised in the report, and require such report to be forwarded to the IRS Commissioner for review. 

9–10 Strengthening Risk Management 

through Improved Communication (6) 

B5 A contributing factor to the IRS’s management 

problems was the decentralization of its employees, including some who worked from home as often as 4 days per week, and managers who remotely supervised employees 2,000 miles away. 

B5.1 Evaluate whether current organizational structures and workplace 

locations are inhibiting performance. Make appropriate adjustments to improve communication between employees and their managers. 

10 Realigning Organizational Functions for Improved Service (4) 

B6 Some managers within the EO Division were not 

trained in the substantive tax areas that they managed, including one who did not complete any technical training during the 10 years that she served in a managerial EO position. 

B6.1 Set minimum training standards for all managers within the EO 

division to ensure that they have adequate technical ability to perform their jobs. 

10 Bolstering Employee Training (6) 

B7 The IRS did not perform any audits of groups alleged to have engaged in improper political 

activity from 2010 through April 2014. During that time, the IRS tried to implement new processes to select cases for examination, but a memo from Judy Kindell, Sharon Light and Tom Miller stated that this approach ‘‘arguably [gave] the impression that somehow the political leanings of [the organizations] mentioned were considered in making the ultimate decision.’’ The IRS recently discontinued use of the Dual Track process and now uses generalized procedures when deciding whether to open an examination of an exempt organization’s political activities. 

B7.1 Review the recently enacted procedures to determine if: (1) the 

process enables the IRS to impartially evaluate allegations of impermissible political activity; (2) any of the referrals have resulted in the IRS opening an examination related to political activity, and if so, whether such an examination was warranted; and (3) if necessary, the IRS should make further modifications to ensure that it carries out the enforcement function in a fair and impartial manner. 

10 Ensuring Neutral Review Processes (8) 

68 

Appendix A—Finance Committee Findings and Recommendations—Continued 

1. Bipartisan (B) Findings and Recommendations 

Finding Description Recommendation Description 

Finance 

Committee 

Report Page # 

IRS Report Subheading (Page #) 

B7.2 The IRS should fully implement all recommendations of the Government Accountability Office in their July 2015 report titled 

‘‘IRS Examination Selection: Internal Controls for Exempt Organization Selection Should be Strengthened,’’ GAO–15–514. 

10 Response to Government Accountability Office Recommendations (11) 

B7.3 No later than July 1, 2017, we request that TIGTA conduct a review of the three points noted above in Recommendation #1 

related to the revised EO Exam procedures. 

10 Recommendations outside IRS 

Jurisdiction or that Require Legislative Changes (11) 

B8 On multiple occasions, the IRS improperly disclosed sensitive taxpayer information when responding to Freedom of Information Act (FOIA) 

requests. Employees who were responsible for these disclosures received minimal or no discipline. 

B8.1 Require all outgoing FOIA responses to be reviewed by a second 

employee to ensure that taxpayer information is not improperly disclosed. 

11 Improving FOIA Procedures (9) 

B9 In 2010, the IRS received a FOIA request from a 

freelance journalist seeking information about how the agency was processing requests for tax-exempt status submitted by Tea Party groups. After 7 month, the IRS erroneously informed the journalist that they did not possess any documents that were responsive to her request. 

B9.1 Ensure that IRS procedures specify which organizational units 

within the agency should be searched when the IRS receives an incoming FOIA request on a particular topic. For example, when the IRS receives a FOIA request for records related to tax-exempt applications, the agency should search the records of all components within the Exempt Organizations division. 

11 Improving FOIA Procedures (9) 

69 

B9.2 To be consistent with the intent of FOIA, employees handling FOIA 

requests should construe the requests broadly and contact the requestor to clarify the scope of the request whenever necessary. However, the IRS should also take appropriate measures to safeguard taxpayer information and avoid improper disclosure. 

11 Improving FOIA Procedures (9) 

B10 The IRS has made Office Communicator Server 

(OCS) instant messaging software available to its employees. Under the collective bargaining agreement with the National Treasury Employees’ Union, the IRS agreed that it would not automatically save messages sent to and from employees. As a result, messages can only be recovered if an employee elected to save them. TIGTA opined that this policy does not necessarily violate federal recordkeeping laws, but noted that ‘‘[w]hether OCS is being used according to NARA’s guidance depends on how OCS end-users are utilizing the system.’’ 

B10.1 The IRS should review how employees use OCS. If the program is 

not used for IRS business, the agency should evaluate whether it is appropriate and necessary. If OCS is used for official IRS purposes, the IRS should take measures to ensure such use complies with Federal recordkeeping laws. 

11 Review the Use of the Office 

Communicator System (10) 

2. Majority (Maj) Recommendations 

Maj1 The IRS must be removed from the authority of the Treasury Department and established as an independent stand-alone 

agency. 

267 Recommendations outside IRS 

Jurisdiction or that Require Legislative Changes (11) 

Maj2 The Federal Service Labor-Management Relations Statute must be 

amended to designate the IRS as an agency that is exempt from labor organization and collective bargaining requirements. 

267 Recommendations outside IRS 

Jurisdiction or that Require Legislative Changes (11) 

70 

Appendix A—Finance Committee Findings and Recommendations—Continued 

1. Bipartisan (B) Findings and Recommendations 

Finding Description Recommendation Description 

Finance 

Committee 

Report Page # 

IRS Report Subheading (Page #) 

2. Majority (Maj) Recommendations 

Maj3 Congress should amend section 7428 of the Internal Revenue 

Code to enable applicants for tax-exempt status under 501(c)(4), (5), and (6) to seek a declaratory judgment if the IRS has not rendered a decision on whether or not it will approve an application within 270 days. Doing so would afford these organizations the same remedy currently available only to 501(c)(3) organizations, thereby advancing parity among nonprofits. 

267 Recommendations outside IRS 

Jurisdiction or that Require Legislative Changes (11) 

Maj4 A key finding of this report is that many small organizations with 

limited resources were overwhelmed by unduly burdensome IRS demands. We recommend that the IRS establish a streamlined application process for small organizations applying for tax exemption under 501(c)(3) and 501(c)(4) that enables them to avoid unnecessary administrative burdens, provided that appropriate conditions are satisfied. 

267 Streamlining the EO Determination Process to Ensure Timely 

Processing and Reduce Delay (3) 

Maj5 Any further attempt by the IRS to promulgate regulations revising 

the standard for determining whether section 501(c)(4) organizations have engaged in political campaign intervention must not chill the free exercise of political speech by those organizations, nor disproportionately affect organizations on either side of the political spectrum. 

267 Ensuring Neutral Review Process 

(8) 

Maj6 Legislative proposals that would require near-universal disclosure 

of donors, such as those advanced by the Minority Staff, should be rejected. 

258 Recommendations outside IRS 

Jurisdiction or that Require Legislative Changes (11) 

71 

3. Minority (Min) Recommendations 

Min1 Require (c)(4)s, (5)s, and (6)s to file notice of formation within 

24 hours (same as 527s). 

313 Recommendations outside IRS 

Jurisdiction or that Require Legislative Changes (11) 

Min2 Create a bright-line test on political activity (lobbying and campaigning)—for example, a limitation of 10% of expenditures 

during the calendar year. 

313 Recommendations outside IRS 

Jurisdiction or that Require Legislative Changes (11) 

Min3 Penalty: Apply Section 4955 penalty to (c)(4)s—excise tax on excess political expenditures. 313 Recommendations outside IRS Jurisdiction or that Require 

Legislative Changes (11) 

Min4 Require the disclosure of donors who contribute over $200 to 

501(c)(4)s who engage in political activity (same as 527 organizations), or $1,000, which is the threshold in the WydenMurkowski bill. 

313 Recommendations outside IRS 

Jurisdiction or that Require Legislative Changes (11) 

Min5 Require FEC filings to be attached to 990s. 314 Recommendations outside IRS 

Jurisdiction or that Require Legislative Changes (11) 

Min6 Require electronic filing of 990s (included in the Senate Finance 

Committee’s Tax Administration Discussion Draft). 

314 Recommendations outside IRS 

Jurisdiction or that Require Legislative Changes (11) 

Min7 As an alternative, require disclosure similar to 527 organizations 

(or by cross reference) for tax-exempt organizations that do any ‘‘electioneering communications’’ as defined under FEC rules. 

314 Recommendations outside IRS 

Jurisdiction or that Require Legislative Changes (11) 

72 

Appendix A—Finance Committee Findings and Recommendations—Continued 

1. Bipartisan (B) Findings and Recommendations 

Finding Description Recommendation Description 

Finance 

Committee 

Report Page # 

IRS Report Subheading (Page #) 

2. Majority (Maj) Recommendations 

Min8 As an alternative, require tax-exempt organizations that wish to 

fund electioneering communications to fund these operations through a segregated 527 account, thus, contributions would be subject to disclosure. 

314 Recommendations outside IRS 

Jurisdiction or that Require Legislative Changes (11) 

Min9 As an alternative, require these organizations be reclassified as 

527 organizations. 

314 Recommendations outside IRS 

Jurisdiction or that Require Legislative Changes (11) 

Min10 The Follow the Money Act introduced by Chairman Wyden and 

Senator Murkowski requires that all individuals and entities engaged in independent political spending, including 501(c)(4)s, disclose the names of donors that contribute over $1,000 per year. The legislation also requires real-time disclosure of significant independent political expenditures by 501(c)(4)s similar to the way political candidates report spending to the FEC. This legislation would lessen the processing burden on the IRS Exempt Organizations office because its disclosure regime will eliminate the incentive for organizations to apply for tax-exempt 501(c)(4) status as a means to funnel large anonymous donations into federal elections. 

314 Recommendations outside IRS 

Jurisdiction or that Require Legislative Changes (11) 

73 

Min11 A final option which would not require changes in law envisions 

the IRS reversing its decision in 1959 to interpret ‘‘exclusively’’ as meaning ‘‘primarily.’’ The regulatory decision that has led to hundreds of millions of dollars of political spending by ‘‘social welfare’’ organizations could be cancelled by another regulatory decision setting the same standards that applied before 1959. 

314 Ensuring Neutral Review Processes (8) 

Min12 The Democratic staff recommends that additional work be done to 

determine what reforms to 501(c)(5) and 501(c)(6) organizations are needed. 

314 Streamlining the EO Determination Process to Ensure Timely 

Processing and Reduce Delay (3) 

74 


102715.001
75 


102715.002
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Appendix C—Interim Guidance Memorandum, TE/GE–04–0715–0018 

(July 16, 2015) 

DEPARTMENT OF THE TREASURY 

INTERNAL REVENUE SERVICE 

WASHINGTON, DC 20224 

TAX EXEMPT AND 

GOVERNMENT ENTITIES 

DIVISION 

JULY 17, 2015 

Control No: TEGE–04–0715–0018 

Affected IRM: 4.75.5 

Expiration Date: July 16, 2017 

MEMORANDUM FOR ALL EXEMPT ORGANIZATIONS MANAGERS 

FROM: Tamera L. Ripperda, Director, Exempt Organizations 

SUBJECT: Political Activities Referral Committee 

This memorandum clarifies the composition and operations of the Political Activities 

Referral Committee (PARC). 

Effective immediately, a PARC will consist of three IR–04 managers (OPM General 

Schedule (GS) grade 14 equivalent) who will be selected at random. All EO Examinations and Rulings and Agreements front-line IR–04 managers are eligible for selection to a PARC. The managers who are selected to serve on a PARC will receive 

appropriate training, and will serve on that committee as a collateral assignment 

for a period of 2 years The inventory volume of political activities referrals received 

will determine the number of PARCs established and the time commitment required 

by the members of a PARC. 

A PARC will review and recommend referrals for audit in an impartial and unbiased manner. A PARC must identify and document to the case file that the referral 

and associated publicly available records establish that an organization and any relevant persons associated with that organization may not be in compliance with Federal tax law. All PARC members will use the Reporting Compliance Case Management System (RCCMS) to document their activities and conclusions for the duration 

of their assignment to a PARC. In order for a referral considered by the PARC to 

be forwarded to an EO Examination group for audit consideration, two out of three 

PARC members must make that forwarding recommendation (majority rule). 

Referral Classification Specialists will follow normal referral case building procedures prior to submitting a referral to a PARC. This includes, but is not limited to, 

IDRS information. Accurint, any internet research and the completion of the Classification Lead Sheet. See attached Exhibit for the Classification Lead Sheet. 

This memorandum supersedes IG Memo, Procedures for Dual Track Approach for 

Issues Involving Possible Political Campaign Intervention, issued October 4, 2012. 

This memorandum will expire on the earlier of 2 years from the date of issuance 

or the date incorporated in the affected IRMs. If there are any questions regarding 

this memorandum, those questions should be directed to the EO Examinations Referrals Manager. 

ATTACHMENT 

DISTRIBUTION: 

www.irs.gov 

77 

QUESTIONS SUBMITTED FOR THE RECORD TO HON. JOHN A. KOSKINEN

QUESTIONS SUBMITTED BY HON. RON WYDEN

Question. On October 26, 2015, the press reported that the IRS obtained and received training for a cell-site simulator, commonly referred to as a stingray, which 

works by mimicking a cell phone tower in order to collect data from phones that 

connect to it. This comes on the heels of other news reports that many companies 

have taken to tracking their employees’ movements through cell phone trackers in 

order to avoid triggering a taxable presence in foreign countries. The IRS has an 

important role to play in combating money laundering, drug trafficking, and international tax dodging, but tax enforcement and protection of personal privacy must 

not be mutually exclusive. Please provide the following information about IRS use 

of cell-site simulators: 

How many times over the past 5 years did IRS criminal investigators use a cellsite simulator or IMSI-catcher to extract information from a mobile phone during 

the course of an investigation? 


102715.003
78 

Answer. In the last five (5) years, IRS Criminal Investigation (IRS–CI) has used 

cell-site simulator technology (also known as Stingray) to track the location of fortysix (46) known cellular devices. As discussed below, the only information captured 

by the device was signaling data. The cell-site simulator device purchased is not capable of extracting data such as email, call logs, text messages, or photos that are 

stored on the target cellular device. 

The cell-site simulator was first deployed in April 2012 and has been used in support of eleven (11) Federal grand jury investigations led by the appropriate United 

States Attorney’s Office, which provided oversight and guidance in obtaining the 

proper court orders and/or tracking warrants. These eleven (11) investigations involved Stolen Identity Refund Fraud (SIRF) and money laundering violations. 

Thirty-eight (38) cellular devices were tracked as part of these investigations. 

IRS–CI has also used the cell-site simulator to assist other federal and local law 

enforcement agencies in four (4) non IRS–CI investigations. Three (3) of the four (4) 

cases were non-grand jury State investigations. In each instance where IRS–CI provided assistance, IRS–CI Special Agents operated the cell-site simulator, ensured 

the proper State court orders had been obtained and followed all applicable laws 

under the guidance of a State Prosecutor. The three (3) cases involved attempted 

murder, murder and gun trafficking investigations. These investigations tracked 

seven (7) cellular devices. One (1) of the four (4) cases was a DEA federal grand 

jury narcotics investigation. In this instance, IRS–CI operated the cell-site simulator 

in coordination with its taskforce partner DEA. IRS–CI verified that DEA obtained 

the appropriate federal court order and followed all applicable laws under the guidance of an Assistant U.S. Attorney (AUSA). This joint taskforce case was a narcotics 

investigation and tracked one (1) cellular device. 

Question. During investigations, what is the precise goal of the use of such a device? What types of information have been collected? 

Answer. As the law enforcement arm of the IRS, IRS–CI’s goal of using cell-site 

simulation technology is to identify and locate individuals under investigation for 

potential criminal violations within IRS–CI’s investigative jurisdiction to include 

tax-related identity theft and money laundering. As identified, prior to November 

30, 2015, IRS–CI used the cell-site simulator to assist other federal and local law 

enforcement agencies in four (4) non-IRS–CI investigations. Subsequent to November 30, 2015, with the implementation of IRS–CI’s Cell-Site Simulator Policy, IRS– 

CI will no longer deploy the cell-site simulator in non-IRS–CI investigations. 

Cell-site simulators used by IRS–CI provided only the relative signal strength and 

general direction of the subject cellular device; they do not function as a GPS locator, as they do not obtain or download any location information from the device or 

its applications. When in operation mode, the cell-site simulator received unique 

identifying numbers from multiple devices in the vicinity of the simulator. Once the 

cell-site simulator identified the specific cellular device it was looking for, it only 

obtained the signaling information related to that particular known device. The cellsite simulator did not remotely capture voice communication, emails, texts, contact 

lists, images or any other content data from the devices. Moreover, cell-site simulators used by IRS–CI did not provide subscriber account information (for example, 

an account holder’s name, address or telephone number). 

Any collected signaling data was deleted at the end of each daily operation. 

Question. During the Committee’s October 27, 2015 hearing, Commissioner 

Koskinen stated IRS cell-site simulators ‘‘can only be used with a court order. It can 

only be used based on probable cause of criminal activity.’’ What type of court order 

do IRS investigators obtain before using cell-site simulators? Please note the number of times each type of court order was obtained over the past 5 years. 

Answer. IRS–CI Special Agents obtained the following court orders through the 

United States Attorney’s office in seeking approval to utilize the cell-site simulator 

in criminal investigations. Other than the three State cases and one DEA case 

noted, all criminal cases utilizing the cell site simulator were Grand Jury 

cases within IRS–CI’s investigative jurisdiction. 

• Search Warrants—24 

• Pen Register/Trap Trace Court Order—14 

• Warrant and Order for Cell phone Location Information and Pen Register— 

8 

79 

IRS–CI deployed the cell-site simulator consistent with Department of Justice 

(DOJ) Policy which, prior to September 3, 2015 permitted use when authorized 

through a court order pursuant to the Pen Register Statute. Department of Justice 

updated the policy effective September 3, 2015 to permit deployment of the device 

after obtaining a search warrant supported by probable cause and issued pursuant 

to Rule 41 of the Federal Rules of Criminal Procedure, subject to certain exceptions. 

IRS–CI continued to follow DOJ’s updated policy and then issued a policy that mirrored the DOJ policy on November 30, 2015. 

IRS–CI has also used the cell-site simulator to assist local law enforcement agencies in three (3) non-IRS–CI State investigations. In each instance, IRS–CI operated 

the cell-site simulator, ensured the proper State court orders had been obtained and 

followed all applicable laws under the guidance of a State Prosecutor. 

QUESTIONS SUBMITTED BY HON. MICHAEL B. ENZI

Question.The Senate Finance Committee’s bipartisan report found that the workplace culture in the Exempt Organizations Division placed little emphasis on valuing or providing customer service. Is this type of culture more pervasive within the 

IRS than just the EO Division? How do we know that it is not? What is the IRS 

doing to make sure this type of work culture is not wide-spread, now or in the future? 

Answer. Since I became IRS Commissioner 21⁄2 years ago, I have held town halls 

at IRS offices across the country, in person and virtually, giving me the opportunity 

to talk with and listen to over 20,000 employees at all levels of the organization. 

From their questions, concerns and suggestions I have learned of their concern 

about the lack of resources that prevent them from providing the level of taxpayer 

service that they think taxpayers deserve. 

When you hear employees talk about the personal satisfaction they derive from 

being able to answer a taxpayer’s question or point them in the right direction, you 

begin to understand the great emphasis IRS employees place on valuing and providing top-quality customer service to taxpayers. Indeed, providing taxpayers with 

quality service is one of the taxpayer rights embodied in the Taxpayer Bill of Rights 

(TBOR) that the IRS adopted in 2014. The TBOR is an important document that 

outlines the 10 fundamental rights taxpayers have when working with the IRS. 

As a regular matter, the IRS provides year-round assistance to taxpayers to help 

them fulfill their tax obligations. The taxpayer assistance provided by the IRS comes 

in many forms, including: outreach and education programs; issuance of tax forms 

and publications, rulings and regulations; toll-free call centers; in-person help at 

Taxpayer Assistance Centers (TAC); and our website, IRS.gov. The budget cuts that 

resulted in our reduced levels of service are particularly challenging for our employees who take pride in meeting our customers’ needs, and even with the most energetic response by our employees, the IRS’s constrained resources are such that we 

were not able to provide our customers with the service that they need and deserve. 

The additional funding that Congress provided the IRS for FY 2016 to improve service to taxpayers was a very helpful development for taxpayers and has enabled the 

IRS to provide our customers with more of the quality service they need to meet 

their tax needs. 

The IRS’s commitment to taxpayer service also means assisting taxpayers who are 

facing difficult economic times and other hardships in meeting their tax obligations; 

and to that end, we have a variety of installment payment options to help taxpayers 

who need an alternative payment schedule. 

I have personally seen and heard about many instances where IRS employees 

have provided high quality service and thus, made a difference for taxpayers. Some 

excerpts from some recent letters from taxpayers: ‘‘She was the consummate professional, and I felt her kindness and human decency;’’ ‘‘I feel she went out of her way 

to help me,’’ and; ‘‘when we complimented her service, she replied, ‘I love my job.’ ’’ 

Similar comments have been received from taxpayers about our telephone assistors, 

employees at our Taxpayer Assistance Centers and enforcement personnel. 

As your question relates specifically to customer service in our Exempt Organizations (EO) Division, we would like to note that EO’s commitment to providing taxpayers with timely service was the underpinning for the IRS’s streamlining of the 

EO determination process that led to the creation of the Form 1023–EZ. In EO and 

across the IRS, our employees and our workplace culture is committed to delivering 

80 

on the IRS mission, which is to ‘‘provide America’s taxpayers top-quality service by 

helping them understand and meet their tax responsibilities and enforce the law 

with integrity and fairness to all.’’ 

Question. Regarding standards for customer service, the GAO continues to recommend that the IRS benchmark its telephone service measures to the best in business to help identify ways to improve service and maintain a high quality service. 

According to the GAO, even though the IRS has in the past benchmarked its telephone level of service measures to both private and public sector organizations, the 

IRS has disagreed with the GAO’s recommendation to continue. The GAO over a 

year ago said: ‘‘While reduced funding has resulted in fewer resources available to 

IRS, a better understanding of the nature and size of service gaps could help it provide the best service possible with declining resources.’’ Why has the IRS declined 

to make this type of effort now—that is, benchmarking its telephone level of service 

measures to other organizations? 

Answer. The IRS has recently decided to, as GAO suggests, update our benchmarking comparisons against public and private sector organizations with comparable customer service goals and challenges. The agencies participating in the 

benchmark study were open to periodic benchmark reviews; however at this time 

a set schedule has not yet been established. The IRS continues to note that private 

sector organizations often do not face the same budgetary constraints, budget volatility and legislative challenges that federal agencies face. Nor do many private sector organizations face an intense filing season, with condensed accelerated demands 

for a portion of the year, and a customer base largely interacting with us once a 

year rather than transacting with us throughout the year. Therefore, defining appropriate service levels against private industry or customer expectations is challenging given the wide variation in private industry business models. 

Question. Of concern is the fact that the IRS has sent Consumer Financial Protection Bureau flyers to taxpayers with their tax refund checks. The flyers solicit information from the recipient taxpayers. 

The Consumer Financial Protection Bureau has the power to examine and to impose reporting requirements on financial institutions, enforce certain consumer protection laws and regulations and make certain rules and regulations. I do not believe this authority extends to soliciting Americans’ stories about money. Additionally, since the Consumer Financial Protection Bureau is funded by a transfer of nonappropriated funds from the Federal Reserve System’s combined earnings, I question whether it is appropriate to use taxpayer dollars to advertise the Consumer Financial Protection Bureau, as the IRS did by including this mailing with tax refunds. Lastly, because the Consumer Financial Protection Bureau is supposed to be 

an independent organization, I do not believe the Treasury Department should be 

soliciting information on behalf of the entity. 

I would appreciate answers to the following questions: 

• What authority did the Treasury Department rely on to include this Consumer Financial Protection Bureau information with IRS tax refunds? 

• What agency paid to print and mail the Consumer Financial Protection Bureau flyers? 

• Has the IRS respected all the boundaries and complied with all laws concerning confidential taxpayer information with the inclusion of the Consumer 

Financial Protection Bureau flyer and solicitation of information from taxpayer recipients? 

Answer. The IRS does not mail refund checks to taxpayers. This process is handled by the Bureau of Fiscal Service (BFS) at the Department of Treasury and they 

make the decision about what, if anything, will be included with the refund check. 

In consultation with the BFS, we have determined the following. 

Treasury’s authority to make payments on behalf of the United States Government, and to issue checks and other drafts, is found in the United States Code at, 

inter alia, 31 U.S.C. §§ 321, 3321, and 3325. In 2013, Treasury successfully leveraged check inserts to help federal beneficiaries meet Treasury’s electronic payment 

requirement. Check inserts also have been used for other purposes such as Social 

Security Administration Cost of Living Adjustment notifications or Medicare payment information. Many check inserts include information that directs the check recipient to a government website or a phone number for important program information. Check insert messages may simply concern public interest matters such as disaster preparedness or fraud and identity theft prevention. 

81 

At the request of the CFPB, the BFS included check inserts in approximately 11.9 

million tax refund mailings from February to April of this year. The CFPB was responsible for all printing and shipping costs related to these check inserts. The 

CFPB was also responsible for reimbursing the BFS for the cost of its receiving and 

enclosing these inserts (IAA for $19,397 in FY 2016). No BFS appropriations were 

used as a result of the CFPB check enclosures. 

The BFS is not in possession of any taxpayer recipient information as a result 

of actions taken by the taxpayer in response to the CFPB flyer. The BFS neither 

collects nor receives such information. 

PREPARED STATEMENT OF HON. RON WYDEN, 

A U.S. SENATOR FROM OREGON

In early August, the Finance Committee released the final report on its bipartisan 

investigation into the IRS’s processing of applications from for tax-exempt status. 

Our investigation looked back at the period between 2010 and 2013. The committee 

reviewed 11⁄2 million pages of e-mails and documents and conducted interviews with 

more than 30 IRS officials. 

Our investigation found alarming bureaucratic dysfunction. Many applicants for 

tax-exempt status were treated badly and deserved much better service from their 

government. For example, between 2010 and late 2011, a total of 290 applications 

for tax-exempt status had been set aside for review. Only two applications had been 

resolved successfully. Not 200—two. That was unacceptable mismanagement. The 

investigation, however, did not find any evidence of criminal wrongdoing. 

Chairman Hatch and I both took time to speak about our views on the Senate 

floor when the report came out. The focus of today’s hearing, however, is what the 

IRS is doing to guarantee, once and for all, that this type of deeply troubling mismanagement never happens again. 

The Finance Committee’s report included 36 recommendations—18 bipartisan, 12 

Democratic, and 6 Republican. Among them were proposals to: 

• Set minimum training standards for managers in the exempt organization office to ensure those employees can adequately perform their duties. 

• Institute a standard policy that employees must reach a decision on all taxexemption applications within 270 days of when they’re filed. 

• Create a position with the Taxpayer Advocate’s office dedicated solely to helping organizations applying for tax-exempt status, and many others. 

I want to thank Commissioner Koskinen for responding to those recommendations 

in a letter sent last month to me and Chairman Hatch. My takeaway from the letter 

is that the commissioner sees genuine progress being made to clean up the mess, 

and I look forward to hearing more about it today. 

While Commissioner Koskinen is here, I also want to address the problem that 

occurred in Martinsburg, WV. Low-level IRS employees in Martinsburg deleted 

backup tapes that likely contained e-mails that were within the scope of the committee’s investigation while it was ongoing. 

This mistake was completely unacceptable and inexcusable, and there are reports 

that there was some lying afterward. This cannot happen again. I want to hear 

what the IRS is doing to fix it. 

Finally, on Friday the committee received a detailed letter from the Department 

of Justice concerning their investigation into this matter, and I ask unanimous consent it be entered into the record. 

Thank you, Commissioner, for being here today. It’s my hope that the committee 

will have a productive debate about how best to guarantee that the kind of bureaucratic bumbling uncovered in our investigation will never recur. 

82 

U.S. Department of Justice 

Office of Legislative Affairs 

Office of the Assistant Attorney General Washington, D.C. 20530 

October 23, 2015 

The Honorable Orrin G. Hatch 

Chairman 

Committee on Finance 

U.S. Senate 

Washington, DC 20510 

The Honorable Ron Wyden 

Ranking Member 

Committee on Finance 

U.S. Senate 

Washington, DC 20510 

Dear Mr. Chairman and Senator Wyden: 

We write to inform you about the Department of Justice’s criminal investigation 

into whether any IRS officials committed crimes in connection with the handling of 

tax-exemption applications filed by Tea Party and ideologically similar organizations. Consistent with statements from the Department of Justice (the Department) 

throughout the investigation, we are pleased to provide additional information regarding this matter now that we have concluded our investigation. In recognition 

of not only our commitment to provide such information in this case, but also the 

committee’s interest in this particular matter, we now provide a short summary of 

our investigative findings. 

In collaboration with the FBI and Treasury Inspector General for Tax Administration (TIGTA), the Department’s Criminal and Civil Rights Divisions conducted an 

exhaustive probe. We conducted more than 100 witness interviews, collected more 

than 1 million pages of IRS documents, analyzed almost 500 tax-exemption applications, examined the role and potential culpability of scores of IRS employees, and 

considered the applicability of civil rights, tax administration, and obstruction statutes. Our investigation uncovered substantial evidence of mismanagement, poor 

judgment, and institutional inertia, leading to the belief by many tax-exempt applicants that the IRS targeted them based on their political viewpoints. But poor management is not a crime. We found no evidence that any IRS official acted based on 

political, discriminatory, corrupt, or other inappropriate motives that would support 

a criminal prosecution. We also found no evidence that any official involved in the 

handling of tax-exempt applications or IRS leadership attempted to obstruct justice. 

Based on the evidence developed in this investigation and the recommendation of 

experienced career prosecutors and supervising attorneys at the Department, we are 

closing our investigation and will not seek any criminal charges. 

The Investigation 

The Department’s probe began in May 2013, following a TIGTA audit report revealing the IRS’s mishandling of tax-exempt applications filed by groups it suspected to be involved in political activity. See TIGTA Audit Report, Inappropriate 

Criteria Were Used to Identify Tax-Exempt Applications for Review, Ref. No. 2013– 

10–053 (May 14, 2013). TIGTA’s audit report revealed that the IRS coordinated the 

review of applicants for tax-exemption under Internal Revenue Code Sections 

501(c)(3) and 501(c)(4), which limit the amount of political activity in which such 

groups can engage. According to the audit report, one way in which the IRS identified groups for coordinated review was through politically focused keywords, such 

as ‘‘Tea Party,’’ ‘‘9/12 Project,’’ and ‘‘Patriots,’’ and the inventory of applications identified for coordinated review was internally referred to as the ‘‘Tea Party cases.’’ 

These applications were subjected to heightened scrutiny, including burdensome and 

unnecessary information requests, which caused significant processing delays. Although TIGTA’s audit report detailed no evidence or allegation of discriminatory intent, its findings were unsettling and prompted the Department of Justice to initiate 

a criminal investigation. Our probe, which was managed by an experienced team of 

83 

career prosecutors and supervising attorneys from the Criminal Division’s Public Integrity Section and Civil Rights Division’s Criminal Section, in partnership with 

seasoned law enforcement agents from the FBI and TIGTA, spanned the better part 

of 2 years. As explained below, our investigation confirmed the TIGTA audit report’s 

core factual findings and examined in detail what motivated the decisions leading 

to the IRS’s handling of these tax-exempt applications. 

At the investigation’s outset, the Department took careful steps to preserve the 

possibility of criminal prosecution in the face of potential Fifth Amendment issues. 

Under the Fifth Amendment, statements obtained from Federal employees under 

threat of termination—a common occurrence in administrative investigations like 

the TIGTA audit—as well as evidence derived from those statements, cannot be 

used against such employees in a criminal prosecution. Garrity v. New Jersey, 385 

U.S. 493, 497–98 (1967); Kastigar v. United States, 406 U.S. 441, 460 (1972). We 

therefore formed two teams—a prosecution team principally responsible for the 

criminal investigation, and a filter team responsible for shielding the prosecution 

team from statements and information that risked contaminating an otherwise viable criminal prosecution. Before the prosecution team was given access to fruits of 

the audit report, the filter team reviewed prior statements by IRS employees to 

TIGTA auditors to assess whether a court might deem them compelled under the 

Fifth Amendment, and evaluated the statements and evidence derived from these 

prior statements to determine whether they could be traced to sources independent 

from any potentially compelled statements. This prophylactic measure was further 

necessitated by IRS leadership’s order to its employees to cooperate in the parallel 

congressional investigation, raising concerns that a court could deem statements 

given to congressional committees to have been compelled. In early October 2013, 

we determined that the filter procedure was no longer necessary and that any potential prosecution supported by the evidence would not be frustrated by a Fifth 

Amendment challenge. 

The prosecution and filter teams conducted over 100 interviews. Top-level IRS officials, including former IRS Commissioner Douglas Shulman, former Acting IRS 

Commissioner Steven Miller, and former Exempt Organizations Director Lois 

Lerner, voluntarily participated in extensive interviews with the prosecution team, 

as did their close advisors and career managers and line-level revenue agents directly involved in processing tax-exempt applications. Some key witnesses were 

interviewed multiple times. No person interviewed during the investigation was 

made promises of non-prosecution in order to obtain their statements. 

Throughout the investigation, not a single IRS employee reported any allegation, 

concern, or suspicion that the handling of tax-exempt applications—or any other 

IRS function—was motivated by political bias, discriminatory intent, or corruption. 

Among these witnesses were several IRS employees who were critical of Ms. 

Lerner’s and other officials’ leadership, as well as others who volunteered to us that 

they are politically conservative. Moreover, both TIGTA and the IRS’s Whistleblower Office confirmed that neither has received internal complaints from IRS employees alleging that officials’ handling of tax-exempt applications was motivated by 

political or other discriminatory bias. 

In addition to conducting interviews, we also collected and reviewed voluminous 

relevant documents. On May 31, 2013, the Department served the IRS with a demand that it preserve all documents potentially material to the investigation, with 

the same obligations and subject to the same potential sanctions that would apply 

had the IRS been served a Federal grand jury subpoena. The IRS produced more 

than 1 million pages of unredacted documents and asserted no privileges against 

disclosure. The Department shared Congress’s frustration with the IRS’s revelation 

in June 2014 that its document collection and preservation process was susceptible 

to potentially catastrophic loss. Specifically, the IRS revealed that its electronic 

backup system for e-mails was vulnerable to the crash of a single employee’s hard 

drive, which could result in the permanent loss of that employee’s e-mail archive. 

Indeed, this is what occurred with respect to Ms. Lerner, whose hard drive crashed 

in June 2011, causing the destruction of her e-mail archives. Our confidence in the 

IRS’s data collection process was further undermined by the 4-month delay in its 

disclosure of this information, as well as TIGTA’s discovery that, in March 2014, 

IRS information technology employees inadvertently destroyed more than 400 electronic backup tapes that may have contained copies of Ms. Lerner’s e-mails. 

Despite these shortcomings, we are confident that we were able to compile a substantially complete set of the pertinent documents. The IRS collected documents 

from more than 80 employees—many more employees than were regularly and diVerDate Mar 15 2010 15:40 Dec 01, 2016 Jkt 000000 PO 00000 Frm 00087 Fmt 6601 Sfmt 6621 R:\DOCS\22724.000 TIMD
84 

rectly involved in the matters under investigation—making exceedingly remote the 

chance that a hard drive crash or other technical failure experienced by any particular employee could cause the permanent loss of any relevant e-mail or other document. Moreover, we did not rely exclusively on the IRS to collect documents. We 

also searched Ms. Lerner’s entire computer and Blackberry, obtained the complete 

e-mail boxes of IRS employees central to the investigation (as opposed to obtaining 

only those e-mails the IRS deemed responsive), and performed office searches of 

some officials. We also obtained documents directly from several witnesses. Our extensive witness interviews revealed no indication of any missing material documents, and no IRS witness reported seeing any documents that have since gone 

missing or are otherwise unaccounted for. Finally, as discussed more below, our investigation revealed no evidence that the IRS’s document collection and retention 

problems, Ms. Lerner’s hard drive crash, or the IRS’s delayed disclosure regarding 

these matters were caused by a deliberate attempt to conceal or destroy information. 

The Department also obtained and reviewed the IRS’s tax-exempt-application files 

for nearly 500 groups that applied for status between 2009 and the release of the 

Audit Report in May 2013, which were subject to the IRS’s coordinated review regarding political activity. According to an analysis by the FBI, nearly 70 percent of 

the applications coordinated for review were submitted by right-leaning groups, including the Tea Party, confirming the TIGTA audit’s finding that such groups were 

disproportionately impacted by the IRS’s coordinated review of applications. We 

identified groups suffering the most significant of the impacts of these procedures 

and obtained interviews with representatives of 11 of them. Some of these interviews were obtained through lawyers, including a firm representing as many as 50 

individual organizations. Although not all of these represented organizations agreed 

to be interviewed, their lawyers either informed us that the information provided 

by organizations whose representatives did agree to be interviewed was sufficient 

to further the Department’s criminal investigation, or provided detailed information 

about their clients’ interactions with the IRS. In addition, we had the benefit of reviewing the detailed complaints filed in civil cases lodged in the District of Columbia 

and Southern District of Ohio, as well as reviewing public testimony from applicants 

who appeared before Congress to describe their interactions with the IRS. 

Investigative Findings 

In order to bring criminal charges, we must have evidence of criminal intent. The 

Department searched exhaustively for evidence that any IRS employee deliberately 

targeted an applicant or group of applicants for scrutiny, delay, denial, or other adverse treatment because of their viewpoint. Intentional viewpoint discrimination 

may violate civil rights statutes, which criminalize acting under color of law to willfully deprive a person of rights protected by the Constitution or Federal law. See 

18 U.S.C. §§ 241, 242. Intentional viewpoint discrimination may also violate criminal 

tax statutes that prohibit IRS employees from committing willful oppression under 

color of law, for example by deliberately failing to perform official duties with the 

intent of defeating the due administration of revenue laws, or by corruptly impeding 

or obstructing the administration of the Tax Code. See 26 U.S.C. §§ 7214(a)(l), 

7214(a)(3), 7212(a). These statutes require proof beyond a reasonable doubt that an 

IRS official specifically intended to violate the Constitution, tax code, or another 

Federal law. 

As applied to this case, a criminal prosecution under any of these statutes would 

require proof that an IRS official intentionally discriminated against an applicant 

based upon viewpoint. It would be insufficient to prove only that IRS employees 

used inappropriate criteria to coordinate the review of applications, acted in ways 

that resulted in the delay of the processing applications, or disproportionately subjected some applicants to burdensome or unnecessary questions. Instead, we would 

have to prove that such actions were undertaken for the very purpose of harassing 

or harming applicants. Proof that an IRS employee acted in good faith would be a 

complete defense to a criminal charge; and proof that an IRS employee acted because of mistake, bad judgment, ignorance, inertia, or even negligence would be insufficient to support a criminal charge. 

Our investigation found no evidence that any IRS employee acted with criminal 

intent. We analyzed the culpability of every IRS employee who played a role in coordinating for review applications or handling them afterwards, from line-level revenue agents and managers in the Cincinnati-based Determinations Unit, to tax law 

specialists and senior executive officials based in Washington, DC. Apart from the 

belief by many tax-exempt applicants affiliated with the Tea Party and similar 

ideologies that they had been targeted, we found no evidence that any IRS employee 

85 

intentionally discriminated against these groups based upon their viewpoints. To 

the contrary, the evidence indicates that the decisions made by IRS employees, 

though misdirected, were motivated by the desire to treat similar applications consistently and avoid making incorrect decisions. Their plans to treat applications consistently were poorly implemented, due to a combination of ignorance about how to 

apply section 501(c)(4)’s requirements to organizations engaged in political activity, 

lack of guidance from subject matter experts about how to make decisions in an 

area most witnesses described as difficult, and repeated communication and management issues. Moreover, many employees failed to engage in critical thought 

about the effect their actions (or inactions) would have upon those who applied for 

tax-exempt status. We found that many IRS employees’ failure to give adequate attention to the applications at issue was caused by competing demands on their time 

and an unwillingness to be held accountable for difficult decisions over sensitive 

matters. We did not, however, uncover any evidence that any of these employees 

were motivated by intentional viewpoint discrimination. 

As noted above, no IRS employee we interviewed, from those directly involved in 

decision making to those who were primarily witnesses to the conduct of others, reported having any information suggesting that any action taken by any person in 

the IRS was done for the purpose of harming or harassing applicants affiliated with 

the Tea Party or similar groups. These witness accounts are fully supported by contemporaneous internal IRS documents, which do not suggest that there was a partisan political motive for any of the decisions made during the handling of the applications. Moreover, any inference of specific intent that might be drawn from the 

length of the delay in processing applications, the burdensomeness of the information requests, or the fact that Tea Party and ideologically similar organizations were 

disproportionately affected by the IRS’s coordination efforts, is contradicted by witnesses’ explanations of why IRS employees made the decisions that they did, all of 

which—even if misguided—are inconsistent with criminal intent. 

Importantly, our investigation revealed that this was not the first time that the 

IRS had used inept labels in organizing their review of applications. Prior to the 

IRS procedures that were the subject of our investigation, the IRS had historically 

coordinated review of applications based on the applicant’s name and affiliations, including using keywords such as ‘‘progressive’’ and ‘‘ACORN.’’ This historical practice 

creates a substantial barrier to establishing criminal intent, and bolsters the conclusion that IRS employees did not believe that coordinating for review applications 

using words like ‘‘Tea Party’’ could potentially violate the Constitution or the tax 

code, or that this method of coordinating applications for review was discriminatory 

or otherwise inappropriate. Moreover, the decision to coordinate the review of applications and the discussions about how to handle them were conducted openly across 

multiple IRS components and among many different employees with a range of political views, including some who voluntarily identified themselves in interviews as 

conservative or Republican. Such open discussion of planned actions is inconsistent 

with criminal intent. 

The evidence that we developed demonstrated a disconnect between employees in 

Cincinnati, who were principally responsible for identifying the applications for review and crafting the burdensome information requests, and employees in Washington, DC, who were principally responsible for the delay and failure to provide 

guidance on how to handle the application backlog despite repeated requests that 

they do so from revenue agents and their supervisors in Cincinnati. As a result, no 

one person (or group of people) was responsible for the chain of events that resulted 

in the manner in which applications were ultimately coordinated for review and 

then delayed. Instead, we found overwhelming evidence that the ill-advised selection 

criteria, burdensome information requests, and application delays were the product 

of discrete mistakes by line-level revenue agents, technical specialists, and their immediate supervisors, and that those mistakes were exacerbated by oversight and 

leadership lapses by senior managers and senior executive officials in Washington, 

DC. We developed no evidence that the decisions IRS employees made about how 

to handle applications, either in Cincinnati or Washington, were motivated by discriminatory intent or other corrupt motive. 

The one official who, by virtue of her role as Director of the IRS’s Exempt Organizations Division, arguably had the most oversight responsibility for all tax-exempt 

applications, was Ms. Lerner. Due to her position, and because the U.S. House of 

Representatives Ways and Means Committee referred civil rights allegations 

against her to the Department on April 9, 2014, we took special care to evaluate 

whether Ms. Lerner had criminal culpability. The need for scrutiny of Ms. Lerner 

in particular was heightened by the discovery and publication of e-mails from her 

86 

1TIGTA has developed evidence that, in June 2015, GS Grade 4 employees and their supervisor working at the IRS’s Enterprise Computing Center may have made misleading statements 

to TIGTA about the manner in which electronic server hard drives were inventoried. There is 

no evidence suggesting that the employees were involved in the handling of tax-exempt applications, intended to conceal information about the IRS’s handling of tax-exempt applications, or 

that they acted at the behest of any of the IRS employees involved in the handling of tax-exempt 

applications. Rather, the evidence suggests that the employees failed to inventory the server 

hard drives properly and later sought to avoid being held accountable for that failure. The 

Criminal Division’s Public Integrity Section and the Civil Rights Division’s Criminal Section determined that the possibly misleading statements had no adverse impact on the Department’s 

criminal investigation of the handling of tax-exempt applications. TIGTA has informed the Department that it intends to refer this matter to a U.S. Attorney’s Office. 

official IRS account that expressed her personal political views and, in one case, hostility towards conservative radio personalities. We therefore specifically considered 

whether Ms. Lerner’s personal political views influenced her decisions, leadership, 

action, or failure to take action with respect to tax-exempt applications or any other 

matter. We found no such evidence. 

Our conclusion regarding Ms. Lerner is supported by several factors. First, not a 

single IRS employee that we interviewed, some of whom were critical of Ms. 

Lerner’s leadership and general management style, and some of whom volunteered 

that they consider themselves politically conservative, witnessed, alleged, or suspected that Ms. Lerner acted with a political, discriminatory, corrupt, or other inappropriate purpose. 

Second, our investigation revealed that when Ms. Lerner became fully aware of 

and focused on the Cincinnati-based Determinations Unit’s use of inappropriate criteria, she recognized that it was wrong, ordered that it stop immediately, and instructed subordinates to take corrective action. In fact, Ms. Lerner was the first IRS 

official to recognize the magnitude of the problem and to take concerted steps to fix 

it. To the extent that Ms. Lerner mishandled the oversight of how these tax-exempt 

applications were processed, it resulted from her failure to digest materials available to her from which she could have identified the problem sooner, and her delegation of corrective action to subordinates whom she did not adequately supervise to 

assure that her directions were implemented sufficiently. 

Third, although Ms. Lerner exercised poor judgment in using her IRS e-mail account to exchange personal messages that reflected her political views, we cannot 

show that these messages related to her official duties and actions with respect to 

the handling of these tax-exempt applications. In fact, we uncovered no e-mail or 

other communication showing that Ms. Lerner exercised her decision-making authority in a partisan manner generally, or in the handling of tax-exempt applications specifically, and no witness we interviewed interpreted any e-mail or other 

communication they exchanged with Ms. Lerner in such a manner. 

Finally, our investigation uncovered no evidence that Ms. Lerner intentionally 

caused her hard drive to crash or that she otherwise endeavored to conceal documents or information from IRS colleagues or this investigation. Moreover, it bears 

noting that Ms. Lerner cooperated fully with our investigation, voluntarily sitting 

for approximately 12 hours of interviews with no promise of immunity, producing 

e-mails and documents upon request, and disclosing passwords to her IRS Blackberry to assist in searching its contents. 

We also carefully considered whether any IRS official attempted to obstruct justice with respect to their reporting function to Congress, the collection and production of documents demanded by the Department and Congress, the delayed disclosure of the consequences of Ms. Lerner’s hard drive crash, or the March 2014 erasure of electronic backup tapes. See, e.g., 18 U.S.C. §§ 1503, 1512, 1515, 1519. At 

a minimum, these statutes would require us to prove a deliberate attempt to conceal 

or destroy information in order to improperly influence a criminal or congressional 

investigation. We uncovered no evidence of such an intent by any official involved 

in the handling of tax-exempt applications or the IRS’s response to investigations 

of its conduct.1 Although the IRS’s decision to delay the disclosure of the consequences of Ms. Lerner’s hard drive crash for more than 4 months undermined confidence in its judgment, it was not criminal. The evidence shows that IRS attorneys 

and officials spent that time exercising due diligence to determine what had occurred, mitigating heavily against criminal intent. Similarly, the evidence shows 

that IRS officials in Washington were unaware of the March 2014 erasure of electronic backup tapes until it was brought to their attention by TIGTA in June 2015. 

Although those backup tapes should have been protected from erasure due to the 

87 

Department’s preservation demand, there is no evidence that any IRS employee intended to conceal the backup tapes from our investigation or realized that erasing 

them might violate the preservation demand. There is no basis for any obstruction 

of justice charge arising from the IRS’s data collection and preservation protocol. 

Conclusion 

The IRS mishandled the processing of tax-exempt applications in a manner that 

disproportionately impacted applicants affiliated with the Tea Party and similar 

groups, leaving the appearance that the IRS’s conduct was motivated by political, 

discriminatory, corrupt, or other inappropriate motive. However, ineffective management is not a crime. The Department of Justice’s exhaustive probe revealed no evidence that would support a criminal prosecution. What occurred is disquieting and 

may necessitate corrective action—but it does not warrant criminal prosecution. 

We hope this information is helpful. We have made a substantial effort to provide 

detailed information regarding our findings in this letter, and would be pleased to 

offer a briefing to address any questions you may have on this matter. Please do 

not hesitate to contact this office if we may provide additional assistance regarding 

this or any other matter. 

Sincerely, 

Peter J. Kadzik 

Assistant Attorney General 

(89) 

1 Letter from Peter J . Kadzik (Assistant Attorney General) to Rep. Bob Goodlatte and Rep. 

John Conyers (Oct. 23, 2015), available at 

http://online.wsj.com/public/resources/documents/IRS1023.pdf. 

COMMUNICATION

COMMON CAUSE

Holding Power Accountable 

1133 19th St., NW., Suite 900 

Washington, DC 20036 

United States Senate 

Committee on Finance 

Statement for the Record 

Stephen Spaulding 

Senior Policy Counsel and Legal Director 

For the Hearing 

‘‘The Internal Revenue Service’s Response to Committee Recommendations 

Contained in Its August 5, 2015 Report’’ 

October 27, 2015 

Chairman Hatch and Ranking Member Wyden, thank you for the opportunity to 

submit this statement for the record. 

Last week, the Department of Justice concluded its investigation in connection 

with the handling of tax-exempt applications filed by new social welfare organizations and ‘‘found no evidence that any IRS official acted based on political, discriminatory, corrupt, or other inappropriate motives.’’ 1

Instead, as this testimony explains, we believe much of this controversy erupted 

because of vague IRS rules governing political activities of tax exempt entities under 

Section 501(c) of the Internal Revenue Code—and in particular, social welfare organizations. Their lack of clarity, coupled with a substantial increase in tax-exempt 

organization applications post-Citizens United, hobbled compliance and enforcement. 

To be clear: it was wrong for the IRS to subject some ‘‘social welfare’’ nonprofit 

applications to extra scrutiny based solely on their names and identified interests. 

In keeping with the findings of this Committee’s bipartisan report, the agency 

should take action to ensure these mistakes are not repeated. 

Specifically, the IRS and Treasury Department should write new rules 

that are consistent with the Internal Revenue Code, clarify what constitutes political activity under the tax laws, and clearly state that social 

welfare organizations can spend no more than an insubstantial amount of 

their resources on political activity. 

The real scandal—hundreds of millions of secret dollars in our elections funneled 

through a handful of social welfare organizations—stems from a powerful combination of at least four factors: (1) a lack of bright line standards about what constitutes partisan political activity, including how much political activity social welfare organizations may engage in, and how to measure it; (2) the brazen willingness 

of political consultants to exploit and manipulate the rules governing social welfare 

organizations by operating them as de facto political committees; (3) an underVerDate Mar 15 2010 15:40 Dec 01, 2016 Jkt 000000 PO 00000 Frm 00093 Fmt 6601 Sfmt 6621 R:\DOCS\22724.000 TIMD
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2 551 U.S. 449 (2007). 

3 558 U.S. 310 (2010). 

4 599 F.3d 686 (2010); Richard L. Hasen, The Numbers Don’t Lie, SLATE, Mar. 9, 2012, http:// 

www.slate.com/articles/news_and_politics/politics/2012/03/the_supreme_court_s_citizens_ united_decision_has_led_to_an_explosion_of_campaign_spending_.html (last accessed Oct. 26, 

2015). 5 Center for Responsive Politics, Outside Spending by Cycle, http:/www.opensecrets.org/ 

outsidespending/index.php (last accessed Oct. 26, 20 15). 6 Center for Responsive Politics, Outside Spending by Disclosure, Excluding Party Committees, http://www.opensecrets.org/outsidespending/disclosure.php (last accessed Oct. 26, 2015); 

Center for Responsive Politics, 501(c) Spending, Cycle Totals, by Type, http:// 

www.opensecrets.org/outsidespending/nonprof_summ.php (last accessed Oct. 26, 2015). 

resourced agency that has thus far failed to do its job to hold the largest offenders 

accountable; and (4) champions of gridlock who have blocked Congress from considering comprehensive disclosure legislation in the wake of Citizens United. 

If the IRS fails to move forward in its rulemaking as discussed above, major political groups will continue to masquerade improperly as social welfare nonprofits 

under Section 501(c)(4)—solely to keep political spenders anonymous. This deprives 

the American people of the information they need about who is trying to influence 

their votes, and to whom their elected officials may owe a debt of gratitude after 

Election Day. 

Up to and including the 2006 election cycle, social welfare groups spent little on 

partisan political activity. Then, a series of court decisions dramatically changed the 

status quo. First, the Supreme Court’s 2007 decision in FEC v. Wisconsin Right to 

Life lifted prohibitions on corporate spending for election-related communications 

except for express advocacy and its functional equivalent.2 That led to a sharp increase in spending on electioneering communications by nonprofit groups that do 

not disclose their donors. A far larger increase came after the Supreme Court’s 2010 

decision in Citizens United struck down all prohibitions on corporate election-related 

independent, outside spending.3 Combined with the D.C. Circuit’s opinion in 

SpeechNow.org v. FEC, these decisions led to an explosion in outside election spending.4 It topped $1 billion in the 2012 elections and over $500 million in the 2014 

midterms.5

With this increased spending came increased secrecy about who is financing these 

political expenditures and, consequently, a less-informed electorate. Approximately 

one-third of the outside money in the 2012 and 2014 federal elections came from 

secret sources, to the tune of $481 million, of which spending by social welfare nonprofits accounted for approximately $375 million.6 These numbers, though staggering, underestimate the total spent by these organizations to influence campaigns, 

because they only include the money spent on federal, and not state, elections. The 

amounts also exclude money that funds communications that fall short of express 

advocacy outside of the electioneering communications windows but are clearly intended to influence elections. 


102715.004
91 

7TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION, INAPPROPRIATE CRITERIA WERE

USED TO IDENTIFY TAX-EXEMPT APPLICATIONS FOR REVIEW 3 (2013). 8 26 U.S.C. § 501(c)(4). 

9Treas. Reg. § 1.501(c)(4)–(1)(a)(2)(ii). 

10Treas. Reg. § 1.501(c)(4)–(1)(a)(2)(i). 11 IRS, CHARTING A PATH FORWARD AT THE IRS: INITIAL ASSESSMENT AND PLAN OF ACTION

25 (2013). 12 Id. at 22. 13See Letter from J. Gerald Hebert, Executive Director, Campaign Legal Center and Fred 

Wertheimer, President, Democracy 21 to the IRS, September 28, 2011, available at http:// 

www.democracy21.org/wp-content/uploads/2014/05/9-28-2011-Letter_to_the_IRS_from_Demo 

cracy_21_and_Campaign_Legal_Center.pdf. 14 Robert Maguire, ‘‘Political Nonprofit Spent Nearly 100 Percent of Funds to Elect Tillis in 

2014,’’ CENTER FOR RESPONSIVE POLITICS, https://www.opensecrets.org./news/2015/10/political-nonprofit-spent-nearly-100-percent-of-funds-to-elect-tillis-in-14/ (last accessed Oct. 24, 2015). 15Democracy 21 and the Campaign Legal Center have sent at least 11 letters to the IRS, thoroughly documenting the extent of Crossroads GPS’s campaign activity and its legal argument 

for why the IRS should deny Crossroads GPS’s social welfare status and assess penalties for 

any violations of the law. They sent letters on May 6, 2014; January 2, 2013; September 27, 

2012; July 23, 2012; May 24, 2012; April 17, 2012; March 22, 2012; March 9, 2012; December 

14, 2011; September 28, 2011; and October 5, 2010 which will be provided to the Committee 

as an appendix. 

As election-related spending by social welfare organizations soared after Citizens 

United and SpeechNow.org, so did the number of applications from groups seeking 

501(c)(4) tax-exempt status. They nearly doubled between 2010 and 2012, from 

1,735 in 2010 to 3,357 in 2012.7 Although social welfare organizations may selfdeclare without submitting a formal application to the IRS, the optional approval 

process provides them with more certainty that their operations will not jeopardize 

their tax-exempt status. 

Congress never intended for social welfare organizations to exist as conduits for 

secret political spending. In exchange for their tax exemption, the law requires these 

nonprofits to engage ‘‘exclusively’’ in the promotion of social welfare.8 The IRS has 

said social welfare activities do not include political campaign intervention.9 IRS 

regulations muddied the waters with a primary purpose analysis that is inconsistent with the exclusivity requirement of the Internal Revenue Code.10

Today, no bright line IRS standard exists as to how much and by what measure 

the IRS should evaluate a social welfare organization’s furtherance of its primary 

purpose. As the IRS has explained, ‘‘no precise definition exists in relevant revenue 

rulings, cases or regulations’’ to decide if an organization is ‘‘ ‘primarily’ engaged in 

social welfare activities.’’ 11 This may ‘‘often requir[e] a sophisticated legal and complex factual review to evaluate the application.’’ 12 We are left with a vague ‘‘facts 

and circumstances’’ test that invites inconsistent enforcement of the law. Even when 

applied properly, some political groups are out of compliance with the existing 

flawed regulations. 

In the wake of Citizens United, this discrepancy—coupled with a lack of enforcement—has paved the way for several high-profile partisan political organizations on 

the right and left to pose as social welfare organizations and spend tens of millions 

of dollars from undisclosed sources on elections. Ultimately, it is the secrecy that 

social welfare nonprofits provide to donors that makes them attractive vehicles for 

political spending, and all the more reason why Americans expect the IRS to do its 

job and enforce the law. 

Citing their campaign spending and public reports about their operations, some 

campaign finance reform advocates have urged the IRS to investigate groups on the 

left like Priorities USA and on the right like Crossroads GPS to gauge whether they 

are in fact organizations that exist primarily to influence candidate election outcomes.13

Just last week, the Center for Responsive Politics released a report showing how 

one purported social welfare organization—‘‘Carolina Rising’’—spent 97 percent of 

the almost $5 million it raised in 2014 in support of a single victorious Senate candidate.14

As of today, the IRS has done little to hold the most flagrant violators accountable, despite reams of evidence that their overriding purpose appears to be to provide anonymity for donors eager to spend unlimited amounts of money supporting 

and attacking candidates for public office.15

This troubling trend shows no sign of stopping in 2016. According to the New York 

Times, supporters of former Secretary of State Hillary Rodham Clinton are considVerDate Mar 15 2010 15:40 Dec 01, 2016 Jkt 000000 PO 00000 Frm 00095 Fmt 6601 Sfmt 6621 R:\DOCS\22724.000 TIMD
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16 Eric Lichtblau, ‘‘IRS Expected to Stand Aside as Nonprofits Increase Role in 2016 Race,’’ 

N.Y. TIMES, July 5, 2015, available at http://www.nytimes.com/2015/07/06/us/politics/irs-expected-to-stand-aside-as-nonprofits-increase-role-in-2016-race.html. 17See id. 18See Letter from Fred Wertheimer, President, Democracy 21 and Trevor Potter, President, 

Campaign Legal Center to Senators, Nov. 14, 2013, available at http://www.democracy21.org/ 

wp-content/uploads/2013/11/LETTER-TO-HSE-AND-SENATE-ON-COURTS-REJECTINGCHALLENGES-TO-DISCLOSURE-FINAL-11-1-3-13.pdf. 19 Citizens United, 558 U.S. at 371. 20 Id. at 367. 21Guidance for Tax-Exempt Social Welfare Organizations on Candidate-Related Political Activities, 78 Fed. Reg. 71535 (proposed Nov. 29, 2013) (to be codified at 26 CFR pt. 1). 22TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION, INAPPROPRIATE CRITERIA WERE

USED TO IDENTIFY TAX-EXEMPT APPLICATIONS FOR REVIEW 17 (2013). 23 Id. 

ering activating a 501(c)(4) to support her run for the White House.16 On the Republican side, most of the candidates ‘‘have aligned with nonprofit groups to raise hundreds of millions of dollars,’’ including at least one that has already planned a $1 

million advertising campaign in support of one of the individuals running for the 

nomination.17

Voters deserve to know who is attempting to influence their votes and who is 

speaking to them. Disclosure allows them to evaluate the strength, content, and 

agenda of political messages, and is an important tool to hold representatives accountable to their interests instead of those of financial backers. That is why courts 

have repeatedly upheld disclosure requirements.18

Specifically, the Supreme Court ruled 8–1 in Citizens United that disclosure by 

outside spending groups ‘‘permits citizens and shareholders to react to the speech 

of corporate entities in a proper way. This transparency [in political spending] enables the electorate to make informed decisions and give proper weight to different 

speakers and messages.’’ 19 Citizens United reaffirmed prior campaign finance cases 

that upheld disclosure requirements, citing ‘‘evidence in the record that independent 

groups were running election-related advertisements ‘while hiding behind dubious 

and misleading names.’ ’’ 20

Consistent with this important First Amendment value—an informed electorate— 

the law requires Super PACs and other Section 527 organizations to disclose their 

donors when they spend money to influence elections. Political operatives should 

not circumvent the constitutionally sound bed rock policy of disclosure by 

exploiting inconsistent enforcement and vague regulations governing organizations that Congress never anticipated would engage in election-related 

spending. 

Impartial and consistent enforcement of the law governing nonprofit political 

spending is squarely within the IRS’s mandate and authority. The IRS and Treasury Department took the important step in 2013 of issuing a notice of proposed rulemaking, recognizing that both the public and the government ‘‘would benefit from 

clearer definitions’’ of campaign-related political activity.21 This action was in keeping with one of the recommendations in the Treasury Inspector General for Tax Administration’s (TIGTA) report on the IRS’s use of in appropriate criteria to select 

social welfare applications for review.22 Importantly, TIGTA recommended that 

‘‘guidance on how to measure the ‘primary activity’ of . . . 501(c)(4) social welfare 

organizations be included for consideration in the Department of the Treasury Priority Guidance Plan.’’ 23

The IRS and Treasury Department’s notice of proposed rulemaking was a critical 

first step to solve the problem and protect the integrity of our tax laws. Still, the 

proposal had significant flaws. Common Cause—along with over 27,000 of our members who have signed our petition—continue to urge the IRS to release a second proposed rule for comment. We are filing over 5,000 more comments from Common 

Cause members this week, urging a new rule consistent with the policy outlined in 

this statement for the record. 

It is essential that the next proposed rule establish a low limit on the amount 

of campaign activity a group can engage in consistent with the Internal Revenue 

Code. In keeping with court precedent, new commonsense regulations should allow 

an insubstantial amount of activity that is unrelated to a 501(c)(4)’s social welfare 

purpose without jeopardizing the organization’s tax-exempt status. Such a rule 

would permit a small amount of candidate-related political activity, so long as it is 

not more than an insubstantial part of its activities. 

93 

24 Senate Rep. No 93–1357, 93rd Cong. 2d Sess. (Dec. 16, 1974), reprinted in 1974–1 Cum. 

Bull. 517, 534; Miriam Galston, Vision Service Plan v. U.S.: Implications for Campaign Activities 

of 501(c)(4)s, 53 EXEMPT ORGANIZATION TAX REVIEW 165 (2006). 25 Brandon DeBot and Chuck Marr, Poor IRS Service Reflects Congress’s Deep Funding Cuts 

(June 1, 2015), Center for Budget and Policy Priorities, available at http://www.cbpp.org/sites/ 

default/files/atoms/files/6-1-15tax.pdf. 26Press release, Senate Committee Agrees to FY2016 Financial Services Appropriations Bill, 

July 23, 20 15, available at http://www.appropriations.senate.gov/news/majority/senate-committee-agrees-to-fy2016-financial-services-appropriations-bill. 

To influence elections, an organization could establish a Section 527 organization, 

which requires disclosure, for all other election-related expenditures. This appears 

to be what the Senate expected when it enacted Section 527 in the first place.24

We recognize that the IRS funding levels have fallen steadily from $13.4 billion 

in 2010 to $10.9 billion in 2015—a one-fifth reduction in funding, adjusting for inflation.25 This hobbles meaningful action and forces the IRS to rethink its priorities. 

Senate appropriators proposed another cut in the FY16 Financial Services appropriations bill, reducing the IRS’s funding another $470 million, to $10.4 billion.26

The IRS should not use these budgetary constraints to justify a green light for continued misuse of social welfare organizations. 

Of course, Congress could enact a more robust disclosure regime to respond to the 

new landscape post-Citizens United. Senators, including the ranking member of this 

Committee, have introduced bills that would stem the tide, including the DISCLOSE Act (S. 229) and the Follow the Money Act (S. 791 (113th Cong.)). The DISCLOSE Act has been subjected to repeated filibusters in past years and has not had 

as much as a hearing during this Congress, unfortunately. Still, as discussed above, 

the IRS should enforce the law as written and enact regulations consistent with the 

exclusivity requirements of the Internal Revenue Code and later case law. 

The use of inappropriate criteria to single out some social welfare applicants for 

scrutiny does not justify an abrogation of the agency’s duty to enforce the law fairly 

and impartially in the first place. The IRS should hold political groups on the right 

and the left accountable if they misappropriate the privileges of the social welfare 

organization’s structure. The IRS should bring its regulations in line with the Internal Revenue Code, while watchdogging blatant efforts to violate even the flawed 

rules. 

Thank you, Mr. Chairman, for the opportunity to submit this statement. 

Æ