A Closer Look at the IRS’s Targeting of Tea Party and Other Groups for Review

By James A. Beavers, J.D., LL.M., CPA, CGMA

Procedure & Administration

In a report issued on May 14, the Treasury Inspector General for Tax Administration (TIGTA) found that the IRS used inappropriate criteria that identified for review applications for tax-exempt status from tea party and other organizations based upon their names or policy positions instead of focusing on the activities of the organizations and whether they met the requirements under the law for tax-exempt status.


Organizations that the IRS grants tax-exempt status are subject to strict rules regarding political activities. Sec. 501(c)(3) charitable organizations are prohibited from directly or indirectly participating in or intervening in any political campaign on behalf of or in opposition to any candidate for public office (political campaign intervention). However, Sec. 501(c)(4) social welfare organizations, Sec. 501(c)(5) agricultural and labor organizations, and Sec. 501(c)(6) business leagues may engage in limited political campaign intervention. In recent years, a great deal of controversy has surrounded Sec. 501(c)(4) organizations, due to their use by groups of all political persuasions to engage in political activity that many think is inappropriate for tax-exempt organizations.

Application for Tax-Exempt Status

Organizations seeking federal tax exemption are required to file an application with the IRS. The IRS’s Exempt Organizations (EO) function, Rulings and Agreements office, which is based in Washington, D.C., is responsible for processing applications for tax exemption. Within the Rulings and Agreements office, the Determinations Unit in Cincinnati is responsible for reviewing applications as the IRS receives them to determine whether an organization qualifies for tax-exempt status.

Organizations requesting tax-exempt status generally must submit either a Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, or Form 1024, Application for Recognition of Exemption Under Section 501(a), depending on the type of tax-exempt organization it desires to be. Most (in 2012, 70%) of the applications are approved without an initial review and with little or no additional information other than that asked for in the appropriate application.

If substantial additional information is needed, the application is referred to a specialist in the Determinations Unit. After a specialist in the unit collects the additional information, the application is approved or denied, and a final determination letter is sent to the organization. If the specialist needs technical assistance in processing an application, he or she requests assistance from the Technical Unit in the Rulings and Agreements office.

The IRS’s goal for processing all types of applications for tax-exempt status was 121 days in fiscal year 2012; however, some cases take substantially longer. For example, the EO function stated in its Fiscal Year 2013 Work Plan that applications requiring additional information are not assigned for review until an average of five months after the IRS receives them.

TIGTA Undertakes Audit

During the 2012 election cycle, some members of Congress raised concerns to the IRS about selective enforcement and the duty to treat similarly situated organizations consistently with respect to applications for tax-exempt status. In addition, several organizations applying for Sec. 501(c)(4) tax-exempt status made allegations that the IRS (1) targeted specific groups applying for tax-exempt status, (2) delayed the processing of targeted groups’ applications for tax-exempt status, and (3) requested unnecessary information from targeted organizations. In its audit report, TIGTA stated that it initiated the audit based on concerns expressed by Congress and reported in the media regarding the IRS’s treatment of organizations applying for tax-exempt status.

Targeting of Specific Groups’ Applications for Additional Review

TIGTA found that during its audit period, the Determinations Unit developed and began using criteria to identify cases for review that inappropriately identified specific groups applying for tax-exempt status based on their names or policy positions instead of developing criteria based on the Code and regulations. This led to the cases being labeled “potential political cases” and being sent to a specific team of specialists for review. The identification criteria were contained in a spreadsheet known as the “Be On the Look Out” list (BOLO list) used by the Determinations Unit. With regard to names, the BOLO list called for additional review of all organizations with the words “tea party,” “patriot,” or “9/12 project” in their names. With regard to policy positions, the BOLO list called for applications that indicated that a group was interested in certain issues, such as government spending, government debt, or taxes, to also be flagged automatically for additional review.

During the audit, to rebut the perception of political bias the BOLO list raised, the IRS pointed out to TIGTA that the team of specialists dedicated to potential political cases also worked applications that did not involve these criteria. However, TIGTA found, based on its review, that all Sec. 501(c)(4) tax-exempt applications with tea party, patriot, or 9/12 in their names were forwarded to the potential political cases team.

TIGTA also tested to see if all applications for organizations that had indicators that the organization might engage in significant political campaign intervention were identified for review by the potential political cases team and if cases that did not have indications of significant political campaign intervention were sent to the team. TIGTA found that a significant percentage of cases that should have been sent to the team were not and that an even greater percentage of cases that were sent to the team should not have been sent to it.

Extreme Delays in Processing

During its audit period, TIGTA found that organizations that applied for tax-exempt status and had their applications forwarded to the potential political cases team experienced substantial delays. As of Dec. 17, 2012, many organizations had not received an approval or denial letter more than two years after they submitted their applications, and some cases had been open during two election cycles (2010 and 2012).

In particular, TIGTA found that the cases initially sent to the team were delayed up to 13 months due to the inability of the Technical Unit to promptly reply to a request for assistance. After the potential political cases team began processing the cases, it requested assistance from the Technical Unit in October 2010. Instead of continuing to process the cases while it awaited this assistance, in what the EO claimed was an error due to miscommunication, the potential political cases team stopped processing them. On the other side, despite several follow-ups from the team about the request for assistance, the Technical Unit was unable to provide draft guidance until November 2011.

Also exacerbating the problem was confusion among the specialists in the potential political case team about what was an organization’s primary purpose for Sec. 501(c)(4) purposes and what activities a Sec. 501(c)(4) organization can engage in. The IRS finally responded to this problem in May 2012 by providing a workshop for the specialists. This resulted in a great increase in applications being reviewed and approved, but on Dec. 17, 2012, the average open potential political case had been open 574 days (with 158 potential political cases being open longer than the average calendar days it took to close other full development cases), while the average time to complete an application for tax-exempt status that required additional information was 238 days.

Unnecessary Information Requests

TIGTA further found that the Determinations Unit sent requests for information that it in whole or in part determined were unnecessary for 98 of 170 organizations (58%) that received additional information request letters. TIGTA stated that the Determinations Unit requested irrelevant (unnecessary) information because of a lack of managerial review, at all levels, of questions before they were sent to organizations seeking tax-exempt status and that Determinations Unit specialists lacked knowledge of what activities are allowed by Sec. 501(c)(3) and Sec. 501(c)(4) tax-exempt organizations.

According to TIGTA, this created a burden on the organizations that were required to gather and forward information that was not needed by the Determinations Unit and led to delays in processing the applications. These delays could result in potential donors and grantors being reluctant to provide donations or grants to organizations applying for Sec. 501(c)(3) tax-exempt status. In addition, some organizations may not have begun conducting planned charitable or social welfare work.

TIGTA’s Recommendations and the IRS’s Responses

TIGTA made the following recommendations based on its audit, which the IRS agreed to implement:

1. Formalize in the Internal Revenue Manual the rule that the director of the Rulings and Agreements office must approve all original entries and changes to criteria included on the BOLO list.

2. Develop training or workshops to be held before each election cycle on topics including, but not limited to, the proper ways to identify applications that require review of political campaign intervention activities.

3. Develop a process for the Determinations Unit to formally request assistance from the Technical Unit and the Guidance Unit, including actions to initiate, track, and monitor requests for assistance to ensure that requests are responded to timely.

4. Develop training or workshops to be held before each election cycle on topics including, but not limited to, (a) what constitutes political campaign intervention versus general advocacy (including case examples) and (b) the ability to refer for follow-up those organizations that may conduct activities in a future year that may cause them to lose their tax-exempt status.

5. Provide oversight to ensure that current potential political cases are approved or denied expeditiously.

6. Consider including guidance on how to measure the “primary activity” of Sec. 501(c)(4) social welfare organizations in the Priority Guidance Plan.

7. Develop training or workshops to be held before each election cycle on topics including, but not limited to, how to word questions in additional information request letters and what additional information should be requested.

TIGTA also made two recommendations to which the IRS responded with proposals of alternative corrective actions:

1. Develop procedures to better document the reason(s) applications are chosen for review by the team of specialists. The IRS stated in response it would review its screening procedures to determine whether, and to what extent, additional documentation can be implemented without having an adverse impact on the timeliness of case processing. TIGTA stated that the IRS’s proposed action did not fully address its recommendation, because developing better review procedures would help ensure that applications are being handled impartially, and that adding a brief explanation of why applications are chosen for review would not have an adverse impact on the timeliness of case processing.

2. Develop guidance for special ists on how to process requests for tax-exempt status involving potentially significant political campaign intervention and post it on the internet to provide transparency to organizations on the application process. The IRS stated that it would develop training on this topic. TIGTA again replied that this proposed action would not fully address its recommendation. It stated that it believed specific guidance should be made available to specialists processing cases and that making this guidance available to organizations over the internet could address the IRS’s concern that many applications have incomplete or inconsistent information.


This report is another black eye for the IRS. The IRS has always assured taxpayers that they could count on the IRS to be impartial; its mission statement says that it will “enforce the law with integrity and fairness to all.” However, it is clear that in this case, for whatever reasons, the IRS failed to live up to this standard. The IRS’s mission statement also expresses the agency’s commitment to providing “top quality service,” but the EO function staff and management showed a total lack of care for promptly processing tax-exempt status applications.

As this item was going to press, Acting IRS Commissioner Steven Miller had stepped down as a result of the uproar this controversy has caused, congressional committees had held hearings to try to determine who was responsible, and the Justice Department had opened a criminal investigation. Still, IRS officials have attempted to portray this situation as an isolated and now corrected error. It will likely take years for the IRS to repair this latest damage it has caused to its reputation and shake off the renewed perception that, at best, the IRS is mismanaged and, at worst, that it cannot be trusted to deal with all taxpayers fairly and impartially.

TIGTA Audit Report No. 2013-10-053 (5/14/13)


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