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TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION    Inappropriate Criteria Were Used  Identify Tax-Exempt Applications for Review    May 14, 2013  Reference Number:  2013-10-053                   This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined restricted from public release has been redacted from this document.   Redaction Legend: Tax Return/Return InformationPhone Number  202-622-6500 E-mail Address  TIGTACommunications@tigta.treas.gov Website  http://www.treasury.gov/tigta 
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HIGHLIGHTS 
 INAPPROPRIATE CRITERIA WERE  intervention was started soon after receipt, USED IDENTIFY TAX-EXEMPT work was completed the majority these APPLICATIONS FOR REVIEW applications for months.  This was due delays receiving assistance from the Exempt Highlights Organizations function Headquarters office.   For the 296 total political campaign intervention applications TIGTA reviewed December 17, 2012, 108 had been approved, Final Report issued May 14, 2013 were withdrawn the applicant, none had been denied, and 160 were open from 206 Highlights Reference Number:  2013-10-053 1,138 calendar days (some for more than the Internal Revenue Service Acting three years and crossing two election cycles). Commissioner, Tax Exempt and Government Entities Division. More than months after the initial case was identified, processing the cases began IMPACT TAXPAYERS earnest.  Many organizations received requests Early Calendar Year 2010, the IRS began for additional information from the IRS that using inappropriate criteria identify included unnecessary, burdensome questions organizations applying for tax-exempt status (e.g., lists past and future donors).  The IRS review for indications significant political later informed some organizations that they did campaign intervention.  Although the IRS has not need provide previously requested taken some action, will need more information.  IRS officials stated that any donor that the public has reasonable assurance that information received response request applications are processed without from its Determinations Unit was later destroyed. unreasonable delay fair and impartial WHAT TIGTA RECOMMENDED manner the future. TIGTA recommended that the IRS finalize the WHY TIGTA DID THE AUDIT interim actions taken, better document the TIGTA initiated this audit based concerns reasons why applications potentially involving expressed members Congress.  The political campaign intervention are chosen for overall objective this audit was determine review, develop process track requests for whether allegations were founded that the IRS:  assistance, finalize and publish guidance, targeted specific groups applying for develop and provide training employees tax-exempt status, delayed processing before each election cycle, expeditiously resolve targeted groups applications, and requested remaining political campaign intervention cases unnecessary information from targeted groups. (some which have been process for three years), and request that social welfare WHAT TIGTA FOUND activity guidance developed the Department the Treasury. The IRS used inappropriate criteria that identified for review Tea Party and other their response the report, IRS officials organizations applying for tax-exempt status agreed with seven our nine recommendations based upon their names policy positions and proposed alternative corrective actions for instead indications potential political two our recommendations.  TIGTA does not campaign intervention.  Ineffective management:  agree that the alternative corrective actions will allowed inappropriate criteria developed accomplish the intent the recommendations and stay place for more than months, and continues believe that the IRS should resulted substantial delays processing better document the reasons why applications certain applications, and allowed unnecessary potentially involving political campaign information requests issued. intervention are chosen for review and finalize and publish guidance.Although the processing some applications with potential significant political campaign  
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DEPARTMENT THE TREASURY WASHINGTON, D.C.  20220 TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION   May 14, 2013   MEMORANDUM FOR ACTING COMMISSIONER, TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION  FROM: Michael McKenney  Acting Deputy Inspector General for Audit  SUBJECT: Final Audit Report  Inappropriate Criteria Were Used Identify Tax-Exempt Applications for Review (Audit 201210022)  This report presents the results our review determine whether allegations were founded that the Internal Revenue Service (IRS): targeted specific groups applying for tax-exempt status, delayed processing targeted groups applications for tax-exempt status, and requested unnecessary information from targeted groups.  This audit was initiated based concerns expressed members Congress and reported the media regarding the IRSs treatment organizations applying for tax-exempt status.  This review included our Fiscal Year 2013 Annual Audit Plan and addresses the major management challenge Tax Compliance Initiatives. would like clarify few issues based the IRS response our report.  The response states that our report views approvals evidence that the Exempt Organizations function should not have looked closely those applications. disagree with this statement.  Our objection was the criteria used identify these applications for review. believe all applications should reviewed prior approval determine whether tax-exempt status should granted.  The IRSs response also states that issues discussed the report have been resolved. disagree with this statement well.  Nine recommendations were made correct concerns raised the report, and corrective actions have not been fully implemented.  Further, our report notes, substantial number applications have been under review, some for more than three years and through two election cycles, and remain open.  Until these cases are closed the IRS and our recommendations are fully implemented, not consider the concerns this report resolved.  Managements complete response the draft report included Appendix VIII.  
Michael McKenney
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Inappropriate Criteria Were Used  Identify Tax-Exempt Applications for Review 
Copies this report are also being sent the IRS managers affected the report recommendations. you have any questions, please contact Gregory Kutz,  Assistant Inspector General for Audit (Management Services and Exempt Organizations).
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Inappropriate Criteria Were Used  Identify Tax-Exempt Applications for Review 
  Table Contents  Background .......................................................................................................... Page Results Review ............................................................................................... Page The Determinations Unit Used Inappropriate Criteria Identify Potential Political Cases .............................................................. Page Recommendation .................................................................. Page Recommendations and ....................................................... Page Potential Political Cases Experienced Significant  Processing Delays ......................................................................................... Page Recommendations and .............................................. Page Recommendations through ......................................... Page The Determinations Unit Requested Unnecessary  Information for Many Potential Political Cases ............................................ Page Recommendation ........................................................ Page Appendices Appendix  Detailed Objective, Scope, and Methodology ........................ Page Appendix  Major Contributors This Report ........................................ Page Appendix III  Report Distribution List ....................................................... Page Appendix  Outcome Measures ............................................................... Page Appendix  High-Level Organizational Chart Offices  Referenced This Report ............................................................................ Page Appendix  Timeline Written Criteria for Identifying  Potential Political Cases ................................................................................ Page Appendix VII  Comprehensive Timeline Events ................................... Page Appendix VIII  Managements Response the Draft Report ................... Page  
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Inappropriate Criteria Were Used  Identify Tax-Exempt Applications for Review 
  Abbreviations  BOLO the Look Out Exempt Organizations I.R.C. Internal Revenue Code IRS Internal Revenue Service   
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  Background  Organizations, such charities, seeking Federal tax exemption are required file application with the Internal Revenue Service (IRS).  Other organizations, such social welfare organizations, may file application but are not required so.  The IRSs Exempt Organizations (EO) function, Rulings and Agreements office, which headquartered Washington, D.C., responsible for processing applications for tax exemption.  Within the Rulings and Agreements office, the Determinations Unit Cincinnati, Ohio, responsible for reviewing applications they are received determine whether the organization qualifies for tax-exempt status. Fiscal Year 2012,1 percent all closed applications for tax-exempt status were approved during initial review with little additional information from the organizations. substantial additional information needed, the application placed unassigned inventory until can assigned specialist the Determinations Unit for further processing.  The specialist develops letter(s) requesting the additional information and issues the organization.  Once the specialist receives all the necessary information determine whether organization should afforded tax-exempt status, final determination letter issued the organization either approving denying the request for tax-exempt status. the Determinations Unit needs technical assistance processing applications, may call upon the Technical Unit the Rulings and Agreements office Washington, D.C.2  The IRSs goal for processing all types applications for tax-exempt status was 121 days Fiscal Year 2012; however, some cases may take substantially longer.  For example, the function states its Fiscal Year 2013 Work Plan that applications requiring additional information are not assigned for review until average five months after they are received. Most organizations requesting tax-exempt status must submit either Form 1023, Application for Recognition Exemption Under Section 501(c)(3) the Internal Revenue Code, Form 1024, Application for Recognition Exemption Under Section 501(a), depending the type tax-exempt organization desires be.  For example, charitable organization would request exemption under Internal Revenue Code (I.R.C.) Section () 501(c)(3),3 whereas social welfare organization would request exemption under I.R.C.  501(c)(4).4 12-consecutive-month period ending the last day any month.  The Federal Governments fiscal year begins October and ends September 30. For high-level organizational chart offices referenced this report, see Appendix I.R.C.  501(c)(3) (2012). I.R.C.  501(c)(4) (2012). Page 
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 The I.R.C. section and subsection organization granted tax exemption under affects the activities may undertake.  For example, I.R.C.  501(c)(3) charitable organizations are prohibited from directly indirectly participating intervening any political campaign behalf opposition any candidate for public office (hereafter referred political campaign intervention).5  However, I.R.C.  501(c)(4) social welfare organizations, I.R.C.  501(c)(5)6 agricultural and labor organizations, and I.R.C.  501(c)(6)7 business leagues may engage limited political campaign intervention.  Figure highlights certain characteristics common types tax-exempt organizations. Figure  Characteristics Certain  Common Types Tax-Exempt Organizations 
I.R.C.  501(c)(4),   
Characteristic  I.R.C.  501(c)(3)  (c)(5), and (c)(6)  
May receive tax deductible charitable contributions.  Yes  
May engage political campaign intervention.  Limited (must not constitute primary activity organization)  
Must publicly disclose the identity its donors.  
May engage activity). lobbying8 (i.e., legislative  Limited (must not substantial)  Yes (unlimited amount furtherance  tax-exempt purposes)  
9May engage general advocacy not related legislation the election candidates.  Yes (permitted educational activity)  Yes (unlimited amount furtherance  tax-exempt purposes)  
Must apply with the IRS.  Yes  

Source:  Draft Advocacy Guide Sheet and Internal Revenue Manual. Political campaign intervention the term used Treasury Regulations  1.501(c)(3)-1, 1.501(c)(4)-1, 1.501(c)(5)-1, and 1.501(c)(6)-1. I.R.C.  501(c)(5) (2012). I.R.C.  501(c)(6) (2012). organization engages lobbying, legislative activities, when attempts influence specific legislation directly contacting members legislative body (Federal, State, local) encouraging the public contact those members regarding that legislation. organization also engages lobbying when encourages the public take position referendum.  Lobbying distinguished from political campaign intervention because lobbying does not involve attempts influence the election candidates for public office. organization engages general advocacy when attempts influence public opinion issues germane the organizations tax-exempt purposes, influence nonlegislative governing bodies (e.g., the executive branch regulatory agencies), encourage voter participation through get out the vote drives, voter guides, and candidate debates nonpartisan, neutral manner.  General advocacy basically includes all types advocacy other than political campaign intervention and lobbying. Page 
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 During the 2012 election cycle, the activities tax-exempt organizations received media coverage concerning the amount money spent influencing elections.  According the Center for Responsive Politics, tax-exempt groups, such I.R.C.  501(c)(4), I.R.C.  501(c)(5), and I.R.C.  501(c)(6) organizations, spent $133 million Calendar Year 2010 Federal candidate-oriented expenditures. Calendar Year 2012, this figure increased $315 million.10 addition, shown Figure the number applications for tax-exempt status has increased over the past four fiscal years.11 Figure  Number Applications for  I.R.C.  501(c)(3)(6) Tax-Exempt  Status Received the IRS 
Fiscal  Year  I.R.C. Subsection  
501(c)(3) 501(c)(4) 501(c)(5) 501(c)(6)  
2009  65,179  1,751  543  1,828  
2010  59,486  1,735  290  1,637  
2011  58,712  2,265  409  1,836  
2012  66,543  3,357  1,081  2,338  

Source:  These data were provided the function background and were not validated for accuracy reliability. During the 2012 election cycle, some members Congress raised concerns the IRS about selective enforcement and the duty treat similarly situated organizations consistently. addition, several organizations applying for 
I.R.C.  501(c)(4) tax-exempt status made allegations that the IRS targeted specific groups applying for tax-exempt status, delayed the processing targeted groups applications for tax-exempt status, and requested unnecessary information from targeted organizations.  Lastly, several members Congress requested that the IRS investigate whether existing social welfare organizations are improperly engaged substantial, even predominant, amount campaign activity. initiated this audit based concerns expressed Congress and reported the media regarding the IRSs treatment organizations applying for tax-exempt status. focused our The Center for Responsive Politics obtained its information from the Federal Election Commission. only included expenditures reported the Federal Election Commission specifically for advocating the election defeat clearly identified Federal candidates. Some this increase may due the reapplication those organizations whose tax-exempt status was revoked result not filing information returns for three consecutive years. Page 
This audit focused 
allegations that the IRS targeted 
specific groups applying for 
tax-exempt status, delayed the 
processing targeted groups 
applications, and requested 
unnecessary information from 
targeted organizations. 
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 efforts reviewing the processing applications for tax-exempt status and determining whether allegations made against the IRS were founded.12  Tax-exempt application case files were selected for review June 2012 and were reviewed provided the function between July and November 2012. did not review whether specific applications for tax-exempt status should approved denied. This review was performed the function Headquarters office Washington, D.C., and the Determinations Unit Cincinnati, Ohio, during the period June 2012 through February 2013. conducted this performance audit accordance with generally accepted government auditing standards.  Those standards require that plan and perform the audit obtain sufficient, appropriate evidence provide reasonable basis for our findings and conclusions based our audit objective. believe that the evidence obtained provides reasonable basis for our findings and conclusions based our audit objective.  Detailed information our audit objective, scope, and methodology presented Appendix  Major contributors the report are listed Appendix II. future audit being considered assess how the function monitors I.R.C.  501(c)(4)(6) organizations ensure that political campaign intervention does not constitute their primary activity. Page 
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  Results Review  The Determinations Unit Used Inappropriate Criteria Identify Potential Political Cases The Determinations Unit developed and used inappropriate criteria identify applications from organizations with the words Tea Party their names.  These applications (hereafter referred potential political cases)13 were forwarded team specialists14 for review.  Subsequently, the Determinations Unit expanded the criteria inappropriately include organizations with other specific names (Patriots and 9/12) policy positions.  While the criteria used the Determinations Unit specified particular organization names, the team specialists was also processing applications from groups with names other than those identified the criteria.  The inappropriate and changing criteria may have led inconsistent treatment organizations applying for tax-exempt status.  For example, identified some organizations applications with evidence significant political campaign intervention that were not forwarded the team specialists for processing but should have been. also identified applications that were forwarded the team specialists but did not have indications significant political campaign intervention.  All applications that were forwarded the team specialists experienced substantial delays processing.  Although the IRS has taken some action, will need more that the public has reasonable assurance that applications are processed without unreasonable delay fair and impartial manner the future. Criteria for selecting applications inappropriately identified organizations based their names and policy positions The Determinations Unit developed and began using criteria identify potential political cases for review that inappropriately identified specific groups applying for tax-exempt status based their names policy positions instead developing criteria based tax-exempt laws and Treasury Regulations. **********************************1***************************************** **********************************1********************************************1***.  According media reports, some organizations were classified I.R.C.  501(c)(4) social welfare organizations but operated like political organizations.  ********1********** Until July 2011, the Rulings and Agreements office referred these cases Tea Party cases.  Afterwards, the function referred these cases advocacy cases. Initially, the team consisted one specialist, but was expanded several specialists December 2011.  The function referred this team the advocacy team. Page 
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 *********************************1**************************************.  Soon thereafter, according the IRS, Determinations Unit specialist was asked search for applications with Tea Party, Patriots, 9/12 the organizations name well other political-sounding names. function officials stated that, May 2010, the Determinations Unit began developing spreadsheet that would become known the Be the Look Out listing (hereafter referred the BOLO listing),15 which included the emerging issue Tea Party applications. June 2010, the Determinations Unit began training its specialists issues aware of, including Tea Party cases. July 2010, Determinations Unit management stated that had requested its specialists the lookout for Tea Party applications. August 2010, the Determinations Unit distributed the first formal BOLO listing.  The criteria the BOLO listing were Tea Party organizations applying for I.R.C.  501(c)(3) I.R.C.  501(c)(4) status.  Based our review other BOLO listing criteria, the use organization names the BOLO listing not unique potential political cases.16 function officials stated that Determinations Unit specialists interpreted the general criteria the BOLO listing and developed expanded criteria for identifying potential political cases.17  Figure shows that, June 2011, the expanded criteria included additional names (Patriots and 9/12 Project) well policy positions espoused organizations their applications. Figure  Criteria for Potential Political Cases (June 2011) 
Tea Party, Patriots 9/12 Project referenced the case file 
Issues include government spending, government debt taxes 
Education the public advocacy/lobbying make America better place live 
Statement the case file criticize how the country being run 
Source: function briefing dated June 2011. The mission the IRS provide Americas taxpayers top quality service helping them understand and meet their tax responsibilities and applying the tax law with integrity and fairness all.  According IRS Policy Statement 1-1, IRS employees accomplish this mission being impartial and handling tax matters manner that will promote public confidence.  However, the criteria developed the Determinations Unit gives the appearance that the IRS not impartial conducting its mission.  The criteria focused narrowly the names and policy The BOLO listing includes consolidated list emerging issues the function identifies for dissemination Determinations Unit specialists. did not review the use other named organizations the BOLO listing determine their use was appropriate. During interviews with Determinations Unit specialists and managers, could not specifically determine who had been involved creating the criteria. function officials later clarified that the expanded criteria were compilation various Determinations Unit specialists responses how they were identifying Tea Party cases.   Page 
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positions organizations instead tax-exempt laws and Treasury Regulations.  Criteria for selecting applications for the team specialists should focus the activities the organizations and whether they fulfill the requirements the law.  Using the names policy positions organizations not appropriate basis for identifying applications for review the team specialists. asked the Acting Commissioner, Tax Exempt and Government Entities Division; the Director, EO; and Determinations Unit personnel the criteria were influenced any individual organization outside the IRS.  All these officials stated that the criteria were not influenced any individual organization outside the IRS.  Instead, the Determinations Unit developed and implemented inappropriate criteria part due insufficient oversight provided management.  Specifically, only first-line management approved references the Tea Party the BOLO listing criteria before was implemented. result, inappropriate criteria remained place for more than months.  Determinations Unit employees also did not consider the public perception using politically sensitive criteria when identifying these cases.  Lastly, the criteria developed showed lack knowledge the Determinations Unit what activities are allowed I.R.C.  501(c)(3) and I.R.C.  501(c)(4) organizations. Determinations Unit employees stated that they considered the Tea Party criterion shorthand term for all potential political cases.  Whether the inappropriate criterion was shorthand for all potential political cases not, developing and using criteria that focuses organization names and policy positions instead the activities permitted under the Treasury Regulations does not promote public confidence that tax-exempt laws are being adhered impartially. addition, the applications for those organizations that were identified for processing the team specialists experienced significant delays and requests for unnecessary information that detailed later this report. After being briefed the expanded criteria June 2011, the Director, EO, immediately directed that the criteria changed. July 2011, the criteria were changed focus the potential political, lobbying, [general] advocacy activities the organization.  These criteria were improvement over using organization names and policy positions.  However, the team specialists subsequently changed the criteria January 2012 without executive approval because they believed the July 2011 criteria were too broad.  The January 2012 criteria again focused the policy positions organizations instead tax-exempt laws and Treasury Regulations.  After three months, the Director, Rulings and Agreements, learned the criteria had been changed the team specialists and subsequently revised the criteria again May 2012.  (See Appendix for complete timeline criteria used identify potential political cases).  The May 2012 criteria more clearly focus activities permitted under the Treasury Regulations. result changes made the criteria without management knowledge, the Director, Rulings and Agreements, issued memorandum requiring all original entries and changes criteria included the BOLO listing approved the executive level prior implementation. Page 
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 The team specialists processed applications organizations with names other than Tea Party, Patriots, and 9/12 determine organizations other than those specifically identified the inappropriate criteria were processed the team specialists, reviewed the names all applications identified potential political cases.18  Figure shows that approximately one-third the applications identified for processing the team specialists included Tea Party, Patriots, 9/12 their names, while the remainder did not.  According the Director, Rulings and Agreements, the fact that the team specialists worked applications that did not involve the Tea Party, Patriots, 9/12 groups demonstrated that the IRS was not politically biased its identification applications for processing the team specialists. Figure  Breakdown Potential Political Cases Organization Name 
Pie Chart showing Breakdown Potential Political Cases Organization Name
 
Source: function Potential Political Case Tracking Sheet May 31, 2012.  While the team specialists reviewed applications from variety organizations, determined during our reviews statistical samples I.R.C.  501(c)(4) tax-exempt applications that all cases with Tea Party, Patriots, 9/12 their names were forwarded the team specialists.19 could not determine which potential political cases may have been identified based organizations policy positions. determined this through two statistical samples 338 (7.5 percent) from universe 4,510 I.R.C.  501(c)(4) tax-exempt applications filed during May 2010 through May 2012 that were not forwarded the team specialists.  See Appendix for details our sampling methodology. Page 
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 Some applications with indications significant political campaign intervention were not identified for review the team specialists May 2012, the Director, Rulings and Agreements, approved the current criteria for identifying potential political cases.  The criteria are 501(c)(3), 501(c)(4), 501(c)(5), and 501(c)(6) organizations with indicators significant amounts political campaign intervention. determine all cases with indications significant political campaign intervention were sent the team specialists, reviewed two statistical samples I.R.C.  501(c)(4) applications.  Applications That the IRS Determined Required Minimal Additional Information for Processing  reviewed statistical sample I.R.C.  501(c)(4) cases closed from May 201020 through May 2012 from universe 2,051 applications that the IRS determined required minimal additional information from the organizations (also referred the function merit closures). determined that two percent) approved applications had indications significant political campaign intervention and should have been forwarded the team specialists.21  Based our statistical sample, project estimated merit closure applications were not appropriately identified potential political cases during this time period.22  Applications Identified the IRS That Required Additional Information for Processing  reviewed statistical sample 244 I.R.C.  501(c)(4) cases closed from May 2010 through May 2012 open May 31, 2012, from universe 2,459 applications that the IRS determined required additional information from the organizations applying for tax-exempt status (also referred the function full development applications) but were not forwarded the team specialists.  For the applications that were available for our review, found that percent)23 237 applications24 included indications significant political campaign intervention and should have been processed the team specialists.25 project estimated 141 full development applications were not appropriately identified potential political cases during this time period.26 May 2010 was chosen because the first date that were informed that the Determinations Unit was using criteria which identified specific organizations name. Neither the two cases involved Tea Party, Patriots, 9/12 organization. See Appendix IV. None the cases involved Tea Party, Patriots, 9/12 organization. could not analyze seven sampled application case files because incomplete documentation the case files (six applications) the case file could not located (one application).  See Appendix IV. determined that eight applications were appropriately forwarded the team specialists.  Five the eight application case files involved Tea Party, Patriots, 9/12 organizations. See Appendix IV. Page 
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Inappropriate Criteria Were Used  Identify Tax-Exempt Applications for Review determine cases without indications significant political campaign intervention were sent the team specialists, reviewed all the applications identified potential political cases May 31, 2012.  Applications That the IRS Determined Should Processed the Team Specialists  reviewed all 298 applications that had been identified potential political cases May 31, 2012. the majority cases, agreed that the applications submitted included indications significant political campaign intervention.  However, did not identify any indications significant political campaign intervention for (31 percent) the 296 applications27 that had complete documentation.28 discussed our results with function officials, who disagreed with our findings.  Although function officials provided explanations about why the applications should have been identified potential political cases, the case files did not include the specific reason(s) the applications were selected. function officials also stated that applications may not literally include statements indicating significant political campaign intervention.29  According function officials, organizations may not understand what constitutes political campaign intervention may provide vague descriptions certain activities that the function knows from past experience potentially involve political campaign intervention. these cases, the function believes important review the applications ensure that political campaign intervention not the organizations primary activity. provide further assurance that Determinations Unit employees are handling tax matters impartial manner, would helpful document specifically why applications are chosen for further review.   Recommendations The Director, EO, should: Recommendation  Ensure that the memorandum requiring the Director, Rulings and Agreements, approve all original entries and changes criteria included the BOLO listing prior implementation formalized the appropriate Internal Revenue Manual. Managements Response:  The IRS agreed with this recommendation and will ensure that the procedures set forth the memorandum requiring the Director, could not complete our review two cases due inadequate documentation the case files.  See Appendix IV. Seventeen (19 percent) the applications involved Tea Party, Patriots, 9/12 organizations. should also noted that, some cases, specialists obtained additional information after the application was received that indicated the organizations were involved political campaign intervention which was not available the initial application documentation reviewed. Page 
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 Rulings and Agreements, approve advance all original entries and changes the BOLO listing are made part the Internal Revenue Manual. Recommendation  Develop procedures better document the reason(s) applications are chosen for review the team specialists (e.g., evidence specific political campaign intervention the application file specific reasons the function may have for choosing review the application further based past experience). Managements Response:  The IRS proposed alternative corrective action our recommendation.  The IRS stated will review its screening procedures determine whether, and what extent, additional documentation can implemented without having adverse impact the timeliness case processing. Office Audit Comment: not believe this alternative corrective action fully addresses the recommendation.  Developing procedures better document the reasons applications are chosen for further review would help ensure that applications are being handled impartial manner. addition, detailed the next section this report, the average time these applications have been open 574 days December 17, 2012. not believe documenting brief explanation about why applications are chosen for review would have adverse impact the timeliness case processing. Recommendation  Develop training workshops held before each election cycle including, but not limited to, the proper ways identify applications that require review political campaign intervention activities. Managements Response:  The IRS agreed with this recommendation and will develop training the topics described Recommendations and  Because election cycles are continuous, the IRS will develop schedule which ensures that staff have the training needed handle potential political intervention matters. Potential Political Cases Experienced Significant Processing Delays Organizations that applied for tax-exempt status and had their applications forwarded the team specialists experienced substantial delays. December 17, 2012, many organizations had not received approval denial letter for more than two years after they submitted their applications.  Some cases have been open during two election cycles (2010 and 2012).  The IRS Strategic Plan 20092013 has several goals and objectives that involve timely interacting with taxpayers, including enforcement the tax law timely manner while minimizing taxpayer burden.  The function does not have specific timeliness goals for processing applications, such potential political cases, that require significant follow-up with the Page 
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 organizations.30  The time takes process application depends upon the facts and circumstances the case. Potential political cases took significantly longer than average process due ineffective management oversight.  Once cases were initially identified for processing the team specialists, the Determinations Unit Program Manager requested assistance via e-mail from the Technical Unit ensure consistency processing the cases.  However, function management did not ensure that there was formal process place for initiating, tracking, monitoring requests for assistance. addition, there were several changes Rulings and Agreements management responsible for overseeing the fulfillment requests for assistance from the Determinations Unit during this time period.  This contributed the lengthy delays processing potential political cases. result, the Determinations Unit waited more than months (February 2010 November 2011) receive draft written guidance from the Technical Unit for processing potential political cases. result, the IRS delayed the issuance letters organizations approving their tax-exempt status.  For I.R.C.  501(c)(3) organizations, this means that potential donors and grantors could reluctant provide donations grants.31 addition, some organizations withdrew their applications and others may not have begun conducting planned charitable social welfare work.  The delays may have also prevented some organizations from receiving certain benefits the tax-exempt status.  For example, organizations are approved for tax-exempt status, they may receive exemption from certain State taxes and reduced postal rates.  For organizations that may eventually denied tax-exempt status but have been operating while their applications are pending, the organizations will required retroactively file income tax returns and may liable pay income taxes for, some cases, more than two years. analyze the delays, we: reviewed the events that led delays processing potential political cases, compared the amount time cases assigned the team specialists were open applications that were not assigned the team specialists, and determined organizations were eligible sue the IRS due delays processing certain applications. Potential political cases experienced long processing delays The team specialists stopped working potential political cases from October 2010 through November 2011, resulting 13-month delay, while they waited for assistance from the Technical Unit.  Figure illustrates significant events and delays concerning potential political cases.  For comprehensive timeline events related potential political cases, see Appendix VII. The function, however, had overall goal process merit and full development tax-exempt applications 121 days for Fiscal Year 2012. 298 cases reviewed, were I.R.C.  501(c)(3) organizations. Page 
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 Figure  Timeline Events and Delays Involving the Processing Potential Political Cases (*****1******* Through May 2012) 
Source:  Interviews function employees and our review function e-mails. Ineffective oversight management led significant delays processing potential political cases.  ***************************************1***************************** **********1*******************************. April 2010, the Determinations Unit Program Manager requested via e-mail contact the Technical Unit provide assistance with processing the applications. Technical Unit specialist was assigned this task and began working with the team specialists.  The team specialists stopped processing cases October 2010 without closing any the cases that were begun.  However, the Determinations Unit Program Manager thought the cases were being processed.  Later, were informed the Director, Rulings and Agreements, that there was miscommunication about processing the cases.  The Determinations Unit waited for assistance from the Technical Unit instead Page 
Date  Events and Delays  
******1******  *****************************1******************************* *******************1**********.  
April 2010  The team specialists formed with one specialist who assigned potential political cases and begins working them with the assistance Technical Unit employee.  
October 2010  The team specialists stops processing potential political cases while waiting for assistance from the Technical Unit.  
July 2011  The function decides develop written process the potential political cases.  guidance for the Determinations  Unit   
November 2011  Draft written guidance provided the Determinations Unit.  
December 2011  Additional specialists are added the team specialists.  
January 2012  Specialists begin issuing additional information request letters organizations applying for tax-exempt status, requesting that the information provided  two three weeks.  These time periods are standard response times given for any information request and are included the Internal Revenue Manual.  
February 2012  Concerns are raised the media regarding requests for significant amounts information from organizations applying for tax-exempt status.  The Director, EO, stops specialists from issuing any more letters requesting information.  Instead, letters allowing extensions days respond previous additional information letters were developed and issued March and April 2012.  These letters also noted that applicants should contact the IRS they needed longer than days respond.  
May 2012 workshop given Determinations Unit specialists assigned potential political cases.  Afterwards, review all the open cases completed recommend whether additional processing necessary whether the cases can closed (as December 17, 2012, 160 applications were still being processed).   

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 continuing process the cases.  The Determinations Unit Program Manager requested status updates the request for assistance several times via e-mail.  Draft written guidance was not received from the Technical Unit until November 2011, months after the Determinations Unit stopped processing the cases. the end our audit work February 2013, the guidance had not been finalized because the function decided provide training instead.32 Many organizations waited much longer than months for decision, while others have yet receive decision from the IRS.  For example, December 17, 2012, the IRS had been processing several potential political cases for more than 1,000 calendar days.  Some these organizations received requests for additional information Calendar Year 2010 and then did not hear from the IRS again for more than year while the Determinations Unit waited for assistance from the Technical Unit.  For the 296 potential political cases reviewed,33 December 17, 2012, 108 applications had been approved, were withdrawn the applicant, none had been denied, and 160 cases were open from 206 1,138 calendar days (some crossing two election cycles). March 2012, the Deputy Commissioner, Services and Enforcement, asked the Senior Technical Advisor the Acting Commissioner, Tax Exempt and Government Entities Division, look into concerns raised the media about delays processing applications for tax-exempt status from Tea Party groups and the nature the questions being asked related the applications. April 2012, the Senior Technical Advisor the Acting Commissioner, Tax Exempt and Government Entities Division, along with team function Headquarters office employees, reviewed many the potential political cases and determined that there appeared some confusion Determinations Unit specialists and applicants what activities are allowed I.R.C.  501(c)(4) organizations. believe this could due the lack specific guidance how determine the primary activity I.R.C.  501(c)(4) organization.  Treasury Regulations state that I.R.C.  501(c)(4) organizations should have social  welfare their primary activity; however, the regulations not define how measure whether social welfare organizations primary activity. result this confusion, the function Headquarters employees provided two-day workshop the team specialists May 2012 train them what activities are allowable I.R.C.  501(c)(4) organizations, including lobbying and political campaign intervention.  After this workshop, potential political cases were independently reviewed two people determine what, any, additional work needed completed prior making decision approve deny the applications for tax-exempt status.  This review continued any newly identified potential political cases.  Prior the hands-on training and independent reviews, the team specialists had only approved six percent) 298 applications.  After the hands-on training response the National Taxpayer Advocates 2007 Annual Report Congress, the IRS commented that putting guide sheets for processing applications for tax-exempt status its Internet site would result fewer delays. *************************************1******************************************. Page 
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 and independent reviews began, the Determinations Unit approved additional 102 applications December 2012.34 addition, was decided that applications could approved, but referral for follow-up could sent another unit,35 which could review the activities organization later date determine they were consistent with the organizations tax-exempt status. Potential political cases were open much longer than similar cases that were not identified for processing the team specialists For Fiscal Year 2012, the average time took the Determinations Unit complete processing applications requiring additional information from organizations applying for tax-exempt status (also referred the function full development cases) was 238 calendar days according IRS data. comparison, the average time potential political case was open December 17, 2012, was 574 calendar days (with 158 potential political cases being open longer than the average calendar days took close other full development cases).36  Figure shows that more than percent the potential political cases have been open more than one year. Figure  Number Calendar Days Potential Political Cases  Were Open (as December 17, 2012) 
Total Cases  Number and Percentage37 Potential  Political Cases Open Calendar Day Range  
0120 Calendar Days  121180 Calendar Days  181270 Calendar Days  271365 Calendar Days  More Than 365 Calendar Days  
160 (0%) (0%)  (2%)  (18%)  129  (81%)  

Source:  Our analysis function documentation. the 102 applications, (28 percent) involved Tea Party, Patriots, 9/12 organizations. The Review Operations Unit completes compliance reviews tax-exempt organizations determine whether they are operating accordance with their tax-exempt purposes and are current with their filing requirements.  Unit personnel review information available IRS systems, filed returns, applications for tax exemption, and the Internet assess the organizations operations and make recommendations for further actions. See Appendix IV. Percentages may not equal 100 percent due rounding. Page 
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 Some charitable organizations were eligible sue the IRS for declaratory judgment due the delays processing applications The Determinations Unit did not always timely approve deny the applications for I.R.C.  501(c)(3) tax-exempt status for potential political cases.  However, the tax law provides organizations with the ability sue the IRS force decision their applications the IRS does not approve deny their applications within 270 calendar days.38 May 31, 2012,39 (36 percent) I.R.C.  501(c)(3) potential political cases were open more than 270 calendar days, and the organizations had responded timely all requests for additional information, required. the end our fieldwork, none these organizations had sued the IRS, even though they had the legal right. another open cases, organizations were timely their responses additional information requests, but the 270-calendar-day threshold had not been reached May 31, 2012.  These organizations may have the right sue the IRS the future determinations are not made within the 270-calendar-day period. Recommendations The Director, EO, should: Recommendation  Develop process for the Determinations Unit formally request assistance from the Technical Unit and the Guidance Unit.40  The process should include actions initiate, track, and monitor requests for assistance ensure that requests are responded timely. Managements Response:  The IRS agreed with this recommendation and will develop formal process for the Determination Unit request assistance and monitor such requests. Recommendation  Develop guidance for specialists how process requests for  tax-exempt status involving potentially significant political campaign intervention.  This guidance should also posted the Internet provide transparency organizations the application process. Managements Response:  The IRS proposed alternative corrective action our recommendation.  The IRS will develop training the topics described Recommendations and  Because election cycles are continuous, the IRS Revenue Procedure 2012-09 provides further guidance the implementation this right. Tax-exempt application case files were selected for review June 2012 based May 31, 2012, listing applications being processed the team specialists. The Guidance Unit provides formal and informal guidance that explains how certain laws, such regulations, revenue rulings, revenue procedures, notices, and announcements, may apply exempt organizations. Page 
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 noted that will develop schedule which ensures that staff have the training needed handle potential political intervention matters. Office Audit Comment: not believe that this alternative corrective action fully addresses our recommendation. believe that specific guidance should developed and made available specialists processing potential political cases.  Making this guidance available the Internet for organizations could also address concern raised the IRSs response that many applications appear contain incomplete and inconsistent information. Recommendation  Develop training workshops held before each election cycle including, but not limited to: what constitutes political campaign intervention versus general advocacy (including case examples) and the ability refer for follow-up those organizations that may conduct activities future year which may cause them lose their tax-exempt status. Managements Response:  The IRS agreed with this recommendation and will develop training the topics described Recommendations and  Because election cycles are continuous, the IRS reported that will develop schedule which ensures that staff have the training needed handle potential political intervention matters. Recommendation  Provide oversight ensure that potential political cases, some which have been process for three years, are approved denied expeditiously. Managements Response:  The IRS agreed with this recommendation and stated that, while this ongoing project, closely overseeing the remaining open cases ensure that reaches determinations expeditiously possible. The Acting Commissioner, Tax Exempt and Government Entities Division, should: Recommendation  Recommend IRS Chief Counsel and the Department the Treasury that guidance how measure the primary activity I.R.C.  501(c)(4) social welfare organizations included for consideration the Department the Treasury Priority Guidance Plan.41 Managements Response:  The IRS agreed with this recommendation and will share this recommendation with the IRS Chief Counsel and the Department Treasurys Office Tax Policy. The Department the Treasury issues Priority Guidance Plan each year identify and prioritize the tax issues that should addressed through regulations, revenue rulings, revenue procedures, notices, and other published administrative guidance. Page 
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 The Determinations Unit Requested Unnecessary Information for Many Potential Political Cases The Determinations Unit sent requests for information that later (in whole part) determined unnecessary for (58 percent) 170 organizations that received additional information request letters.42  According the Internal Revenue Manual, these requests should thorough, complete, and relevant.  However, the Determinations Unit requested irrelevant (unnecessary) information because lack managerial review, all levels, questions before they were sent organizations seeking tax-exempt status. also believe that Determinations Unit specialists lacked knowledge what activities are allowed I.R.C.  501(c)(3) and I.R.C.  501(c)(4) tax-exempt organizations.  This created burden the organizations that were required gather and forward information that was not needed the Determinations Unit and led delays processing the applications.  These delays could result potential donors and grantors being reluctant provide donations grants organizations applying for I.R.C.  501(c)(3) tax-exempt status. addition, some organizations may not have begun conducting planned charitable social welfare work. After receiving draft guidance November 2011, the team specialists began sending requests for additional information January 2012 organizations that were applying for tax-exempt status.  For some organizations, this was the second letter received from the IRS requesting additional information, the first which had been received more than year before this date.  These letters requested that the information provided two three weeks (as customary these letters) despite the fact that the IRS had done nothing with some the applications for more than one year.  After the letters were received, organizations seeking tax-exempt status, well members Congress, expressed concerns about the type and extent questions being asked.  For example, the Determinations Unit requested donor information from organizations43 that would required make public the application was approved, even though this information could not disclosed the IRS when provided organizations whose tax-exempt status had been approved.  Figure shows example requests sent organizations applying for tax-exempt status regarding donors. See Appendix IV. the organizations, had Tea Party, Patriots, 9/12 their names. Page 
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 Figure  Example Requests for Information Regarding  Past and Future Donors Letters Sent January/February 2012 
Provide the following information for the income you received and raised for the years from 
inception the present.  Also, provide the same information for the income you expect 
receive and raise for 2012, 2013, and 2014. Donations, contributions, and grant income for each year, which includes the following 
information: The names the donors, contributors, and grantors. the donor, contributor, 
grantor has run will run for public office, identify the office. not, please 
confirm answering this question No. The amounts each the donations, contributions, and grants and the dates you 
received them. How did you use these donations, contributions, and grants?  Provide the details. you did not receive not expect receive any donation, contribution, and grant income, 
please confirm answering None received and/or None expected. 
Source:  Application case files. After media attention, the Director, EO, stopped issuance additional information request letters and provided extension time respond previously issued letters.  The Deputy Commissioner for Services and Enforcement then asked the Senior Technical Advisor the Acting Commissioner, Tax Exempt and Government Entities Division, find out how applications were being processed and make recommendations.  The Senior Technical Advisor and team specialists visited the Determinations Unit Cincinnati, Ohio, and began reviewing cases. part this effort, function Headquarters office employees reviewed the additional information request letters prepared the team specialists and identified seven questions that they deemed unnecessary.  Subsequently, the function instituted the practice that all additional information request letters for potential political cases reviewed the function Headquarters office before they are sent organizations seeking tax-exempt status. addition, function officials informed that they decided destroy all donor lists that were sent for potential political cases that the IRS determined should not have requested.  Figure lists the seven questions identified being unnecessary. Page 
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 Figure  Seven Questions Identified Unnecessary the Function 
Number  Question  Requests the names donors.  Requests list all issues that are important the organization and asks that the organization indicate its position regarding such issues.  Requests the roles and activities the audience and participants other than members the activity and the type conversations and discussions members and participants had during the activity.  Asks whether the officer, director, etc., has run will run for public office.  Requests the political affiliation the officer, director, speakers, candidates supported, etc., otherwise refers the relationship with identified political partyrelated organizations.  Requests information regarding employment, other than for the organization, including hours worked.  Requests information regarding activities another organization  not just the relationship the other organization the applicant.  

Source: function review additional information request letters. reviewed case file information for all 170 organizations that received additional information request letters and determined that (58 percent) had received requests for information that was later deemed unnecessary the function. the organizations:  were informed that they did not need respond previous requests for information and, instead, received revised request for information.  either received letter telephone call stating that their application was approved and they longer needed respond information requests they had received from the IRS.        Page 
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 Figure shows excerpts from the approval letter developed for organizations that did not need respond previous additional information request letter. Figure  Excerpts From Template Approval Letter, Which Includes Statement That Previously Requested Information Longer Needed 
Dear Applicant: are pleased inform you that upon review your application for tax-exempt status have determined that you are exempt from Federal income tax under section 501 (c) (4) the Internal Revenue Code.  Because this letter could help resolve any questions regarding your exempt status, you should keep your permanent records. 
 
Please note that have just completed another review your request recognized tax-exempt under section 501 (c) (4) the Internal Revenue Codes.  Based that review, concluded that not need the additional materials previously requested because your application and materials provide sufficient information. 
Source:  IRS template approval letter. Recommendation Recommendation  The Director, EO, should develop training workshops held before each election cycle including, but not limited to, how word questions additional information request letters and what additional information should requested.  Managements Response:  The IRS agreed with this recommendation and will develop training the topics described Recommendations and  Because election cycles are continuous, the IRS reported that will develop schedule which ensures that staff have the training needed handle potential political intervention matters. Page 
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 Appendix  Detailed Objective, Scope, and Methodology  The overall objective was determine whether allegations were founded that the IRS: targeted specific groups applying for tax-exempt status, delayed processing targeted groups applications for tax-exempt status, and requested unnecessary information from targeted groups. accomplish our objective, we: Assessed the actions taken the function response the increase applications for tax-exempt status from organizations potentially involved political campaign intervention. Interviewed function management identify steps taken and who authorized them. also developed timeline events. Obtained list applications that were identified for processing the team specialists and determined the status the identified cases (open, approved, denied, etc.) through May 31, 2012. also received updated list identified cases through December 17, 2012, determine the status each initial case this date. Determined whether procedures and controls place since May 2010 resulted inconsistent treatment applications potentially involving political campaign intervention. II. Determined whether changes procedures and controls since May 2010 affected the timeliness reviewing applications potentially involving political campaign intervention. Interviewed function personnel determine whether there were any outside influences that affected the timeliness reviewing potential political cases. Reviewed all I.R.C.  501(c)(3) potential political cases determine whether they were processed within the 270-day standard required law. III. Determined whether the actions taken the function identify applications for tax-exempt status organizations potentially involved political campaign intervention were consistent. Selected statistical sample 244 open and closed I.R.C.  501(c)(4) application cases from universe 2,459 cases that the IRS determined needed significant additional information (full development) the Employee Plans/Exempt Organizations Determination System from May 2010 through May 2012 determine whether they should have been identified for processing the team specialists.  Page 
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Inappropriate Criteria Were Used  Identify Tax-Exempt Applications for Review selected our statistical sample using the following criteria: percent confidence level, percent error rate,1 and  percent precision rate. used random sample ensure that each application case had equal chance being selected, which enabled obtain sufficient evidence support our results. contracted statistician reviewed our projections. Obtained the universe 2,459 cases from the Employee Plans/Exempt Organizations Determination System and performed validity checks ensure that the data were accurate. found the data could relied for this review. Obtained statistical sample open and closed application cases. Determined whether application cases with potential political campaign intervention issues were identified for processing the team specialists. Interviewed function personnel obtain their perspective any application cases identified that should have been identified for processing the team specialists but were not. Selected statistical sample closed I.R.C.  501(c)(4) application cases from universe 2,051 cases that the IRS determined did not need significant additional information (merit cases) the Employee Plans/Exempt Organizations Determination System from May 2010 through May 2012 determine whether they should have been identified for processing the team specialists. selected our statistical sample using the following criteria: percent confidence level, percent error rate,2 and  percent precision rate. used random sample ensure that each application case had equal chance being selected, which enabled obtain sufficient evidence support our results. contracted statistician reviewed our projections. Obtained the universe 2,051 cases from the Employee Plans/Exempt Organizations Determination System and performed validity checks ensure that the data were accurate. found the data could relied for this review. Obtained statistical sample closed application cases. Determined whether application cases with potential political campaign intervention issues were not identified for processing the team specialists. expected error rate percent was chosen because determined that cases needing significant additional information had criteria that included the names specific groups. expected error rate percent was chosen because procedures require that cases with political issues generally need significant additional information.  Page 
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Inappropriate Criteria Were Used  Identify Tax-Exempt Applications for Review Interviewed function personnel obtain their perspective any applications identified that should have been identified for processing the team specialists but were not. Obtained and reviewed all 298 application cases identified for processing the team specialists May 31, 2012, determine whether they were correctly identified. Determined whether application cases were correctly identified for processing the team specialists. Interviewed function personnel obtain their perspective any cases identified that should not have been identified for processing the team specialists. Computed the average cycle time processing potential political cases and compared the average cycle time for processing similar cases that were not processed the team specialists. Determined the number organizations that may have been adversely affected inconsistent treatment. IV. Determined whether the function consistently had reasonable basis for requesting information from organizations seeking tax-exempt status that were potentially involved political campaign intervention. Reviewed all 170 potential political cases that were issued additional information request letters determine whether the letters included questions deemed unnecessary the function. Interviewed function personnel obtain their perspective additional information that was requested that may not have been necessary help make determination decision. Determined the number taxpayers that may have been adversely affected. Internal controls methodology Internal controls relate managements plans, methods, and procedures used meet their mission, goals, and objectives.  Internal controls include the processes and procedures for planning, organizing, directing, and controlling program operations.  They include the systems for measuring, reporting, and monitoring program performance. determined the following internal controls were relevant our audit objective: function policies, procedures, and practices for identifying and processing applications for tax-exempt status with indications political campaign intervention. evaluated these controls interviewing personnel, reviewing documentation, reviewing statistical samples applications for tax-exempt status, and reviewing applications identified involving potential political campaign intervention.Page 
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 Appendix  Major Contributors This Report  Gregory Kutz, Assistant Inspector General for Audit (Management Services and Exempt Organizations) Russell Martin, Acting Assistant Inspector General for Audit (Management Services and Exempt Organizations) Troy Paterson, Director Thomas Seidell, Audit Manager Cheryl Medina, Lead Auditor  Julia Moore, Senior Auditor Michael McGovern, Auditor Evan Close, Audit Evaluator  Page 
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 Appendix III  Report Distribution List  Acting Commissioner Office the Commissioner  Attn:  Chief Staff Chief Counsel Deputy Commissioner for Services and Enforcement National Taxpayer Advocate Acting Deputy Commissioner, Tax Exempt and Government Entities Division  SE:T Director, Exempt Organizations, Tax Exempt and Government Entities Division  SE:T:EO Director, Office Legislative Affairs  CL:LA Director, Office Program Evaluation and Risk Analysis  RAS:O Office Internal Control  OS:CFO:CPIC:IC Audit Liaison:  Director, Communications and Liaison, Tax Exempt and Government Entities Division  SE:T:CL   Page 
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 Appendix  Outcome Measures  This appendix presents detailed information the measurable impact that our recommended corrective actions will have tax administration.  These benefits will incorporated into our Semiannual Report Congress. Type and Value Outcome Measure:  Reliability Information  Actual; nine application case files that were either incomplete could not located for review (see page 5). Methodology Used Measure the Reported Benefit: During our review applications for tax-exempt status that were not identified for the team specialists, were unable review seven case files because the case file lacked complete documentation (six cases) the case file could not located (one case). addition, during our review all identified potential political cases through May 31, 2012, were unable analyze two case files because incomplete documentation.  Type and Value Outcome Measure:  Reliability Information  Potential; organizations whose tax-exempt applications were not appropriately identified having significant potential political campaign intervention (see page 5). Methodology Used Measure the Reported Benefit: selected simple random sample I.R.C.  501(c)(4) cases closed from May 2010 through May 2012 from universe 2,051 applications that the IRS determined required minimal additional information from organizations applying for tax-exempt status.  During our case reviews, determined that two cases were not appropriately identified having significant potential political campaign intervention. projected, with percent confidence, actual error rate between 0.38 percent and 6.55 percent1 and that between eight and 134 applications2 were not properly identified for processing the team specialists. The point estimate error rate for the sample 2.13 percent.  The percent confidence interval was calculated using the Exact Binomial Method. The point estimate number error applications 44.  The percent confidence interval was calculated using the Exact Binomial Method.  Page 
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 Type and Value Outcome Measure:  Reliability Information  Potential; 141 organizations whose tax-exempt applications were not appropriately identified having significant potential political campaign intervention (see page 5). Methodology Used Measure the Reported Benefit: selected simple random sample 244 I.R.C.  501(c)(4) cases closed from May 2010 through May 2012 open May 31, 2012, from universe 2,459 applications that the IRS determined required additional information from organizations applying for tax-exempt status.3  During our case reviews, determined that cases were not appropriately identified having significant potential political campaign intervention. projected, with percent confidence, actual error rate between 3.38 percent and 8.43 percent4 and that between and 198 applications5 were not properly identified for processing the team specialists. Type and Value Outcome Measure:  Taxpayer Burden  Potential; 158 organizations that waited longer than average for the IRS make decision regarding their tax-exempt status (see page 11). Methodology Used Measure the Reported Benefit: obtained data from the function the average number days took determine whether application for tax-exempt status was approved denied. Fiscal Year 2012, took average 238 days close case that needed additional information from the organization prior approving denying the application. December 17, 2012, there were 158 potential political cases that were open more than 238 calendar days. Type and Value Outcome Measure:  Taxpayer Burden  Potential; organizations that received additional information request letters with questions that were later deemed unnecessary the function (see page 18). Methodology Used Measure the Reported Benefit: reviewed 170 potential political cases that had received additional information request letters from the Determinations Unit.  Using list seven questions/topics that the function categorized unnecessary, identified potential political cases that included additional information request letters asking questions deemed unnecessary the function. found that seven cases from the sample 244 were not reviewable because incomplete documentation. The point estimate error rate for the sample 5.91 percent with precision  2.52 percent. The point estimate number error applications 141 with precision  applications.  Page 
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 Appendix  High-Level Organizational Chart Offices Referenced This Report  The following high-level organizational chart offices discuss this report, starting with the Deputy Commissioner for Services and Enforcement, who reports the IRS Commissioner.  
High-Level Organizaational Chart
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 Appendix  Timeline Written Criteria for  Identifying Potential Political Cases  The following illustrates the changes the written criteria provided Determinations Unit employees for identifying applications for the team specialists. 
Date  Criteria Developed Actions Taken  
February 2010  ************************1******************************  
************************1**************.  
MarchApril  The Determinations Unit began searching for other requests for tax  
2010  exemption involving the Tea Party, Patriots, 9/12, and I.R.C.  501(c)(4)  
applications involving political sounding names, e.g., We the People  
Take Back the Country.  
July 2010  Determinations Unit management requested its specialists the  
lookout for Tea Party applications.  
August 2010  First BOLO listing issued with criteria listed various local  
organizations the Tea Party movementapplying for exemption under  
501(c)(3) 501(c)(4).  
July 2011  Criteria changed Organizations involved with political, lobbying,  
advocacy for exemption under 501(c)(3) 501(c)(4) based the  
concerns the Director, EO, raised June 2011.  
January 2012  Criteria changed Political action type organizations involved  
limiting/expanding government, educating the constitution and bill  
rights, social economic reform/movement based Determinations Unit  
concerns that the July 2011 criteria was too generic.  
May 2012  Criteria changed 501(c)(3), 501(c)(4), 501(c)(5), and 501(c)(6)  
organizations with indicators significant amounts political campaign  
intervention (raising questions exempt purpose and/or excess private  
benefit).  

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 Appendix VII  Comprehensive Timeline Events  The following chart illustrates timeline events from February 2010 through July 2012 involving the identification and processing potential political cases. shows that there was confusion about how process the applications, delays the processing the applications, and lack management oversight and guidance.  The timeline was developed using documentation provided the function well numerous interviews with function personnel. 
Date  Event  Additional Details  Source  
February 25, 2010  ****************1************************   E-Mail  
Around  March 2010  The Determinations Unit Group Manager asked specialist search for other Tea Party similar organizations applications order determine the scope the issue.  The specialist continued complete searches for additional cases until the precursor the BOLO listing was issued May 2010.  Determinations Unit personnel indicated that they used the description Tea Party shorthand way referring the group cases involving political campaign intervention rather than target any particular group.  The specialist used Tea Party, Patriots, and 9/12 part the criteria for these searches.  Interview  
March 1617, 2010  Ten Tea Party cases were identified.  The Acting Manager, Technical Unit, requested two more cases transferred Washington, D.C.   ***********************1*********************  Not all the ten cases had Tea Party their names.  E-Mail  
April  12, 2010  The new Acting Manager, Technical Unit, suggested the need for Sensitive Case Report the Tea Party cases.  The Determinations Unit Program Manager agreed.   E-Mail  
April 2010  ****************1***************************    E-Mail  
April 2010 Determinations Unit specialist developed list identified Tea Party cases during search applications.  Three had already been approved tax-exempt.  While the heading the document listing these cases referred Tea Party cases, not all the organizations listed had Tea Party their names.  E-Mail  

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Date  Event  Additional Details  Source  
April 19, 2010  The first Sensitive Case Report was prepared the Technical Unit.  Sensitive Case Reports are shared with the Director, Rulings and Agreements, and chart summarizing all Sensitive Case Reports provided the Director, EO.  Documentation  
April 2526, 2010  The Determinations Unit Program Manager requested Technical Unit contacts for the specialist assigned work other Tea Party cases.  Contacts were received.   *************************1****************************************   E-Mail  
May 17, 2010  The Determinations Unit specialist will send additional information request letters the Technical Unit for review prior issuance part the Technical Units attempt provide assistance the Determinations Unit.   E-Mail  
May 26, 2010  ******************1****************************************   E-Mail  
May 27, 2010  The Technical Unit began reviewing additional information request letters prepared the Determinations Unit.   Interview  and E-Mail  
June  2010  Determinations Unit began training its specialists emerging issues watch for, including emerging issue referred Tea Party Cases.   Documentation  
June 14, 2010  *******************1*************************    E-Mail  
June 30, 2010  ********************1************************  **********1***********  E-Mail  
July 2010  Determinations Unit management requested its specialists the lookout for Tea Party applications.   E-Mail  
July 2010  ***************1*****************************    E-Mail  
July 27, 2010  Prior the BOLO listing development, e-mail was sent updating the description applications involving potential political campaign intervention and providing coordinator contact for the cases.  The description was changed read, These cases involve various local organizations the Tea Party movement [that] are applying for exemption under 501(c)(3) 501(c)(4).   Interview and Documentation  

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Date  Event  Additional Details  Source  
August 12, 2010  The BOLO listing was developed the Determinations Unit order replace the existing practice sending separate e-mails all Determinations Unit employees cases watch for, potentially abusive cases, cases requiring processing the team specialists, and emerging issues.  The description applications involving potential political campaign intervention the BOLO listing was the same description used the July 27, 2010, e-mail.   Interview and Documentation  
August 2010  The responsibility for applications involving potential political campaign intervention was moved different team specialists part group realignment within the Determinations Unit.   Interview and Documentation  
October 2010  Applications involving potential political campaign intervention were transferred another Determinations Unit specialist.  The specialist did not work the cases while waiting for guidance from the Technical Unit.  Per the Director, Rulings and Agreements, there was miscommunication about not working the cases while waiting for guidance.   Interviews  
October 19, 2010  Technical Unit personnel forwarded memorandum their Acting Manager describing the work completed the Tea Party cases the Technical Unit.  Included was list the cases the Technical Unit had assisted the Determinations Unit with.  The list included cases, which did not have Tea Party their names.  E-Mail  
October 26, 2010  Determinations Unit personnel raised concerns the Technical Unit with the approach being used develop the Tea Party cases:  Why does the Technical Unit need review every additional information request letter when template letter could approved and used all the cases?   E-Mail  
November 16, 2010 new coordinator contact for potential political cases was announced.   Interview and Documentation  
November 1617, 2010 Determinations Unit Group Manager raised concern the Determinations Unit Area Manager that they are still waiting for additional information request letter template from the Technical Unit for the Tea Party cases.  The coordinator had received calls from taxpayers checking the status their applications.   E-Mail  
November 17, 2010  The Determinations Unit Program Manager discussed Tea Party cases with the Technical Unit manager.  Review the cases the Technical Unit found that not all the cases had the same issues template letter had not been developed.   E-Mail  

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Date  Event  Additional Details  Source  
December 13, 2010  The Determinations Unit Program Manager asked the Technical Unit manager for status the Tea Party cases.  The Technical Unit manager responded that they were going discuss the cases with the Senior Technical Advisor the Director, EO, shortly.   E-Mail  
January 28, 2011  The Determinations Unit Program Manager requested update the Tea Party cases from the Technical Unit Acting Manager.   E-Mail  
January 2011 new person Manager role.  took over the Technical Unit Acting   Interview  
February 2011  The Technical Unit Acting Manager provided update the Determinations Unit Program Manager the cases being worked the Technical Unit.  Letters were being developed and would reviewed shortly.   E-Mail  
March  2011 Determinations Unit Group Manager reminded the Determinations Unit Program Manager follow with the Technical Unit the status the Tea Party cases.   E-Mail March 30, 2011  *******************1************************.1      E-Mail  
March 31, 2011  The Determinations Unit Program Manager stated that, while waiting for assistance from the Technical Unit, the Determinations Unit still needed work Tea Party cases the extent possible.  This contradicts the October 2010 decision not work cases until assistance received from the Technical Unit and supports the statement the Director, Rulings and Agreements, that there was miscommunication about not working the cases while awaiting assistance.   E-Mail  
April 13, 2011  *****************1***************************.    E-Mail  
June 12,  2011  The Acting Director, Rulings and Agreements, requested criteria used identify Tea Party cases from the Determinations Unit Program Manager.  The Determinations Unit Program Manager requested criteria from Determinations Unit Group Manager.   E-Mail The Taxpayer Advocate Service independent organization within the IRS that provides assistance taxpayers whose tax problems have not been resolved through normal IRS channels.  Taxpayer Advocate Service employees must, times, rely assistance from employees assigned other IRS functions. request assistance, the Taxpayer Advocate Service issues Operations Assistance Request specifying the actions needed help resolve the taxpayers problem. Page 
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Date  Event  Additional Details  Source  
June 2011 Determinations Unit Group Manager provided criteria for identifying potential Tea Party cases the Determinations Unit Program Manager.  Information was then forwarded the Acting Director, Rulings and Agreements.  These criteria are very different than the BOLO listing criteria available the time.  E-Mail  
June 2011  **************************1*************************************************   E-Mail  
June 2011  The Acting Director, Rulings and Agreements, commented that the criteria being used identify Tea Party cases may have resulted over-inclusion.  **********************1************************   E-Mail  
June 2011  The Determinations Unit Program Manager mentioned that the Determinations Unit needed assistance from the Technical Unit ensure consistency.   E-Mail  
June 29, 2011 briefing was held with the Director, EO.  The briefing paper noted that the Determinations Unit sent cases that met any the criteria below designated team specialists worked:  Tea Party, Patriots, 9/12 Project referenced the case file.  Issues include Government spending, Government debt, taxes.  Education the public via advocacy/lobbying make America better place live.  Statements the case file criticize how the country being run.  Over 100 applications were identified this time. was decided develop guide sheet for processing these cases.  The briefing paper for the Director, EO, was prepared Tax Law Specialists the Technical Unit and the Guidance Unit and was reviewed the Acting Manager, Technical Unit. Guidance Unit specialist was the primary author the briefing paper. During the briefing, the Director, EO, raised concerns over the language the BOLO listing criteria.  The Director, EO, instructed that the criteria immediately revised.  Documentation and E-Mail  
July 2011 conference call was held with the Technical Unit; the Director, EO; and the Determinations Unit Program Manager.  They developed new criteria for identifying cases.  The Determinations Unit Program Manager made changes the BOLO listing.  The criteria were changed organizations involved with political, lobbying, advocacy for exemption under 501(c)(3) 501(c)(4).   E-Mail  

TIGTA Seal
Inappropriate Criteria Were Used  Identify Tax-Exempt Applications for Review  
Date  Event  Additional Details  Source  
July 2011  The function Headquarters office would putting document together with recommended actions for identified cases.   E-Mail  
July 23, 2011  The Technical Unit was assigned new person coordinate with the Determinations Unit.   E-Mail  
July 24, 2011  Work commenced the guide sheet when the Acting Manager, Technical Unit, asked tax law specialists draft list things for Determinations Unit specialists look for when working these cases.   E-Mail  
August 2011  Rulings and Agreements office personnel held meeting with Chief Counsel that everyone would have the latest information the issue.   E-Mail  
August 2011 Guidance Unit specialist asked Counsel would review check sheet prior issuance the Determinations Unit.  The Acting Director, Rulings and Agreements, responded that Counsel would review prior issuance.   E-Mail  
August 10, 2011  *******************1***********************************************   Documentation  
September 15, 2011  The Determinations Unit Program Manager sent list all identified cases the Acting Director, Rulings and Agreements, that the Technical Unit could complete limited triage the cases using available information from the electronic case files. Technical Unit specialist reviewed the list determine any cases could closed merit closed with adverse determination letter.  This triage was considered third screening.   E-Mail  
September 21, 2011  The draft guide sheet was sent for review and comment various function Headquarters office employees.   E-Mail  
October 2011 new person took and Agreements.  over the Acting Director, Rulings   Interview  
October 24, 2011 Technical Unit manager