Ousted IRS acting Commissioner Steven Miller knew trouble was brewing… (Andrew Harrer, Bloomberg )
WASHINGTON — Steven Miller, the top enforcement official at the Internal Revenue Service, thought he might have trouble on his hands.
Election season was well underway in March 2012 when tea party organizations started to complain angrily of IRS harassment over their requests for tax-exempt status. The media was looking into it. Congress had picked up the scent.
Miller dispatched an advisor to Cincinnati, where a field office handles applications from nonprofits, to figure out what was up. What he learned would blow up into a crisis that would damage the agency's reputation and lead to his ouster last week.
With little oversight from Washington, agents in Ohio had been singling out some conservative groups for extra scrutiny, seeking to make sure they were not too heavily involved in politics to qualify as tax-exempt.
Worse yet, the agents had sent the organizations letters with numerous intrusive questions, including the groups' positions on political issues and the names of their donors.
Miller failed to tell Congress what he knew for more than a year, despite repeated queries from House committees. On Friday, at times chagrined and combative as he spoke to House members, Miller called the IRS' focus on conservative groups "obnoxious" and described what happened as "horrible customer service."
No evidence yet suggests that the IRS agents in Cincinnati had a political agenda. But ample evidence has emerged in congressional testimony and in an inspector general's report that they were overwhelmed by an influx of applications from new politically oriented nonprofits. At the same time, they were left to fend for themselves, unsupervised by Washington managers who never created rules on how to evaluate the new groups.
"Cincinnati basically became an island of its own out there," said Paul Streckfus, a former IRS attorney. He suggested the missteps and clumsy response stemmed from a "hidebound" and insular culture at the IRS. "They don't trust outsiders," he said. "They know they're always under attack, and they have a bunker mentality: 'If we keep our heads down long enough, we will survive the latest onslaught.'"
The scandal, which appears to have started with one specialist in Cincinnati, was slow-building, born of a dysfunctional bureaucracy and a fateful reorganization years ago that placed more authority in the hands of accountants and lawyers 500 miles from headquarters in Washington.
"In my view, there was a failure of management in D.C. to get their hands around this early enough," said Marvin Friedlander, who retired in 2009 after 41 years with the IRS. "Cincinnati should have reached out to Washington headquarters people, and Washington should have gotten ahead of the curve."
The inquiry has put a spotlight on an obscure branch of the IRS, the Tax Exempt/Government Entities Division, which is largely housed in an office building in downtown Cincinnati.
Former employees describe staff in the Cincinnati office as well-intentioned but overworked, struggling to keep up with more than 60,000 applications a year from groups that want to be classified as tax-exempt, such as churches, chambers of commerce, PTAs and advocacy groups.
The applications are reviewed by about 200 people in a "determinations unit," about 140 of those in Cincinnati. To keep ahead of the flood, former employees say, the staff frequently resorts to shortcuts.
"That office is given direction to move as quickly as possible, but also be accurate," said Philip Hackney, an assistant law professor at Louisiana State University who worked in the IRS chief counsel's office from 2006 to 2011. "It's impossible. They miss a lot of stuff."
The agency has had to work with a smaller staff — overall, the exempt division has about 860 people, Miller told Congress last year, down nearly 10% from its peak. Once, lawyers from national headquarters regularly compiled briefings on emerging issues and conducted weeklong training sessions in Cincinnati. But those were scrapped in 2004.
In years past, the office had spent little time worrying about so-called social welfare organizations formed under section 501(c)4 of the tax code, instead focusing more attention on charity groups.
But that changed in 2010, after the Supreme Court's decision in Citizens United. Political operatives stepped up their use of social welfare groups as vehicles to spend hundreds of millions to shape the outcome of elections — all of it from hidden sources. Social welfare organizations are not required to reveal their donors, unlike political committees.
To qualify, however, such groups cannot have politics as their "primary purpose." But the rules don't say how much political activity is too much. That fraught issue was left in the hands of agents with mostly accounting backgrounds who were ill-suited to deal with questions of politics and the 1st Amendment.