Tea Party Groups File Lawsuits against IRS


An advocacy group has filed a lawsuit in a Washington, D.C., federal court on behalf of 25 Tea Party and conservative organizations against the Internal Revenue Service and top IRS officials, in addition to the U.S. Attorney General and Treasury Secretary, arguing that the Obama administration overstepped its authority in subjecting applications for tax-exempt status from Tea Party groups to extra scrutiny.

The lawsuit, from the American Center for Law and Justice, urges the court to find that the Obama administration violated the First and Fifth Amendments of the U.S. Constitution, the Administrative Procedure Act, along with the IRS’s own rules and regulations. The lawsuit requests a declaratory judgment that the defendants unlawfully delayed and obstructed the organizations’ applications for a determination of tax-exempt status by means of conduct that was based on unconstitutional criteria and impermissibly disparate treatment of the groups. The suit also seeks injunctive relief to protect its clients—and their officers and directors—from further IRS abuse or retaliation. Further, the lawsuit seeks compensatory and punitive monetary damages to be determined at trial at a later date.

The IRS has come under fire in the past month after the former director of its Exempt Organizations division revealed that it had screened applications for tax-exempt status by filtering them out using terms like “Tea Party” and “patriot” to group them together. The disclosure came just days before the release of a critical report from the Treasury Inspector General for Tax Administration after several years of questioning from lawmakers in Congress who had written to the IRS asking about delays in applications for 501(c)4 tax exemptions .


The director, Lois Lerner, pleaded the Fifth Amendment when she was called before Congress and has been put on administrative leave (see IRS Exempt Organization Director Lois Lerner Replaced on an Acting Basis). Former acting commissioner Steven T. Miller has also been pressured to step down and has been replaced by Daniel Werfel from the Office of Management and Budget (see Werfel Has a Month for ‘Thorough Review’ at IRS).

“The IRS and the federal government are not going to get away with this unlawful targeting of conservative groups,” said ACLJ chief counsel Jay Sekulow in a statement. “As this unconstitutional scheme continues even today, the only way to stop this flagrant and arrogant abuse of our clients’ rights is to file a federal lawsuit, which we have done. The lawsuit sends a very powerful message to the IRS and the Obama administration—including the White House: Americans are not going to be bullied and intimidated by our government. They will not be subjected to unconstitutional treatment and unlawfully singled out and punished because of their ideological beliefs. Those responsible for this unprecedented intimidation ploy must be held accountable.”

In the lawsuit, the ACLJ cites six counts arguing the federal government violated the Constitution, federal law, and even its own rules and regulations.

The suit contends that the Obama Administration “unlawfully delayed and thereby effectively denied approval of Plaintiffs’ applications for tax exempt status by means of a comprehensive, pervasive, invidious and organized scheme that purposefully established unnecessary and burdensome inquiries and scrutiny of Plaintiffs’ applications based solely upon Plaintiffs’ political viewpoints (or Defendants’ assumption of Plaintiffs’ viewpoints, based on their organizational names).”

Further, the complaint asserts that the federal government’s “unlawful conduct included but was not limited to excessive scrutiny of Plaintiffs’ applications by requiring donor names, listing of issues important to Plaintiffs’ organizations, including their positions on such issues, the contents of communications between the organizations and legislative bodies, the applicants’ criteria for membership, volunteer names and the political affiliations of persons associated with the organizations . . .”

The ACLJ said Wednesday it is representing a total of 25 organizations in the lawsuit, with additional groups likely to be added to the suit as it progresses. The names of the organizations represented are available here. Of the 25 groups, 13 organizations received tax-exempt status after lengthy delays, 10 are still pending, and two withdrew applications because of frustration with the IRS process.

The ACLJ lists as defendants in the case: U.S. Attorney General Eric Holder; the Internal Revenue Service; Treasury Secretary Jacob Lew; Steven Miller, former acting commissioner of the IRS; Lois Lerner, director of Exempt Organizations Division for the IRS; Holly Paz, director, Office of Rulings and Agreements; and unknown named officials inside the IRS.

The ACLJ noted that the IRS contends that the targeting scheme originated with a couple of rogue IRS agents out of the Cincinnati, Ohio office and contends the abusive conduct has been halted. However, the ACLJ said it has correspondence showing this tactic was used not only in the Cincinnati office, but also from two offices in California—El Monte and Laguna Niguel—as well as the national office in Washington, D.C. It said the Washington office sent a letter to one of its clients as recently as one month ago.

Furthermore, the ACLJ said it has letters signed by Lerner suggesting her personal involvement in sending invasive questionnaires to 15 of our clients in March 2012 nine months after she was told about the scheme and promised to stop it.

CREW Lawsuit
The IRS has also been facing lawsuits from the other side of the political divide, with the advocacy group Citizens for Responsibility and Ethics in Washington filing multiple lawsuits encouraging the agency to crack down on political groups seeking tax-exempt status. CREW filed another lawsuit last week against the IRS in the same D.C. federal district court where the ACLJ filed its lawsuit. CREW’s suit aims to compel the agency to initiate a rulemaking procedure to address conflicts between the Tax Code’s requirements for Section 501(c)(4) groups and implementing IRS regulations.  Current IRS regulations grant tax-exempt status under section 501(c)(4) of the Tax Code to groups “primarily engaged” in promoting social welfare.  The tax laws, however, require such groups to be “operated exclusively” for social welfare purposes.

“As the ongoing IRS scandal shows, the 501(c)(4) regulation is unmanageable,” said CREW executive director Melanie Sloan in a statement. “It clearly conflicts with the Tax Code, and IRS employees are simply at a loss as to how to apply it.  Remarkably, the IRS has known the regulation presents enforcement issues for more than 50 years, but has failed to act.  CREW has sued to force the IRS to finally deal with this issue.”

CREW pointed out that groups seeking or claiming 501(c)(4) status have interpreted the IRS regulation to mean they can spend up to 49 percent of their annual expenditures on electoral activities, while still maintaining tax-exempt status. During the 2012 election cycle, Section 501(c)(4) groups spent nearly $255 million on elections. In April, following up on its earlier lawsuit against the IRS, CREW filed a rulemaking petition with the agency seeking a revision to this regulation to eliminate the glaring loophole that allows these tax-exempt groups to engage in substantial political activity while keeping the identities of their donors secret.

The discrepancy between the “operated exclusively” standard of the law and the “primarily engaged” language of the regulations has been controversial within the IRS ever since the regulations were enacted in 1959.  The IRS revisited the problem multiple times in the 1960s and 1970s, but did nothing.  Additionally, since 2011, at least two rulemaking petitions seeking to correct the problem have been filed, with the IRS responding merely that it is “aware” of the issue.

“Until now, it has been impossible to persuade the IRS or Congress to confront this issue,” said Sloan. “But now that the entire country has been educated about this previously obscure tax matter, this lawsuit may finally spur reform. The current IRS scandal directly stems from the problematic regulation. Only by changing it can we be sure we won’t see a repeat of the current debacle.”

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Wealthy Increasingly Concerned about Health Costs

Family health and the costs of long-term care and financial support for extended family have emerged as major concerns for high net worth investors and their families, with family health perceived as the biggest risk to family wealth, according to a new survey.

The survey, by U.S. Trust, polled 711 high net worth adults in the U.S. with more than $3 million in investable assets. It found that 47 percent of the respondents have created a financial plan to address long-term care needs that they and their spouse or partner might need, but only 18 percent have a financial plan that accounts for parents’ long-term care costs.

Only one-quarter (27 percent) of baby boomers and 16 percent of those who are over age 68 say they ever expected their parents might turn to them for financial assistance. Yet, one-third of Generation X and nearly half (46 percent) of Generation Y expect their parents or in-laws to rely on them for financial assistance at some point in their lives.

Sixty-three percent of wealthy people feel responsible for financially supporting their parents or in-laws if needed, even if it jeopardizes their own financial security, and 55 percent feel a responsibility to provide financial assistance for less financially fortunate siblings if they were to need it. Fifty-six percent of wealthy parents say they provide financial support to their adult children.

Nearly half (46 percent) of respondents have provided substantial financial support (not a loan) to adult family members other than their own spouse or partner. Two-thirds (69 percent) do not have a financial plan that accounts for the financial needs of any of these other adult family members.

The study found that the wealthy have a heightened sense of financial security and have shifted their investment priorities from asset protection to asset growth. Yet their well-documented aversion to risk still prevails. Lower risk trumps the pursuit of higher returns as a priority in managing their wealth. Despite this, investment risk is one of three broad areas, including family wealth and retirement planning, where U.S. Trust found a disconnect between goals and proactive wealth planning.

“The majority of people we surveyed grew up in middle-class families and created their own wealth,” said U.S. Trust president Keith Banks in a statement. “They don’t see themselves as wealthy, and many are unaware of risks and circumstances that grow increasingly complex as wealth accumulates. The wealthy have been disciplined about protecting their assets from market loss, but may have a false sense of financial security. They are not adequately planning for family health concerns or for the retirement that they want. We need to shift the conversation about wealth management to these important topics and expand their understanding of risk.”

Eighty-eight percent of people surveyed say they feel financially secure right now, and 48 percent feel even more financially secure today than they did five years ago. Those who don’t feel confident about their future financial security are more likely to be women, members of Generation X (adults aged 33 to 48) and households on the highest tier of the high net worth segment, all of whom share a primary concern about income in retirement.

Six in 10 (60 percent) high net worth investors say asset growth is a higher priority than asset preservation, a reversal of goals from a year ago when nearly six in 10 (58 percent) said that asset protection was more important. Yet, nearly two-thirds (63 percent) still say that reducing risk and achieving a lower rate of return is more important than pursuing higher returns by increasing risk.

A little over half (56 percent) of high net worth investors have a large amount of funds still sitting in cash accounts. Only 12 percent are content leaving their cash on the sidelines, yet few (16 percent) have immediate plans to move it. Two in five plan to gradually invest cash holdings over the next two years, and 35 percent have no plans to invest it.

Fifty-seven percent of respondents said that pursuing higher returns regardless of the tax impact is a higher priority than minimizing taxes. Only 34 percent feel very well-informed about the impact of recent tax law changes on the total return of their investment portfolio.

Only 37 percent of respondents, including 42 percent of men and 30 percent of women, feel very well-informed about how the tax law changes affect their income. And two in three respondents do not feel well-informed about strategies available to them to help minimize the impact of taxes on income, investments or their estate. Nearly seven in 10 (69 percent) of high net worth investors aren’t changing investment strategy in order to minimize taxes.

The majority of wealthy investors (86 percent) agreed that a long-term buy-and-hold approach still is the best growth strategy, with 35 percent strongly agreeing with this.

Sixty-two percent of high net worth households, including 52 percent of those still working, said they are very confident they will have sufficient income in retirement, in contrast to the rest of the U.S. population.

Six in 10 non-retirees have been calculating their retirement income by reviewing expected distributions from retirement savings accounts. Yet a large number have not adequately accounted for the impact of inflation (47 percent), taxes on their investment income (52 percent), life expectancy (56 percent), the cost of long-term care (62 percent), or any financial support that might be needed by their children (80 percent) or parents (82 percent).

Three-quarters of respondents have not adequately factored into their retirement planning any increase or decrease in real estate values. Yet 23 percent of retirees and 52 percent of non-retirees (including 39 percent of baby boomers) say primary residential real estate is important to funding their retirement.

Only one in three high net worth adults under the age of 49 envisions working beyond age 65. Meanwhile, six in 10 baby boomers, many already of retirement age, now have plans to work beyond age 65.

Once retired from their current occupation, 11 percent of respondents say they are likely to continue working full-time in a new endeavor and 41 percent expect to continue working on a part-time basis. More than half (54 percent) of the wealthy would like to spend time volunteering.

The report, “Insights on Wealth and Worth,” found that the transfer of wealth and values is important in high net worth households, and that attitudes and behaviors about money, work and charitable giving begin to take shape early in life within the home. This year’s survey found that generational gaps in attitudes about leaving an inheritance have narrowed and that work ethic and the transfer of financial skills and knowledge have the greatest influence on the next generation.

Only one-quarter of all survey respondents attribute the majority of their wealth to an inheritance. Those who have inherited wealth are more likely to want to leave an inheritance themselves. Seventy-seven percent of people who inherited the majority of their wealth, and 63 percent of those who earned it, consider it an important goal to leave a financial inheritance to the next generation.

Two in three Baby Boomers do not expect to receive an inheritance; 57 percent of adults under the age of 32 do expect an inheritance. Sixty-four percent of Baby Boomers, compared to 78 percent of adults younger than age 32 and 72 percent of those over age 68, think it’s important to leave an inheritance.

Only two in five wealthy parents (42 percent) agree strongly that their children are/will be well-prepared to handle their inheritance. Few wealthy parents believe their children will be mature enough to handle their wealth before the age of 25. Just 39 percent of parents whose children already are age 25 or older have fully disclosed their wealth to children, while 53 percent have disclosed just a little and 8 percent have disclosed nothing at all. The two most common reasons for not disclosing wealth to children are (1) overall aversion to the topic, having been taught never to discuss wealth with anyone; and (2) parents’ concern that disclosing information about family wealth will negatively affect their children’s work ethic.

Eighty-eight percent of parents agreed that their children would benefit from discussions with a financial professional. One in three (31 percent) respondents received formal financial training themselves from a professional advisor. Yet only 16 percent of parents have provided, or have plans to provide, their children with access to formal financial skills training.

Two-thirds of wealthy parents say they would rather have their children grow up to be charitable than to be wealthy.

Eighty-nine percent of wealthy parents believe their children appreciate the value of a dollar and the privileges of growing up in a family with good fortune. However, half of parents (51 percent), particularly those with young children, think their children feel entitled to a lifestyle that was worked hard for, and 47 percent worry that, by growing up without knowing what it’s like to go without, their children may not attain the same level of success. When it comes to estate planning, U.S. Trust found that, while the basics, such as a written will, are in place, comprehensive planning is incomplete. Survey respondents cited the top three goals of estate planning as (1) ensuring the needs of a spouse are met; (2) minimizing estate taxes; and (3) minimizing the administrative burden of settling one’s estate.

Despite awareness of the importance of estate planning, the survey found that nearly three-quarters (72 percent) of respondents do not have a comprehensive estate plan, including 84 percent of those under the age of 49, and 65 percent age 49 or older.

Approximately one-half (55 percent) have never established a trust of any kind, primarily for two reasons: procrastination and the mistaken notion that outlining wishes in one’s will precludes the need for a trust.

Six in 10 respondents have named, or intend to name, their spouse or partner as executor of their estate. Only 32 percent of people consider the financial knowledge and skills of the person they name as their executor. Having sufficient legal and financial knowledge was cited as the top difficulty in serving as an executor by those who already have served, particularly by women.

Two-thirds (67 percent) of respondents say they have organized their personal, financial, medical and legal records and information in one place, but nearly half (46 percent) have not informed the executor of their estate about how to access the records. Fifty-five percent of respondents say they have organized passwords for accessing digital records or accounts, but 63 percent have not specified their wishes authorizing access to the passwords or to any online assets.

The survey found a desire to use wealth in a way that reflects personal goals, passions and tangible assets. In addition to leaving too much cash on the sidelines, the survey also found a limited understanding of innovative, risk-based approaches to portfolio construction and insufficient planning to protect some of these non-financial assets.

Sixty-five percent of wealthy households surveyed own investments in some type of tangible asset, ranging from real estate to oil and gas properties to farmland, a trend particularly evident among younger investors. One-third (35 percent) of investors under the age of 32 say that tangible investments are important to their overall wealth strategy given the current tax, political and economic environment.

Six in 10 wealthy individuals feel that they can have some influence on society by how they invest, and 45 percent agree that it’s a way to express their social, political and environmental values. Nearly half (46 percent) of respondents feel so strongly about the impact of their investment decisions that they would be willing to accept a lower return from investments in companies that have a greater positive impact. Forty-four percent would be willing to take on higher risk.

One-half (51 percent) of those surveyed, including 65 percent of women and 67 percent of investors under age 49, think it is important to consider the impact of investment decisions on society and the environment. Yet only one in four investors has reviewed their investment portfolio to evaluate its impact on these concerns.

Six in 10 (59 percent) high net worth individuals dedicate a portion of their wealth to the collection of valuable assets such as such as fine art, watches and jewelry, antiques, fine wines and rare coins and books or classic and high-performance cars. The majority say they collect primarily for enjoyment and the intrinsic value of the collection, versus expecting a return, which may explain why so few have taken steps to protect their collections as they might other financial assets. Only about half of those with collections have insurance. Only 19 percent of collectors have discussed or outlined their wishes for the collection with future heirs.

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IRS Hearings Express Lawmakers’ Outrage


The first round of congressional hearings on the Internal Revenue Service’s scrutiny of small-government groups didn’t reveal the people who started that practice or provide clearer answers on why they did it.

So far, the intense questioning and outrage by lawmakers on three separate committees directed at the IRS hasn’t shown who decided to give extra attention to “Tea Party” and “patriot” groups applying for tax-exempt status based on their names. It hasn’t explained why the agency kept using what an inspector general called “inappropriate” criteria even after IRS officials tried to stop it in 2011.

“What people want to know is who is going to be held accountable and how they’re going to be held accountable,” said Representative Scott DesJarlais, a Tennessee Republican.

Even as the White House has changed its timeline about who was informed in 2013, lawmakers also haven’t proven that anyone outside the IRS knew of the practice until after the 2012 election.

Former IRS Commissioner Douglas Shulman testified under oath again yesterday that he kept the information inside the agency, and Deputy Treasury Secretary Neal Wolin said he didn’t know any of the details until May 10, 2013.

Lawmakers asked for the names of low-level employees and received none. They sought explanations for the IRS actions and got mostly generalities.

At least six separate inquiries continue: four from congressional committees, a Justice Department criminal probe and further review by the inspector general who oversees the IRS that could result in referrals to prosecutors. Steven Miller, the acting IRS commissioner, lost his job, and Joseph Grant, who oversaw tax-exempt groups, is retiring early.

Lawmakers’ Frustration
At two House hearings and one in the Senate, lawmakers expressed frustration with the lack of clarity from senior IRS officials, including Shulman. They criticized the agency’s breach of trust and pledged to keep investigating.

“You’re really good at certain parts of detail and you obscure the rest,” Republican Representative Paul Gosar of Arizona told Shulman, who left the IRS in November 2012.

One IRS employee who could have provided more detail—Lois Lerner, who oversees tax-exempt organizations—refused to testify to the House Oversight and Government Reform Committee.

Lerner, accused of making false statements to Congress, cited her constitutional right not to incriminate herself after insisting that she had done nothing wrong and committed no crimes.

“She’s at the heart of the storm,” said Representative Jim Jordan, an Ohio Republican. “You would have liked for her to answer our questions.”

Constitutional Rights
Committee Chairman Darrell Issa, a California Republican, said he may recall Lerner to testify and suggested that by giving a statement, she may have waived her constitutional rights. Some criminal-procedure experts questioned whether Lerner said enough to give up her right against self-incrimination.

Lerner’s opening statement was “puffing,” said Washington criminal defense attorney Stanley Brand, who was House general counsel from 1976 to 1983. “She’s not answering questions, and she’s not giving an account of what happened. She’s saying, ‘I’m innocent.’”

As a practical matter, congressional Republicans can test Lerner’s assertion only by holding her in contempt and referring her case to the Justice Department for prosecution—a process that could take two years, Brand said.

Lawmakers could call Lerner to testify again and require her to answer questions that aren’t incriminating, said Gabriel Chin, who teaches criminal procedure at the University of California Davis School of Law. Still, he said, “If it gets anywhere near the issue, she’s allowed not to say.”

Consistent Procedures
The IRS has insisted that lower-level employees in the agency’s Cincinnati office, which handles applications for tax-exempt status, came up with the idea of using “Tea Party” as a shorthand for a batch of cases that raised concerns of impermissible political activity. The IRS maintains that it was trying to apply consistent procedures to similar cases and not trying to target groups based on their views.

So-called social welfare groups organized under section 501(c)(4) of the tax code can engage in politics as long as it’s not their primary purpose. Hundreds of groups had their applications delayed because of the extra scrutiny, and some received extensive questionnaires that asked for lists of donors. Social welfare groups don’t have to disclose donors.

“We have had some difficulty in terms of getting clarity from some of the employees we’ve interviewed,” J. Russell George, the inspector general who issued a May 14 report on the issue, said at yesterday’s hearing.

Representative James Lankford, an Oklahoma Republican, said more than a few employees had come up with the questions.

“This is a pretty large list of people that are involved in creating this,” he said. “Someone knew. In fact a lot of someones knew.”

Lawmakers from both parties criticized George’s process, particularly allowing managers to sit in during interviews of lower-level employees.

Screening Group
The House oversight committee yesterday released internal IRS e-mails that back up part of the IRS’s story while leaving some questions unanswered.

In one e-mail on June 2, 2011, Cindy Thomas of the tax-exempt division wrote to Holly Paz, who supervised legal guidance on issues involving the groups.

Thomas described the screening criteria, which captured “Tea Party” groups, as something the “screening group came up with based on cases they were seeing” as applications came in.

“If we don’t want the screening group to include all of these type issues as ‘tea party cases,’ they would have no problem including or excluding certain cases,” Thomas wrote in a plea for a consistent rule. “What I am trying to say is that it doesn’t matter what the cases are called or how they are grouped.”

The chain of e-mails occurred before a June 29, 2011, meeting at which Lerner ordered that the use of “Tea Party” as a screening criterion be stopped.

It bolsters the point in the inspector general’s report that ineffective management and training left employees in Cincinnati without adequate rules.

Written Answers
The committee also released written answers to questions that Lerner submitted to the inspector general. A key section—on the origin of the employees’ interest in political cases—is blacked out.
In her written statement, Lerner said after the June meeting, employees changed the criteria again, “unbeknownst to me,” to include groups “educating on the Constitution and Bill of Rights.” She made them change it again, according to her statement.

Staff members from the oversight panel, the Senate Finance Committee, the House Ways and Means Committee and a Senate investigative subcommittee are pursuing the issue. Oversight staffers interviewed Paz this week and are seeking to speak with four other IRS employees.

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IRS’s Lerner Will Invoke Her Constitutional Right to Silence

Lois Lerner, the mid-level Internal Revenue Service official at the center of a controversy over the agency’s scrutiny of small-government groups, will invoke her constitutional right not to testify before Congress, according to a letter from her lawyer.

“She has not committed any crime or made any misrepresentation but under the circumstances she has no choice but to take this course,” William Taylor of Zuckerman Spaeder LLP in Washington wrote to Representative Darrell Issa, a California Republican and chairman of the House Oversight and Government Reform Committee.

Lerner, who oversees tax-exempt organizations, first learned that Tea Party groups were getting extra scrutiny in June 2011. The controversy over the IRS actions erupted when she apologized for the practice on May 10 at an industry conference.

Issa has issued a subpoena to Lerner to appear before Congress. He is holding a hearing on the matter that’s scheduled to start at 9:30 a.m. tomorrow in Washington.

“Chairman Issa remains hopeful that she will ultimately decide to testify tomorrow about her knowledge of outrageous IRS targeting of Americans for their political beliefs,” Ali Ahmad, a spokesman for Issa, said in a statement.

In his letter, Taylor asked that Lerner be excused from appearing, which would “have no purpose other than to embarrass or burden her.”

The Fifth Amendment of the U.S. Constitution protects individuals from making self-incriminating statements.

Issa Letter
In a May 14 letter to Lerner, Issa mentioned several oral and written statements she made to committee staff members, including a Feb. 24, 2012 statement that the criteria for selecting groups for additional scrutiny hadn’t changed.

“It appears that you provided false or misleading information on four separate occasions last year,” wrote Issa and fellow Republican Representative Jim Jordan of Ohio.

The Justice Department has opened a criminal probe into the matter, and it is a crime to make false statements to Congress.

A telephone call to Taylor wasn’t immediately returned.

Acting IRS commissioner Steven Miller and former commissioner Douglas Shulman have testified under oath at previous hearings on the matter.

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Outgoing IRS Chief Miller Denies Targeting at Congressional Hearing


Steven Miller, who is being forced out as acting commissioner of the Internal Revenue Service, said the agency has learned from its mistakes while denying that it had targeted nonprofit groups for review because of their political views.

Under questioning from House Republicans at the first hearing on the agency’s selective scrutiny of small-government groups that applied for tax-exempt status, Miller insisted that IRS employees didn’t have partisan motivations.

“What happened here is that foolish mistakes were made by people trying to be more efficient,” Miller said at a House Ways and Means Committee hearing.

Republicans peppered Miller with questions, demanding that he explain why he didn’t inform Congress once he learned in May 2012 about what had happened.

Four congressional committees are investigating the IRS in a scandal that has erupted over the past week and hearings will be held next week. Miller is losing his job. The Justice Department has started a criminal probe that could ensnare senior officials for lying to Congress and lower-level workers for other potential offenses.

Miller revealed some new details today about what happened at the IRS and the agency’s response. He said one employee was reassigned while another was given “oral counseling.” He also said he didn’t know the name of the employee who created a list that subjected groups with “Tea Party” or “patriot” in their names to extra scrutiny.

In Advance
He also said that IRS officials had talked in advance with a Washington lawyer, Celia Roady, who asked the question at a May 10 tax conference that brought the controversy into the public eye. Lois Lerner, a mid-level official who oversees tax-exempt groups, answered Roady’s question, detailing what the IRS had done, and apologized.

Republicans sought to broaden the IRS controversy on tax-exempt groups to include other missteps at the agency and the Obama administration.

The IRS scandal is the “latest example of a culture of cover-ups” at the agency and in the Obama administration, said Representative Dave Camp, chairman of the House Ways and Means Committee.

Camp, a Michigan Republican, is leading the hearing today on the selective scrutiny of applications for tax-exempt status. In his opening statement, Camp cited other accusations against the agency, including the release of confidential information about nonprofit groups.
Miller and Russell George, inspector general for the IRS, are the only two witnesses testifying.

‘Systematic Abuse’
“This systematic abuse cannot be fixed with just one resignation or two,” Camp said. “And, as much as I expect more people need to go, the reality is this is not a personnel problem. This is a problem of the IRS being too large, too powerful.”

Representative Paul Ryan of Wisconsin, the 2012 Republican vice presidential candidate and a panel member, focused on Miller’s July 25, 2012, testimony to a Ways and Means subcommittee in which he didn’t explain how the grouping of organizations for further scrutiny was done.

“How can we not conclude that you misled this committee?” Ryan asked.

Miller said he answered the question truthfully.

“I did not mislead Congress or the American people,” Miller told the panel. “I answered questions as they were asked.”

Representative Sander Levin, the top Democrat on the Ways and Means panel, said he and other lawmakers are “angry” at the IRS for not being forthright. He is calling for the departure of Lerner.

Informed Lawmakers
Levin said Miller and former IRS Commissioner Douglas Shulman should have informed lawmakers when they found out in May 2012 about the targeting of these groups seeking tax-exempt status.

Still, Levin said the Republican-led panel should seek the “truth” and not use the opportunity for “political gain.”

Less than an hour after the hearing started, the National Republican Congressional Committee, the political arm of House Republicans, blasted an e-mail and is running paid ads on Facebook Inc.’s social network site that target Democrats for accepting campaign donations from the National Treasury Employees Union, which represents IRS employees.

The Republican groups in the ads are saying President Barack Obama, the Democratic Congressional Campaign Committee and a list of Democratic lawmakers, including James Clyburn of South Carolina and Debbie Wasserman Schultz of Florida, should return $700,000 in campaign contributions received from the organization.

Werfel Chosen
Obama yesterday announced that he’d chosen Danny Werfel, controller of the White House budget office, to replace Miller as acting IRS commissioner effective May 22.

Miller is a lawyer and a 25-year career employee of the IRS. At one point, he was in charge of overseeing tax-exempt organizations. Most recently, he was deputy commissioner for services and enforcement, a position that gave him broad authority over individual and corporate tax returns.

The inspector general’s May 14 report showed that IRS employees used terms such as “Tea Party” and “patriot” to select which applications would receive tougher questioning.

“The IRS leadership has demonstrated a total disregard for the oversight role of Congress and this committee,” he said.

‘Troubling’ Questions
George said the investigation raised “troubling” questions about whether the IRS has effective management oversight and control, “at least” when dealing with exempt organizations.

Miller said the IRS will implement all the recommendations made by the inspector general after its review of the incident. In its official response released May 14, the IRS had been resisting some of the recommendations.

Obama hasn’t nominated an IRS commissioner. Shulman, Miller’s predecessor, was appointed by President George W. Bush and announced in April 2012 that he wouldn’t seek a second term. Miller replaced him as acting commissioner in November. A nominee for IRS commissioner must be confirmed by the U.S. Senate. An acting commissioner doesn’t need confirmation.

Joseph Grant, who had been appointed to oversee tax-exempt groups and government entities on May 8, announced he would retire as of June 3.

House Speaker John Boehner yesterday cited a section of the tax code that provides criminal penalties of as much as five years in prison for people who commit “extortion or willful oppression under the color of law.”

The IRS inspector general, which already released one report May 14, will be recommending another investigation, Obama said yesterday. Karen Kraushaar, a spokeswoman for the inspector general, said she was prohibited by law from confirming the existence of an investigation.


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Obama Appoints OMB Official as Acting IRS Commissioner

President Barack Obama appointed Danny Werfel, controller of the White House budget office, as acting commissioner of the Internal Revenue Service.


Werfel on May 22 will replace Steven Miller, who was forced to resign on Wednesday following disclosure of the agency’s selective scrutiny of small-government groups seeking tax-exempt status. (See “IRS Commissioner Fired Over Tea Party Targeting.”)

“As we work to get to the bottom of what happened and restore confidence in the IRS, Danny has the experience and management ability necessary to lead the agency at this important time,” Obama said in a statement released by the White House today.

Werfel, 42, will serve until the fiscal year ends September 30, the White House said. The acting IRS commissioner position doesn’t require Senate confirmation.

Obama hasn’t nominated a permanent commissioner since the term of Douglas Shulman, a George W. Bush appointee, ended in November.

OMB controller, and another departure:Werfel was confirmed as controller of the Office of Management and Budget in October 2009. He is in charge all federal programs on financial reporting, curbing improper payments, selling surplus government property, and streamlining government purchasing and information technology programs.

The IRS announced on Thursday that a second official will leave the agency. Joseph Grant, who oversees tax-exempt organizations and government entities, will retire June 3, according to an IRS memo.

Grant had only been appointed to his position on May 8. At the time, Miller issued a statement saying Grant would “provide strong leadership and continuity.”

Grant was previously the deputy commissioner over tax- exempt groups and government entities. He is a former member of the Democratic staff of the House Ways and Means Committee, according to the memo.

At a news conference earlier on Thursday, Obama said he wasn’t aware of the IRS matter before the counsel’s office was informed April 22.

“The minute I found out about it, then my main focus is making sure that we get the thing fixed,” he said in the White House Rose Garden.

Obama also said the IRS inspector general would be seeking a further investigation.

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IRS Commissioner Fired Over Tea Party Targeting


President Obama announced during a press conference late Wednesday afternoon that he had asked for and received the resignation of Acting IRS Commissioner Steven T. Miller, over the recently revealed news that the agency had been targeting for extra scrutiny the applications of Tea Party and similar groups for tax-exempt status.

“It’s important to institute new leadership that can help restore confidence,” Obama said at the White House.

A report released on Wednesday night by the Treasury Inspector General for Tax Administration revealed that starting as early as 2010, a unit of the IRS had been using a list of politically charged and “inappropriate” criteria to single applications out, including whether the applying group’s name included the words “Tea Party,” “Patriot” or “9/12.” (See “TIGTA: ‘Ineffective Management’ Led to Targeting.”) The watchdog group found no evidence of outside political influence in the singling out of those groups.

Miller, who had been acting commissioner since November 2012, apparently knew about the targeting of the groups as early as May 2012, and has maintained that it was the result of the actions of a small number of IRS employees in a unit in Cincinnati, and not politically motivated.

“This has been an incredibly difficult time for the IRS given the events of the past few days,” Miller wrote in a letter to IRS employees. “And there is a strong and immediate need to restore public trust in the nation’s tax agency.”

No successor was named, and Miller wrote that he would leave the agency in June after working on an “orderly transition” to a new commissioner.

A number of senators and congressman had suggested that Miller resign or be fired, and Attorney General Eric Holder has announced that he will pursue a criminal investigation of the scandal. (See “Holder Orders Criminal Probe of IRS Tea-Party Group Focus.”)

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Holder Orders Criminal Probe of IRS Tea-Party Group Focus

Attorney General Eric Holder ordered a criminal investigation into the Internal Revenue Service’s targeting of small-government advocacy groups for extra scrutiny.


“The FBI is coordinating with the Justice Department to see if any laws were broken in connection with those matters related to the IRS,” Holder said at a news conference today.

The IRS has admitted that it singled out groups for extra scrutiny based solely on whether their names included words such as “tea party” and “patriot,” leading to investigations from four congressional committees and raising questions about whether partisan motivation drove the agency’s actions.

The White House said it had no involvement in the matter and that it is awaiting an inspector general’s report before deciding how to respond to treatment of advocacy groups as they sought tax exemptions as nonprofit organizations.

“I am certainly not aware and am confident that no one here was involved in this,” White House spokesman Jay Carney said in Washington. “We have to find out exactly what happened.”

A report by the inspector general who oversees the IRS is due to be released, officials from the inspector general’s office told congressional staff members at a meeting yesterday, said a Democratic aide who requested anonymity to discuss the private conversation.

Holder spoke about the planned investigation by the Justice Department and the Federal Bureau of Investigation at a news conference today in Washington.

IRS Errors
The acting IRS commissioner said the agency’s errors in targeting small-government groups stemmed from the lack of a “sufficient process” and weren’t the result of partisanship.

In an opinion piece in USA Today, Steven Miller wrote that the IRS sought to centralize its handling of applications for tax-exempt status following a “sharp increase” in the number of applications, which more than doubled between 2010 and 2012 (see IRS ‘Mistakes’ Didn’t Stem from Partisanship, Acting Chief Says).

“While centralizing cases for consistency made sense, the way we initially centralized them did not,” he wrote. “The mistakes we made were due to the absence of a sufficient process for working the increase in cases and a lack of sensitivity to the implications of some of the decisions that were made.”

President Barack Obama called it “outrageous” yesterday for the IRS to target groups promoting limited government for special attention (see Obama Calls IRS Targeting of Tea Party Groups ‘Outrageous’).

First Learned
The president said he first learned of the IRS targeting through news reports May 10. On that day Lois Lerner, the IRS official in charge of overseeing tax-exempt groups, acknowledged that the agency had targeted for special review groups promoting limited government and issued an apology.

Calls for congressional probes of the matter followed. They intensified after disclosures over the weekend that the Treasury Department inspector general’s report found that IRS officials knew of the targeting of the groups as early as June 2011, nine months before the agency’s head told lawmakers it wasn’t occurring.

“I think they purposely misled me,” said Senator Orrin Hatch of Utah, the top Republican on the Finance Committee. “This is really, really, very disconcerting to me.”

‘No Place’
The IRS hasn’t explained why it didn’t restart the screening process in June 2011, which was more than six months before it started sending inquiries to the groups.

“Mistakes were made, but they were in no way due to any political or partisan motivation,” Miller wrote.

“We fixed the situation last year, and have made significant progress in moving the centralized cases through our system,” Miller continued, adding that more than half of the cases have been approved or withdrawn. “These applications, which came from all parts of the political spectrum, received the same, even-handed treatment.”

The House Ways and Means Committee will hold a May 17 hearing with Miller and Inspector General J. Russell George as the only witnesses, according to a statement by panel Chairman Dave Camp and the committee’s top Democrat, Sander Levin, both of Michigan.

Representative Charles Boustany, a Louisiana Republican and chairman of the Ways and Means oversight subcommittee, sent a letter to Miller demanding by May 15 all agency communication containing the words “tea party” and “patriot” as well as the names “of all individuals involved in this discrimination.”

‘Improperly Identified’
The IRS said in a statement that Miller was first notified by agency staff on May 3, 2012, that “some specific applications were improperly identified by name” and had been forwarded for further review.

“Those were, I think as everyone can agree, if not criminal, they were certainly outrageous and unacceptable,” said Holder, who said he ordered the investigation on May 10. “We are examining the facts to see if there were criminal violations.”

Senate Majority Leader Harry Reid, a Nevada Democrat, compared what he called the “inexcusable” IRS actions to scrutiny he said was given in the past to the NAACP, the environmental group Greenpeace and a church in California.

Reid said the government must ensure that political groups don’t improperly gain tax-exempt status.

“Preventing overtly political groups like the one run by Karl Rove from masquerading as social welfare organizations is really a critically important task,” Reid said today. He said organizations run by Rove, a former top political strategist for President George W. Bush, have one purpose, “to defeat Democrats.”

Senate Finance Committee Chairman Max Baucus also said his panel would investigate. House Oversight and Government Reform Committee Chairman Darrell Issa has said his panel will hold hearings on the IRS’s actions, which he said represent a clear “abuse of power.”

Representative Mike Turner, an Ohio Republican on Issa’s committee, introduced legislation yesterday criminalizing IRS discrimination against individuals or groups based on political speech or expression. Florida Senator Marco Rubio, a Republican, said he will introduce the measure in his chamber.

The Senate Permanent Subcommittee on Investigations is expanding its inquiry of whether the IRS didn’t enforce the law on tax-exempt groups to include the extra scrutiny it gave to Tea Party-affiliated groups.

‘Ensure Consistency’
Miller, the acting IRS commissioner since November, told lawmakers in July that the agency had grouped together advocacy organizations seeking nonprofit status “to ensure consistency, to ensure quality” without saying that some groups had been scrutinized for having words like “tea party” in their names.

According to a timeline from the inspector general’s report, Miller became involved in the issue as early as March 8, 2012. That was 19 days before his predecessor, Douglas Shulman, testified to Congress that the IRS hadn’t targeted groups based on ideology.

Anti-tax Tea Party groups, some of which include the word “patriot” in their names, formed after Obama took office in January 2009 and helped fuel gains by Republicans in the 2010 midterm election that gave the party control of the U.S. House.

In addition to groups with “tea party” and “patriot” in their names, other organizations selected for the additional IRS review included those in which “statements in the case file criticize how the country is being run,” according to a June 29, 2011, briefing given to Lerner, the timetable says.

The IRS has been under pressure to regulate political spending by nonprofit groups, in particular those falling under Section 501(c)(4) of the U.S. tax code. Organizations qualifying for that status don’t have to disclose donors even when engaging in political activity.

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IRS Ramps up Criminal Investigations

The Internal Revenue Service’s Criminal Investigation unit released an annual report Friday showing that it increased investigations, prosecutions and convictions of tax evaders and preparers last year.


Initiations of criminal investigation amounted to 5,125 cases in fiscal 2012 while the number of investigations completed was 4,937, an increase of 5 percent compared to fiscal 2011. Convictions totaled 2,634 in fiscal 2012 while the conviction rate edged up slightly to 93 percent.

The IRS also investigated and prosecuted more tax preparers last fiscal year. It initiated 443 investigations in fiscal 2012, up from 371 in fiscal 2011. There were 276 prosecution recommendations in fiscal 2012, an increase from 233 in fiscal 2011. Sentencings rose to 172 in fiscal 2012 from 163 in fiscal 2011.

The 28-page report summarizes a wide variety of IRS CI activity on a range of tax-related issues during the year ending Sept. 30, 2012.

“The key to our successes is perseverance and dedication to working complex financial investigations aimed at stopping tax fraud, identity theft, offshore tax evasion, public corruption, money laundering and other financial crimes,” said IRS Chief of Criminal Investigation Richard Weber in a statement. “This annual report showcases some of the many significant cases that were completed by CI during fiscal year 2012 and the many program areas we cover as an organization. These cases are just a few examples of the thousands of investigations initiated by CI last year, as we continue to make our mark as the finest financial investigators in the world.”

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U.S., UK and Australian Tax Authorities Uncover Information on Offshore Tax Evaders and Advisors


The Internal Revenue Service is teaming up with tax authorities in the United Kingdom and Australia to battle offshore tax havens after uncovering new information on specific taxpayers and advisors.

The tax administrations from the U.S., Australia and the U.K. announced a plan Thursday to share tax information involving trusts and companies that hold assets on behalf of residents in jurisdictions throughout the world. The IRS said the three nations have each acquired a substantial amount of data revealing extensive use of such entities organized in a number of jurisdictions including Singapore, the British Virgin Islands, Cayman Islands and the Cook Islands.

The data they have acquired purportedly contains both the identities of the individual owners of these entities, along with the advisors who assisted in establishing the entity structure.

The IRS said it has been working together with the Australian Tax Office and the U.K.’s HM Revenue & Customs to analyze the data they have acquired and have already uncovered information that may be relevant to the tax administrations of other jurisdictions. The IRS said they have also developed a plan for sharing the data, along with their preliminary analysis, if requested by those other tax administrations.

“This is part of a wider effort by the IRS and other tax administrations to pursue international tax evasion,” said IRS Acting Commissioner Steven T. Miller in a statement. “Our cooperative work with the United Kingdom and Australia reflects a bigger goal of leaving no safe haven for people trying to illegally evade taxes.”

While there is nothing illegal about holding assets through offshore entities, such offshore arrangements are often used to avoid or evade tax liabilities on income represented by the principal or on the income generated by the underlying assets, the IRS pointed out. In addition, advisors may be subject to civil penalties or criminal prosecution for promoting such arrangements as a means to avoid or evade tax liability or circumvent information reporting requirements.

The IRS expects the multilateral cooperation and coordinated effort of the tax authorities will allow many countries to efficiently process this information and effectively enforce any laws that may have been broken.  Increasingly, tax administrations are working together in this way to assist one another in identifying non-compliance with the tax laws.

The IRS is encouraging U.S. taxpayers holding assets through offshore entities to review their tax obligations with respect to these holdings, seek professional advice if necessary, and to participate in the IRS Offshore Voluntary Disclosure Program where appropriate. Failure to do so may result in significant penalties and possibly criminal prosecution, the IRS warned.

Last month, a group known as the International Consortium of Investigative Journalists, reported that they had uncovered a large cache of secret documents revealing that tens of thousands of people, including government officials from around the world, are using offshore companies and trusts to avoid taxes (see Documents Shed Light on Wide Use of Tax Havens).

On Thursday, the ICIJ said it believes the secret records described by the IRS are believed to include those it obtained. It noted that British tax authorities claim they have even more data than that unearthed by ICIJ. The total size of the ICIJ files, measured in gigabytes, is more than 160 times larger than the leak of U.S. State Department documents by Wikileaks in 2010.

A statement from the British tax office puts the size of the data obtained by the three tax authorities at 400 gigabytes, compared to the 260 gigabytes gathered by the ICIJ.

“The 400 gigabytes of data is still being analyzed but early results show the use of companies and trusts in a number of territories around the world including Singapore, the British Virgin Islands, the Cayman Islands and the Cook Islands,” the British tax office statement said. “The data also exposes information that may be shared with other tax administrations as part of the global fight against tax evasion.”

Last month, the ICIJ and 37 media partners began reporting on more than 2.5 million files that include the names of thousands of American, Australian and British citizens as well as families and associates of long-time despots, Wall Street swindlers, Eastern European and Indonesian billionaires, Russian corporate executives, international arms dealers and a sham-director-fronted company that the European Union has labeled as a cog in Iran’s nuclear-development program.

The files leaked to ICIJ provide facts and figures—cash transfers, incorporation dates, links between companies and individuals—that illustrate how offshore financial secrecy has spread aggressively around the globe, allowing the wealthy and the well-connected to dodge taxes and fueling corruption and economic woes in rich and poor nations alike. The records detail the offshore holdings of people and companies in more than 170 countries and territories.

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