Democratic lawmakers on the Senate Finance Committee said Tuesday the IRS, while engaging in "unacceptable" targeting of conservative groups, may have been set up for failure by campaign finance law ambiguities that allowed tax-exempt groups to engage in partisan politics without disclosing their donors.
In the Senate's first hearing on revelations that the tax agency had targeted tea party and other conservative groups for special scrutiny, Democrats focused largely on the foggy environment that led to the scandal, while minority Republican members of the panel excoriated senior IRS officials for failing to stop specialists in Cincinnati from burdening tea party groups and others with excessive requests for information.
Applicants who were singled out by specialists in the Cincinnati field office from early 2010 to May 2012 had filed for tax-exempt status under a portion of the tax code that limits their political activities as a "social welfare" groups, according to an audit from the Treasury's Inspector General for Tax Administration.
The designation, however, allowed the so-called 501(c)(4) to shield the identities of people who funded their operations.
"Clearly, a Mack truck is being driven through the 501(c)(4) loophole," Committee Chairman Max Baucus, Montana Democrat, said, noting he asked the IRS to look into the issue in late 2010.
The well-attended hearing provided former IRS Commissioner Douglas Shulman his first opportunity to testify about the scandal that mostly unfolded during his time at the helm of the agency.
Mr. Shulman said he was not personally responsible for the crux of the scandal — establishing inappropriate criteria that prompted specialists in the tax-exempt organization division to "be on the lookout" for tea party groups and others as of July 2010.
"With that said, this happened on my watch," he told the committee, "and I very much regret that it happened on my watch."
"I don't think that qualifies as an apology," Senate Minority Whip John Cornyn, Texas Republican, said.
Mr. Shulman also said he did not know about attempts by more senior IRS officials to correct the issue in the summer of 2011, directing the tax-exempt status division in Cincinnati to broaden their criteria for scrutiny.
"If you don't know it, [it] sounds like someone wasn't doing his job," Mr. Baucus told the George W. Bush appointee, who left the agency six months ago.
Taking a broader view, committee Democrats said the situation raises questions about whether the IRS has the resources it needs to vet thousands of applications for tax-exempt status that may be skirting the limits of campaign finance law.
Sen. Ron Wyden, Oregon Democrat, said he would like the revenue agency and the Federal Elections Commission to come up with rules to guide tax-exempt groups that delve into electoral politics.
In their rounds of questioning, Republican lawmakers made it clear that their investigation of the scandal has just begun.
Utah Sen. Orrin G. Hatch, the finance panel's ranking Republican, accused top-ranking IRS officials both past and present of failing to let Congress know about the problem while it was going on.
"Why did you mislead me and my colleagues?" Mr. Hatch said.
Acting IRS Commissioner Steven Miller, who has been forced to resign, said he never lied to the Senate.
But Mr. Miller did apologize more than once, adding onto his tour of contrition on Capitol Hill after an appearance on Friday before the House Committee on Ways and Means.
Yet he reiterated his belief that officials in the Cincinnati suffered from a lack of guidance and oversight — not political animus against conservatives.
Sen. Mike Crapo, Idaho Republican, said he does not buy that explanation.
"I think it is almost beyond belief," he said, that officials had nonpartisan reasons for scrutinizing conservative organizations.
He noted the inspector general had to rely on the word of people implicated in the scandal, and they weren't under oath when they provided information for the audit.
The turmoil surrounding the IRS broke on Friday, when Lois Lerner, director of exempt organizations for the Internal Revenue Service, apologized for the extra scrutiny during an event with the American Bar Association.
Mr. Miller said the question-and-answer that led to the apology was arranged ahead of time and was intended to get out in front of the story, since the inspector general had finished his report.
Mr. Obama's spokesman, Jay Carney, said Monday that White House counsel Kathryn Ruemmler learned of audit last month, but had limited detail and kept Mr. Obama out of the loop to insulate him from the investigation.
According to the inspector general's report: In early 2010, specialists in the Cincinnati field office began to search for applications with terms such as "tea party" or "patriot" in their names. By July of that year, the unit's manager asked the specialists to "be on the lookout" for tea party cases.
Ms. Lerner ordered the Cincinnati field office in July 2011 to change its criteria to "political, lobbying or advocacy" when deciding which 501(c)(4) applications to flag.
But specialists, viewing her instructions as too broad, again started to use policy-based criteria in January 2012.
Republican lawmakers raised questions about reports of intense and laborious scrutiny of conservative groups seeking tax-exempt status, which prompted the audit. The IRS changed its criteria once more in May 2012 to bring it in line with Treasury Department regulations.
The inspector general concluded the specialists were not motivated by politics, but used inappropriate criteria because of lax oversight.
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