IRS Official Takes Tough Questions at Contentious Hearing

Members of Congress expressed bipartisan outrage today at the Internal Revenue Service for singling out conservative groups when reviewing applications for tax exemption and called for another agency official to be ousted.

A four-hour hearing before the House Ways and Means Committee also laid bare the confusing rules nonprofit and IRS officials must navigate when political activity may play a part in a tax-exempt organization’s mission.

Acting IRS Commissioner Steven Miller, who resigned this week, apologized for “foolish mistakes” his agency made when using phrases associated with conservative political organizations, such as “Tea Party” and “patriots,” when deciding to apply extensive scrutiny to their applications. But he repeatedly denied the organizations were flagged because of political bias and rejected the term “targeting.”

Partisanship should never “appear to be a consideration in determining the tax exemption of an organization,” Mr. Miller said.

He testified alongside Russell George, the Treasury Department inspector general whose audit this week detailed that the scrutiny of conservative groups began in March 2010. Many committee members were upset that several IRS officials, including Mr. Miller and Lois Lerner, director of the IRS division that oversees tax-exempt organizations, never acknowledged the practice when asked in previous hearings on the issue.

The first time IRS officials publicly declared knowledge of the issue was last week, when Ms. Lerner answered a question at an American Bar Association tax conference about accusations by conservative groups that the IRS had applied intrusive scrutiny to small-government Tea Party groups. She apologized for what she said was inappropriate questioning and said the agency’s procedures had been modified.

But the unusual setting for the revelation led some to assume that the question had been planted with the tax lawyer who asked it: Celia Roady, who serves as a member of the IRS Advisory Committee on Tax-Exempt and Government Entities.

“Was Ms. Roady’s question planned in advance?” asked Rep. Devin Nunes, Republican of California. “Yes,” said Mr. Miller. “It was a prepared Q and A.”

Rep. Sander Levin of Michigan, the committee’s senior Democrat, called for Ms. Lerner to step down for saying nothing when she appeared before the Ways and Means oversight subcommittee shortly before that apology.

“She failed to disclose what she knew to this committee, choosing instead to do so at an ABA conference two days later,” he said. “This is wholly unacceptable, and one of the reasons we believe Ms. Lerner should be relieved of her duties.”

Ms. Lerner was not available for comment. Her phone greeting at her IRS office line said that she is out of the office until May 20. Ms. Roady said in a statement that Ms. Lerner had asked her to pose the question after the tax official’s prepared remarks at the ABA meeting. “She did not tell me, and I did not know, how she would answer the question.”

Congressional inquiries show no sign of abating. Ms. Lerner is scheduled to testify next week to the House Oversight and Government Reform Committee, and the Senate Finance Committee has planned a hearing for next week.

Rep. Dave Camp, the Michigan Republican who chaired today’s hearing, also signaled he is not ready to drop the issue. “I promise the American people this investigation has just begun,” he said.

Members of the audience applauded when Rep. Mike Kelly, Republican of Pennsylvania, chastised Mr. Miller for calling the actions of his agency inappropriate but not illegal. He said taxpayers do not get to make that distinction when they are found to have violated IRS rules.

“You can put anyone out of business,” Mr. Kelly said. “I don’t know that I got any answers from you today. There’s a heck of a lot more that has to come out in this.”

Mr. Miller and Ms. Lerner have both said agency officials used key words like “Tea Party” to help streamline the processing of applications from organizations seeking status as 501(c)(4) “social welfare” groups, which are allowed to engage in some partisan politics. Both said there had been a significant increase in such applications between 2010 and 2012—from almost 1,500 to nearly 3,400. But the agency started applying the extra scrutiny in March 2010, before a jump in applications had begun, according to the inspector general’s report.

Rep. Todd Young. Republican of Indiana, said the numbers in the report showed that applications actually declined from 2009 to 2010, before they began to increase in 2011. “How do you reconcile the facts I’ve just laid out showing no uptick in 501(c)(4) applications with your stated motivation for targeting conservative groups?” Mr. Young asked.

“I think there was an uptick,” Mr. Miller said. “I have to look at the numbers.”

Rep. Jim Renacci, Republican of Ohio, came to the defense of the Ohio Christian Alliance, which he said was subject to extensive questions from the IRS over its application to seek exempt status as a charity. He said the group’s mission was to focus on “life, faith, and freedom” but that the group was being screened for political purposes.

Mr. Miller said the IRS has a responsibility to make sure that organizations that operate with tax exemption obey the rules that say politics cannot be their primary activity. The word “primary” has been interpreted to mean that the groups cannot spend more than half of their budgets on political activities, although no specific definition like that exists. “One of our difficult areas is determining what’s politics and what’s education,” Mr. Miller said. “It’s a very difficult line.”

While many committee Democrats also lambasted the IRS, they were generally more sympathetic to arguments that the agency was understaffed and operating under vague guidance about how to determine whether a group was fulfilling its social-welfare mission. Rep. Xavier Becerra, Democrat of California, said the rules need to be tightened because 501(c)(4) groups that are following the rules are being tainted by others that are improperly engaging in political activities.

Earl Blumenauer, Democrat of Oregon, said Congress has “slowly been starving the budget of the IRS” as it has made the tax code more complex. Inadequate staff, training, and equipment “invites shortcuts,” he said.

In response to questions, Mr. Miller said the agency needed more people to handle the 70,000 applications for tax-exempt status that it receives each year.

Send an e-mail to Doug Donovan or Suzanne Perry.