Somewhat after the fact, the Department of the Treasury's Inspector General for Tax Administration released its report detailing the "inappropriate criteria" used by the IRS to filter applications for non-profit status. Or, in English: here's why the IRS apologized to the Tea Party last Friday. But it owes an apology to a lot of other groups, too.

The somewhat cryptic apology — in which the IRS' Lois Lerner, director of the Exempt Organizations Division, explained that an office in Cincinnati had used a shortcut that paid undue attention to Tea Party groups — was fleshed out over the next few days. But it was the imminent release of the Inspector General's report that likely prompted Lerner to say any thing at all.

It wasn't only the issue with the Tea Party groups that is featured in the final document, though that's obviously the primary motivator for the political response. And the IG makes clear that media attention to the concerns of conservative applicants for status as a 501(c)(4) non-profit led members of Congress to demand an investigation. In total, the IG report recommends nine different improvements for the IRS to follow, all aimed at speeding and clarifying the process of approving such applications. Until those changes are made, it says in its introductory memo, "we do not consider the concerns in this report to be resolved."

The concerns are threefold. The first is that IRS employees established an unfair process for flagging applications for additional review. The second is that the review process itself took an exceptionally long time. The third is that requests for additional information from applicants was handled improperly.

Targeting the Tea Party

It is the IRS' Determinations Unit, headquartered in Cincinnati, Ohio, that reviews applications for 501(c)(4) status — the non-profit status recently in vogue for its combination of allowing political activity and masking donors. Between 2010 and 2012, the number of organizations applying as (c)(4)s doubled from 1,735 to 3,357. Since 2010 was also the peak of the Tea Party movement, applications from groups trumpeting the Tea Party ideology had also increased substantially. For the IRS, this posed a tricky problem. The rules for 501(c)(4)s stipulate that an organization's focus should be the improvement of social welfare, and that political activity must not comprise its primary activity. There are various ways in which 501(c)(4)s easily skirt that stipulation.

Still, the IRS is empowered to try and block political actors from getting (c)(4) status. To that end, in August 2010 the group in Cincinnati created a "Be On the Look Out" (BOLO) list intended to be used to flag "potential political cases" for further review. The IG report identifies four of the criteria that were used.

The following June, the director of exempt organizations was briefed on the BOLO standards and immediately ordered they be changed. They were. But in January 2012, the criteria were changed back out of concern that the new standards were too broad. Then in May 2012, the specific Tea Party flag was again removed.

However, it wasn't just Tea Party groups that were identified as potential political cases. More than two-thirds of the groups flagged for additional review weren't specifically identified by name.

It is also worth noting that under review by the IG, every official interviewed indicated that "the criteria were not influenced by any individual or organization outside the IRS." In other words, no one pinned any blame on the White House.

Reviews took far too long

One of the undercurrents to the IG's report is that the system for approving (c)(4) status was not well-run. The inspectors took a survey of applications that weren't flagged as potential political cases, and found 185 from two categories that would have met the IRS' standard for further review. Of the 296 applications that were flagged, the IG felt that 91 didn't need to be. (Seventeen of those were ones associated with Tea Party groups.)

But that problem pales in comparison to the problem with the length of time it took for the reviews. In October 2010, the Determinations Unit stopped processing potential political applications altogether, under the mistaken belief that they were to wait for a technical review of procedure. Until the following November, the IG reports, no reviews took place. The IG also thinks it knows why:

We believe this could be due to the lack of specific guidance on how to determine the “primary activity” of an I.R.C. § 501(c)(4) organization. Treasury Regulations state that I.R.C. § 501(c)(4) organizations should have social welfare as their “primary activity”; however, the regulations do not define how to measure whether social welfare is an organization’s “primary activity.”

That complex difference is precisely the loophole that many political 501(c)(4) organizations exploit, and the one that confuses outside observers of the process, as we outlined yesterday. The stoppage wasn't intentional though, the staff was supposed to continue processing claims while that guidance was being developed.

In May 2012, the IRS held a two-day workshop to train staff on the differentiation, but the damage had already been done. The average period of time a normal non-profit had to wait to learn the determination of that status was 238 days. For potential political applicants, the figure was 574.

Recommendations

Of the nine recommendations outlined by the Inspector General, the IRS accepted seven.

TIGTA recommended that the IRS finalize the interim actions taken, better document the reasons why applications potentially involving political campaign intervention are chosen for review, develop a process to track requests for assistance, finalize and publish guidance, develop and provide training to employees before each election cycle, expeditiously resolve remaining political campaign intervention cases (some of which have been in process for three years), and request that social welfare activity guidance be developed by the Department of the Treasury.

In their response to the report, IRS officials agreed with seven of our nine recommendations and proposed alternative corrective actions for two of our recommendations.

The two the IRS disagreed with focused on the IRS' clarification of why and how applicants are flagged for further review — one of the most vexing questions for applicants and outside observers alike.

The political fall-out of the report will likely be fairly minor compared to the furor that has erupted already. There's not much in it that was known previously, except, perhaps, the extent to which internal management failures made a bad problem worse. What goes largely unmentioned in the debate over the IRS' behavior is the affect on other non-profit applicants, something that the IG report calls out specifically.

[T]he IRS delayed the issuance of letters to organizations approving their tax-exempt status. For [traditional non-profit] organizations, this means that potential donors and grantors could be reluctant to provide donations or grants. In addition, some organizations withdrew their applications and others may not have begun conducting planned charitable or social welfare work. The delays may have also prevented some organizations from receiving certain benefits of the tax-exempt status.

The failure, in other words, wasn't only that a non-partisan government agency established a lamentable guideline to make its job easier. It's also that the job was done remarkably poorly overall.

Update, 8:39 p.m.: President Obama released a statement after reviewing the report. It reads, in part:

[T]he report’s findings are intolerable and inexcusable.  The federal government must conduct itself in a way that’s worthy of the public’s trust, and that’s especially true for the IRS.  The IRS must apply the law in a fair and impartial way, and its employees must act with utmost integrity. ...

I’ve directed Secretary Lew to hold those responsible for these failures accountable, and to make sure that each of the Inspector General’s recommendations are implemented quickly, so that such conduct never happens again.

This presumably means that the number of recommendations with which the IRS will comply will go from seven to nine.