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The Forgotten 21 Disks: The IRS’s Unlawful Disclosure of Taxpayer Data to DOJ & FBI

November 9, 2017 by

Just as the Internal Revenue Service (“IRS”) targeting scandal was beginning to fade from Washington’s collective memory, it returned to the forefront of the national political scene with a vengeance.  It started with the Department of Justice (“DOJ”) decision in early September to forgo further criminal investigation of Lois Lerner and other IRS officials because of allegedly insufficient evidence of “criminal intent.”  Shortly thereafter, the Treasury Inspector General for Tax Administration’s (“TIGTA”) released an audit review that expanded upon the watchdog’s 2013 report, which had concluded the IRS inappropriately selected conservative tax-exempt applicants for heightened scrutiny based on their names and policy positions rather than objective criteria.  TIGTA’s new report found that the IRS had similarly mistreated left-leaning groups.  As my colleagues argued, TIGTA’s findings hardly diminished the import of the earlier investigation, but “widen[ed] the scope of IRS misconduct and increase[ed] the urgency for further changes at the agency.”  More importantly, the report impliedly highlighted the absence of any serious attempts to root out the cause of IRS politicization.

While TIGTA announced its revised findings, the IRS rolled out a work plan for the Tax Exempt and Government Entities division—the component in which Ms. Lerner worked—which signaled efforts to develop “data-driven” criteria and “analytics” for IRS decision-making.  That, of course, raised the curious question of what exactly the IRS meant by “data-driven” and what criteria it previously had been using to assess tax-exempt compliance.  And this development was followed in quick succession by a DOJ announcement that it had reached a settlement agreement with some of the so-called “Tea Party” groups, who successfully argued their constitutional rights had been violated by the IRS.  Finally, Commissioner Koskinen ended his tenure as head of the IRS and, on the way out the door, tried—yet again—to downplay TIGTA’s role in exposing IRS wrongdoing.  “Sometimes they get a little carried away with their reports,” he suggested.

Lost in all this news—particularly, the DOJ decision not to reopen a criminal investigation—was the government’s stunning admission that confidential taxpayer data was, in fact, unlawfully disclosed by the IRS to the DOJ Public Integrity Section and the Federal Bureau of Investigation.  As Cause of Action Institute (“CoA Institute”) reported last year, the DOJ Inspector General (“DOJ-OIG”) confirmed that “protected taxpayer information was included on compact discs (CDs) that the IRS provided to the Department [of Justice] in response to a Department request.”  Those infamous twenty-one disks contained more than 1.1 million pages of return information on different tax-exempt groups.  DOJ-OIG summarily concluded that the “matter does not warrant further investigation.”  TIGTA, which was also alerted to the unlawful disclosure, refused to comment.

DOJ ostensibly sought this trove of non-public information as part of the Obama Administration’s efforts to prosecute exempt entities for engaging in prohibited political activity.  Given the pattern of IRS abuse and politicization in previous administrations, however, those stated goals were always suspect, particularly given Ms. Lerner’s involvement.  Now, in light of TIGTA’s revelations about the scope of the IRS’s targeting, progressives should be as alarmed as conservatives about the lack of accountability for one of the largest and most significant breaches of taxpayer confidentiality laws in U.S. history.

When it confirmed that taxpayer data had been mishandled, DOJ-OIG also claimed that DOJ informed Congress about the unlawful disclosure.  We filed a Freedom of Information Act (“FOIA”) request last year to investigate the matter.  That request has gone unanswered.  We filed two additional follow-up requests last month (here and here), one of which also seeks records about the processing of the 2016 request.  To date, the authorities have refused to hold anyone at the IRS or DOJ accountable for the wrongful disclosure of countless pages of Americans’ private tax information.  The importance of these records cannot be overstated.  CoA Institute remains committed to bringing them to public light.

Ryan P. Mulvey is Counsel at Cause of Action Institute

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Has the IRS Changed Its Selection Criteria or Just a Machine?

November 3, 2017 by

In May 2013, the Treasury Inspector General for Tax Administration (“TIGTA”) reported audit results showing that between May 2010 and May 2012, the Internal Revenue Service (“IRS”) used “inappropriate criteria” to identify which organizations’ applications for tax-exempt status it would give heightened scrutiny.  TIGTA found that IRS selections had been based on groups’ names or policy positions rather than objective indicia that groups might act outside the requirements and limitations for tax-exempt status under 26 U.S.C. § 501(c).  As restated by TIGTA in its latest Review of Selected Criteria Used to Identify Tax-Exempt Applications for Review, published this month, “using names and/or policy positions instead of developing criteria based on tax-exempt laws and Treasury Regulations is inappropriate.”

The IRS asserts it has been reforming its review-selection process ever since in an effort to develop “data-driven” criteria and use “data analytics to inform decision-making.”  For example, the latest work plan for the Tax Exempt and Government Entities 2018 fiscal yeatar says the IRS will “continue to improve Form 990, 990-EZ, and 990-PF compliance models” as part of a new “data-driven approach” to checking compliance and selecting returns for examination.  The phrases “data-driven selection criteria” and “data analytics” can conjure algorithms and black-box calculators that are supposed to mirror impartial decisions and whose lack of bias is notoriously difficult to understand without expert background and sophisticated mathematics.

The IRS’s description of its approach, however, proffers something much simpler that does not involve sophisticated mathematics or algorithmic analysis.  Instead, its new “data-driven” approach involves analyzing informational returns for indicia that the group is operating outside the restrictions of the tax-exempt statutes or not complying with reporting obligations.  So, under the 2018 Plan, examinations will target organizations whose returns show the “highest risk of Employment Tax non-compliance” (such as 1099 information showing “high distributions” or numerous employees but “zero or minimal Medicare and/or Social Security wages paid”).  And examinations will focus on entities that do not file schedules required by their Form 990 information.  More generally, when an entity’s Form 990 suggests it has taxable business income unrelated to its charitable purposes, an examination should ask whether the entity filed Form 990-T and if not, why not.

If this “data-driven” approach is new, a few questions arise:  How was the IRS using data from Form 990 series returns before now?  Why weren’t these compliance criteria used previously?  Shouldn’t the IRS have been flagging these potential problems all along?

In any event, to the extent “data-driven” analysis does not rely on names or policy positions but instead focuses on objective indicia of compliance with the law and Treasury regulations, the new approach will be better than the IRS’s past inappropriate practices.  But if that’s all that’s being changed, and the data being relied upon is still from Forms 1023 and 990, then perhaps “machine-driven” better captures the new examination-selection criteria than “data-driven.”

Mike Geske is Counsel at Cause of Action Institute.

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President Trump to appoint a new watchdog for the Intelligence Community

November 3, 2017 by

As we have argued previously, one of the most troubling aspects of President Obama’s legacy was his failure to nominate permanent Inspectors General (“IGs”) at many agencies across the federal government.  Without presidentially-appointed, Senate-confirmed leadership, there is always a real danger that IG offices will lack the necessary commitment to transparency and accountability in government.  As Senator Ron Johnson has commented, “acting” IGs—who are typically career civil servants—risk being “not truly independent [because] they can be removed by the agency at any time; they are only temporary and do not drive office policy; and they are at greater risk of compromising their work to appease the agency or the president.”

When President Obama left office, twelve agencies lacked an IG.  Since taking office, President Trump has steadily moved to remedy this dearth of leadership.  Last month, we praised the President for nominating five individuals to some of these watchdog vacancies.  Now, we can sound another note of accomplishment following the White House’s announcement today that it intends to name Michael Atkinson as Inspector General of the Intelligence Community.  Although this post only became vacant shortly after President Trump took office—the former IG, Charles McCullough, retired in March 2017—it is a vital one, particularly in the current political climate.  Mr. Atkinson, who studied law at Cornell University, currently serves as the Acting Deputy Assistant Attorney General for the Department of Justice’s National Security Division.  He previously worked in the Department’s Fraud and Public Corruption Section.

We reiterate our hope that the White House will continue its efforts to find IGs for all current vacancies, such as those at the Department of Defense, the Department of Energy, and the Department of Housing and Urban Development.  The Department of the Interior, sadly, continues to lack a permanent IG since the previous watchdog left office 3,175 day ago.  These large agencies have substantial budgets, and presidentially-appointed IGs will provide an important internal check on waste, fraud, and abuse.

Ryan P. Mulvey is Counsel at Cause of Action Institute.

 

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Newest TIGTA Review Shows Broader Extent of Political Targeting by IRS

October 27, 2017 by

The U.S. Department of Justice has filed a proposed consent order settling a federal case in which scores of organizations allege that the IRS violated their rights to free speech, free association, and equal protection of the law when it screened their applications for tax-exempt status on the basis of their names and policy positions alone. In the consent order the IRS admits its process was wrong and the Court will declare that “discrimination on the basis of political viewpoint in administering the United States tax code violates fundamental First Amendment rights.” That’s a spectacular settlement and a welcome outcome for the plaintiffs. But it will not end the IRS’s continuing practice of preparing sensitive case reports for supervisory review whenever an application or request for information might “attract media or Congressional attention.” The Internal Revenue Manual provisions that authorize sensitive case reports are where the scandal of political targeting by the IRS began. And until those provisions are withdrawn, cases and requests that an administration considers “sensitive” but outside the terms of the new consent order may still get special treatment within the IRS.

In a 2013 Audit Report, the Treasury Inspector General for Tax Administration (“TIGTA”) found that the IRS “inappropriately identified specific groups applying for tax-exempt status” whose applications would receive special scrutiny. Over a two-year period beginning in May 2010, the IRS inappropriately identified those groups “based on their names or policy positions instead of developing criteria based on tax-exempt laws and Treasury Regulations.” The result was a process by which the IRS demanded and examined additional information from these groups after labelling them “Tea Party cases,” and the ensuing controversy was dubbed the “IRS Tea Party targeting scandal.”

In its new 2017 Review, published earlier this month, TIGTA recounts how the IRS developed and used 17 “selection criteria” between 2004 and 2013 to identify which groups and applications for tax-exempt status deserved extra attention. Politicians and media outlets are claiming that the 2017 Review proves there never was an “IRS Tea Party targeting scandal” because the IRS also used names and policy positions to select progressive, liberal, and Democratic-affiliated groups for heightened scrutiny. A Washington Post headline sums up the revisionist interpretation:  “Four years later, the IRS tea party scandal looks very different.  It may not even be a scandal.”

This 2017 Review provides new information, disclosing that the IRS sometimes used names and political positions alone as selection criteria for heightened scrutiny of tax-exempt applications instead of the organization’s activities and the requirements of the Internal Revenue Code and related regulations. The initial 2013 Audit Report was limited to two years of IRS practice beginning in May 2010 because that was “the first date that [TIGTA was] informed that the Determinations Unit was using criteria which identified specific organizations by name.” 2013 Audit Report at 9 n. 20.  Yet the 2017 Review shows that the same kind of “inappropriate” practice began at least five years earlier, and neither the new 2017 Review nor the early press and political commenters recognize the significance of this revelation.

Yes, as the early reactions suggest, two of the overtly partisan criteria identified in the 2017 Review are tied expressly to the Democratic Party and “progressive” partisans.  But the IRS first used these criteria to choose applications for heightened scrutiny way back in 2005 and 2007, during the George W. Bush administration.

At the end of 2007, the IRS selected applications from groups named in the “Emerge network of organizations” whose purpose “was to train women to run as Democratic candidates for public office.” By September 2008 the IRS highlighted the “Emerge” criterion in an e-mail alert and training.  Up to 12 applications may have been affected by the Emerge criterion, either initially or upon subsequent review.

In October 2005 the IRS began using the “Progressive” criterion, identifying “the word ‘progressive’” and the “Common thread.”  In April 2007, the IRS noted further that the groups “appear as anti-Republican” with “references to ‘blue’ as being ‘progressive.’”  Up to 74 applications may have been affected by the Progressive criterion.

These two criteria are no small potatoes. Together, the Emerge and Progressive criteria may have played an inappropriate role in more than half (96 of 181) of the applications considered in the 2017 Review.

Two other criteria identified in the 2017 Review are overtly partisan for the other side. Just before the 2010 mid-term elections, the Obama IRS looked for “Pink Slip” and “We the People” in names or titles as proxies for Tea Party groups to select tax-exempt applications for special examination. And in the run up to the 2012 general election in which President Obama was re-elected, the IRS began using “Paying the National Debt” to identify applications for extra scrutiny, a criterion which overlapped with “We the People.”

So, reporters and politicians who claim that the IRS’s inappropriate use of names and policy positions was never a scandal are ignoring the important chronology revealed in the new 2017 Review. By claiming that this selection process was not scandalous because goose and gander got the same sauce without considering who applied that sauce and when, they are condoning politically influenced tax decisions at the IRS so long as the law allows presidents of both political parties to harass their political opponents. But wrongs on both sides don’t make a right. As John McGlothlin of Cause of Action Institute opined last week in “The Hill,” the 2017 Review shows that “neither side focused on the larger point – that citizens from both sides of the political spectrum, were being denied their rights.”

Politics periodically infects tax enforcement and administrations of both parties have used political targeting by the IRS. But as Cause of Action Institute has discussed many times, the larger point is that the IRS and Congress have turned blind eyes to the identifiable, current provisions in the Internal Revenue Manual that allow such meddling. So inappropriate political targeting by the IRS remains a threat under the agency’s own regulations, even now under President Trump. Leviathan’s nature is to flee reform, so let’s hope Congress exercises its power to tame that beast, and soon. Without those reforms, the IRS can and inevitably will continue to use  inappropriate, politically-charged criteria in enforcement, investigatory, and compliance decisions, to evade congressional reforms, and to avoid accountability.

Mike Geske is counsel at Cause of Action Institute.

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DHS Watchdog Claims Political Appointees No Longer Politicizing FOIA

October 20, 2017 by

One of the earliest transparency scandals of the Obama Administration erupted in 2010 when the Associated Press discovered that officials at the Department of Homeland Security (“DHS”) had, “in a highly irregular move,” started to “filter hundreds of public records requests through political appointees, allowing them to examine what was being requested and delay releasing sensitive material.”  These appointees, along with senior officials and public affairs staff, effectively blocked or delayed the disclosure of potentially embarrassing or politically-damaging agency records under the Freedom of Information Act (“FOIA”).  Their interjection into the FOIA process—and retaliation against career staff members who objected to this “sensitive review”— resulted in a congressional inquiry and damning Oversight Committee report.  The Obama Administration politicized FOIA the same way at the Department of Housing and Urban Development, the Environmental Protection Agency, the State Department, and the Department of the Treasury.  The situation at DHS, however, has improved, according to a recently-released Inspector General report.

The July 7, 2009 memorandum establishing sensitive review procedures at DHS included extensive reporting requirements, including updates to the White House about agency disclosures.  The DHS Inspector General politely described this, in a March 2011 report, as “unprecedented.”  It “created inefficiencies that hampered full implementation” of the FOIA.  More troubling, the policy had the practical effect of targeting media organizations and critics of the Administration.  Agency officials regularly delayed requests from media outlets, for example, so that they could develop a public response to damaging records.  And other disclosure decisions were sometimes based on the political affiliation of a requester.

Now, in response to a June 2015 request from the U.S. Senate Homeland Security and Governmental Affairs Committee, the Inspector General has published a new report that revisits its earlier findings and suggests that the culture of FOIA politicization at DHS has improved.  Since 2011, DHS has “reduced the number of days that political appointees . . . have to review releases from 3 days to 1 day.”  The sensitive review process has been renamed the “1-Day Awareness Notification Process.”  And, in most cases, FOIA officers “no longer wait for approval before releasing responses to significant FOIA requests” because it is “not required.”  An audit of 57 “significant requests” showed that none were delayed because of political appointee intervention.

These findings are positive.  The more limited involvement of fewer political appointees—“an advisor to the DHS Secretary, an official in the Office of Public Affairs, and the Chief FOIA Officer”—as well as a shorter “notification” period, limits the potential for politicization while respecting agency leadership’s concern for being kept aware of disclosures that might ignite media attention.  The apparent removal of any sort of necessary “clearance” authorization from political staff, or the removal of a requirement to obtain such clearance before release, is also a helpful development.  Oddly, DHS’s revised procedures are only “informally documented” in a “2012 email” and “2015 draft guidance.”  According to the Inspector General’s report, the DHS Privacy Office aims to finalize them by the end of the year.  The sooner, the better.

Ryan P. Mulvey is Counsel at Cause of Action Institute.

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Progress has been made in appointing IGs, but more should be done

October 16, 2017 by

Earlier this year, we highlighted an important, troubling, occasion: the passage of the 3,000th day without a permanent Department of Interior Inspector General (“IG”).  Five months have passed and President Trump has still not appointed a watchdog for that agency.  At least eight other IG offices are similarly without permanent leadership.  Nevertheless, despite the need for greater effort on the part of the Administration, due credit should be given for the important progress that has been made in appointing competent individuals to some of the vacancies.

We applaud President Trump for nominating five individuals to IG posts since taking office.  In June, Robert Storch was nominated to oversee the National Security Agency.  In September, Mark Greenblatt and Christopher Sharpley were selected for the Export-Import Bank and Central Intelligence Agency, respectively.  And last week, President Trump announced his intent to nominate yet another two IGs—John Edward Dupuy for the Office of Personnel Management, and Gail Ennis for the Social Security Administration.  These candidates all appear to be eminently qualified.  Better, nearly all of them have previous experience working in IG offices.

It was inexcusable for President Obama to neglect to fill empty IG spots with qualified candidates, and President Trump has made important steps to rebuilding the federal government’s watchdog network.  We hope that the White House will make a special effort, however, to find IGs for Cabinet-level entities, such as the Department of Defense, the Department of Energy, and the Department of Housing and Urban Development.  These agencies, in particular, have substantial budgets, and permanent IGs would provide an important internal check on waste, fraud, and abuse.

As we argued before, the absence of permanent IGs is concerning because it can reflect a lack of commitment to transparency and accountability in government.  Acting IGs cannot truly be independent.  As Senator Ron Johnson has commented, “[t]hey are not truly independent [because] they can be removed by the agency at any time; they are only temporary and do not drive office policy; and they are at greater risk of compromising their work to appease the agency or the president.”

President Trump should accelerate his efforts to identify and nominate strong, independent, and motivated watchdogs.  Taxpayers and the federal government only stand to benefit—as the savings illustrated on the new Oversight.gov suggest. We look forward to the White House’s future efforts on this critical issue.

Ryan P. Mulvey is Counsel at Cause of Action Institute.

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Watchdog Exposes IRS Record Management Failures

July 18, 2017 by

The Treasury Inspector General for Tax Administration (“TIGTA”) released an important report yesterday that detailed the Internal Revenue Service’s (“IRS”) inconsistent and inadequate records retention policies over recent years. The audit had been requested in March 2016 by the House Committee on Ways and Means.  TIGTA, the IRS’s watchdog, concluded that the agency had failed to “comply with certain Federal requirements that agencies must ensure that all records are retrievable and usable for as long as needed.”  In other words, TIGTA took the IRS to task for having ignored the requirements of the Federal Records Act (“FRA”) and the Freedom of Information Act (“FOIA”).

Consider some highlights from the report:

  • “The IRS’s current e-mail system and record retention policies do not ensure that e-mail records are saved and can be searched[.]”
  • “[R]epeated changes in electronic media storage policies, combined with a reliance on employees to maintain records on computer hard drives, has resulted in cases in which Federal records were lost or unintentionally destroyed.”
  • “Interim actions taken by the IRS while developing an upgraded e-mail solution do not prevent loss of e-mail records.”
  • The IRS’s “interim e-mail archiving policy for executives” was “not implemented effectively because some executives”—including four members of the Senior Executive Team—did not properly configure their e-mail accounts . . . and the IRS did not have an authoritative list of all executives required to comply with the interim policy.”
  • “Policies requiring the IRS to document search efforts [under the FOIA] were not followed for some cases.”
  • “The IRS does not have a consistent policy to search for records from separated employees.”

TIGTA’s report offers countless examples of how not to comply with federal law.  Yet none of the details are terribly unexpected.  Ever since the Lois Lerner Tea Party targeting scandal broke in 2013, the IRS has been grilled for its shoddy records management.  Cause of Action Institute’s oversight of the agency revealed, for example, that the IRS used to delete BlackBerry messages after only fourteen (14) days because of “routine system housekeeping” and “spacing constraints.” More egregiously, the IRS intentionally failed to capture, preserve, or retain instant messages created on its Microsoft Office Communications Server (“OCS”) platform because of a contractual agreement with the National Treasury Employees Union.  That “memorandum of understanding” sought to “enhance employee work environments and allow employees to more effectively and efficiently collaborate with their colleagues.”  In other words, the IRS had no systemic means of assuring that employees’ communications on OCS were not records subject to the FRA or the FOIA and, if they were, that they were appropriately retained and retrievable.  Our lawsuit against the IRS helped push the agency to implement a new records management system for text and instant messages in line with the requirements of the law.  Unfortunately, as the TIGTA report demonstrates, the agency still falls short with respect to its management of email records.

It is also unsurprising—but still deeply troubling—that TIGTA concluded the IRS “did not consistently ensure that potentially responsive records” were identified, searched, and produced in response to FOIA requests. CoA Institute frequently litigates with the IRS over requests that go unanswered for months.  The fight usually boils down to a disagreement over the adequacy of the agency’s search.  Regrettably, courts give agencies a great deal of deference in justifying the reasonableness of their searches, even when a declarant fails to provide sufficiently specific information about how a search was conducted.  In some of our cases, IRS FOIA officers have merely asked senior employees whether potentially responsive records exist and then called it a day.  That’s unacceptable.  The onus is now on the IRS to make improvements, and it is for Congress and taxpayers to ensure those improvements are made.

Ryan P. Mulvey is Counsel at Cause of Action Institute

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