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Originally published June 16, 2013 at 8:30 PM | Page modified June 17, 2013 at 7:24 AM

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IRS supervisor in D.C. checked on tea-party applications

Testimony contradicts agency’s claim that only staffers in the Cincinnati office were involved.

The Associated Press

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WASHINGTON — An Internal Revenue Service (IRS) supervisor in Washington says she was personally involved in scrutinizing some of the earliest applications from tea-party groups seeking tax-exempt status.

Holly Paz, who until recently was a top deputy in the division that handles applications for tax-exempt status, told congressional investigators she reviewed 20 to 30 applications. Her assertion contradicts initial agency claims that a small group of agents working in an office in Cincinnati were solely responsible for mishandling the applications.

Paz, however, provided no evidence that senior IRS officials ordered agents to target conservative groups or that anyone in the Obama administration outside the IRS was involved.

Instead, Paz described an agency in which IRS supervisors in Washington worked closely with agents in the field but didn’t fully understand what those agents were doing. Paz said agents in Cincinnati openly talked about handling “tea party” cases, but she thought the term was merely shorthand for all applications from groups that were politically active — conservative and liberal.

Paz said dozens of tea-party applications sat untouched for more than a year while field agents waited for guidance from Washington on how to handle them. At the time, she said, Washington officials thought the agents in Cincinnati were processing the cases.

Paz was among the first IRS employees to be interviewed as part of a joint investigation by the House Oversight and Government Reform Committee and the House Ways and Means Committee.

Congressional investigators have interviewed at least six IRS employees. The Associated Press has reviewed transcripts from three interviews — with Paz and with two agents, Gary Muthert and Elizabeth Hofacre, from the Cincinnati office.

The IRS declined to comment for this story.

A yearlong audit by the agency’s inspector general found that IRS agents had improperly targeted conservative political groups for additional and sometimes onerous scrutiny when those groups applied for tax-exempt status. The audit found no evidence that Washington officials ordered or authorized the targeting.

But the IRS watchdog blamed ineffective management by senior IRS officials for allowing it to continue for nearly two years during the 2010 and 2012 elections.

Since the revelations became public in May, much of the agency’s leadership has been replaced and the Justice Department has started a criminal investigation.

Both Paz and her supervisor, Lois Lerner, who headed the division that handles applications for tax-exempt status, have been replaced.

Agency officials told congressional aides that Lerner was placed on administrative leave. They did not disclose the status of Paz, except to say she was replaced June 7.

Paz told congressional investigators that an IRS agent in Cincinnati flagged the first tea-party case in February 2010. The agent forwarded the application to a manager because it appeared to be politically sensitive, Paz said. The manager told Paz, who said she had the application assigned to a legal expert in Washington.

Paz headed a technical unit in Washington that gave guidance to agents who screened applications for tax-exempt status. The agents worked mainly in Cincinnati. One of their tasks was to check the applicants’ level of political activity.

IRS regulations say tax-exempt social-welfare organizations may engage in some political activity but their primary mission cannot be influencing the outcome of elections. It is up to the IRS to make that determination.

“Oftentimes what we will do, and what we did here, is we’ll transfer it to (the technical unit), get someone who’s well-versed on that area of the law working the case so they can see what the issues are,” Paz said. “The goal with that is ultimately to develop some guidance or a tool that can be given to folks in (the Cincinnati office) to help them in working the cases themselves.”

By fall 2010, the legal expert in Washington, Carter Hull, was working on about 40 applications, Paz said. A little more than half had “tea party” in the name, she said.

IRS agents in Cincinnati were singling out groups for extra scrutiny if their applications included the words “tea party,” “patriots” or “9-12 project,” according to the inspector general’s report. Paz said she didn’t learn that agents were targeting groups based on those terms until June 2011, about the time Lerner first ordered agents to change the criteria.

Paz said an IRS supervisor in Cincinnati had commonly referred to the applications as “tea party” cases. But, Paz said, she thought that was simply shorthand for any application that included political activity.

In all, agents singled out 298 applications for additional scrutiny because the groups appeared to be involved in political activity, the inspector general’s report said.

But IRS agents in Cincinnati weren’t given adequate training on how to handle the cases until May 2012, the report said.

Before the training, only six applications had been approved. Afterward, an additional 102 applications were approved by December 2012, the report said.

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