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Originally published June 24, 2013 at 6:01 PM | Page modified June 25, 2013 at 1:51 PM

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IRS employees used terms including ‘progressive,’ ‘Israel’

Documents show that “progressive,” “Israel” and “occupy” appeared on versions of “be-on-the-lookout” lists used by employees in the office that reviewed tax-exempt applications for tea-party groups and other small-government advocates.

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WASHINGTON — The Internal Revenue Service used the terms “progressive,” “Israel” and “occupy” on internal documents that helped agency employees screen groups’ applications for tax-exempt status, according to IRS documents.

The disclosure adds a dimension to the controversy surrounding IRS scrutiny of applications for tax exemptions. The agency revealed last month that it had given extra attention to tea-party groups and other small-government advocates in a controversy that has eroded trust in the IRS.

Now, documents obtained by Bloomberg News show that “progressive,” “Israel” and “occupy” appeared on versions of “be-on-the-lookout” lists used by employees in the office that reviewed tax-exempt applications in an effort to coordinate similar issues.

The term “progressive” appeared on a November 2010 document released by the House Ways and Means Committee Democrats. It appears to refer to applications for 501(c)(3) status, or groups that can get tax-deductible contributions, not the 501(c)(4) status sought by many tea-party groups.

Employees were told to watch for applications that were “partisan and appear as anti-Republican.”

Organizations operating under section 501(c)(4) of the tax code must operate “exclusively” for the purpose of promoting social welfare.

The IRS has interpreted that statute to mean that the groups can’t have politics as their primary purpose. Groups expecting to spend between 40 and 50 percent of their resources and time on politics should go through the regular application process, acting IRS Commissioner Danny Werfel said.

Social-welfare groups don’t have to disclose their donors, making them an attractive structure for anonymous political involvement.

“The audit served as the basis and impetus for a wide range of congressional investigations and this new information shows that the foundation of those investigations is flawed in a fundamental way,” Rep. Sander Levin of Michigan, the top Democrat on the Ways and Means panel, said in a statement.

Werfel said Monday that he was suspending the use of such lists, which were used as recently as last month.

The IRS took several weeks to release the documents, as it had to scrub the be-on-the-lookout lists of taxpayer-specific information before making them public.

The disclosure of the specific terms fits with what Holly Paz, an IRS lawyer at the center of the controversy, told congressional investigators.

“There were a number of specifically named organizations and issues that were on there, and at the same time that tea party was on there, there were other liberal organizations that were also specifically listed by name,” she said.

Werfel also released a report Monday outlining his plans for restoring trust in the agency and reducing the backlog of applications for tax-exempt status.

Groups stuck in the IRS backlog will have a chance for speedy approval of their applications if they promise to limit political spending.

Advocacy groups that have been delayed for more than 120 days can receive tax exemptions if they agree to spend less than 40 percent of resources and volunteer hours on politics and more than 60 percent on activities promoting social welfare, Werfel said.

The IRS said it would send letters to about 80 groups offering a faster option, which would allow them to get their tax-exempt status within two weeks. They must make their time and spending calculations based on political activity, including public communications identifying a candidate within 60 days of a general election or 30 days of a primary.

The controversy has spurred six congressional inquiries and a Justice Department criminal probe. Since taking over the agency, Werfel has replaced at least three IRS managers who oversaw applications for tax exemption — Paz, Lois Lerner and Joseph Grant.

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