By Fredreka Schouten and Gregory Korte, USA TODAY
WASHINGTON - The political firestorm over the Internal Revenue Service's admission that it targeted conservative groups for additional scrutiny during the 2012 election could jeopardize separate efforts under way in Congress to force the agency to crack down on nonprofit political organizations, observers say.
Republicans, including Senate Minority Leader Mitch McConnell of Kentucky, immediately denounced the IRS after a top official acknowledged that organizations that included the words "tea party" or "patriot" in their applications for tax-exempt status were singled out for additional questioning. The Republican-controlled House plans an investigation.
The scandal erupted Friday when Lois Lerner, who heads the IRS unit that oversees tax-exempt groups, apologized for the enhanced scrutiny of Tea party-related groups' tax-exempt applications. She told reporters Friday that the actions were undertaken by low-level employees in Cincinnati. and that she learned of the additional scrutiny through news reports last year.
A draft timeline of events compiled by the agency's inspector general, however, indicates Lerner was briefed about the additional scrutiny in 2011.
"This is going to be fodder for partisan warfare in Congress," said Richard Hasen, a campaign-finance expert who teaches law at the University of California-Irvine. He said congressional hearings are justified.
"At the very least, it's a distraction for the IRS," he said. "At the most, it will significantly dampen efforts to rein in shadowy" groups.
Campaign-finance watchdogs, along with a handful of mostly Democratic lawmakers, have put increasing pressure on the IRS to more closely monitor the actions of so-called "social welfare" organizations -- arguing these groups have abused the tax code to mask their funders.
These tax-exempt groups can conduct political activity, but it cannot be their primary function. Experts say that groups are spending as much as 49% of their money on politics, instead of a minimal amount.
In the 2012 election, social welfare groups - led by Crossroads GPS , an organization linked to Republican strategist Karl Rove -- spent more than $254 million on last-minute advertising to shape the outcome of the presidential and congressional elections, according to a tally by the Center for Responsive Politics, which tracks political money.
None disclosed its donors.
Bills in the House and Senate would require top donors to put their names on any political advertising they helped fund. Previous efforts to pass similar measures have failed. Proposed legislation introduced last month by Sens. Ron Wyden, D-Ore., and Lisa Murkowski, R-Alaska, also would give the IRS the power to temporarily revoke the tax-exempt status of serious violators.
Wyden said political operatives are "masquerading as tax-exempt social welfare groups."
"The IRS has refused to take on its clear responsibility to interpret and enforce the existing law when it comes to these tax-exempt 'social welfare' groups that injected massive amounts of dark money into the 2012 elections," he said.
David Keating, president of the Center for Competitive Politics, which favors fewer campaign-finance regulations, said the IRS incident "proves Congress should not pass pending legislation to give the IRS more power over advocacy or political groups,"
"The agency abuses that power, doesn't understand the need to exercise it with caution, or is simply incompetent to exercise it with care," he said.
David Vance of the Campaign Legal Center, one of the campaign-finance watchdog groups urging the IRS to investigate social-welfare groups, said that "the goal of this political storm is to scuttle the IRS cracking down on the larger abuses."
"I hope this doesn't cause them to turn around with their tail behind their legs and leave the field," he said.
The controversial IRS action disclosed Friday did not involve groups that had already secured their tax-exempt status and were active in politics. Instead, IRS officials decided to subject conservative groups to additional questions as they reviewed the organizations' applications for tax-exempt status.
Lerner, who heads the IRS Exempt Organization section, said workers inappropriately assumed that any group with "tea party" or "patriot" in its name needed more scrutiny for political activity just because of its name. About 300 groups that had applied for tax-exempt status were put into a "bucket" of cases needing further scrutiny, and of those, about a quarter had tea party affiliations, she said.
Lerner said what happened in Cincinnati won't affect the agency's ability to investigate other tax-exempt groups for improper political conduct. Officials who conduct those reviews are "used to looking at organizations in a very different way," she said.
Those reviews are done by staffers in Dallas, who submit allegations to a review panel, which decides if further investigation is warranted. She said the episode has even further sensitized the IRS to avoiding even the appearance of political decision making. Lerner made her apology at a meeting of the American Bar Association's exempt organization committee in Washington Friday.
Suzanne Ross McDowell, a partner with Steptoe & Johnson who heads that committee, said the IRS has been inundated with new applications for tax-exempt organizations ever since the U.S. Supreme Court decided in 2010 to allow direct corporate and union spending on independent political advertising.
"But there is a lot of uncertainty about how you draw the line between intervention in a political campaign, and other activities that are not intervention in a political campaign, such as issue advocacy," she said.
"These are very tough questions, and I don't think any of us have the answer."
Richard Briffault, a campaign-finance expert at Columbia Law School, said the IRS has a legitimate responsibility to examine whether organizations that receive tax protections have appropriately limited their political activity. But, as nonprofits proliferate, the agency has been pressured to play a larger role in helping to uncover donors who critics say choose to fund social-welfare groups just to hide their political contributions.
"If Congress were to develop more effective rules for campaign-finance disclosure ... some of this problem would go away," Briffault said. "That doesn't look like it's happening any time soon."