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IRS mishandling of Tea Party reviews still unresolved, audit charges

Attorney General Eric Holder announced a criminal investigation into the IRS' handling of applications for tax-exempt status by conservative groups. NBC's Lisa Myers reports.

Poor management allowed low-level IRS employees to single out Tea Party and other conservative groups seeking tax-exempt status for extra review, and the agency continues to drag its heels on fixing things, according to an inspector general's report obtained Tuesday by NBC News.

The IRS said in its formal response that it had satisfactorily answered all of the complaints in the audit by the Treasury Department's inspector general for tax administration. But Acting Deputy Inspector General Michael McKenney made it clear in a cover letter accompanying the document that "we do not consider the concerns in this report to be resolved," noting that the IRS objected to two of his office's nine recommendations calling for clearer regulations, stricter processes and better documentation of what the IRS is doing and why.

President Barack Obama said in a statement Tuesday evening that the report's findings were "intolerable and inexcusable." He said he had ordered Treasury Secretary Jack Lew "to make sure that each of the Inspector General's recommendations are implemented quickly."

The audit blamed confusion by IRS administrators for the inappropriate reviews, which Attorney General Eric Holder said Tuesday would be focus of a federal criminal investigation.

The report found that mismanagement led the IRS to ask some groups for unnecessary information — in some cases, it asked groups to list the names and address of future donors — and delayed processing of some groups' requests, some for more than three years.

The average delay was 13 months, it said.

Two IRS offices — the Washington headquarters of its Exempt Organizations unit, which is responsible for processing applications for tax-exempt status, and an office in Cincinnati called the Determinations Unit — come in for the brunt of the blame in the 48-page report, parts of which are redacted.

The audit found that in June 2011, the Cincinnati office distributed an expanded "Be On the Look Out" list of criteria for identifying potential political cases. The so-called BOLO list identified four reasons for officers to give an application special attention:

  • "Tea Party," "Patriots" or "9/12 Project" is referenced in the case file
  • Issues include government spending, government debt or taxes
  • Education of the public by advocacy/lobbying to "make America a better place to live"
  • Statements in the case file criticize how the country is being run

"The criteria developed by the Determinations Unit gives the appearance that the IRS is not impartial in conducting its mission," the audit concluded. "The criteria focused narrowly on the names and policy positions of organizations instead of tax-exempt laws and Treasury Regulations."

In its response, the IRS acknowledged "the mistakes outlined in the report," saying they were caused by "the lack of a set process for working the increase in advocacy cases and insufficient sensitivity to the implications of some of the decisions made."

Related: As applications swell, IRS nonprofit division overloaded, understaffed

The agency blamed low-level "front line career employees" acting out of what it said was "a desire for efficiency and not out of any political or partisan viewpoint."

It also claimed that some of the political groups were at fault because their applications were "vague as to the activities the applicants planned to conduct."

Groups seeking 501(c)(4) tax-exempt status can advocate for particular general political positions, but their primary purpose must be "social welfare," and they are barred from intervening in political campaigns.

"A number of applications indicated that the organization did not plan to conduct political campaign activity," the IRS said. But elsewhere in their applications, they "described activities that in fact appeared to be such activities," it said.

Many of the groups "did not understand what activities would constitute political campaign intervention," it said, even as it noted in the same document that "there are no bright-line tests" for what constitutes such activity.

"As the report discusses, these issues have been resolved," the IRS declared.

"Meet the Press" moderator David Gregory discusses the IRS's admission that it singled out conservative groups, saying there's frustration more wasn't done to deal with the issue.

But the audit disagreed, saying: "Although the IRS has taken some action, it will need to do more so that the public has reasonable assurance that applications are processed without unreasonable delay in a fair and impartial manner in the future."

In a statement late Tuesday, the IRS contended that it didn't act out of any political bias, saying the cases singled out for review in the Cincinnati office since 2010 "included organizations of all political views."

The audit didn't specifically address allegations that Acting IRS Commissioner Steven Miller misled Congress because he knew about the inappropriate procedures but kept quiet for months before they were made public.

In a speech on the Senate floor, John Cornyn of Texas, the Republican whip, thundered that Miller "should resign today" if it is established that he "willfully misled Congress when inquiries were made earlier about this sort of scandalous political activity."

Sen. Orrin Hatch, R-Utah, said that regardless of whether it acted out of political bias, the IRS had made a mess of things.

"This was either one of the greatest cases of incompetence that I've ever seen or it was the IRS willfully not telling Congress the truth," he said.

In its statement, the IRS said it never intended to hide the issue. Instead, it said, it waited to say anything until it could see the audit "and we reviewed their findings."

In what was described as a "tough meeting" Tuesday, Senate Finance Committee Chairman Max Baucus, D-Mont., told Miller that "he is in for some serious questioning" from the committee, sources in the meeting told NBC News' Kelly O'Donnell.

The Finance Committee is expected to convene a hearing into the controversy, although one hasn't yet been scheduled. Baucus told Miller on Tuesday that the committee would accept nothing less than his "complete cooperation and transparency," one of the sources said.

Lisa Myers, Kelly O'Donnell and Richard Gardella of NBC News contributed to this report. Follow M. Alex Johnson on Twitter and Facebook.

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