As Lois Lerner Pleads the Fifth, The IRS’s Problems Aren’t Just Political

The IRS has money and management problems that made a scandal “inevitable,” one of Lois Lerner’s predecessors tells Caitlin Dickson.

Since dropping the bomb that her division of the IRS had been improperly giving extra scrutiny to conservative groups applying for tax-exempt status, Lois Lerner, head of the IRS Exempt Organizations division, has kept quiet. Tuesday, she made it official, pleading the Fifth Amendment at a House Oversight Committee.

But as the scandal over the organization singling out groups with “tea party,” “patriot,” or “9/12” in their names has grown—after initially denying knowledge, the Obama administration has acknowledged it knew of the tax agency’s actions during the election—former IRS leaders were at once unsurprised and sympathetic to Lerner’s plight, pointing to structural problems at the IRS that have nothing to do with politics.

“It was inevitable something was going to happen,” said Marcus Owens, who served as director of the IRS Exempt Organizations Division from 1990 until he retired in 2000. That was the same year that the 1998 IRS Restructuring and Reform Act was implemented, ushering in, he said, a culture of disorganization and miscommunication.

“Virtually all IRS executive positions were realigned and reevaluated, and a lot of field offices positions were eliminated. The channels of communication between field offices and the Washington headquarters were muddied,” Owens said. “Instead of having clear, hierarchical oversight, Cincinnati was given the responsibility to handle things that would normally be handled by the better-equipped Washington office.”

In an effort to save money, he said, the “safety valves” that had existed to move questionable or politically charged exemption applications to Washington were shut off, as part of “a rational allocation of scarce resources.

“They should have used politically neutral, fact-based criteria to capture organizations that are most likely pushing the line on political activity,” Owens said. “At the same time, the inspector general should have made it clear that these organizations were voluntarily submitting applications to the IRS for evaluation.

“This is a case of funding problems and management problems. Everyone is thinking that the IRS was hunting down conservative organizations with bloodhounds or something when what they were really doing was opening the morning’s mail … The IRS is really a collection agency for the government. Tax returns that generate revenue must be accurate, but those that don’t generate revenue receive less attention,” he said. “That’s just the way it is.”

“The length of time it takes to process applications for exemption has gone up across the board, said Owens, who now deals with the IRS as an outside lawyer representing nonprofit organizations seeking tax-exempt status. ”It’s very difficult to engage Lerner’s division on those sorts of issues … It’s a very slow process and it can be frustrating to organizations that are hoping for much quicker decision making.”

Lerner’s immediate predecessor, Martha Sullivan, retired from the IRS in 2005 and declined a request to comment on this story.

Milton Cerny, another IRS alum who served as technical adviser to the assistant commissioner on Employee Benefits and Tax Exempt Organizations, noted that the agency has been looking for a better way to interpret the 1942 law that birthed social-welfare organizations at least since he started working there in 1960.

“When the Citizens United decision came down, and there were a number of 501(c)(4)s applying for tax exemption, I’d hoped this whole area would be studied and proper rules would be determined,” Cerny said. “I haven’t seen that happen yet.”

Cerny believes the most important thing the IRS can do right now is to appear as transparent as possible. “The agency has to understand that the country’s perception of the government is generally very low,” he said. Lerner has a constitutional right not to testify, Cerny said, but “I think it would benefit the public [if she did], so we can have a better understanding of what happened.”