Taxing Days Ahead for Everyone in IRS Scandal

The IRS faces a massive audit, and the cost will be paid by taxpayers.

The conference was called “lavish” and “shameless.” Could it pass an IRS audit? Here’s what experts say.
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The use of computer screening allows such quick changes in tactics without additional funding or staff. The report says the "Determinations Unit," as the group was known, set its own criteria notifying high-level administrators. The report also says the guidelines and management controls were not in place to prevent the unit from doing it, and through the use of search terms in a database, Atkinson says, "it's the kind of thing that can be done easily with use of technology."

The cost to taxpayers. The final cost could be felt far beyond Washington as a crippled IRS tries to regroup to serve its central role in the U.S. budget crisis, both as a provider of information and the collector of tax revenue. In a statement, the White House said President Obama's nominee, Daniel I. Werfel, the controller of the Office of Management and Budget, "has the experience and management ability necessary to lead the agency at this important time."

His experience has been as a front-line administration official in working with Congress to manage the impact of sequestration, the cuts mandated at the start of the year to head off a total shutdown of the government as the U.S. borrowing limit approached.

The last budget showdown two years ago resulted in a cut in the U.S. credit rating by Standard & Poor's, which cited the Washington stalemate as a key reason for the loss of status. Its rival agency, Moody's, has also put the U.S. debt rating on a credit watch. The credit-rating companies declined comment for this article.

At the same time, IRS duties are expanding. The agency has begun using third-party data from a wide range of public and private sources it has not used in the past. It is also taking on the chore of managing the implementation of health care reforms, which add a range of tax credits and charges that will complicate taxes for millions of returns.

[Read: What Does the IRS Know About You?]

In a statement, Obama said Werfel "will lead efforts to ensure the IRS implements new safeguards to restore public trust and administers the tax code with fairness and integrity."

A high-tech crackdown on tax-exempts. The first victim of the IRS shakeup, acting director Steven Miller, had a long history of involvement in policing misuse of tax-exempt filings. He vowed to Congress to act as the "cop on the beat" to ensure "charities behave in accordance with their charter and the privilege of tax exemption." He created an electronic processing form that could screen filings. He told Congress in 2007 that there were more than 1.6 million tax-exempt groups with assets totalling $3 trillion, excluding churches, and pushed for more professionalism and accountability in nonprofits.

Miller moved through the ranks of the IRS in a 25-year career, with much of his recent time spent as commissioner of the agency's tax exempt and government entities division - the division in the midst of the scandal. He stepped up enforcement and screening of groups seeking tax-exempt status and pushed for more transparency from nonprofits to document their social welfare goals and to account for their spending and donations. Critics say he was less forthcoming about the IRS's enforcement policy.

IRS unshackled puts agency in jeopardy. Miller brought the same commitment to the top of the agency. But the inspector general's report blamed his "shortcuts" as part of the problem. The agency's more aggressive tax collection and use of snooping technology without restraint has drawn criticism from both sides of the political spectrum. The American Civil Liberties Union has pushed for the release of IRS documents that show the agency was allowed by its counsel to open emails without warrants, and how it instructs agents on using information on Facebook and other sites. The IRS denied it opens emails without a warrant, but has not outlined the limits and guidelines for other uses of personal data.

[Read: Who Does IRS Snare in its Robo-Audits? Not the Wealthy.]