Attorney General Eric Holder said Tuesday he had initiated an FBI investigation into allegations the Internal Revenue Service inappropriately targeted conservative groups for scrutiny as they applied for special tax- exempt status.
"Those were, I think as everyone can agree, if not criminal they were certainly outrageous and unacceptable," he said. "We are examining the facts to see if there were criminal violations."
But the Obama administration continued to deflect answers to questions about the issue, with White House spokesman Jay Carney saying they would deny further comment pending the release of an Inspector General report due to be issued "imminently."
"We need the independent inspector general's report to be released before we make judgments," Carney said.
There's also speculation by some that last Friday's admission from a top IRS official may have been a planned rollout in an attempt to blunt criticism in advance of the report being made public Tuesday.
Lois Lerner, the head of the IRS' tax-exempt division, responded last Friday to a question regarding unconfirmed rumors that the IRS had scrutinized the applications for conservative groups as 501(c)(4) tax-exempt status organizations, saying the government agency was "wrong" to target such groups. The audio of her response to the question was obtained by U.S. News & World Report from the American Bar Association, which hosted the panel discussion where the disclosure came. (The relevant portion begins at 49 minutes and 30 seconds).
"They used names like "tea party" or "patriots" and they selected cases simply because the application had those names in the title," Lerner said. "That was wrong, that was absolutely incorrect, it was insensitive and it was inappropriate."
Someone who attended the event said it appeared as if Lerner was drawing from a prepared statement and it struck the person as curious how much detail she provided. The National Review Online reports Capitol Hill sources who say the question, asked by Celia Roady, a lobbyist in the firm of Morgan Lewis, was planted.
President Obama said Monday that "if" the accusations about the IRS targeting are true the situation is "outrageous."
But regardless of the fact that Lerner blamed low level staffers in Cincinnati for setting up the protocol because of the proliferation of groups applying for tax-exempt status under the 501(c)(4), the circumstances have already had real damage and lawmakers on both sides of the aisle are calling for congressional hearings, the first of which is scheduled for Friday morning.
Jenny Beth Martin, co-founder of Tea Party Patriots, which is a national umbrella organization for many local chapters, says the people responsible need to be held accountable.
"The overreach and the abuse of power is very, very, very bad," she says. "The consequences need to be severe enough and the rules and regulations and laws that are put in place as a result of this need to be enough to stop any person in the IRS or anyone in the government from using the IRS as a political weapon ever again in the future."
Many tea party groups originally spawned in 2010 because of a distrust of the government and frustration over what they perceived as wasted taxpayer dollars. The 501(c)(4) status, designated for "social welfare" organizations is one that allows groups to keep their donors anonymous and thus has become increasingly popular as other tax-exempt organizations, such as 527's, also popular among political groups, require more disclosure. Lerner said that in 2010, 1,500 groups applied for the status and the number more than doubled to 3,400 in 2012.
Fran Hill, a professor at the University of Miami School of Law who specializes in this area of tax law, says this exemption has been on the books since 1913, dating back to the original tax code. She says it's always been a vague area and the recent scandal only highlights a deeper problem within the IRS.
"The state of the law in c4 is incoherent across the board because it serves the IRS purposes of avoiding difficult issues and saying no to powerful forces who are trying to shoehorn their generally commercial activities into c4," she says, citing groups like HMOs and homeowners organizations as common applicants for the tax exemption, though she doesn't think they truly fit the description connoted by "social welfare" in the law.
"One has to understand it is far broader than just anything to do with politics and I think it's been a failure of IRS administration of 501c4 for decades and decades," Hill says.
As far as Julia Hodges, the head of the Mississippi Tea Party, is concerned the whole ordeal was just a waste of time and energy that left her demoralized and feeling picked upon. Hodges' group had been working on their application for the tax designation for three years before finally giving up.
"My thought was, okay, well we want to dot our I's and cross our T's and answer this as honest as possible because that's what we're supposed to do," she says, explaining how they treated each of the lengthy questionnaires and letters that they continued to receive from the IRS. She says a retired CPA and lawyers who were part of the political group volunteered their time to complete the application, but eventually they decided enough was enough.
"It was just – you wanted to pull your hair out," Hodges says. The IRS had more than 20 contacts with the Mississippi group over a three-year period, including sending questionnaires requesting information such as whether or not the group had a Facebook page and to provide "all email communications to members for call to action," according to copies of the requests provided to U.S. News.
"But for us, it's a matter of being worried about the government harassing citizens for participating in the political process, and it's a right to assemble, it's a right to the First Amendment, it's a right to say, 'hey I don't agree with this and I need to speak up' and it was an overzealous government harassing you – that's what we felt."
One Washington, D.C.-based Republican consultant who has gone through the application process says he's not surprised to hear of the targeting, which is one of the reasons his group spent top dollar on a legal team to handle it.
"We spent a ton of money and months – and we got very detailed set of questions about what we were doing and we answered them professionally and with the assistance of counsel and non-profit consultants and our approval came very quickly," he says.
He also says it's unlikely someone actually within the Obama administration directly asked the IRS to target conservative groups, but adds there's no doubt it offered clear disapproval for the proliferation of tax exempt political groups.
"I am a big believer in what I call 'signaling,'" he says. "I think Obama administration officials signaled very loudly and aggressively over the last four years all about this secret, dirty money and the IRS goes, 'okay, but let's just target the tea party.'"
The fallout will likely continue for weeks, as lawmakers await the opportunity to grill IRS officials on Capitol Hill.