By Kim Dixon and Patrick Temple-West
WASHINGTON (Reuters) - President Barack Obama on Thursday nominated John Koskinen, known as a trouble-shooter of distressed organizations, to lead the Internal Revenue Service amid a controversy over the agency's scrutiny of conservative political groups.
If confirmed by the Senate, Koskinen will take over the agency's 90,000 employees responsible for administering the increasingly complex tax code.
The IRS has been reeling since an inspector general's report in May found the agency unfairly handled applications from Tea Party and other conservative groups seeking tax-exemption.
The revelations led Obama to fire the acting IRS commissioner and put others on administrative leave, while the FBI and congressional committees began investigations.
Koskinen was in charge of the government's effort to prevent computer failures ahead of the "Y2K" bug for the year 2000. He helped manage Freddie Mac, the government-controlled mortgage funding group, during the recent financial crisis, and served as deputy mayor for Washington, D.C. during its troubled fiscal times.
"John is an expert at turning around institutions in need of reform," Obama said in a statement. "John knows how to lead in difficult times ... I am confident that John will do whatever it takes to restore the public's trust in the agency."
Koskinen will need confirmation by the Senate for a five-year term. The IRS is now being led by an acting commissioner, Daniel Werfel, appointed by Obama in May to serve through September.
When the Tea Party controversy broke, former IRS Commissioner Douglas Shulman and then-Acting Commissioner Steven Miller angered Republicans, who said they failed to take responsibility.
Werfel has had better relations with Republicans, but Dean Zerbe, a former counsel to Republican Senator Charles Grassley, said it is vital for stability that a permanent chief be in place.
"Koskinen will need all his skills and background in turnarounds as he brings his lunch pail to the IRS," Zerbe said.
He may have his work cut out for him, with a top Republican irked that Obama did not consult with him before making the announcement.
"Given the magnitude of the scandal facing the IRS, I am more than a little mystified that neither the President nor the Secretary of Treasury either consulted with or told me in advance," said Senator Orrin Hatch, the top Republican on the Senate Finance Committee, which must clear the nomination.
On Thursday, the Republican-controlled U.S. House of Representatives debated several bills to revamp rules at the agency. Some were partisan measures not likely to go far, while others were bipartisan such as one stating explicitly a "taxpayer's bill of rights."
Koskinen is known for taking over crisis situations, such as the federal government's feverish work to prevent what some said could be a technological calamity with the year change from 1999 to 2000.
He is a lawyer by training with little record of a background in taxes.
The IRS has taken over more responsibilities outside traditional tax collection in recent years, from administering refundable tax credits to playing a major role in implementing Obama's healthcare law.
On Thursday, Werfel faced hostile questions from a Republican committee on the agency's readiness to deal with its healthcare law duties. The IRS is working frantically to get systems up and running for online health exchanges by an October 1 deadline.
The IRS also is preparing to enforce a new anti-tax evasion law, the Foreign Account Taxpayer Compliance Act. The law's start date was delayed until July 2014, in part because the IRS was struggling to finish writing the implementation rules.
Congressional tax-writers are also working to revamp the tax code, now running more than 70,000 pages, though the effort faces steep odds in the hyper-partisan atmosphere in Washington.
(Reporting by Kim Dixon; Editing by Vicki Allen)