By Kim Dixon
WASHINGTON (Reuters) - A watchdog inside the Internal Revenue Service, responding to charges of agency bias against Tea Party and other conservative groups, called on Wednesday for "apology payments" of up to $1,000 for those the agency subjects to excessive delays.
In its semi-annual report to Congress, the National Taxpayer Advocate said it largely agreed with recommendations for reform last month by the Treasury Inspector General for Tax Administration (TIGTA).
TIGTA's report set off controversy after it found the IRS gave undue partisan scrutiny to Tea Party and other conservative groups, even holding up some applications for years without action. It recommended more concise guidelines for IRS agents when reviewing tax-exempt applications.
That report threw the IRS into a crisis, prompting the exit of top IRS officials and FBI and congressional investigations. New developments in the six-week long saga have slowed, and prospects for quick fixes in Congress seem unlikely.
In her report on Wednesday, Taxpayer Advocate Nina Olson said IRS problems go deeper.
"The real crisis facing the IRS - and therefore taxpayers - is a radically transformed mission coupled with inadequate funding to accomplish that mission," Olson said.
Olson recommended that Congress authorize the IRS to make "apology payments" to applicants for tax exempt status stuck in IRS bureaucracy due to miscommunication and management failures.
She called for payment of up to $1,000 to taxpayers where the agency "has caused excessive expense or undue burden," or a "significant hardship."
Many Republicans want to cut funding for the agency, which they say has become too powerful in recent years.
A major source of controversy in the tax-exempt fracas has been the use of a "be on the lookout list" using terms like "Tea Party" to flag applicants for extra scrutiny.
Internal IRS documents released this week showed liberal groups, using the search terms "progressive" and "blue," may also have faced excessive scrutiny and delays.
Olson said that of the 915,000 taxpayer cases her office handled during the time studied by the inspector general, only 19 cases appeared to have faced the selection criteria.
She said of these, the IRS granted exemption status to 11, and said it found that none of the six cases handled by the Cincinnati office, at the center of the controversy, appear to involve a pattern of inappropriate selection criteria.
At the heart of the tax-exempt controversy were groups applying for tax-exempt status under 501(c)(4) of the tax code. These entities can engage in a limited amount of partisan activity, as long as that is not their primary purpose.
Fuzzy IRS rules in this area led to confusion among IRS agents in applying the law, Olson said in her report.
Under current law, applicants seeking (c)(4) status cannot use the courts to demand an answer on their applications, like charities organized under 501 (c)(3) can.
Olson recommended giving the groups this legal redress.
(Reporting By Kim Dixon; Editing by Nick Zieminski)