When it comes to the effectiveness of using watch lists to identify terrorist threats, theory and reality yield very different results. On May 21, the Treasury Inspector General for Tax Administration (TIGTA) issued a report criticizing the Internal Revenue Service (IRS) for not using the FBI's Terrorist Screening Center's (TSC) consolidated watch lists to check nonprofit tax filings for possible matches to suspected terrorists. At the same time, non-governmental groups have criticized the watch lists as being riddled with errors and said no clear reason exists as to why some people or groups are put on the lists. Additionally, a 2005 Justice Department Inspector General report confirmed many deficiencies with the TSC. The TSC was created December 1, 2003, and is run by the FBI to consolidate terrorist watch lists and provide 24-hour, 7-day-a-week operational support for federal, state, local, territorial, tribal, and foreign governments as well as private sector screening across the country and around the world. TIGTA assumes the larger TSC list would produce better information than Treasury's own Office of Foreign Assets Control's (OFAC) list of 1,600 entities and individuals officially designated as terrorists. Use of the OFAC list by private companies for similar screening has caused innocent people to be flagged as terrorists, creating problems with everything from buying a car to getting a job. This led the Lawyer's Committee for Civil Rights of San Francisco Bay Area (LCCR) to file a lawsuit against the Treasury Department on May 16 to force disclosure of public records that would document the extent of the problem. This raises the question of why the IRS should expand its screening program before fundamental problems with the lists are addressed, including lack of a process to remove erroneous listings. The TIGTA report primarily addressed inefficiencies in the IRS process, including failure to automate its list checking and manually screening tax-exempt status applications (Form 1023) and annual information reports (Form 990) for "Middle eastern sounding names." It based its recommendations on two questionable assumptions:

• That use of the OFAC list with 1,600 names instead of the TSC list, which has over 200,000 names, "increases the possibility of identifying individuals already known to be or suspected of being involved in terrorist-related activities"
• That charities and nonprofits are a "significant source of alleged terrorist activities."

The Treasury Department has never provided documentation to back up its claims that the charitable sector is a significant source of terrorist financing or activity. It is equally possible that expanded list checking would not produce terrorist links, since the U.S. nonprofit sector is not a significant source of terrorist financing. In fact, only six of the 43 charities on OFAC's list are based in the United States and subject to IRS regulation. The report recommended that the IRS Director of Exempt Organizations, "in coordination with key IRS and external stakeholders, develop and implement a long-term strategy to automate the process used to initially identify potential terrorist activities related to tax-exempt organizations" and "evaluate whether more comprehensive terrorist watch lists, including any applicable TSC information, should be used …" The IRS has accepted the recommendations and "agreed to meet with Federal Bureau of Investigation personnel to evaluate how the TSC information may serve their needs and will evaluate whether other, more comprehensive terrorist watch lists can be used." By agreeing to automate its process, whatever watch list the IRS uses will be checked against data submitted in Forms 1023 and 990, including:

• names, titles and addresses of officers, directors and trustees
• names and addresses of the five highest paid employees and independent contractors
• contributors of more than $5,000 per year.

The question then becomes whether the results will provide useful leads to the IRS Criminal Investigation Division or FBI. TIGTA assumes that the minimal results to date are due to the inefficient manual system and use of the smaller OFAC list. The report says that the IRS only identified 93 potential connections between October 2005 and September 2006 based on Form 1023. Of these, only three merited further review, and one was cleared and granted tax-exempt status. The other two were still under review as of December 2006. List checking against Form 990 between April 2005 and October 2006 produced 201 potential connections, and further review revealed that none were positive matches. The OFAC list is composed of "Specially Designated Nationals and other persons whose property is blocked, to assist the public in complying with the various sanctions programs administered by OFAC." The designation process has been criticized for being arbitrary, using secret evidence and lacking a meaningful independent review of OFAC decisions. The larger TSC list combines data from federal agencies, states, and local government and the FBI's massive Terrorist Identities Datamart Environment (TIDE). According to a March 25, 2007, Washington Post article "Terror Database has Quadrupled in Four Years," TIDE is a huge database used by various agencies to create watch lists. Its manager, Russ Travers, told the Post, "The single biggest worry that I have is long-term quality control." This raises legitimate questions about whether the IRS should use the expanded list. The lack of standards and the inability of erroneously listed persons to get taken off the list create huge potential for mistakes and negative consequences for innocent victims. This has been amply demonstrated with the OFAC list. A report from LCCR details multiple examples of how many Americans are being denied jobs and various services because their names are similar to others who are designated. After Treasury failed to respond to its Freedom of Information Act requests to learn more about these impacts, LCCR sued to force further disclosure. The complaint notes that Treasury has no process for removing names placed on the list erroneously, or for distinguishing common names similar to those on the list, saying "An increasing number of private companies, including banks, mortgage companies, car dealerships, health insurers, landlords and employers screen consumers names against the OFAC list . . . Consumers discover the OFAC list when they are told that they cannot make a purchase, open an account or do business because their name appears on a terror list." Use of additional lists can only exacerbate the problems experienced with the OFAC list. For example, adding names from state lists could cause nonviolent advocacy groups to be flagged. Another Washington Post story "Ala. Ends Terror Watch List," published May 28, 2007, details how a state terror list had to be taken down from the Web because it listed environmental, gay rights and other groups.