The Treasury Inspector General for Tax Administration (TIGTA) released an audit report on June 18 that found Internal Revenue Service (IRS) employees have an inconsistent understanding of prohibited political intervention by charities and religious organizations. It also found the IRS has not been timely in evaluating cases under investigation. The report acknowledged improved educational efforts but failed to recognize the inherent difficulty in explaining the overly vague "facts and circumstances" test the IRS uses to determine if prohibited partisan activity has occurred. The IRS began the Political Activities Compliance Initiative (PACI) in June 2004 to educate charities about the ban on 501(c)(3) organizations from participating or intervening for or against candidates for office and to improve enforcement against such violations. In April, the IRS announced it would continue the PACI program this election cycle and included new education efforts and increased examinations of charities believed to be violating the ban, including assessment of referrals made to the IRS.

The audit report, Improvements Have Been Made to Educate Tax-Exempt Organizations and Enforce the Prohibition Against Political Activities, but Further Improvements Are Possible, is intended to determine the effectiveness of PACI and the IRS's ability to address alleged political campaign intervention. It details the process involved when the IRS considers taking on an investigation. Employees research the issue in each referral of alleged activities, gathering evidence which is then provided to an independent group of Exempt Organizations (EO) employees, known as the Referral Committee. The Committee considers the referral and evidence to decide whether the referral calls for an examination. Those that will be examined are forwarded to an EO Examination group that notifies the tax-exempt organization that it will be investigated for potentially prohibited political activity.

The audit found that employees did not always understand why certain referrals were included within PACI and that employees interpreted the criteria differently for evaluating referrals. In fact, employees did not receive the same training. TIGTA states, "Providing the same training to all employees involved in the Initiative and ensuring adequate feedback from the Committee as to why a referral is not selected would clarify what constitutes prohibited political activity and provide better assurance that all organizations potentially involved in prohibited political activities are being treated consistently and fairly."

TIGTA found that IRS employees do not always understand why some referrals are included in the initiative and why others are not. This lack of clarity is a problem for all parties. As an updated Congressional Research Service report from April continued to assert, the "line between what is prohibited and what is permitted can be difficult to discern." OMB Watch supports the creation of a bright-line definition of prohibited political intervention, which IRS employees seem to also need, considering the finding that employees examining cases need clarification as to what constitutes prohibited political activity.

The report found problems with the length of time it took for employees to handle the cases and that referrals were not always researched in an acceptable time frame. "Overall, 63 of the 100 referrals selected for examination in the 2006 Initiative were not processed in a timely manner using the established expedited process." It made two overall recommendations:

• Evaluate all referrals of potentially prohibited political activities in a timely manner by monitoring all significant activities and analyzing collected data to ensure that appropriate staffing is available
• Improve the understanding of prohibited political intervention criteria by providing the same training for all employees

The audit did find improvement in IRS education for tax-exempt organizations on the types of prohibited activities. These educational activities include publishing the results of the 2006 Initiative, publishing a Fact Sheet in February 2006, a new Revenue Ruling in June 2007, and updating an IRS webpage specific to political campaign intervention. The audit reports, "While educational efforts and streamlined processes enabled the IRS to make substantial improvements to the Initiative, the IRS could make further enhancements by having data readily available to pinpoint the reasons why timeliness goals are not always met and by ensuring that all employees clearly understand what should be included in the Initiative."

TIGTA cited materials with examples of prohibited activities as a sign of improved educational material. However, Lois Lerner, the director of Exempt Organizations, posted a program letter to EO employees in April, which stated that "the IRS has encountered a number of cases with varied fact patterns not directly covered by those examples." The guidance that has been provided leaves many situations in gray areas, which contributes to an increasing number of complaints to the IRS, as well as confusion and apprehension on the part of organizations who want to be otherwise engaged in civil society at election time.