The document isn't clear on whether the IRS misled Congress. 5 takeaways from IRS report

The most hotly anticipated IRS probe since Watergate didn’t exactly live up to the hype.

The Treasury Inspector General for Tax Administration report leaked on Tuesday evening doesn’t nail anyone for lying to Congress. It didn’t out rogue liberal IRS agents with an ax to grind against nonprofit tea party groups.


But the watchdog report did break new ground, clearly declaring that the IRS crossed the line in asking about donors to conservative groups. It reveals the IRS to be a stubborn agency that isn’t ready to fix all the problems in the report. And it warns that a crackdown on these 501(c)(4) groups isn’t coming any time soon.

( PHOTOS: 10 slams on the IRS)

Here’s the top five things takeaways from the Inspector General report:

IRS agents weren't partisan

Republicans looking for a smoking gun on partisan motive will have to keep looking — the report stops short of calling the IRS intentionally partisan, even if the questions might have been inappropriate.

Most of the report focuses on reprimanding the IRS for choosing ineffective criteria that could be construed as partisan rather than focusing on a partisan motive. Only about 15 percent of the potential cases had the terms “Tea Party,” “patriots” and “9/12” in their organization name. The remaining cases were flagged for other reasons.

The report found that the narrow focus of the criteria “gives the appearance that the IRS is not impartial in conducting its mission.”

“Using the names or policy positions of organizations is not an appropriate basis for identifying applications for review by the team of specialists,” the inspector general said.

( Also on POLITICO: Watchdog: IRS used 'inappropriate criteria')

The report never directly accuses the IRS of bias, just the appearance of impropriety.

Despite the inappropriate search criteria, the majority of applications flagged by the Cincinnati office had indications of significant violations of tax policy. The report found that about 69 percent of the fully documented cases on the list were properly identified.

Unclear on whether the IRS misled Congress

The report remains silent on what is emerging as the biggest Republican grievance — how Acting IRS Commissioner Steven Miller and former Commissioner Doug Shulman failed to disclose to Congress what they learned about the targeting program after May 2012.

Miller wrote letters to the House Ways and Means Committee and Senate Republicans months after he was briefed but never disclosed that the agency was giving an extra critical eye to conservative groups. Government oversight Chairman Darrell Issa (R-Calif.) also accused division head Lois Lerner of misleading Congress after her June 2011 discovery.

“It appears that you provided false or misleading information on four separate occasions last year in response to the committee’s oversight of the IRS’s treatment of conservative groups applying for tax exempt status,” Issa and committee member Rep. Jim Jordan (R-Ohio) wrote.

But you won’t read about that in the IG report.

The controversial answers from Miller on why top agency employees did not tell Congress about the extra scrutiny will likely come forth during the Ways and Means hearing this Friday.

Asking about donors crossed the line

If tea party groups thought the questions were intrusive, even the Inspector General agrees that asking about donors and books read was a bridge too far.

The Inspector General said donor lists and details were an unnecessary, burdensome request in the vetting process. That may be the biggest victory for frustrated conservatives.

The report also makes clear that the IRS knew that it overstepped its bounds when it asked for donor records.

“Officials informed us that they decided to destroy all donor lists that were sent in for potential political cases that the IRS determined it should not have requested,” the report said.

Lerner also stopped sending out requests for donor information after the media began to raise questions about their motives. She gave extensions to groups still working on donor responses but didn’t cancel the requests.

But the report only offered a mild recommendation for how to fix the problem.

“The director … should develop training or workshops to be held before each election cycle including, but not limited to, how to word questions in additional information request letters and what additional information should be requested,” the report said.

That vague direction is not likely to satisfy tea party groups who would like to see more explicit instructions about what the IRS can and can’t do in the future.

The IRS hasn't fixed all the problems

There are nine recommendations from the IG in the report — but the IRS only agreed with seven of the conclusions. Michael McKenney, the acting deputy inspector general for audits, specifically noted in the report the agency’s refusal to implement each change.

“We do not consider the concerns in this report to be resolved,” he said.

Instead of drafting new guidelines for how to work with groups that are political in name or actions and posting those guidelines to the Internet, the IRS said it planned to cover potentially political cases in its new training sessions.

“We believe that specific guidance should be developed and made available to specialists processing potential political cases. Making this guidance available on the Internet for organizations could also address a concern raised in the IRS’s response that many applications appear to contain incomplete and inconsistent information,” the inspector general wrote.

The IRS and the inspector general also disagreed about whether new procedures are needed to investigate the tax exempt status of any 501(c)(4). The agency said it would only review standing procedures, not create new guidelines. The watchdog report also recommends that the IRS chief counsel and the Department of the Treasury issue guidance on how the “primary activity” of 501(c)(4) groups is measured.

Four of the recommendations from the report focus on additional training for employees reviewing nonprofit applications. The IRS has instituted this training to preempt election cycles when the number of new applications for 501(c)(4)s is expected to spike.

The agency will also create ways for tax-exempt division employees to request additional help with back-logged cases and to streamline request to ensure delays are avoided.

No plans to crack down on 501(c)(4) groups

The IG report reveals that it may become virtually impossible to investigate whether one of these nonprofits has crossed a line into pure political work.

No more than 49 percent of a group’s time is supposed be spent on political activities, but the IRS may now have no set standard to judge when a group does cross that line.

Nor has the agency been particularly eager to take on that responsibility.

The IG report remains silent in this report on how to better these tax-exempt groups when social advocacy turns political.

The inspector general only goes as far as urging the agency to establish guidelines but doesn't offer suggestions. At this point, given the blowup over the investigations of conservative groups, that may be politically impossible for a while.

This article first appeared on POLITICO Pro at 10:17 p.m. on May 14, 2013.