Applications for tax exemption from advocacy nonprofits had not yet spiked when the Internal Revenue Service began using what it admits was inappropriate scrutiny of conservative groups in 2010.
In fact, applications were declining, data show.
Top IRS officials have been saying that a “significant increase” in applications from advocacy groups seeking tax-exempt status spurred its Cincinnati office in 2010 to filter those requests by using such politically loaded phrases as “Tea Party,” “patriots,” and “9/12.”
Both Steven Miller, the agency’s acting commissioner until he stepped down Wednesday, and Lois Lerner, director of the agency’s exempt-organization division, have said over the past week that IRS officials started the scrutiny after observing a surge in applications for status as 501(c)(4) “social welfare” groups. Both officials cited an increase from about 1,500 applications in 2010 and to nearly 3,500 in 2012. President Obama ask Mr. Miller to resign on Wednesday.
The scrutiny began, however, in March 2010, before an uptick could have been observed, according to data contained in the audit released Tuesday from the Treasury Department’s inspector general for tax administration.
The number of 501(c)(4) applications for all of 2010 was actually less than in 2009.
“It doesn’t bear out the statement that there was a surge in 2010,” said Bruce Hopkins, a tax attorney specializing in nonprofits. “That’s inconsistent with what Lois said last week.”
The audit says the IRS began to use “inappropriate criteria” to single out applications in March 2010. By April 2010, a “sensitive case report” was issued on “Tea Party cases,” indicating that managers in Cincinnati were aware of the sensitive nature of the reviews.
According to the audit, 1,735 groups applied for 501(c)(4) exemption for the federal fiscal year that ended September 30, 2010—six months after the IRS began its scrutiny. That was down slightly from 1,751 the prior year.
The number grew to 2,265 during the fiscal year that ended September 30, 2011, and to 3,357 in 2012. By then the criteria the IRS was using to flag groups had changed three times to include searches for groups with names that contained “Bill of Rights,” “educating on the constitution,” and “limiting/expanding government.”
Mr. Miller wrote in USA Today on Monday that the IRS began to centralize those applications in 2010 because the division that supervises tax-exempt organizations observed a sharp increase in the number of applications from groups “potentially engaged in political campaign intervention” that were seeking either 501(c)(4) status or designation as a 501(c)(3) charity. He then cites the increase between 2010 and 2012.
The audit shows that 501(c)(3) applications also declined in both 2010 and 2011 from the previous years.
Ms. Lerner offered the same explanation for why the applications were being heavily scrutinized when she publicly apologized for the procedures during an American Bar Association conference last week in Washington.
“Between 2010 and 2012, we started seeing a very big uptick in the number of 501(c)(4) applications we were receiving,” she said. “It more than doubled.”
IRS officials did not return requests for comment about the discrepancy in how they accounted for their actions. Since her comments, both Democrats and Republicans have condemned the procedures. The House Ways and Means Committee is scheduled to question Mr. Miller at a hearing on Friday, and the Justice Department is conducting an investigation of the agency for any possible criminal actions related to these cases.
In the IRS’s official response to the inspector general’s audit findings also cites that surge when explaining why agents needed to centralize these applications.
The letter, written by Joseph Grant, acting commissioner for tax-exempt and government entities at the IRS, said the agency’s review was also motivated by “numerous referrals from the public, media, watchdog groups, and members of Congress alleging that specific section-501(c)(4) organizations were engaged in political campaign activity to an impermissible extent.”
Paul Streckfus, publisher of EO Tax Journal and a former IRS employee who reviewed tax-exemption applications, said he believes that pressure from those referrals caused the IRS to start using the criteria that have gotten it in trouble.
“It wasn’t so much the number of applications but the complexity,” Mr. Streckfus said.
Typical applications from advocacy groups submitted before 2010 had never involved such a massive grass-roots political network like the Tea Party, which advocates for smaller government, he says.
“The initial problem wasn’t that there was so many but that there wasn’t any guidance on how to deal with these cases,” he said.
David French, senior counsel for the American Center for Law and Justice, which represents 27 Tea Party groups that were singled out, said the IRS is clearly on record as citing the increase as a reason for its scrutiny.
“In fact, the number of 501(c)(4) applications dropped between 2009 and 2010, when the IRS began its unconstitutional targeting. That’s plain from the IG report,” Mr. French said. “Even if applications did increase—as they eventually did—the solution is to create viewpoint neutral, constitutionally appropriate criteria for evaluation, not to implement ideological screening.”
Says Mr. Streckfus: IRS officials “have a lot to answer for.”
Suzanne Perry contributed to this article.