Decade-Old Tea Party Case Looms Over IRS Probe of Career Leaders

In the decade since the IRS’s tax-exempt division was found to have flagged conservative-leaning nonprofit applications, Republicans haven’t forgotten.

Both of the senior career officials—Holly Paz and Elizabeth Kastenberg—put on administrative leave last week for unspecified, alleged conduct against Republicans worked for Lois Lerner, the central figure of the 2013 controversy. And while Lerner, the tax-exempt division head, and other top leaders were ousted amid investigations and congressional hearings, Paz and Kastenberg remained at the IRS.

Now other employees may worry that they’ll be fired or put on leave if their work or views don’t align with the Trump administration’s priorities, former IRS officials said. It could hinder the IRS’s work to implement the GOP’s massive tax law, especially since a quarter of the agency has exited amid President Donald Trump’s federal workforce cuts.

“When people are scared, they don’t make decisions, and that’s not good for taxpayers,” said Sunita Lough, former commissioner of the Tax-Exempt and Government Entities Division following the fallout who is now retired.

The move to investigate Paz and Kastenberg depicts a battle over politicization of an agency that’s widely seen as nonpartisan. Trump put a former Republican congressman at the helm of the IRS and called on the agency to revoke Harvard University’s tax-exempt status while Republicans have long pointed to the case as evidence of bias inside the agency.

New Commissioner Billy Long voted to hold Lerner in contempt of Congress when he served there for refusing to answer questions about her involvement and urged the IRS to investigate its treatment of nonprofits.

“The IRS’s conduct appears widespread and almost certainly has a chilling effect on the right to free speech,” Long said in a 2014 statement. “It is imperative we get answers for the American people and hold those who are found guilty responsible.”

The IRS said in a statement that it doesn’t comment on personnel decisions. Kastenberg, Paz, and Lerner couldn’t be reached for comment.

Former IRS official Lois Lerner, center, testifies during the IRS investigation before the House Oversight and Government Reform Committee March 5, 2014.

Photo by Chip Somodevilla/Getty Images

Tea Party Controversy

A GOP lawmaker and two conservative nonprofits this year renewed calls for change at the IRS. Paz was the second-in-command to Lerner at the Tax-Exempt Division and now leads the Large Business & International Division.

The American Accountability Foundation, led by former Republican staffer Tom Jones, created multiple reports this year published in the Washington Examiner highlighting Kastenberg and Paz’s involvement in the Tea Party controversy.

Sen. Joni Ernst (R-Iowa) said in a March letter to the Treasury secretary that the Biden-era audit push—and Paz’s leadership of the LB&I division—was partisan and wasteful.

“Kudos to Commissioner Billy Long for placing Ms. Paz on administrative leave after I exposed that she was getting the gang back together,” Ernst said in a statement last week.

Paz was a key official in helping Lerner decide how to handle the Tea Party cases and served as an intermediary with the Cincinnati office, which handled the review of tens of thousands of tax-exempt status applications. The IRS had seen a surge of applications following a Supreme Court ruling that loosened restrictions for political contributions.

“There was a huge backlog of applications which essentially was due to lack of guidance and indecisiveness on the part of lawyers and senior management in D.C.,” Lough said. “There was no evidence of political bias.”

The lack of guidance on how the IRS would handle cases describing policy views meant many applications remained unapproved.

“What criteria are being used to label a case a ‘Tea Party case’? We want to think about whether those criteria are resulting in over-inclusion,” Paz wrote in an email to an IRS Cincinnati official cited in a 2014 House Committee on Oversight and Government Reform report.

Kastenberg, who leads the Office of Professional Responsibility, was a tax law specialist for exempt organizations at the time and one of the employees assigned to review at least two Tea Party applications, according to the House report.

The controversy traces back to a Treasury Inspector General for Tax Administration report showing the IRS was unfairly scrutinizing Tea Party groups. TIGTA later found that the IRS also was flagging some progressive groups.

Former IRS Commissioner John Koskinen, who came into the agency after the controversy, said the situation was overblown.

“I was there for four fun-filled years with the Freedom Caucus trying to impeach me,” said Koskinen. “I never knew what anybody’s political affiliations or leanings were. I talked to 20,000 IRS employees in person and never had or heard a political comment. It’s just part of the ethos.”

Lerner and Steven Miller, acting IRS commissioner during the controversy, both resigned. The IRS settled two related lawsuits and restructured its tax-exempt division. And Congress continues to prevent the IRS from regulating tax-exempt political activity.

Career Employees in Focus

Former IRS officials say that targeting employees for their political leanings adds to morale problems in the already-crippled agency.

“It is unconscionable to put any IRS representative on administrative leave based on assertions of partisanship and doing so will have a chilling effect on the overall IRS operations going forward,” said Chuck Rettig, IRS commissioner during the first Trump administration who’s now a shareholder at Chamberlain Hrdlicka.

The American Accountability Foundation’s reports name other IRS employees and identify their political leanings based off social media and personal campaign contributions. The group has created similar lists for other federal employees and said it was unfairly targeted for an IRS audit in 2023.

Republicans also have criticized a reorganization within Paz’s division last year that created a pass-through compliance unit, which aimed to make audits of partnerships more efficient amid a push to increase enforcement on wealthy tax cheats.

Charles Flint, a former Republican staffer and CEO of the recently formed Alliance for IRS Accountability nonprofit, said the unit unfairly targets certain businesses.

“Where there is smoke there is fire, especially when it comes to these people,” said Flint, who also called for Paz to be investigated. “They already have a history of doing this.”

—With assistance from Caleb Harshberger