An inside look at the Cincinnati IRS office at the heat of the storm.

The NYT takes a peek at how the processing of 501(C)(4) applications transpired. Again, it allows for a good peak inside the bureaucracy:

While there are still many gaps in the story of how the I.R.S. scandal happened, interviews with current and former employees and with lawyers who dealt with them, along with a review of I.R.S. documents, paint a more muddled picture of an understaffed Cincinnati outpost that was alienated from the broader I.R.S. culture and given little direction.

Overseen by a revolving cast of midlevel managers, stalled by miscommunication with I.R.S. lawyers and executives in Washington and confused about the rules they were enforcing, the Cincinnati specialists flagged virtually every application with Tea Party in its name. But their review went beyond conservative groups: more than 400 organizations came under scrutiny, including at least two dozen liberal-leaning ones and some that were seemingly apolitical.

Over three years, as the office struggled with a growing caseload of advocacy groups seeking tax exemptions, responsibility for the cases moved from one group of specialists to another, and the Determinations Unit, which handles all nonprofit applications, was reorganized. One batch of cases sat ignored for months. Few if any of the employees were experts on tax law, contributing to waves of questionnaires about groups’ political activity and donors that top officials acknowledge were improper.

“The I.R.S. is pretty dysfunctional to begin with, and this case brought all those dysfunctions to their worst,” said Paul Streckfus, a former I.R.S. employee who runs a newsletter devoted to tax-exempt organizations. “People were coming and going, asking for advice and not getting it, and sometimes forgetting the cases existed.”

Are there clear guidelines for how the IRS should distinguish between political organizations and social welfare organizations?

Apparently not, and that's one of the problems underlying the IRS scandal.

Th determination involves somethign called the facts and circumstances test.

From WSJ's Law Blog:

Tax-exempt groups organized under section 501(c)(4) of the Internal Revenue Code may engage in some political activity, but they must be “primarily engaged” in promoting social welfare.

But deciding what counts as too much political activity is far from an exact science. The IRS is supposed to apply what’s known as a “facts and circumstances” test, basically a souped-up version of “know it when you see it.”

According to an IRS guidance memo from 1995, the IRS is supposed to weigh a myriad of factors like “the amount of funds received from and devoted to particular activities; other resources used in conducting such activities, such as buildings and equipment; the time devoted to activities (by volunteers as well as employees); the manner in which the organization’s activities are conducted; and the purposes furthered by various activities.”

A political educational organization that qualifies for a 501(c)(4) exemption must “conduct its activities in a non-partisan manner.” A group’s philosophy may be consistent with that of a major political party, but that’s OK if its activities are primarily educational.

If “its activities are under the direction of a Board of Directors whose members were appointed by the national committee of a major political party,” that’s a problem, according to the guidance memo. If the group “selects issues to study based on the needs of the party, and receives substantial financial support from the party,” that’s also a red flag.

An “action” group — another type of 501(c)(4) — may engage in political campaign activities if those “activities are not the organization’s primary activity.”

These circumstances make one wonder how any of these groups were granted tax exempt status.

The Treasury Department and the IRS

Here's a tiny tiny flowchart of the Treasury Department. See if you can spot the Internal Revenue Service on the bottom left corner. Click here for a larger version, and here for a list of all the bureaus within the Treasury Department. We'll unpack this soon.