WASHINGTON -- When front-line tax agents in Cincinnati used the term "tea party," they didn't just mean conservative groups. Instead, a "tea party" case could refer to an application for tax-exemption from any group -- including liberal ones -- believed to be engaging in political activity, one IRS official told congressional investigators.
"Since the first case that came up to Washington happened to have that name, it appeared to me that that's what they were calling it that as a shorthand, because the first case had been that," said Holly Paz, the Internal Revenue Service's director of rulings and agreements. She said "tea party" could mean any political group, just like "Coke" is used as a generic term for soda, or people refer to tissues as "Kleenex."
Since the IRS revealed last month that applications from Tea Party groups had been subjected to additional scrutiny that delayed their approval for two to three years, congressional investigators have been trying to determine whether liberal groups were also caught up in the same process. An inspector general's report failed to resolve that question, and other IRS employees have given conflicting testimony about what they understood the term "tea party" to mean.
Paz, the highest-ranking IRS official with knowledge of the targeting to thus far cooperate with the congressional investigation, spoke to House Oversight Committee Chairman Darrell Issa, R-Calif., and bipartisan committee staffers on May 21. USA TODAY reviewed all 222 pages of the transcript of her interview.
STORY: Cincinnati IRS agents first raised Tea Party issues
Paz said liberal groups were mentioned by name, alongside the Tea Party, on an IRS BOLO -- or "be on the lookout" -- list. Screeners in Cincinnati, where all applications for tax-exemptions are processed, used the list to identify sensitive or complex cases that should be sent to specialists in Cincinnati and Washington.
"And I was aware of, you know, other cases at that time that were working their way through the D.C. office that involved proposed denials of exemption to liberal organizations that supported the Democratic Party. So I had no indication that we were not being balanced in what we were doing," Paz said.
But Elizabeth Hofacre, the agency's emerging issues coordinator in Cincinnati when the targeting began, has told investigators that she kicked out any progressive groups that other agents tried to put in with the Tea Party cases. She said she understood the term to mean conservative or Republican groups. "I was tasked to do Tea Parties, and I wasn't - I wasn't equipped or set up to do anything else."
A USA TODAY analysis of IRS data shows that dozens of liberal groups received tax-exempt approval in the 27 months that Tea Party groups sat in limbo, even though the liberal groups were engaging in similar kids of activity. Groups applying for the exemption are supposed to be primarily focusing on social welfare, not political activity.
STORY: IRS approved liberal groups while Tea Party in limbo
Paz's lawyer confirmed Saturday that she has been placed on administrative leave from the agency, but said she's done nothing wrong.
"Holly Paz was the whistle-blower and was the first to point out the problem," said Roel Campos, her Washington attorney, in an e-mailed statement. He noted that Paz was on maternity leave during two key time periods -- when the targeting first started in early 2010, and again when the IRS sent letters to Tea Party groups asking questions the agency now admits were improper.
Both times, Paz returned from leave to discover problems, and both times she brought them to the attention of her boss, Lois Lerner, Campos said.
Lerner, the director of exempt organizations, has invoked her right against self-incrimination in refusing to testify, but said she, too, has done nothing wrong.
On July 5, 2011, Lerner convened a meeting in Washington -- with Cincinnati managers attending by phone -- to discuss the Tea Party cases, Paz said. It was clear that screeners were using key words like "Tea Party", "Patriots" or '9/12" to identify cases for greater scrutiny.
Lerner "said the criteria needed to immediately be changed," Paz said. "She directed that they cease using the filters and labels that they were using before and that they would use this new phraseology about organizations with political lobbying or advocacy."
But in January 2012, IRS managers changed the criteria again to "political action type organizations involved in limiting/expanding government, educating on the Constitution and Bill of Rights, social economic reform/movement."
Paz said she was "surprised" the criteria would be changed again after Lerner ordered the problem fixed. While not as bad as using "Tea Party" keywords, "I felt that it was more appropriate to have criteria that were tied to the exemption requirements," Paz said.
It's unclear who was responsible for the change, Paz told investigators. "Because it was a very informal process and sort of a group decision, it wasn't really clear who was responsible," she said.
As Congress started asking questions, acting IRS commissioner Steven Miller sent Nancy Miller, a high-ranking IRS lawyer, to Cincinnati to investigate in April, 2012. Paz accompanied her. That review concluded that Cincinnati employees "didn't fully have a grasp on what sort of activity was permissible" by social welfare groups.
Paz said at least one liberal group had its tax-exemption denied during that time, but because of taxpayer privacy laws she could not be specific.
"And the main issue was that they were providing support to the Democratic Party," she said.
Paz, based in Washington, had various roles during the targeting, but eventually headed the IRS's Rulings & Agreements Office, which was responsible for processing applications for tax-exempt groups. She supervised about 330 employees, mostly in Cincinnati.
A registered Democrat, Paz contributed $4,000 to the Obama campaign in 2008, federal records show.
"Holly Paz is a consummate professional. Her political preferences have absolutely no impact in the discharge of her duties," her lawyer said.
Gregory Korte, USA TODAY