On May 21st, the United States Treasury Inspector General for Tax Administration (TIGTA) released a report documenting numerous deficiencies in the process used to identify terrorist activities related to tax-exempt organizations. The report (pdf) discusses how the IRS employs severely outdated manual paper checks of limited terrorist watch lists to uproot any links with terrorism. The outdated list documents only 1,600 known organizations, compared to the updated, 200,000-name list compiled by the Federal Bureau of Investigation.
The constraints of such lax policies are all too clear. Using the smaller and outdated list, the IRS identified 93 possible terrorist organizations in 2006, and all but two were approved for tax-exempt status without further investigation. Such inefficiencies loom even larger in the far-reaching tax-exempt system of our nation: the IG report documents that in fiscal year 2006 there were around 1.6 million tax-exempt organizations (excluding churches) with $2.4 trillion in assets and $1.2 trillion in yearly revenues.
"The IRS clearly needs to use a more inclusive terrorist watch list and to computerize its tracking system as soon as possible," said Inspector General J. Russell George. "This nation is at war, and we must use all the tools available to us to stop the flow of U.S. dollars to our enemies."
Current IRS practices contradict regulations by the Department of Treasury that outline that all U.S. persons, including U.S.-based charities, are prohibited from dealing with anyone associated with terrorism under Executive Orders 13224 and 12947. In light of recent terrorist threats, President Bush has urged the Department of Treasury “to lead a comprehensive and sustained campaign against the sources and conduits of terrorist financing,” yet ensuing investigations including those recently completed by TIGTA, expose terrorist abuse of these charitable pathways.
In response to the report, the Senate Finance Committee Chair Max Baucus (D-Montana) sent a letter (pdf) to Treasury Secretary Paulson inquiring why the Treasury appears to be using an insufficient terrorist watch list and why they have been slow to automate the process of matching names to an updated watch list. Baucus stated that he was “concerned that the IRS has not implemented a coherent terrorist tracking system in a timely manner.”
POGO has also received information indicating that a major criterion currently used for flagging tax documents is whether the individual or organization has a "Middle Eastern sounding name,” which amounts to racial profiling in an attempt to flag potential suspects, rather than use available updated watch lists. These practices are both unsound and incomplete, and should be subject to further investigation.
-- Jesse Ferrantella