IRS grades poorly in finding tax-exempt terrorists
According to the Treasury Inspector General for Tax Administration, which does independent oversight of the tax agency, IRS investigators look at paper documents and use a limited terrorist watch list to pinpoint possible ties between charitable and other nonprofit groups and terrorists.
As a result, the report said, "There is a risk that these charities will not be reported to the federal government authorities fighting terrorism."
"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."
Senate Finance Committee Chairman Max Baucus, D-Mont., responding to the report, said that "shutting down terrorist financing is one of the biggest challenges facing our country in the aftermath of the Sept. 11 attacks. It's disturbing that the Treasury Department does not require the IRS to use the most basic tool for fighting terrorism financing: a comprehensive watch list."
Baucus, in a letter to Treasury Secretary Henry Paulson, noted that IRS personnel told the Treasury Inspector General that they mainly look for "Middle Eastern-sounding names" when considering which tax filings to flag for further review.
"Beyond the potential for discrimination, the process raises concerns that the IRS is allowing individuals with terrorist connections to avoid detection simply because their names do not fit into a narrow predetermined profile," he wrote.
The report said that in fiscal year 2006 there were about 1.6 million tax-exempt organizations, excluding churches, with $2.4 trillion in assets and $1.2 trillion in annual revenues. In tax year 2003, the latest year figures were available, these organizations filed about 300,000 returns subject to review for possible terrorist connections.
IRS officials manually check these returns against a terrorist watch list maintained by the Treasury Department Office of Foreign Asset Control (OFAC). IRS officials in fiscal 2006 initially identified 93 suspect cases from one form used by charitable groups, but all but two have since been approved for tax-exempt status.
Inspection of a second form used by these groups in the April 2005-October 2006 period initially produced 201 potential terrorist-related connections. After further review, the IRS determined these forms did not contain a match to the OFAC terrorist watch list.
The IRS has been manually comparing names and organization to the OFAC list since October 2002. But the report noted that that list contains about 1,600 unique terrorist and organization names or aliases, while the Terrorist Screening Center, an interagency operation run by the FBI since the end of 2003, contains more than 200,000 names suspected of terrorist activities.
The Treasury Inspector General recommended that the IRS develop and implement a long-term strategy to automate the process of identifying potential terrorists.
It said that IRS officials agreed with that recommendation and the agency is currently testing software to check names on the forms filed by charitable groups. They also agreed to meet with FBI officials to evaluate coordination with the Terrorist Screening Center.