Tea party investigation: Is the problem the IRS or the tax code?

The acting IRS chief lost his job Wednesday because of the tea party investigation, and Republican leaders want more. But the scandal really points to an IRS in over its head, some experts say.

President Obama announced that acting IRS commissioner Steven Miller tendered his resignation on Tuesday, making a man who took the helm after the Internal Revenue Service had stopped targeting conservative groups the first casualty of the IRS’s misdeeds.

“It’s important to institute new leadership that can help restore confidence going forward,” Mr. Obama said.

But tax experts and campaign-finance analysts say the solution may be less in trying to dig out bad apples than in overturning the entire cart. The IRS scandal is just the latest argument for why America’s tax code may be too complex to function – too massive and ambiguous for an underfunded IRS to enforce well and too complicated for taxpayers to comprehend.

“This will be an issue we delve into in tax reform,” said Senate Finance Committee Chairman Max Baucus (D) of Montana, his chamber’s leading tax-reform champion, on the Senate floor Wednesday. “Clearly something is amiss for the IRS to behave the way it did. “

The president vowed that the White House would work “hand-in-hand” with members of Congress investigating the IRS and that Treasury Secretary Jacob Lew would immediately begin implementing recommendations from an inspector general’s report chronicling the fact that IRS agents gave special scrutiny to tea party groups in 2011 and 2012, actions the president called “inexcusable.”

Attorney General Eric Holder told a congressional panel earlier in the day that the Department of Justice is continuing a criminal investigation of IRS officers involved in the matter.

While Obama had previously hedged his statements on the IRS’s bad behavior in the careful tones of someone waiting for all the facts, the release of the inspector general’s report Tuesday evening gave way to an angrier, more direct approach.

“The misconduct that it uncovered is inexcusable, and Americans are right to be angry about it, and I am angry about it,” he said. “I will not tolerate this behavior in any agency but especially at the IRS, given the power that it has and the reach that it has in all of our lives.”

That angry disposition certainly matches the attitude on Capitol Hill, where House Speaker John Boehner (R) of Ohio said that jail time, not resignations, would be the true measure of accountability.

But the IRS, despite its troubling performance in the matter at hand, is otherwise playing a losing hand.

First is an issue of dollars.

“The tax code has become unmanageably large, and there hasn’t even been an attempt to keep the IRS paced with that,” in regard to funding, says Lloyd Mayer, a professor of law at Notre Dame University in South Bend, Ind.

For that reason, Nina Olsen, the nation’s taxpayer advocate, argued in congressional testimony last week that since her tenure began with the IRS in 2001 she has “never been more concerned” about its ability to advise taxpayers and accurately collect taxes.

Spending reductions mandated by the sequester and the tripling of new applications for 501(c)4 status (the provision in question in the current scandal) accentuate the agency’s problems, says Nina Crimm, a law professor at St. John's University in New York.

“They are totally overwhelmed,” says Professor Crimm. “They don’t have sufficient manpower to really cull through [nonprofit applications] and thoughtfully work this whole thing out.”

Beyond budget problems, there’s another good reason why the IRS should get out of the business of adjudicating the tax status of political groups, argues Professor Mayer. The agency has been purposefully held away from politics and is not equipped to handle political issues.

“The IRS is badly suited to deal with these fast-moving, politically sensitive types of disputes,” Mayer says. “Partially because it is so politically insulated to make sure it’s not abused, it also has a tin ear when it comes to politics. It doesn’t recognize when it’s dealing with a politically sensitive thing and, when it does, it doesn’t handle it right.”

Finally, the rule that attempts to distinguish 501(c)4 groups – which qualify as nonprofits but retain their ability to join the political process – from churches and charities is ambiguous at best.

“The law is very unclear and very vague, and Congress could create a clearer definition of what is political activity for these purposes,” says Mayer.

Could the burgeoning tax-reform movement on Capitol Hill, then, help sharpen this part of the code and help prevent future issues?

The two men leading the tax reform charge – House Ways and Means Chairman Dave Camp (R) of Michigan and Senator Baucus – will both hold investigative hearings in the coming days on the IRS scandal, giving them an up-close-and-personal look at what exactly went wrong.

Both chambers will also look into the issue of tax-exempt organizations directly.

In his press conference Tuesday, Obama hinted at just such a resolution.

“We’re going to have to make sure that the laws are clear so that we can have confidence that they are enforced in a fair and impartial way and there’s not too much ambiguity surrounding these laws,” the president said. “That’s what I expect, that’s what the American people deserve. And that’s what we’re going to do.”

But some experts are skeptical that Congress will do much to fix the system that underlies the current IRS scandal, even if they do manage the long-shot feat of a sweeping tax overhaul sought by Baucus and Representative Camp.

"How much of the code, if any, is really going to be tackled?” Crimm asks. “And is this something that this Congress wants to tackle in terms of the tax exempt area?”

“My suspicion is that a lot of them might not see fit to tackle this area,” she says, because picking a campaign-finance fight amidst an already difficult slog to paring back the nation’s tax code is probably a bridge too far.