By Patrick Temple-West and Thomas Ferraro
WASHINGTON (Reuters) - An investigation of the Internal Revenue Service was launched on Friday after a senior IRS official publicly apologized for subjecting conservative political groups to "inappropriate" scrutiny.
In a practice that drew complaints during the 2012 election campaign, groups with the words "Tea Party" or "patriots" in their names were flagged for closer IRS review when they applied to the agency for tax-exempt status.
"We would like to apologize for that," said Lois Lerner, director of the IRS tax-exempt office at an American Bar Association conference. She said the practice "was absolutely incorrect and it was inappropriate."
Lerner said screening of the conservative groups was "absolutely not" influenced by the Obama administration.
In what could be a major embarrassment for the IRS and a potential distraction for President Barack Obama, the matter is under investigation by the IRS inspector general.
"What we know of this is of concern and we certainly find the actions taken, as reported, to be inappropriate," White House spokesman Jay Carney said at a briefing.
"And we would fully expect the investigation to be thorough and for corrections to be made in a case like this," he said.
The admission by the IRS drew immediate responses from many Republicans and at least one powerful Democrat.
House of Representatives Republican Leader Eric Cantor vowed a House investigation would follow. Senate Republican Leader Mitch McConnell called for a White House review.
CONGRESS TEES UP INQUIRY
Representative Dave Camp, the Republican chairman of the tax-writing House Ways and Means Committee that oversees the IRS, said he will hold a hearing. "The IRS absolutely must be non-partisan in its enforcement of our tax laws," Camp said.
Democratic Senator Carl Levin, who chairs the Senate Permanent Subcommittee on Investigations, said his panel has been looking into the IRS's "failure" to enforce a law that requires tax-exempt 501(c)(4) groups be engaged exclusively in social welfare activities and not partisan politics.
He said the latest development "raises a second issue: whether the IRS, to the extent it has enforced its rules, has been impartial in doing so. Both issues require investigation."
Tax-exempt applications for groups ranging from charities to labor unions are routinely reviewed by IRS civil servants.
Known as 501(c)(4) groups after the section of the tax code that makes them tax-exempt, such organizations can collect money from anonymous donors and spend it on advertising. To stay tax-exempt, they cannot endorse a candidate or a political party.
The number of groups seeking 501(c)(4) status jumped after the U.S. Supreme Court's 2010 "Citizens United" decision lifting government limits on corporate spending in federal elections.
Such contributions became controversial during the 2012 election season, as groups favoring both major parties financed ad campaigns to try to influence the race between Obama, a Democrat, and Republican challenger Mitt Romney.
NO GROUPS DENIED STATUS
Lerner said none of the groups subjected to extra scrutiny by the IRS has been rejected yet for tax-exempt status.
For that reason, a legal damages claim against the IRS by the conservative groups was unlikely, said Marcus Owens, a lawyer at the firm of Caplin & Drysdale.
A former IRS tax-exempt division director, Owens has since represented a range of nonprofit organizations. "It's hard to find the injury there," he said, adding that IRS scrutiny historically has focused on trying to determine if 501(c)(4) groups are politically active or not.
Judson Phillips, founder of Tea Party Nation, which claims 55,000 members nationwide, said in a telephone interview:
"I'm shocked they apologized ... Tea Party groups across the country have told stories about having unreasonable delays in getting their non-profit status from the IRS."
Lerner said targeting of conservative groups was done by revenue agents in Cincinnati "without talking to managers."
Cleta Mitchell, a lawyer at the firm of Foley & Lardner who represents conservative groups, said she was skeptical managers were not involved. In a letter to the IRS released to reporters, Mitchell demanded answers from the agency.
"The fact that nearly 100 citizens groups received identical, burdensome questionnaires from IRS offices across the nation demonstrates that this was not a few ‘low level' employees responsible for the effort," Mitchell wrote.
(Additional reporting by Susan Heavey, Kim Dixon, Mark Felsenthal, Patricia Zengerle; Editing by Kevin Drawbaugh and Philip Barbara)