WASHINGTON (Reuters) - President Barack Obama on Thursday chose a White House budget official to lead the beleaguered Internal Revenue Service and vowed to ensure that the tax-collection agency will not single out any more groups based on their political beliefs.
Danny Werfel, who has been Obama's point man in overseeing the controversial "sequestration" budget cuts, will tackle the biggest scandal of Obama's presidency when he takes charge of the IRS on May 22.
It could be a thankless job.
The IRS faces a criminal investigation and at least three congressional probes in the wake of last week's revelation that during the past three years, the agency's examiners had targeted conservative groups for extra scrutiny after the groups applied for tax-exempt status.
The agency has been without a permanent chief since November and lost another senior official on Thursday when Joseph Grant, the head of the division at the center of the scandal, announced plans to retire.
Grant's retirement followed Obama's decision on Wednesday to fire acting IRS Commissioner Steven Miller. The IRS has acknowledged that Miller knew about the targeting of conservative groups last year; several members of Congress have complained that Miller did not tell them about it.
Obama is racing to get ahead of a political firestorm that threatens to derail his second-term agenda as Republicans and conservative groups accuse his administration of using the levers of power - including the IRS, which is supposed to be non-partisan - to persecute political enemies.
The Democratic president has rejected that notion, and said he did not know about the IRS's targeting of conservative "Tea Party" and "Patriot" groups until the agency acknowledged last week that it had done so.
Obama fired Miller after an internal IRS audit released on Tuesday found that poor management - not partisan politics - had led to an "inappropriate" focus on conservative groups.
"I think we're going to be able to figure out exactly what happened, who was involved, what went wrong, and we're going to be able to implement steps to fix it," Obama said at a news conference on Thursday with Turkish Prime Minister Tayyip Erdogan.
"It is just simply unacceptable for there to even be a hint of partisanship or ideology when it comes to the application of our tax laws," Obama added.
Obama has faced a series of recent setbacks that could threaten his ability to pursue priorities such as revamping the nation's immigration laws and a budget deal with congressional Republicans.
Obama's Republican critics have hammered the administration's handling of the deadly militant attack last year on the U.S. mission in Benghazi, Libya, and the Justice Department has faced bipartisan criticism for seizing phone records of journalists from the Associated Press as part of a criminal probe into intelligence leaks.
'SOMETHING PROFOUNDLY UN-AMERICAN'
On Capitol Hill the IRS scandal seemed to rewind the clock to 2010, when groups aligned with the conservative Tea Party movement were a frequent and vocal presence outside Congress.
"There is something profoundly un-American about targeting your political opponents," Kentucky Republican Senator Rand Paul, a potential 2016 presidential candidate, told a crowd of about 100 Tea Party enthusiasts outside the Capitol on Thursday.
The scandal dates to March 2010, as the IRS struggled to deal with a surge of new advocacy groups that sprang up in the wake of a Supreme Court decision that struck down limits on independent political spending by businesses and other outside groups.
The agency has trouble keeping track of the more than 1 million tax-exempt organizations that already exist, analysts say.
The number of applications for tax-exempt "social welfare" status nearly doubled from 2010 to 2012, according to IRS figures.
Groups applying for what is known as 501(c)4 status can engage in limited campaign activity but are not supposed to make electioneering the focus of their efforts. Unlike political campaigns, they may keep their donors secret.
Spending by these groups and other similar organizations jumped to $309 million in 2012 from $79 million in the 2008 election, according to the Center for Responsive Politics. Conservative groups accounted for about three-quarters of that total, according to the watchdog group.
As a result, the agency faced pressure from top Democrats such as Illinois Senator Dick Durbin, New York Senator Charles Schumer and Max Baucus, who heads the Senate's tax-writing committee, to make sure the non-profit groups weren't exploiting a loophole to evade taxes and keep their donors secret.
Because that activity lacked revenue-generating potential, it was seen as a low priority within an agency whose central mission is tax collection, according to tax specialists.
The IRS gave the task to a field office in Cincinnati, Ohio, rather than assign it to higher-ranking staff in its Washington headquarters.
According to an internal IRS watchdog, that unit set its own criteria for checking tax-exempt groups in the absence of clear guidance from more senior officials.
AN 'INTRUSIVE' AUDIT
At the rally on Thursday, Tea Party speakers described how the increased scrutiny prevented them from participating in the democratic process - in some cases by delaying their groups' applications until after the 2012 elections had passed and in other cases through overly intrusive questioning by IRS agents that some Tea party groups say led them to give up their organizing efforts.
"The IRS just keeps asking questions. Our audit has been so intrusive," said Susan McLaughlin of the Liberty Tea Party in Liberty Township, Ohio. McLaughlin said her group had been waiting for three years to win tax-exempt status.
Republicans in Congress vowed to conduct a thorough investigation.
Senate Republican Leader Mitch McConnell of Kentucky called on the IRS's internal watchdog to investigate whether the agency had leaked the donor list of the National Organization for Marriage, a conservative group fighting gay-marriage initiatives, to a rival group.
"This is what government intimidation and harassment looks like," McConnell said.
They may get some answers on Friday, when ousted IRS chief Miller testifies before the House of Representatives Ways and Means Committee.
The man who will fill his shoes worked as a non-partisan civil servant in the White House budget office for Republican President George W. Bush before Obama asked him to take on the more partisan role of controller.
Werfel, 42, developed a track record of coolly responding to harsh questions from lawmakers as he testified several times this year about the "sequestration" budget cuts that kicked in after Congress and the White House failed to reach a larger deficit-reduction deal.
Werfel takes over a tax agency that is maligned by many Americans even in the best of times. Obama eventually will have to decide whether to ask the Democrat-led Senate to confirm Werfel to the job permanently or nominate another candidate who could win more support among Republicans.
"No one in their right mind would want the job right now," said Paul Streckfus, a tax journalist who used to work in the IRS division that is now at the center of the scandal.
As the furor has increased, some key IRS employees have pulled out of public events.
Lois Lerner, the IRS official who broke the news of the scandal last week, canceled plans to speak at a graduation ceremony for her law-school alma mater, Western New England University.
And in Washington, the IRS softball team canceled a scheduled match against the staff of Senator John Cornyn, the Texas Republican said on Facebook.
(Additional reporting by Thomas Ferraro, Richard Cowan, Kim Dixon, Tabassum Zakaria, Elvina Nawaguna, Mark Felsenthal, Kevin Drawbaugh, Nanette Byrnes, Roberta Rampton; Writing by Andy Sullivan; Editing by David Lindsey and Jim Loney)