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IRS controversy: What's the potential fallout?

After lawmakers question the IRS over the undue scrutiny the agency put on conservative groups that filed for tax-exempt status during the 2012 elections, they'll want to take action -- to hold people accountable and eventually consider legislation to amend any systemic problems that led to this kind of political discrimination. At the same time, both Democrats and Republicans are using the controversy for political fodder.

Members of Congress are already questioning the IRS about the scandal behind closed doors, but the public line of questioning starts Wednesday, when Attorney General Eric Holder testifies before the House Judiciary Committee.

Holder on Tuesday announced he's directed his department to work with the FBI to conduct a criminal investigation into what he called "outrageous and unacceptable" actions at the IRS. While the scandal has outraged officials from both sides of the aisle, Republicans on the Judiciary Committee Wednesday are likely to hold Holder's feet to the fire.

"Oversight over the Department of Justice is a key function of the House Judiciary Committee and recent events illustrate the importance of this duty," Judiciary Committee Bob Goodlatte, R-Va., said in a statement. "Any abridgement of the First Amendment is very concerning, especially reports that the IRS targeted conservative groups for unwarranted scrutiny during an election year."

Holding the IRS accountable

In addition to the FBI investigation, the IRS discrimination against conservative groups was the subject of an investigative report by a Treasury Department inspector general. The report, obtained by CBS News late Tuesday afternoon, blamed lax management at the IRS.

On Friday, the House Ways and Means Committee will grill acting IRS commissioner Steve Miller over that management. In a preview of what questions they'll ask, Chairman Dave Camp, R-Mich., and Rep. Sandy Levin, D-Mich., the top Democrat on the committee, sent Miller a letter asking that he respond to several questions by May 21.

The letter asks, "Who knew about the targeting of conservative groups, when did they become aware and what actions were taken upon learning of the practice?" It also questions, "Did the IRS at any time notify the White House" of the targeting?

Camp and Levin also question why the agency in recent years never acknowledged that conservative groups were targeted, even though the Ways and Means Committee asked about it after Miller and others had learned about the misconduct.

"Despite repeated calls for cooperation, the agency failed to be completely truthful in its responses to the Committee during its nearly two-year long investigation of this matter, and in testimony before the committee," they wrote.

In an interview Tuesday with CBS News' Nancy Cordes, Camp said Miller's failure to tell the truth was the "most troubling" aspect of the controversy.

"We need to know more -- we need to know knew about this, who authorized it, who signed off, who reported on all of this," Camp said. When asked whether Miller should lose his job, Camp said he needed to get all the facts before making that judgment.

Miller wrote in a USA Today op-ed Tuesday that "mistakes were made" but that the practice was "in no way due to any political or partisan motivation." Camp told Cordes that Miller's op-ed didn't go far enough.

"This was a large operation," he said, noting that 200 people in the IRS's Cincinnati office flagged groups applying for tax-exempt status. "So they made administrative decisions about where to do this, how many people to have involved, so we really do need to get to the bottom of all this."

Miller was already on Capitol Hill Tuesday to meet with Senate Finance Committee Chairman Max Baucus, D-Mont., who also plans on holding hearings on the matter. Tuesday's closed-door meeting between Miller and Baucus lasted about 45 minutes, and afterward the senator told reporters he asked Miller some "very tough questions" and will continue to do so.

Like Camp, Baucus said he needs to "get the facts" before saying whether Miller should step down.

When asked by CBS News why he didn't tell Congress the truth when asked directly about political discrimination in the agency, Miller declined to answer, only noting he will testify on Friday. He added, "We're open to talking to anybody and being as honest as we can."

The agency has yet to say if it's held anyone accountable, but it's possible, as the Washington Post reported, that the discrimination was a clear violation of the so-called "10 deadly sins" in the Internal Revenue Service Restructuring and Reform Act of 1998. If it's determined an employee committed any of those sins -- which include "violating the rights protected under the Constitution" -- they must be terminated, the law says.

It's unclear, however, who specifically could be held accountable. The Treasury IG report CBS News obtained on Tuesday said the decisions to flag certain groups were made by front line managers but that top officials should have figured it out much earlier.

Both Miller and Lois Lerner, head of the IRS division that oversees tax-exempt organizations, are career bureaucrats at the IRS. The only two political appointees in the IRS are its chief counsel and commissioner. Miller was tapped to serve as acting commissioner after commissioner Doug Shulman, who was appointed by President George W. Bush, stepped down in November.

Like Miller, Shulman told Congress the IRS wasn't engaging in political discrimination. He, however, isn't yet slated to appear before Congress again.

Changes to the law

The House and Senate hearings to come are expected to focus just on the facts of the misconduct at the IRS. Eventually, however, Congress may want to take further action.

Republicans in the House and the Senate have already introduced legislation would make it a crime for anyone in the IRS to discriminate against a group or individual for their political or religious views or expressions.

Democrats, meanwhile, see this as an opportunity for campaign finance reform. The tax-exempt "social welfare" organizations in question -- in the 501(c)(4) category -- are allowed to spend unlimited sums of money on politics as long as politics isn't their main focus.

These tax-exempt organizations are not required to disclose their donors -- so after the Citizens United Supreme Court case in 2010 cleared the way for corporations to spend unlimited amounts of money in politics, the number of applications for 501(c)(4) status more than doubled, CBS News' Jan Crawford reports.

Senate Majority Leader Harry Reid on Tuesday told reporters, "There are these shadowy, political groups masquerading as social welfare organizations in order to solicit anonymous donations from we don't know who -- big corporations and also wealthy people. That needs to stop."

Reid said it's time to revive the Disclose Act, a bill Democrats pushed in 2010 to require greater disclosure on campaign advertising funded independently by corporations, unions and other organizations. Reid said the legislation " would have taken the IRS out of the business of investigating these groups."

House Minority Leader Nancy Pelosi, D-Calif., similarly called the IRS controversy an "opportunity" to revive campaign finance reform. "We need accountability at the IRS, of course, as to how this happened," she said Monday on MSNBC. "But we've really got to overturn Citizens United, which has exacerbated the situation."

Democrats pointed out this week that McConnell in decades past also expressed skepticism about 501(c)(4) organizations, suggesting they should be subject to further scrutiny.

Tuesday, however, McConnell said the Disclose Act is "designed to give the IRS even more power directly to quiet the voices of the critics of this administration."

Asked about his past critical remarks about tax-exempt organizations, McConnell said, "As I've said consistently for over two decades, and now the Supreme Court has underscored, you have a right to engage in the political debate in this country. Even corporations have a right to engage in the political debate."

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