By Andy Sullivan and Kim Dixon
WASHINGTON (Reuters) - The outgoing head of the U.S. Internal Revenue Service angered Republican lawmakers on Friday by resisting their demands that he identify who at the tax-collection agency had inappropriately targeted conservative groups for extra scrutiny.
But during the first hearing into a growing IRS scandal that could preoccupy Washington for months, Republicans did learn that a top official in President Barack Obama's administration knew that the IRS was looking into targeting by the tax agency nearly a year ago.
That detail could encourage Republicans' efforts to link the scandal to the White House as the administration faces a series of setbacks that threaten to derail Obama's second-term priorities, which include revamping immigration laws and reaching a budget deal with Republicans.
Friday's hearing was dominated by lawmakers' grilling of acting IRS Commissioner Steven Miller, who provided few clear answers while apologizing for the extensive questioning and years-long delays that many conservative groups have experienced after applying for tax-exempt status.
Miller, who was fired by Obama on Wednesday, said the overly aggressive scrutiny of such groups was the result of mismanagement, not partisan politics. His comments echoed the findings of a Treasury Department inspector general's report released this week.
"I think what happened here is that foolish mistakes were made by people trying to be more efficient," said Miller, who will leave his post next week and be replaced by Daniel Werfel, a budget specialist in the administration.
Miller said he did not know who had come up with the idea to single out groups that appeared to be politically conservative for intense reviews of whether they qualified to be tax-exempt.
He said that although the added scrutiny was wrong, he did not think that IRS employees had broken any laws.
That claim drew the ire of Republicans on the House of Representatives Ways and Means Committee, as did Miller's shrugs when lawmakers pressed him over why he had not told Congress about the probe even though he learned about it a year ago.
"This is offensive, to hear this testimony," said Representative Tom Reed, a Republican from New York.
A LINK TO THE WHITE HOUSE?
The hearing did seem to yield some fruit for Republicans who are trying to cast the targeting of conservative "Tea Party" and "Patriot" groups as a political initiative encouraged by the Obama administration, a claim the White House rejects.
Critics have hammered the White House this week on the IRS scandal, its handling of the deadly attack on the U.S. mission in Benghazi, Libya, and the Justice Department's seizure of phone records of Associated Press journalists in a criminal probe into intelligence leaks.
The Treasury Department's internal watchdog, J. Russell George, told the House panel that Deputy Treasury Secretary Neal Wolin, an Obama political appointee, learned nearly a year ago that a government watchdog was looking into inappropriate targeting by the IRS.
Wolin, the No. 2 official at Treasury, is due to testify next week before the House Oversight and Government Reform Committee.
In a statement, the Treasury Department said it made the probe public last fall in an annual report that listed more than 200 other internal investigations.
Treasury Secretary Jack Lew was told about the investigation when he took office in March, the department said, but neither he nor Wolin was told about its findings even as a preliminary version circulated elsewhere within the department.
Miller's often-defiant appearance on Friday was unlikely to satisfy Republicans who have accused Obama's Democratic administration of using the machinery of government to target political foes.
They also have accused Miller of misleading Congress last year.
Miller acknowledged that he learned that IRS investigators were looking into the issue a year ago, but he did not mention the probe to lawmakers until the news became public last week. He said he had not misled lawmakers by keeping quiet about the issue in prior appearances on Capitol Hill.
"I was answering the questions that I was asked" by Congress, he told the House committee.
Miller appeared to grow irritated over the course of the four-hour hearing, repeatedly interrupting questioners, flashing quizzical looks and shrugging his shoulders.
Miller said the IRS has had trouble keeping up with the flood of 70,000 tax-exempt applications it has received in recent years, and asked for money to hire more examiners.
Several Republicans responded that the IRS should instead be shrunk.
The IRS has seen the number of groups applying for 501(c)4 status nearly double in the wake of January 2010 Supreme Court decision that loosened campaign-finance rules.
That status allows groups to keep their donor lists secret while engaging in limited political activity. Political campaigns, by contrast, must make their donor lists public.
Several Democrats on the committee said the IRS needed to take a harder look at those applications to ensure that political groups do not exploit the tax code to shroud political activities in secrecy.
Miller said the IRS needs clearer guidance from Congress to determine what constitutes political activity.
FACEBOOK POSTS, BOOK LISTS
The scandal has angered lawmakers in both parties, but Miller's appearance appeared to further inflame Republicans who see it as a symptom of a federal government that has grown too large and is overly intrusive into Americans' lives.
Tea Party groups investigated by the IRS say the tax agency made unusually extensive demands, such as asking the groups to provide social-media posts and lists of books that members had read, and tell agents whether any members of the group planned to run for public office in the future.
The questioning in some cases took nearly three years, preventing some groups from participating in the 2010 and 2012 elections.
The Treasury Department report did not identify individuals in the IRS's Washington headquarters or its Cincinnati field office who were responsible for coming up with the criteria used to single out conservative groups. The watchdog is continuing its investigation.
Republicans have vowed to find out who was involved, but Miller did not provide much of a road map.
"Who is responsible for targeting these individuals?" asked Representative Kevin Brady, a Texas Republican.
"I don't have names for you," Miller responded.
Republicans accused him of dodging their questions.
"I'm hearing, 'I don't know, I don't remember, I don't recall, I don't believe,'" said Representative Dave Reichert of Washington. "You don't even know who investigated the case, but yet you say it was investigated."
Democrats seemed more inclined to accept Miller's explanation.
"I am not convinced that this is a great big political conspiracy," Democratic Representative Danny Davis said.
Two other congressional committees will hold IRS hearings next week. One of them, the House Oversight and Government Reform Committee, plans to question five lower-level IRS employees over whether they played a role in the targeting of conservative groups.
Wolin and Douglas Shulman, who was IRS commissioner when the targeting occurred, also are scheduled to testify.
(Additional reporting by Karey Van Hall, Patrick Temple-West and Susan Heavey; Writing by Andy Sullivan; Editing by David Lindsey, Jackie Frank and Jim Loney)