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How Not to Handle a Scandal (Courtesy of the IRS)

The IRS has done everything wrong in responding to charges that it let politics govern which groups it scrutinized most heavily. Here's how you can learn from their mistakes.

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It seems like it was about 17 scandals ago, but last month the Internal Revenue Service revealed that it had singled out conservative-leaning groups for special scrutiny in reviewing their applications for tax-exempt status.

To understand just how poorly the agency has handled things since then, it might help to imagine if your business were in a similarly scandalous situation.

Four steps to scandal dysfunction

First, imagine it comes to your attention that one of your employees has done something wrong. Instead of correcting the problem and owning up to it in a frank message to stakeholders, you try to slip the admission past everyone by referring to it in the answer to a planted question in a speech.

Second, news of your company's transgression spreads. Your response? Make another short speech insisting you've done nothing wrong, but then refuse to answer any more questions.

Third, as stakeholders and competitors swarm, announce that you've fired or reassigned a bunch of people involved in the problem (a problem some of your other people now insist isn't that big a deal to begin with).

Finally, a month-and-a-half after the news breaks, announce that you've investigated your own organization and found that maybe you didn't really do what you admitted to having done in the first place.

A defense that only muddies the waters

That's about where things stand this week.

The whole scandal erupted over how the agency reviewed nonprofit groups' applications for tax-exempt status under Section 501(c)(4) of the Internal Revenue Code. The law is notoriously difficult to interpret, and the job is even harder since a U.S. Supreme Court decision in 2010 said that 501(c)(4) organizations can spend unlimited amounts of money and keep their lists of donors secret.

More than a month after the agency ham-handedly broke news of its own transgressions, however, it finally has come up with a defense.

Instead of singling out conservative-leaning groups, it now says it singled out lots of people across the political spectrum! If they really singled out everyone, the implication is that maybe they didn't really single out anyone!

And you know what? That's a pretty good defense if it's true (a defense to a charge, don't forget, that the agency basically leveled at itself).

Let the bureaucrats be bureaucrats

I heard from some current and former government officials last month after I first wrote about the IRS's admissions, and it's fair to say almost none of them liked my take on the matter.

Mostly, they didn't like what they saw as my put-down of government bureaucrats. The truth is that the rest of us--especially the entrepreneurs and the dynamic people who actually move society forward--need bureaucrats.

Entrepreneurs need them to provide even-handed, predictable enforcement of society's rules.

When the IRS said it had singled out groups whose names included words and phrases like, "liberty," "tea party," and "patriots," most people took them at their word. Why would they offer an admission that they'd so blatantly violated the fundamental public trust?

So if we now learn that they were applying the same strict standards to groups that seemed to span the political spectrum--words like "progressive" and "occupy," for example, or that advocated in favor of Obamacare--that might well be have been allowable, or at least excusable.

But if that's true, it raises an even larger, more obvious question: Why didn't they say so to begin with?

Making a problem linger for longer

The IRS's answer to that question would likely be that it was another government entity within the Treasury Department that identified the problems to begin with, but that's a nonstarter.

I doubt there's a single person on the planet outside of government who cares about whether this bureaucratic office or that one first found the problem.

Instead, in the wake of the latest developments, even nonpartisan Washington reporters are calling for a more thorough investigation. By offering a defense only in dribs and drabs, the IRS has pretty much assured that this is a scandal that won't go away.

Last updated: Jun 25, 2013

BILL MURPHY JR. | Columnist

Bill Murphy Jr. is a journalist, ghostwriter, and entrepreneur. He is the author of Breakthrough Entrepreneurship (with Jon Burgstone) and is a former reporter for The Washington Post.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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