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U.S. defends IRS tax-exempt review in pro-Israel group lawsuit

A woman walks out of the Internal Revenue Service building in New York in this May 13, 2013 photo. REUTERS/Shannon Stapleton
A woman walks out of the Internal Revenue Service building in New York in this May 13, 2013 photo. REUTERS/Shannon Stapleton

By Patrick Temple-West

WASHINGTON (Reuters) - The Obama administration on Friday defended the Internal Revenue Service's process for reviewing applications for tax-exempt status and contested a lawsuit filed by a pro-Israel group that is arguing its application was discriminated against.

At a federal district court hearing in Washington, a pro-Israel group, Z Street, argued that it has a legal right to sue the IRS for allegedly targeting its 2009 application for extra scrutiny. Z Street said this violated its legal rights.

Obama administration attorneys said Z Street's application is still pending. As a result, they said, Z Street must use an established IRS appeals process to resolve any dispute over the way its application was handled. The government asked the judge to toss out Z Street's lawsuit.

No decision was reached and it was unclear when Judge Ketanji Jackson would rule.

The hearing came amid a simmering controversy over IRS handling from 2010 to 2012 of applications for tax exemption filed by Tea Party and other conservative groups.

President Barack Obama in May ousted the IRS's chief over the targeting, while the Justice Department and congressional committees launched investigations.

A lawyer for Z Street cited recent comments by acting IRS commissioner Danny Werfel, in which he said the IRS had inappropriately screened tax-exempt applicants based on their policy positions and their names.

Z Street, which disbanded in 2011, said it was told by an IRS agent in 2010 that the agency had concerns about tax-exempt status applicants whose positions on Israel contradicted the U.S. government's policy.

In June, the IRS released documents that showed it used search terms to screen a broad array of political groups applying for tax-exempt status. These "be-on-the-lookout" lists included groups advocating for Israel, as well as conservative and liberal political groups.

At least 41 Tea Party groups are suing the Obama administration for delaying their tax-exemption applications.

The case is Z Street v. Shulman, No. 1:12-cv-00401 in the U.S. District Court for the District of Columbia.

(Editing by Kevin Drawbaugh and Matthew Lewis)

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