Treasury Watchdog Launches Probe Into Whether Administration Spied on Conservative Billionaires' Taxes

Shown here is David Koch, co-owner of Koch Industries. (AP Photo)

A Treasury Department watchdog has launched an investigation into whether the Obama administration improperly snooped around the tax records of the mega-conglomerate that has poured millions into Republican campaigns.

J. Russell George, Treasury's inspector general for tax administration, wrote in a brief letter Sept. 28 to Sen. Charles Grassley, R-Iowa, that he will launch a "review" of the allegation at the request of Grassley and six other Republican senators.

The controversy concerns the multibillion-dollar oil company Koch Industries, a major political contributor to conservative causes and a major target this year of Democrats trying to stoke voter outrage over the funding behind those causes.

President Obama publicly called out the Koch-funded Americans for Prosperity at an early August fundraiser in Texas -- that incident, in turn, helped fuel suspicion after an administration official was quoted later in the month speaking in unusual detail about Koch finances.

Coinciding with the release of a report on corporate tax reform, the official was quoted saying Koch, described as a "really giant firm," was set up as a pass-through company -- in other words, a company structured to escape corporate taxes by allowing income to flow directly through it.

But a Koch attorney questioned where and how the administration found that information -- while at the same time denying the suggestion that it does not pay corporate income tax -- and Grassley subsequently called for a probe into whether officials breached tax privacy law.

In a Sept. 24 letter, Grassley and other senators urged George to investigate the "very serious allegation" that the administration may have violated the IRS code that protects federal tax return privacy. The senators noted that the Koch website does not reveal anything about being a "flow-through entity."

"Thus, the statement that Koch is a pass-through entity implies direct knowledge of Koch's legal and tax status, which would appear to be a violation," they wrote. "The statement is also troubling because it was made shortly after the president highlighted the advocacy work of certain tax-exempt organizations funded by Koch Industries, Inc."

A company spokesman told FoxNews.com said Koch Industries is "cooperating fully" with the investigation, adding that the firm is "grateful that our concerns appear to be taken seriously."

Koch Industries has been an increasingly popular topic of political conversation after The New Yorker published a lengthy article on the "war against Obama" being waged by the company's owners, David and Charles Koch. The article detailed the Koch family's enormous wealth; their role in setting up the conservative Americans for Prosperity and the libertarian Cato Institute; and their web of political contributions -- though the political donations are difficult to pinpoint, the magazine reported that the family's charitable foundations have spent close to $200 million over the past decade.

Campaign finance records at the Federal Election Commission show the firm's political action committee, KochPAC, contributed about $8 million over the past decade, with much of that money going to the campaigns of top Republicans on Capitol Hill.

Rep. Chris Van Hollen, D-Md., chairman of the Democratic Congressional Campaign Committee, said in an interview with Bloomberg TV in September that companies like Koch are "going in and opposing Democratic candidates and supporting Republican candidates."

Koch Industries has fought back against the sudden press.

The company issued an article-length statement in August slamming the New Yorker piece as a smear job full of "factual inaccuracies" and "misrepresentations." The company then wrote a letter to the magazine objecting to the implication that it was "secretly funding and participating in a shadowy political netherworld."

After Grassley requested an investigation into the possibility of administration meddling, Koch attorney Mark Holden said in a statement the firm was "deeply concerned" about the administration's access to their records.

"As a matter of law, the administration should not be accessing or disclosing our confidential tax information. In addition, even if the administration has not accessed our confidential tax information, we remain concerned that we were singled out by an administration official on a conference call regarding corporate income taxes. For the administration to single out one corporation, with no evidence of wrongdoing, is not only troubling to us, but should be troubling to all Americans," he said.

"Hopefully, the actions by the Senate Finance Committee will uncover the facts as to what, if any, confidential information was accessed and disclosed by the administration," he wrote.

An administration official denied the charge in a statement to Politico.com last month, saying no senior officials had access to tax returns and that the Koch information probably "came up from publicly available information."

The IG investigation might not provide resolution anytime soon, though, unless Republicans win a majority in the Senate.

The same provision the administration is being accused of violating also prohibits most members of Congress, including Grassley, from accessing IRS information. The chairman of the Senate Finance Committee, where Grassley is the ranking member, is one of two members of Congress allowed to access that information. The chairman of the House Ways and Means Committee is the only other member granted access.

George said in his letter to Grassley that there would be "certain constraints on my ability to share information from our review with you" without a request from the chairman, but he would make available what is allowable by law.