By Kim Dixon

WASHINGTON (Reuters) - An IRS official effectively waived her right not to testify about the tax agency's targeting of conservative groups, a Republican-led congressional committee concluded on Friday in a vote that cleared the way for Congress to hold her in contempt.

Lois Lerner, former head of the Internal Revenue Service's tax-exempt division, angered Republicans last month when she invoked her constitutional right not to answer their questions at a hearing.

The committee is investigating the IRS's admission that it subjected applications for tax exempt status from groups with "Tea Party" or "Patriot" in their names to special scrutiny.

By reading a statement telling lawmakers that she did "nothing wrong" before invoking her Fifth Amendment protections, some Republicans said that Lerner waived her rights.

The Oversight and Government Reform Committee of the U.S. House of Representatives approved on a party-line vote a Republican resolution on Friday saying that Lerner did waive her Fifth Amendment protection against self-incrimination.

"That is the not the way the Fifth Amendment works. You don't get to tell your side of the story," and then avoid cross examination, said Republican Trey Gowdy. "She sat there and could have said nothing."

The vote could clear the way for Republicans to haul Lerner back before the committee, where she would likely again invoke her Fifth Amendment rights. That would likely lead to a vote to hold her in contempt of Congress, Republican aides said.

A contempt of Congress vote could lead to her being prosecuted in a court and subject her to a maximum $1,000 fine and potential 12-month prison sentence. Lerner is now on administrative leave and has been replaced in her post.

The Republican-controlled Oversight Committee is leading a congressional probe of IRS agents in Cincinnati from early 2010 to early 2012 singling out applications for tax-exempt status from conservative groups for extra scrutiny.

The controversy led President Barack Obama's ouster last month of the IRS's chief and an FBI probe.

IRS officials in Washington, including some who reported to Lerner, were aware of the practices carried out in Cincinnati almost from the start, according to interviews with IRS officials that have become public.

Some Republicans have tried to link the affair to the Democratic president, but no evidence yet supports that claim.

Democrats on the panel said they want to hear from Lerner, but that she is within her rights to not testify. They said the vote reflects the partisan path Republicans have taken with the investigation.

"This back and forth political bickering is an embarrassment ... This resolution is completely improper and is nothing more than an opportunity to grandstand," said Democrat Steven Horsford.

Lerner's attorney, William Taylor, said this week that protesting innocence and invoking the right not to answer questions is not a waiver of constitutional rights.

(Editing by Kevin Drawbaugh and Doina Chiacu)