By Kim Dixon and Kevin Drawbaugh

(Reuters) - Internal Revenue Service employees in Ohio, who singled out conservative groups applying for tax-exempt status for extra scrutiny, likely did not consider the political implications, an IRS official in Washington has told congressional investigators.

Providing additional details about the worst crisis to hit the IRS in years, tax agency official Holly Paz told investigators she was concerned when she learned that IRS employees were singling out groups with "Tea Party" and other key words in their names.

Paz is the most senior IRS official to be extensively interviewed by investigators. Ousted acting IRS Commissioner Steve Miller was among the top-level Washington officials grilled by Congress in recent weeks. Investigators conducted longer transcribed interviews with IRS employees behind closed doors.

A mid-level official in Washington before she was put on administrative leave, Paz worked for the director of the tax-exempt unit.

Paz said she was worried the practice of flagging certain groups for scrutiny, which she said was not politically motivated, "might give the impression that there was ... some bias," Paz said in the interview last month. Reuters has reviewed the interview transcript.

Some IRS employees in Cincinnati were screening non-profit groups' applications for tax-exempt status and chose some applications from Tea Party-aligned groups for closer scrutiny.

In doing so, Paz said, the employees likely did not consider that their decisions and practices could be perceived as politically motivated. "They are not as sensitive as we would like them to be as to how things might appear," she said.

Roel Campos, Paz's attorney, said his client "has been exemplary. When she discovered a problem in June 2011 she immediately sent it to her superiors." Paz could not be reached for comment.

The screening carried out in Cincinnati, which Paz said she became aware of in February 2010, drew complaints from conservative groups and Republican politicians. It fully came to light on May 10 when Paz's boss, Lois Lerner, publicly apologized for the targeting at a legal conference.

A political furor erupted that led to an FBI investigation, the ousting by President Barack Obama of the chief of the IRS and several congressional hearings. Lerner has also been placed on administrative leave.

Darrell Issa, Republican chairman of the House of Representatives oversight committee leading the inquiry, in a statement, said the Paz transcript shows "we still don't know why everything happened and who is responsible."

None of the interviews to date suggest any involvement by elected officials in beginning the screening.

Republicans have noted that Paz gave $2,000 to Obama's campaign in 2008.

Elijah Cummings, the top Democrat on Issa's panel, said Paz's comments confirm an earlier inspector general audit. Paz said in the interview she agreed with nearly all of that report.

Issa and Cummings have been squabbling over whether to release full transcripts of the congressional interviews. This continued on Sunday. "It's time to stop politicizing this investigation," Cummings said in a statement.

The inquiry by congressional committees is continuing. Republicans are trying, without success so far, to link Obama to the screening, while Democrats are trying to put an end to the controversy, which is headed into its sixth week.

A report last month from the U.S. Treasury Inspector General for Tax Administration, an IRS watchdog, found "inappropriate criteria" were used by IRS agents to select applications for added attention. The report found no political motivations.


Paz is one of more than six IRS employees who have been interviewed in the probe. A congressional aide said last week that investigators may seek interviews with 20 more people.

Paz said front-line IRS employees, such as those who conducted the screening, are unaccustomed to their work being in the spotlight.

"Many of these employees ... were used to a world where how they would talk about things internally was not something that would be public or anyone would be interested in," she said.

The U.S. tax code allows many types of non-profit groups to be tax-exempt, but sets limits on their political activities. The IRS has to ensure that groups apply for tax exemption respect those limits, though they are often vaguely defined.

The Supreme Court's 2010 "Citizens United" decision unleashed a torrent of new money into politics. Some of it flowed into groups organized under Section 501(c)(4) of the code. Many of these groups were politically conservative.

Campaign finance critics say 501(c)(4) attracts political "dark money" because the law allows such groups to keep donor identities secret. Such groups may be politically active, but under the law, this cannot be their primary purpose.

The IRS has struggled for years with enforcing the law, and related 501(c) tax-exemption statutes for non-profits.

On the issue of balance, Paz told investigators that she knew of some liberal, pro-Democrat groups that had received extra scrutiny in Washington too.

"I had no indication that we were not being balanced in what we were doing," she said.

(Additional reporting by Patrick Temple-West; Editing by Stacey Joyce)

["Stock Photo: Pensacola, Fl - 21 May: Protesters Rally In Front Of Local Irs Office In Pensacola, Fl On May 21, 2013 In Response To News That Conservative Groups Like The Tea Party Were Harassed By Irs Officials." on Shutterstock]