United States President Barack Obama has condemned as intolerable and inexcusable findings that the Internal Revenue Service improperly targeted conservative groups for special tax scrutiny.
The investigation followed complaints by right-wing groups that new regulations had not been applied fairly.
A report by the Inspector-General for Tax Administration concludes that the IRS allowed its agents to improperly target conservative groups, such as the so-called Tea Party movement, by subjecting applications for tax exempt status by such groups to extra scrutiny.
Three congressional committees are investigating the matter and Attorney-General Eric Holder has ordered a criminal inquiry, the BBC reports.
Mr Obama said he has ordered Treasury Secretary Jacob Lew to hold those responsible for the IRS's actions accountable.
"The IRS must apply the law in a fair and impartial way, and its employees must act with utmost integrity. This report shows that some of its employees failed that test."
The Obama administration has denied playing any role in choosing IRS audit targets, insisting that the IRS operates independently from the White House, and the Justice Department has launched a separate inquiry.
A Treasury Inspector General for Tax Administration (TIGTA) report found that senior IRS officials told inspectors the decision to focus on Tea Party and other groups based upon their names or policy positions was not influenced by any individual or organisation outside the agency.
However, it found that managers had allowed "inappropriate criteria" to be developed and stay in place for more than 18 months, resulting in "substantial delays" in processing applications for tax-exempt status, and requests for "unnecessary information", such as lists of past and future donors.
Of the 296 total applications reviewed by TIGTA, 108 were approved, 28 were withdrawn by the applicants, and 160 were still open, the report said.
The acting IRS Commissioner of the Tax Exempt and Government Entities, Joseph Grant, said: "We believe the front line career employees that made the decisions acted out of a desire for efficiency and not out of any political or partisan view point."
