Kevin McCarthy talks Iraq, future of the GOP; latest on IRS scandal

This is a rush transcript from "Fox News Sunday," June 22, 2014. This copy may not be in its final form and may be updated.


ISIS insurgents on the march in western Iraq. We'll have the latest.

And House Republicans elect new leaders and try to present a united front heading into the midterm election.


REP. STEVE SCALISE (R-LA), MAJORITY WHIP-ELECT: We've got solid, conservative solutions that are going to solve the problems facing our country.

REP. KEVIN MCCARTHY (R-CA), MAJORITY LEADER-ELECT: I make one promise -- I will work every single day to make sure this conference has the courage to lead, with the wisdom to listen.

WALLACE: We'll sit down with Kevin McCarthy to discuss immigration, spending and the Tea Party in his first interview since being elected House majority leader. It's a "Fox News Sunday" exclusive.

Then, fireworks on Capitol Hill. As lawmakers grill the head of the IRS over those lost Lois Lerner e-mails.

REP. DAVE CAMP (R), MICHIGAN: What I didn't hear in that was an apology to this committee.

JOHN KOSKINEN, IRS COMMISSIONER: I don't think an apology is owed.

REP. PAUL RYAN (R), WISCONSIN: I don't believe you. This isn't credible.

KOSKINEN: I have a long career. That's a first time anyone has said that they do not believe me.

WALLACE: We'll talk with attorney Cleta Mitchell who represents conservative groups in a lawsuit against the IRS, and Julian Epstein, a former top Democratic House staffer.

Plus, President Obama announces he'll send 300 military advisers to help stop the advance of Islamic extremists. Our Sunday panel weighs in on the decision to send U.S. troops back into Iraq.

And our power player of the week, Starbucks CEO Howard Schultz on his trademark brand's newest roll out.

HOWARD SCHULTZ, STARBUCKS CEO: This is an investment in our people, in our company, and in society. It is a win-win.

WALLACE: All, right now, on "Fox News Sunday."


WALLACE: And hello, again, from Fox News in Washington.    Islamic militants continue to seize towns in western Iraq today and now control the main border crossing into Syria. All this as Secretary of State Kerry arrives in the Middle East, trying to build support for a new unity government in Baghdad.

Fox News correspondent Shannon Bream has the latest from the White House -- Shannon.

SHANNON BREAM, FOX NEWS CORRESPONDENT: Chris, as the White House continues to mull over strategy regarding just how involved the U.S. will be in that growing conflict in Iraq, ISIS is making steady gains, continuing to move forward in areas that are critical to its advance. We're talking about keyboarder towns along Iraq's border primarily with Syria, capture of those towns making the border between the two countries more porous, facilitating the movement of weapons, equipment, and fighters.

There's also growing concern about the city of Haditha, which is home to the heat dam across the Euphrates River. Damage to that dam could be devastating to the surrounding area, causing major flooding and potentially shutting down portions of the country's electrical grid.

This morning, the Iraq government has released video it says shows militant aircraft bombing suspected militant hideout in Mosul, which was taken by ISIS fighters about two weeks ago. Fox News cannot independently verify the authenticity of the video. There is still no confirmation about the details regarding up to 300 so-called military advisers the president may send into Iraq. There are so many questions about what kind of legal protections they would have. Administration officials say they are continuing to negotiate that with the current Iraqi government.

As you mentioned, Secretary of State John Kerry has touched down in the region. He's expected to make several stops there with an emphasis on encouraging Iraqi Prime Minister Nouri al Maliki to make it clear that his government will be more inclusive of all the competing factions within his country -- Chris.

WALLACE: More on this with the panel a little later. Shannon, thank you.

After Eric Cantor's stunning primary loss, House Republicans voted this week to replace him as majority leader.

Joining us now for his first interview since winning the number two job in the House, California Congressman Kevin McCarthy.

Congressman, congratulations.

MCCARTHY: Thank you. Thanks for having me.

WALLACE: Welcome back to "Fox News Sunday."

Let's start with Iraq where as we reported, ISIS is still on the move. Was President Obama right to send these military advisers to help the Iraqi army? Or should he move further and authorize military strikes against is now?

MCCARTHY: I think the first thing he needs to do, because to me, this is not just about Iraq. This is about Syria, this is about Egypt, this is about the entire Middle East.

What is our strategy? Why do you send troops? What are they going to do?

If you don't have an overall strategy, how do we push back this momentum of this terrorism that's growing throughout the entire region? To me, the key part was, lay out a strategy, then we can see the outcome of what we need to do to make it happen.

WALLACE: But we cannot allow ISIS to have a safe haven.

MCCARTHY: We cannot allow it. I don't have a problem sending the 300, but I think it's more important, what is the strategy you're going to have going forward. So what military options do you have? I leave everything on the table right now.

WALLACE: Including boots on the ground?

MCCARTHY: I put everything on the table.

But most people when you talk to them don't think boots on the ground work right now. You don't need it. But if you don't have a strategy, what would the boots on the ground even do? That's the question you have to have.

WALLACE: Does it make sense to authorize military strikes, airstrikes now, simply to degrade, slow down ISIS, which is moving across Iraq?

MCCARTHY: If you have a strategy that says the airstrikes have to go, then yes, that would be right. If you don't have a strategy, why do you pick what you're going to do next?

I think the key part is lay out what we want to do for the entire region, to stop the momentum of this growth, we cannot allow them to continue to grow. By not acting, now, they have half a billion dollars. They're growing each and every day.

By our lack of action has allowed them to grow. So, build an overall strategy that moves that momentum backwards. Airstrikes could be a very good -- big key part of it.

WALLACE: House Republicans elected you majority leader this week by a wide margin, but some Tea Party activists are concerned. Richard Viguerie, a longtime conservative activist said you and Steve Scalise, the new House whip, the man who replaced you in the three job, are, quote, "business-as-usual, go-along-to-get-along Washington insiders. The gap between the leadership of the Republican Party and the base of the party continues to widen."

How do you plead?

MCCARTHY: I think he probably doesn't know my background. I'm a conservative. I believe in the idea of freedom and liberty, but more importantly, look at my voting background. I voted against billing out Wall Street. I voted against, never voted for a tax increase.

I come through the grassroots. My family was not Republicans. I'm the youngest. I came to this party based upon choice. I believe the Constitution matters, that it's not just a few pieces of paper.

WALLACE: But -- and we're going to get to your family background because a lot of people don't know you, a little bit later. But I want to talk about that record.


WALLACE: And your voting record, because you're generally seen as less conservative than the man you're replacing, Eric Cantor. Let me put a couple of numbers up on the screen.

The Club for Growth ranked Cantor with a 68 percent conservative voting record. You at 53 percent. "National Journal" says Cantor was the 80th most conservative House member. You were 170th. They base this on votes on various issues.

Your response.

MCCARTHY: And American Conservative Union gets me a lifetime rating of 90. Faith and Freedom gives me 100 percent, who rates with conservatives. Check my voting record. Check what I believe, and look what I have done.

From the standpoint is, when they wanted to bail out Wall Street, I said no twice. When they wanted to raise taxes, I've always said no. I have a philosophical belief that this Constitution matters.

WALLACE: Let's talk, going forward, because you have to face issues between now and November. So, let's do this kind of a lightning round, quick questions, quick answers.

MCCARTHY: All right.

WALLACE: Immigration. You are on the record supporting a path to legalization for the millions of illegal immigrants who are now in this country. Will you try to pass comprehensive immigration reform before the election that includes, not a path to citizenship, but a path to legalization?

MCCARTHY: I'm on record saying nothing about immigration, until we secure the borders. The borders are not secure.

Look at the humanitarian crisis that is happening right now along the border states. These are children coming from three major countries in Central America. They're going across. Kids are dying.

Who knows (ph) what's happening when it comes to human trafficking and others, it's because our borders are not secure. Until you secure the borders, you cannot have the conversation about anything else.

WALLACE: But you are on the record as of I know last January, a bunch of quotes where you did say that you thought that there should be legal status --

MCCARTHY: I don't believe there should be citizenship. I believe in the rule of law. I believe there's an opportunity. But if you don't secure the borders, there's nothing.

Until we secure the borders, because the borders are not secure, we're not enforcing the laws. And I think that's a reasonable position. Until that's secure, you can't have an immigration debate.

WALLACE: So, are you saying no comprehensive immigration reform that would include border security but also a path to legalization.

MCCARTHY: Until the borders are secure, I think that's reasonable.

WALLACE: That must come first?

MCCARTHY: That must come first.

WALLACE: OK. The Highway Trust Fund runs out of money this summer. Do you support raising the gas tax to keep the trust fund going?

MCCARTHY: No. That's a Democrat idea. Continue to raise taxes on the families going forward. Why don't we find a broader solution?

The whole highway bill is another example of why I ran. This was a good intended to go through. It now does things it never was intended to do.

We can build a bridge, the Golden Gate Bridge in three years, but it takes us two decades to build an on ramp. This needs to be totally reformed as we move. But I believe it's one of the options that we put forward two years ago was the idea for a new funding source. Open up federal land for exploration, federal government, put that into resources to build the bridges and roads that we need.

WALLACE: Authority for the Export-Import Bank, which backs, supports, helps encourage the selling of U.S. products overseas, expires in September. Do you agree with conservatives who say that the Export-Import Bank is a form of crony capitalism and it should be put out of business, allowed to expire?

MCCARTHY: One of the problems with government is it's going to take hard earned money so others do things that the private sector can do. That's what Ex-Im Bank does. The last authorization of the Ex-Im Bank directed the president and the treasury secretary to wind down the Ex-Im bank, negotiate with other countries, to wind them down so we have a level playing field.

We've got hearings going on next week in financial service, which I sit on. I think Ex-Im Bank is one that government does not have to be involved in. The private sector can do it.

WALLACE: So straightforward question, you can say it right here. You would allow the Ex-Im Bank to expire in September?

MCCARTHY: Yes, because it's something that the private sector can be able to do.

WALLACE: What is your attitude about doing business with Barack Obama for the rest of his presidency?

MCCARTHY: I believe you can work with anybody. The challenge has been Harry Reid. Let me give you an example. There's more than 240 bills that have passed the House that haven't been brought up inside the Senate.

If you want to know the problem and frustration with Washington, it's the Senate. The Senate has not moved anything. They never send something to the president's desk. So, how do you even negotiate with the president if he doesn't have the bill on his desk?

The Senate doesn't even allow amendment. We're going through the appropriations process right now in an open process. Sheila Jackson Lee has offered 29 amendments just on appropriation bills. That's about 20 more than the entire caucus of the Republicans inside the Senate has been able to offer for about the whole last year.

So, what is the hold-up here? Harry Reid and the Senate. If that fundamentally changes in November, I think it will be a new day for America and a new direction.

WALLACE: Finally, let's talk about Kevin McCarthy, because, sir, frankly, a lot of people, this is the first chance they get to see and hear you. You grew up in Bakersfield, California. Your dad was a firefighter, as you point out. Your folks were Democrats.

How did you become a Republican?

MCCARTHY: Philosophical belief.

I was the youngest. I came in the '80s. I watched Ronald Reagan and I watched Jimmy Carter say, you know, put on a sweater and the best case behind, and Ronald Reagan say, no pastel, fly (ph) the bold colors, go to the shiny city on the hill. I knew what I wanted to believe. I believed in an entrepreneur, in greater liberty and freedom, and that's why I took a risk at 19 to create my own company.

WALLACE: I want to talk about because -- and I think a lot of people don't know this. You won the California state lottery or won a prize in the California state lottery just out of high school, $5,000. Parlayed it through the stock market, and at age 19, you opened your own delicatessen.

MCCARTHY: Because I believe in risk. You know, if I failed, I didn't expect government to bail me out. But if I succeeded, I didn't expect government to take my taxes.    So, I took this money, I created my own company. My father and I even built the counter in my dad's garage, and we created a deli. And I soon learned if you're a small business owner, you're the first one to work, the last to leave, the last to be paid. You learn what regulation does to your business and the challenges. You wonder where common sense is.

By the end of two years, I was successful enough to have enough money to pay my way through college. So, I sold my business because I wanted to finish college. My local paper said, be a summer intern in Washington, D.C. with my local congressman. I didn't know the guy, but I thought he would be lucky to have me, right?

So I applied and he turned me down. You know what the end of the story is? I'm now elected to the seat I couldn't get the internship for. It's only on this country that you get that type of opportunity.

WALLACE: Let's talk about life here in Washington. You sleep on a sofa in your office.


WALLACE: Your congressional office when you're in Washington. You're now the House majority leader. Don't you think you need better digs?

MCCARTHY: No, you go why I do that? Because I go back and I read for the next day. I don't ever want to become Washington. I go home every weekend. I don't want it to be comfortable. I don't want to have to worry about my roof in Washington, the school district in Washington.

I want to worry about what Jim Bomain (ph) who owns Smith Bakeries in Union Avenue in Bakersfield, California, worries about. He wakes up at 2:00 in the morning to still bake the best brownies you've ever had, which Jody (ph) says I eat too many of. But how does it affect him? Why should I ever be comfortable here?

And I believe it makes me a better member. It makes sure that I continue to listen. Makes sure I can do a better job.

WALLACE: Finally, you helped actor Kevin Spacey develop his role as Frank Underwood in "House of Cards." I have to ask you, how much of you is in that character?

MCCARTHY: Pretty much none of it. I was never going to help him. He kept asking me. I wouldn't ask him until I found out he played a Democrat and I told him to come on in I'd give him any advice. But the only I told him is, I'd tell the members vote your conscience, vote your district, just don't surprise me, because people come here, they should represent their district, they should represent their philosophies. That should be the power of the idea in Washington.

WALLACE: I have to ask you, though, in the Frank Underwood role, did you ever kill a political opponent?   MCCARTHY: But I jokingly say, if I ever did, it would be easy to whip and then seven members text me to ask me if they'd be the ones I would kill.


WALLACE: I was going to ask, did you ever want to kill?

MCCARTHY: No, no, no. Look, we're all conservatives. The only thing we ever battle over, our tactics, not ideology. Some want to get there faster than others, but there's so much more than divides us than the philosophy of Obama and big government than the idea of greater liberty and freedom which we believe in.

WALLACE: Congressman McCarthy, thank you. Thanks for coming in today. We look forward to more conversations. Don't be a stranger, sir.

MCCARTHY: Glad to be here.

WALLACE: Congratulations again.

MCCARTHY: Thank you so much.

WALLACE: The president sends U.S. military advisers to Iraq, but holds off on airstrikes. Our Sunday group discusses the wisdom of going back into Iraq. That's next.

Plus, what would you like to ask the panel. Just go to Facebook or Twitter @FoxNewsSunday, and we may use your question on the air.



BARACK OBAMA, PRESIDENT OF THE UNITED STATES: We're developing more information about potential targets associated with ISIL. And going forward, we will be prepared to take targeted, and precise military action if and when we determine that the situation on the ground requires it.


WALLACE: President Obama announcing a partial escalation of our involvement in Iraq, sending in hundreds of military advisers but holding off on airstrikes for now.

It's time for our Sunday group: syndicated columnist George Will; Judy Woodruff, co-anchor of the "PBS NewsHour"; Michael Needham of Heritage Action for America; and Fox News political analyst, Juan Williams.

So, George, military advisers but no military action, trying to push out the prime minister of Iraq, Nouri al Maliki. Is Obama doing too little, too much, or is he getting it about right?

GEORGE WILL, SYNDICATED COLUMNIST: Well, it's hard to know what he can do and it's also hard to know what he is doing, because the 300 or so military advisers are only a military consequence if they're going to do more than advise, that is if they're on the ground in order to pick targets and do air control for attacks from the air that only the United States can do. The problem is the president has said they will take no military action that helps one sect or another.

Since Iraq is one sect or another, it's hard to see how you can do that. With regard to al Maliki, it's pretty clear the president would like to have regime change to change the government of Iraq, both its structure and current composition. The problem is al Maliki is supported by the security services such as they are, that haven't melted away, and he's supported by Iran. It's hard to see how he gets rid of them.

Finally, we seem to be somehow pleased or ought to be pleased that Muqtada al-Sadr's Mahdi Army is back.

WALLACE: Let me just say, he's an even more radical Shiite cleric, more than Maliki.

WILL: Correct, and he was a huge problem for the pacification of Iraq, but now it seems that in some sense, we need him to come back into the fray.

WALLACE: Oh, boy.

We ask you, and this picks up on all the comments that George has made.

We asked you for questions for the panel and we got a lot of responses like this on Facebook from Brad Stutler. "Why should we care when the soldiers and police that we trained obviously don't care enough to secure their own interests?"

Judy, how do you answer Brad and a lot of other people who are just worried about us getting sucked back into Iraq?

JUDY WOODRUFF, PBS NEWSHOUR: Well, we know there are no good options right now in Iraq. We know that what the president told us a few years ago, that Iraq was a secure and a stable country, didn't turn out to be right.

We know a few other things. We know that Maliki is someone who is divisive. It's someone who is not willing to compromise.

We also know that if we're to make strikes on whose side are we doing it? Where do we strike? Who do we strike? It is -- what we have seen is ISIS, which was expelled from al Qaeda because it's even more extreme than al Qaeda, it's not like going against the German army in France 70 years ago.

And, finally, Chris, this president has said or has suggested that the United States doesn't want to be Maliki's air force. So, we've got to be -- this country has got to be careful about what it does going in.

WALLACE: Yes, I want to pick up on that because while some hawks like John McCain this week were calling for immediate U.S. airstrikes against ISIS, there was a very interesting reaction from General David Petraeus, who is the architect of the U.S. troop surge in Iraq that was so successful back in 2007. Take a look.


GEN. DAVID PETRAEUS (RET), FORMER TOP U.S. COMMANDER IN IRAQ: This cannot be the United States being the air force for Shia militias or a Shia on Sunni-Arab fight. It has to be a fight of all of Iraq against extremists.


WALLACE: Michael, does Petraeus have a point that at this point, if you go in on the side of the Iraqi government, you're going in on the side of the Shiites against the other factions? And that you shouldn't do this until you have some kind of a unity or more unified government in Baghdad.

MICHAEL NEEDHAM, CEO, HERITAGE ACTION FOR AMERICA: No, absolutely, he does. We can't be doing anything that makes us look like we're picking sides in a civil war. The problem is in terms of holding together a coalition government, we don't have any good options. The reason we don't have any options is that the president a months ago was running around town talking about how his foreign policy was don't do stupid stuff, but that actually means the foreign policy of weakness and a foreign policy for American disengagement from the world, and the stupidest thing we can be doing right now is having America disengage from the world.

So, six years ago, he makes the decision. We're going to pull out of Iraq, leave no forces, the forces that could have been there, identifying the intelligence and targeting the assets that would have prevented this from happening. Six months when the intel was coming in, that there was going to be a challenge to the government, we didn't send the 300 troops there because that would have gone back on the president's statement that Iraq was stable and self-reliant.

And so now, we're forced into a situation where we have no good options and it's because of the president's policy of weakness that is showing itself with Russia, showing itself in the Middle East, and it doesn't work.

WALLACE: I can see you, Juan, chomping at the bit.

But before you do, because there does seem to be a growing feeling in support of Michael's point of view. A new poll out this week showed that support, public support for the president's foreign policy has hit a new low of just 37 percent. And here's what House Speaker John Boehner had to say this week about the president's larger foreign policy.

(BEGIN VIDEO CLIP)   REP. JOHN BOEHNER (R-OH), HOUSE SPEAKER: It's not just Iraq. It's Libya. It's Egypt. It's Syria. The spread of terrorism has increased exponentially under this president's leadership.


WALLACE: And it isn't just John Boehner. As we saw from the poll, there's a growing feeling among Americans that the president's war on terror isn't working.

JUAN WILLIAMS, Fox NEWS POLITICAL ANALYST: Well, I think that's a sign of frustration is what it is. We had an endless stream of, you know, chaos in the world, events emerging. I think it was President Lincoln who said something to the effect of "I don't control events, events control me."

I think that applies directly to this situation. But what you're seeing is that the polls indication there's no good alternatives.

If you ask the same polls, if you ask Americans, should we send Americans into Syria? No. Should we send them into Iraq? No. Should we antagonize Putin in Russia? No. So, should we stay in Afghanistan? No.

So in a sense, the president is reflecting American attitudes. But he's having to deal with the, you know, a band of troublesome players and failure in terms of Maliki. It's Maliki's failure in Iraq. Let's not confuse that.

Michael said, well, why -- you know, he's not engaged in the world. Remember, it was President Bush who decided we were going to pull out of Iraq. That was President Bush's decision.

So you have a situation where this president is trying to manage things. I think the poll, Chris, reflects frustration, not a lack of faith. When you start to hear people like Boehner, like Dick Cheney this week in "The Wall Street Journal," you know, critical of this president, I think people are then reminded, gee, you know, I might not think the president is doing such a great job with this, but boy, I'm glad he's not the Republicans whose rating is even lower than the president's.


NEEDHAM: In the presidential debate, President Obama said he was the one who made the decision not to leave a residual force in Iraq.

WALLACE: A residual force.

NEEDHAM: That would have given us options. When America is strong and America leads around the world, we have options that we can debate. When America is weak and withdraws from the world, we don't have options.

WILLIAMS: I don't think it's a matter of withdrawing.   WALLACE: Wait, wait, let me ask you a question, Michael, and I have heard this from all of you, no good options. What would you do in Iraq now? Forget the past, today?

NEEDHAM: This is the problem. We don't have options. I'd probably do something pretty similar to what President Obama is doing. What would I have done six months ago? I would have sent people in to send intel and help target. We could have stomped this out in 24 hours?

What would I have done when we pulled out? I would have left a residual force. When you pull back from the world, you're left in a situation where you don't have options. The problem was in the past. The problem isn't going forward.

WALLACE: George?

WILL: Iraq has been a civil war waiting to happen for many decades. And I don't think we can blame the president. This president, like all presidents, is suffering from what Greg Weiner, a very smart political scientist, calls narcissistic policy disorder. Narcissistic polity disorder is a belief that everything in the world happens because of us or somehow about us and that we can do something about it. In fact, we can't.

WALLACE: On that happy note -- panel, we have to take a break here. We'll see you a little later.

Up next, outrage on Capitol Hill after the IRS commissioner refuses to apologize for the loss of Lois Lerner's e-mails. We'll talk to a lawyer who's suing the IRS on behalf of conservative groups who were targeted.


WALLACE: The scandal over the IRS targeting of conservative groups got new life this week. We learned a computer hard drive belonging to Lois Lerner, the former IRS official at the center of the controversy, reportedly crashed back in 2011. Destroying two years of emails crucial to the investigation. That led to IRS commissioner John Koskinen facing some very angry congressmen this week. Joining us now, the attorney representing some of the conservative groups suing the IRS, Cleta Mitchell, and a former top Democratic House staffer, Julian Epstein. So, let's start with the case of the missing emails. And here is the very testy exchange this week between the chairman of the House Ways and Means Committee and the IRS commissioner. Take a look.


REP. DAVE CAMP (R-MI), CHAIRMAN WAY'S MEANS COMMITTEE: What I didn't hear in that was an apology to this committee.

JOHN KOSKINEN, IRS COMMISSIONER: I don't think an apology is owed. Not a single e-mail has been lost since the start of this investigation.


WALLACE: The IRS and Koskinen says that Lois Lerner asked the IRS to try to recover, to fix, to go through her e-mail once it crashed, as soon as it crashed, in 2011, and they say they have been able by going to other people that the e-mails were sent to, to recover 67,000 of the e-mails she was involved in. So, I guess the question is what is your beef?

CLETA MITCHELL, ATTORNEY FOR TEA PARTY GROUPS: Well, there are several beefs. Let's start with the fact that the number of e-mails doesn't matter, because if there were 200,000 or 2 million, what matters is that the committee on House Oversight asked in June -- on June 9th of 2013, June 4TH of 2013, asked for, sent a letter asking for all of the e-mails of Lois Lerner specifically. In August, when they hadn't gotten a response, they issued a subpoena. They reissued that subpoena to Koskinen when he was commissioner late last year. And if you go back and look at the testimony, the hearing where he testified in March, the committee repeatedly, the members ask him about Lois Lerner's e-mails. When he's going to give us Lois Lerner's e-mails. He testified Friday that he knew as early as February about this computer glitch. What I think is appalling is that they have not answered the question, they didn't tell us, they didn't tell us a year ago. And I also want to say that I don't believe -- I'm with Paul Ryan. I don't believe him. They should have told, they should have come forward about this a year ago. There should have been a lot more investigation than what we've heard.

WALLACE: I want to pick up on what Cleta is saying, Julian, because here is why a lot of people are so suspicious. And take a look at this timeline that we put together. June 3rd, 2011, 2011, Chairman Camp, House Ways and Means, asked the IRS about the targeting of conservative groups seeking tax exempt status. June 13th, just ten days later, Lerner reports that her hard drive has crashed. February 2013, IRS realizes that the emails are missing. At least that's what they say. June 13th, 2014, the IRS finally tells Congress. Julian, I guess two questions. How do you explain this four-month delay between when the IRS says they knew the e-mails were missing and when they finally told Congress, and how do you explain this apparent coincidence that it is ten days after Congress starts asking about the e-mails that Lois Lerner says, oh, the hard drive has crashed?

JULIAN EPSTEIN, FORMER TOP DEMOCRATIC HOUSE STAFFER: So, let me say, I think anytime you have targeting of any group by the IRS, it's inappropriate, I think an apology in that instance is warranted. I think anytime when you have emails missing in the course of investigation, it's a problem. I think the idea that there is some cover-up, the way some Republicans are suggesting, I think is nonsense. The timing was coincidental, and I think perhaps unfortunate.

WALLACE: How do you know that?

EPSTEIN: Well, the timing, the outline -- the outline that you just suggested, but there's nobody that suggests, Chris, that there was any bad faith involved in the computer crash when the computer crashed ...


EPSTEIN: Let me finish my point, if I may. When the computer crashed, Lois Lerner immediately went to the IT professionals at IRS, the IRS IT professionals all confirm that. They all confirm they went to extraordinary lengths to try to recover that information.

MITCHELL: But the truth of the matter is, we don't know that. We have a few emails that were selectively produced that show that she was -- let me tell you what. If that had been my hard drive and that had happened, I would have been a little more outraged than she appeared to be. Then here are some other questions. I've had IRS employees who have e-mailed me this week who said all of their servers are not -- it's not one little computer in Washington. That there are servers in three different places in the United States. The IRS has a contract with a professional e-mail archiving company. I want to know why the FBI has not stepped forward and said what they have done to try to bring in their very sophisticated capabilities to understand what happened. So I don't think that we can say that there ...

EPSTEIN: Let me just finish the point. During the Bush administration, the Valerie Plame investigation, a contributor on this network came on to concede that 5 million emails may have been lost by the White House during the course of the U.S. attorney investigation, e-mails were misplaced, during the course of the torture memo investigation e-mails were lost. This isn't the first time this has happened. I think the question is, and the question for Cleta, is there any demonstration of any bad faith here? All of the administration ...

WALLACE: Great question. Let's get a quick answer. Because I want to move onto something else.

MITCHELL: I don't think we know the answer to that. I think there is bad faith in that this should have been known a year ago. It was known to the IRS a year ago, and it should have been disclosed a year ago.

WALLACE: OK, let me move on to another subject, and frankly, the bottom line subject. One of the groups pointed that you represent suing the IRS. It's a group called True the Vote, which saw tax exempt status back in 2010. The IRS finally favored and granted their application in 2013. Three years ...

MITCHELL: After we sued them.


MITCHELL: On the day they were to answer.

WALLACE: I understand your outrage, and I think a lot of people understand the outrage that it takes three years for that, but do you have any hard evidence that either the White House or the Obama campaign ordered the targeting of any conservative group?    MITCHELL: Absolutely. All you have to do is look at the report. That the House Oversight Committee posted on its website, and they have a new website that has all of this information. And if you look at the timeline, and now I understand why the Democrats have been trying to shut ...

WALLACE: That's the point, do you have any hard evidence?

MITCHELL: That's because the president and members of Democratic senators and Democratic House members were beating on the IRS, demanding that the IRS do something to stop these conservative and Tea Party groups.

EPSTEIN: Who inside the White House, Cleta, and who inside treasury did this?

MITCHELL: The president of the United States went around the country giving speeches.

EPSTEIN: That is not hard evidence.

MITCHELL: Talking ...

EPSTEIN: I mean Chris is asking you a specific question and you're not answering the question.

MITCHELL: Well, let me ask you this.

EPSTEIN: No, answer the question.

MITCHELL: The pertinent time period that we would know whether there was such direct evidence has been conveniently lost.

EPSTEIN: Let me try to answer the question -- Can I respond to that?

WALLACE: Because I want to ask you about President Obama, who was as outraged initially as Cleta Mitchell was about the whole IRS scandal.

EPSTEIN: Appropriately so.

WALLACE: But watch how his attitude changed over the next few months. Take a look.


BARACK OBAMA, PRESIDENT OF THE UNITED STATES OF AMERICA: I've reviewed the Treasury Department watchdog's report and the misconduct that it covered is inexcusable.

But with this endless parade of distractions and political posturing and phony scandals, Washington's taken its eye off the ball.

And there was some bone-headed decisions.

UNIDENTIFIED MALE: Bone-headed decisions?

OBAMA: Out of ...

UNIDENTIFIED MALE: But no mass corruption.

OBAMA: Not even mass corruption. Not even a smidgen of corruption.


WALLACE: Julian, how does inexcusable misconduct become a phony scandal and then not a smidgen of corruption?

EPSTEIN: If you simply look at the IT, the inspector general report, I think the inspector general report says essentially the same thing.

WALLACE: The inspector general never did an investigation. He did an audit.

EPSTEIN: I think the inspector general ...

WALLACE: And he was responding, when he responded initially to the inexcusable misconduct, it was after the inspector general's report.

EPSTEIN: That's correct. And I think the inspector general ...

WALLACE: There's never been for all of the referral to the Justice Department, there's never been a criminal investigation of this. So, how can a president say that there's not a smidgen of corruption? What's the basis for that?

EPSTEIN: Because I think the inspector general report and the committee investigation has essentially left every stone -- no stone unturned. Let me try to -- some basic facts here. The inspector general report and all of the evidence shows that this was initiated by a low-level Republican staffer in a Cincinnati office.

MITCHELL: This is not true.

EPSTEIN: Let me finish the point, if I may, without interruption. That two -- on two occasions senior officials in the IRS slapped down this effort to target, and it was inappropriate, of conservative groups. That there's no evidence whatsoever that the White House or the Treasury Department.

WALLACE: We have limited time. Both of you. You have made a point. I think it's a fair point. Cleta, how do you respond?

MITCHELL: It's not true. I mean if you look at the interviews that have been posted, the information, this all was a result of the response by the IRS and high ranking officials in the IRS. I mean look, I dealt with Lois Lerner among others. And the fact of the matter is they were concerned about the Citizens United decision and the political pressure that was being brought to bear on all of these civil service employees and they were trying to "do something." We just learned because the investigation has been allowed to continue, we just learned in the last two months that Lois Lerner sent the data -- a database of 12,000 citizens organizations to the FBI for possible criminal recommendation.


WALLACE: Wait, wait. I've got 30 seconds left. I have one last question for Cleta. I'm sorry, but I just want to ask you this, where does the scandal go from here? How do you think that the missing e- mails should be handled? And how do we get to the bottom of if there was anyone above and beyond Lois Lerner who was responsible for targeting these groups?

MITCHELL: Well, we have to be able to look at e-mails outside of the IRS. That's one thing that the IRS commissioner has not been forthcoming about. We're going to be meeting and conferring with the lawyers of the Justice Department, lawyers for the IRS and Lois Lerner this week in our lawsuit, and I doubt we'll get very far. We'll ask the court to order an independent forensic investigation and maybe the lawsuits are the only way we are going to get to the bottom of this.

WALLACE: I'll give you ten seconds, final word.

EPSTEIN: There's no evidence that the White House or senior Treasury officials were involved in this. This was started by a Republican staffer inside the Cincinnati office. The senior officials at IRS twice slapped this process down. Democrats were investigated as well. The critics have never shown that there's anything approaching a serious scandal here involving political officials, even if the targeting was admittedly inappropriate.

WALLACE: Cleta, Julian, thank you both. To be continued. And we will, of course, we'll stay on top of this. What do you think about the IRS targeting scandal and the new report about Lois Lerner's hard drive crashing? Join the conversation on Facebook with other FNS viewers. Up next, our Sunday group returns to try to solve the case of the missing e- mails. You'll want to stick around for this.


WALLACE: Now you can connect with "Fox News Sunday" on Facebook and Twitter. Be sure to check out exclusive material online at Facebook and share it with other Fox fans. And tweet us at "Fox News Sunday" using # FNS. Be part of the discussion and weigh in on the action every "Fox News Sunday."



PAUL RYAN (R ), WISCONSIN CONGRESSMAN: This is a pattern of abuse. A pattern of behavior that is not giving us any confidence that this agency is being impartial. I don't -- I don't believe you. This is incredible.

KOSKINEN: I have a long career. That's the first time anybody has said that you don't believe me. I'm actually ...

RYAN: I don't believe you.


WALLACE: Well, usually, mild mannered Congressman Paul Ryan ripping into the IRS chief this week over claims the agency lost thousands of e-mails connected with the IRS targeting scandal. And we're back now with the panel to continue the conversation. The IRS commissioner says back in 2011, when Lois Lerner's hard drive crashed, that she immediately called the I.T. people, asked them to retrieve any of the files that they could. George, how credible?

GEORGE WILL, SYNDICATED COLUMNIST: Incredible. And here's -- let me tell you why we need a special prosecutor in this. One of my pet peeves with current English usage is the treatment of disinterested and uninterested as synonyms. We wish the Justice Department were interested in this. It were a disinterested investigator of this. Instead, it's uninterested in the investigation. We can no more expect Mr. Holder to investigate this White House than we could have expected John Mitchell to investigate the Nixon White House. Here's -- we know six things, Chris. We know first the targeting occurred. Therefore, second, we know that this is worse than article two of the Nixon impeachment count, which said Nixon endeavored to use the IRS. The IRS back then resisted. Third, we know that this became public in an act of deceit when Lois Lerner planted a question with a friend in an audience to try and get this out on her own terms. Fourth, we know that she has taken the Fifth Amendment because she has a right to do this when she has a reasonable suspicion that there might be criminal activity involved. Fifth, we know that from the timeline you put up today, that there has been 13 months of stonewalling on this. And sixth, now we know that not only her hard drive, but six other people intimately involved in this suddenly crashed in an amazing miraculous coincidence. Religions have been founded on less, ten days after the investigation started. That's why we need a special prosecutor.

WALLACE: Judy, the IRS scandal, I think it's fair to say, seemed to be fading, for lack of new information. Does the case of the missing e-mails give it new life?

JUDY WOODRUFF, CO-ANCHOR, PBS NEWSHOUR: Well, what I can say, Chris, is I haven't reported this story. I haven't -- I don't know what happened inside the IRS. But what I can say is I have known John Koskinen for 30 years. He is a man of total integrity, as I think any Republican or Democrat who knows him well will say. He was -- had had a very successful long career in the private sector. He ran Y2K for the government successfully. Even worked for the District of Columbia government. The charges here don't fit the man. So, you know, this is a story we'll continue to talk about, but this is -- you know, we live in a city where investigations go on, e-mail searches go on, but the man at the center of this, I can tell you from my personal experience, is not what it appears.    WALLACE: The only point I would make back at that is John Koskinen was not there when any of these things happened. He wasn't there when the targeting allegedly happened. He wasn't there when the hard drive crashed. He's been there only for the last six months. So, you can argue about whether he was trying to hide it from Congress when he found out in February, but you can't talk about what was going on in 2010 or 2012.

WOODRUFF: Well, he has provided evidence as I understand it in the last few days that indicates that what Lois Lerner did back in 2011 when the hard drive crashed was she tried to get her e-mails recovered. And it didn't happen. This was well before the story became public. So that's what he's done. He's also talked about what the Treasury Department independent inspector general has done. In that yes, there was inappropriate action on the part of IRS employees, but no, it doesn't appear to be politically motivated. So, John Koskinen is cooperating, but the debate will go on about what happens and whether there should be another investigation.

WALLACE: Michael, I want to ask you a question that I asked Cleta Mitchell. There are a lot of suspicions and rightly so. A lot of questions, but so far, and correct me if I'm wrong, is there any hard evidence that either the White House or the Obama campaign directed this targeting?

MICHAEL NEEDHAM, CEO, HERITAGE ACTION FOR AMERICA: Well, I don't know what's worse. If we live in a country now where a bunch of unelected bureaucrats inside the IRS can decide on their own, so go target political opponents.


WALLACE: The president was ordering.

NEEDHAM: Either way, we're in a pretty bad situation. But look, we're supposed to have a system of checks and balances between three elected or two elected and the Supreme Court branches of our government. We no longer live in that system. We have an out of control executive branch because the Congress has given up its prerogative. Even executive branch that has unilaterally changed Obamacare dozens of times. Even executive branch that has made unconstitutional appointments for the NLRB, an executive branch, that has done, what we have seen with the IRS, so on. It's time for congress to step back up. That's why I agree with George that we should have a special prosecutor. That's why I think it's unconscionable that Kathleen Sebelius' replacement at HHS went through as quickly as she did. And we didn't get to the bottom of all of this unilateral executive changes, so it's time for Congress to step back up and reassert its property place in our constitutional form of government.

WALLACE: I want to pick up on one of your comments. Juan, I understand the politics involved here. But on the merits, is there any reason that they shouldn't appoint a special prosecutor at this point?   JUAN WILLIAMS, Fox NEWS POLITICAL ANALYST: Yeah, there's lots of merits, beginning with the fact that the Congress, I mean, a very partisan, driven investigation took place. Darrell Issa House Oversight, went after this. E-mails provided, everything provided, memos -- and nothing -- Inspector General went after and said there was misbehavior in terms of the targeting ...

WALLACE: That was an audit, not an investigation.

WILLIAMS: No, but he went after it, Chris. And what ...


WALLACE: He did not go into the question of what the White House ...

WILLIAMS: Yes, he did. He said there was no political motivation, no outside influence.

WALLACE: He was talking about what was going on in the IRS. He was not -- he did not ...

WILLIAMS: Yes, that's what I'm talking about.

WALLACE: He didn't seek the emails of what was going on in the White House.

WILLIAMS: Well, what we know, and this is something Judy said a moment ago. Don't pass over it so quickly. This crash and everything about it occurred before the Congress said we have some concerns.

WALLACE: That's not true.


WALLACE: That's not true.


WALLACE: I just did a timeline. On June 3rd of 2011, Dave Camp sent a letter to the Chairman of House Ways and Means for the IRS asking about the targeting and it was ten days after the Camp -- wait a minute, it was ten days. I know facts are inconvenient things.


WALLACE: It was ten days after Camp's letter that the hard drive crashed.

WILLIAMS: He sends a letter. I'm saying the minute the Congress said we have questions about IRS targeting, this thing had already happened. Camp sent a letter. Everybody sends letters. But when you say, we have an investigation, that's a different matter. And that's what would have set off the alarms. And that's what sets off alarms in my mind as a reporter. I initially heard this story ...

WALLACE: 15 seconds.

WILLIAMS: This is crazy. What do you mean your e-mails disappeared?

WILL: The hard evidence might or might not be on the hard drives, which conveniently have disappeared. I do not think it is beyond the capacity of the FBI forensic people to verify that.

WALLACE: Thank you, panel. See you next Sunday. This, clearly, has been a continue. Up next, our power player of the week. How one company is helping its employees grew up a higher education.


WALLACE: It's one of America's great companies with 21,000 stores in 67 countries, all selling its special brand. But over the years, it has also been celebrated for its corporate culture. Here's our power player of the week.


HOWARD SCHULTZ, STARBUCKS CHAIRMAN AND CEO: Starbucks coffee company will be the first company in the United States to offer a college education for free.

WALLACE: Howard Schultz is chairman and CEO of Starbucks. And this week, he announced a major new program for its workers.

SCHULTZ: This is a monumental, historic moment in time for our company.

WALLACE: Any employee, Starbucks calls them partners who works at least 20 hours a week, will be able to take courses at Arizona State University's online program.

UNIDENTIFIED MALE: This world class (INAUDIBLE) is being delivered to you through ASU online.

WALLACE: Starbucks will pay full tuition for junior and senior years. Partial assistance for freshman and sophomores.

WALLACE (on camera): You can take any course you want.


WALLACE: You can leave Starbucks after you graduate.

SCHULTZ: We don't want you to leave. We want to retract great talent, but if you take the degree with you, you don't owe us any money.

MICHAEL BOJORQUEZ, STARBUCKS BARISTA: The reason why today's announcement is important to me is because today's where my life changes.

TAMMIE LOPEZ, STARBUCKS BARISTA: It amazes me that I'll be able to accomplish something that I have always seen myself accomplishing, but I never knew when.

WALLACE: What is it going to cost you?

SCHULTZ: This could cost tens of millions of dollars per year depending how many people enroll. And so, the question is, how is Wall Street going to look at this? We're going to significantly lower attrition and attract great people. This is not an expense that we have looked at it. This is an investment in our people, in our company, and in society. And it is a win-win.

WALLACE (voice over): If that sounds like slick PR, Schultz has been putting his money where his mouth is for years. Starbucks has offered health insurance to full and part-time workers since 1989. It has a generous stock option plan. It's committed to hiring 10,000 returning veterans. And it's donating the $30 million for research and treatment of wounded warriors.

(on camera): Do any of your colleagues at other big companies ever say to you, Howard, we're not running charities here?

SCHULTZ: I certainly have gotten a couple of messages and calls saying, you're going to make it a lot harder for us.

WALLACE (voice over): Howard Schultz grew up poor in Brooklyn. But he says the country then offered opportunities for kids like him. Now he says the American dream is broken. With too many people left behind.

SCHULTZ: I'm scarred with what it meant to grow up on the other side of the tracks. I feel the vulnerability and the shame of what that meant as a poor kid, and I see these kids and families and my heart goes out to them.

WALLACE: Schultz says Washington has a role to play, but with government gridlocked, he thinks companies like his have to step up, and the good works are good business.

SCHULTZ: We're playing the long game. We do not want to get into a short-term mentality and play that game with Wall Street. The currency of building a consumer brand today is trust. And that trust has to be based on more things than just making a profit.


WALLACE: Wall Street apparently reacted well to Schultz's new college plan. Starbucks stock finished up more than 2.5 percent for the week, but the company also announced it's raising the price of its larger cups of coffee anywhere from five to 20 cents more. And that's it for today. Have a great week, and we'll see you next "Fox News Sunday."

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