The president's condemnation came as Attorney General Eric Holder said there will be a criminal investigation of the IRS' handling of tax matters involving conservative organizations.
"I have now had the opportunity to review the Treasury Department watchdog's report on its investigation of IRS personnel who improperly targeted conservative groups applying for tax-exempt status. And the report's findings are intolerable and inexcusable," Obama said in a statement released by the White House.
"The federal government must conduct itself in a way that's worthy of the public's trust, and that's especially true for the IRS. 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."
Obama, who has said he first learned of the issue Friday, said he directed Treasury Secretary Jack Lew "to hold those responsible for these failures accountable, and to make sure that each of the inspector general's recommendations are implemented quickly, so that such conduct never happens again."
"But regardless of how this conduct was allowed to take place, the bottom line is, it was wrong," he said.
Holder told a news conference the Justice Department and FBI will look into whether any laws were broken in the singling out of conservative groups for special scrutiny.
Holder said a number of "statutes within the IRS code" could form the basis of a criminal violation, The New York Times reported.
The Hill reported Tuesday a leaked federal watchdog report concludes IRS officials used "inappropriate criteria" to single out Tea Party groups and requested "unnecessary information."
The Washington publication said a copy of the yet-to-be-released Treasury inspector general's report states the tax collection agency identified groups for further scrutiny based on their names and policy positions, instead relying on tax law and regulations for making those determinations. The improper method was used for more than 18 months as a result of "insufficient oversight" by IRS management, The Hill said.
Records indicate IRS actions went beyond an Ohio office, and current and former IRS heads knew about the practice a year ago.
IRS officials at the agency's Washington headquarters and at offices in El Monte, Calif., east of Los Angeles and Laguna Niguel in California's southern Orange County sent queries to conservative groups asking about their donors and other facets of their operations, documents obtained by The Washington Post indicate.
The IRS originally said the alleged anti-conservative targeting was limited to its Cincinnati branch. The Cincinnati IRS employees told conservatives seeking the non-profit status of "social welfare" groups that a Washington task force was overseeing their applications, activists from those groups told the Post.
Lois Lerner, head of the IRS tax-exempt-organizations division, told reporters Friday the "absolutely inappropriate" actions were done by "front-line people" working in Cincinnati to target groups with "Tea Party," "patriot" or "9/12" in their names.
Her office had no immediate comment on the Post report.
The Post and The Wall Street Journal also said the current and former IRS heads were informed a year ago about the conservative group targeting.
The IRS said in a statement Monday acting Commissioner Steven Miller learned from agency staff May 3, 2012, when he was deputy commissioner, some groups' applications for tax-exempt status were improperly selected for extra scrutiny based on their names.
Miller's predecessor and boss at the time, Commissioner Douglas Shulman, appointed by President George W. Bush in 2008, was also informed of the problems in May 2012, aides told the newspapers.
But neither official shared what they learned with Republican lawmakers demanding to know if the IRS was targeting conservative groups, Republicans told the newspapers.
"I wrote to the IRS three times last year after hearing concerns that conservative groups were being targeted," Senate Finance Committee member Orrin Hatch, R-Utah, said in a statement Monday.
"In response to the first letter I sent with some of my colleagues, Steven Miller, the current acting IRS commissioner, responded that these groups weren't being targeted," Hatch said.
"Knowing what we know now, the IRS was at best being far from forthcoming, or at worst, being deliberately dishonest with Congress," he added.
Neither Miller, who became IRS commissioner Nov. 10, nor Shulman, who resigned Nov. 9, could immediately be reached for comment.
On Capitol Hill, two Senate panels -- the Finance Committee and the Permanent Subcommittee on Investigations -- said Monday they would investigate.
"These actions by the IRS are an outrageous abuse of power and a breach of the public's trust," said Finance Committee Chairman Max Baucus, D-Mont. "The IRS will now be the ones put under additional scrutiny."