into allegations that Internal Revenue Service staff singled out grass roots groups, including some affiliated with the ultra-conservative Tea Party.
He ordered treasury secretary Jack Lew to hold "those responsible for these failures accountable."
"The report's findings are intolerable and inexcusable," Obama said in a written statement.
"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 said.
The scandal surrounding the IRS, an independent agency within the Treasury Department, was one of a clutch of political controversies threatening to halt Obama's political momentum at the beginning of his second term.
Republicans seized on the episode, revealed publicly on Friday, to claim a pattern of abuse of power and intimidation by the Obama White House.
But the White House said that no one in Obama's governing or political team had anything to do with targeting the conservative groups, and the president said he only learned about if from news reports last week.
The inspector general's 54-page report found that the IRS used "inappropriate" political criteria when probing groups over an 18-month span.
It did not explicitly mention acts of criminality, but highlighted an overly ambitious review of applications from groups that could be seen as seeking the defeat of Obama and his Democrats in the 2012 elections.
"Early in calendar year 2010, the IRS began using inappropriate criteria to identify organizations applying for tax-exempt status to review for indications of significant political campaign intervention," the report said.
The report determined that a specialist had been "asked to search for applications with 'Tea Party,' 'Patriots,' or '9/12' in the organization's name as well as other 'political-sounding' names."
Lew said he was "deeply troubled" by the report's findings. He said he had "zero tolerance" for any action that undermined confidence in the tax code, and urged the IRS to act on the report's findings.
Attorney General Eric Holder earlier ordered an investigation into the federal tax authority's treatment of Tea Party groups to see if it had violated any laws.
The IRS, acknowledging the mistakes, said "significant improvements in this area are in place, and we are confident that what transpired here will not recur."
"We believe the frontline career employees that made the decisions acted out of a desire for efficiency and not out of any political or partisan viewpoint," wrote IRS acting commissioner for tax exempt and government entities, Joseph Grant.
"And as the report discusses, these issues have been resolved."
But the inspector disputed that, saying "we disagree" with the IRS claim that the issues have been resolved, and that more needed to be done to prevent a repeat of such abuse.
On Friday, the IRS admitted targeting around 75 non-profit groups associated with the ultra-conservative Tea Party movement, as well as other political non-profits for special examination, as Obama fought a furious battle for reelection against conservatives.
They involved the claim of non-profit status by newly-formed, so-called 501(c) groups, many of which were actively involved advocating political stances both sides of the political spectrum.