September 25, 2013

In July 2013, acting Internal Revenue chief Daniel Werfel announced plans to cancel bonuses for union employees (bonuses for non-union employee had already been canceled). Werfel is also investigating canceling bonuses for Senior Executive Service employees, despite the fact that their earnings are based in part on a pay-for-performance arrangement. Werfel said that cancelling bonuses for union employees would allow the IRS to save $70 million and avert scheduling two additional furlough days for July 22 and August 30. Three earlier furlough days which closed IRS operations occurred on May 24, June 14 and July 5.

The furlough days were scheduled as the result of cuts mandated by the sequester. However, the bonuses had also come into criticism as a result of the controversy that occurred during early 2013 over the IRS scandal that they had targeted the applications for Tea Party and other conservative groups seeking tax-exempt status to special scrutiny. Specifically, Senator Chuck Grassley, a Republican from Iowa, has been especially vocal about the propriety of the bonuses.

The IRS Scandal

At the heart of the IRS scandal is the special scrutiny some conservative-leaning groups received for their applications or 501(c) (4) status as social-welfare organizations. The statute as written dictates that organizations seeking 501(c) (4) status must conduct their affairs exclusively for social benefit. However, for reasons that remain unclear, the IRS began interpreting the law to read that organizations must conduct their affairs primarily for social benefit. As a result, the IRS has taken on the task of interpreting whether organizations seeking 501(c) (4) status are in compliance with the re-interpreted statute.

Subjecting the administration of the law to human interpretation invariably results in questionable decisions. However, and despite insistent efforts by Republicans in Congress to link the scandal to President Obama, to date, no connection to the White House has been found. In fact, the IRS Inspector General reported in July 2013 that progressive and liberal groups seeking 501(c) (4) status from the IRS had also been subjected to heightened scrutiny.

The Sequester, Again

As the country heads toward a possible government shutdown and a second debt ceiling fight, the IRS bonus cancellations represent yet another of the lingering aftereffects of the previous debt ceiling fight. As part of the Budget Control Act of 2011, Congress was directed to pass a budget by December 23, 2011 cutting $1.5 trillion from the budget over the next ten years in order to avert a series of across-the-board cuts known as the sequester. However, Congress failed to pass a budget by the deadline, and President Obama was forced to sign the sequester cuts into law.

The sequester was originally designed to take effect on January 1, 2013 and cut $109 billion from the budget in 2013. However, the fiscal cliff compromise delayed the onset of the sequester for two months, and reduced the total amount of cuts for 2013 to $85 billion. Each nonmilitary department in the federal government had to cut nine percent from its budget; defense programs were hit with cuts of 13 percent.

As a result of the 2011 year-end showdown between Congressional Republicans and President Obama, the IRS did not begin accepting 2012 federal income tax returns until January 30, 2013 – a three-week delay from its customary January 8 first acceptance date. The IRS also delayed issuing refunds from approximately eight days after e-filing to 21 days after the filing date. Refund processing for late filers was also adversely affected by the sequester, due to further delays caused by the three furlough days earlier in the year.

IRS Cancels Employee Bonuses

Despite protests from the National Treasury Employees Union, which represents IRS employees, a third-party mediator upheld the decision to cut bonuses in September 2013. The union insists that the bonuses are mandated as part of a collective bargaining agreement, and has appealed the decision. A final decision on the union’s appeal is expected by spring 2014.