May 22, 2014

There are few who would argue that the past couple of years have been rough for the IRS. Traditionally unpopular, the agency has reached new lows in esteem in the eyes of many Americans. With the backlog in processing returns and refunds caused by the 2013 government shutdown and the ongoing kerfuffle about targeting of particular groups for questionable scrutiny concerning their applications for 501(c)(4) tax-exempt status, the last thing the embattled agency needed was a genuine scandal on its hands.

Now there is a genuine scandal associated with the IRS, and it’s, well, scandalous.

IRS Bonuses for Tax Cheats

According to a report issued in April by Treasury Inspector General for Tax Administration J. Russell George, the IRS awarded more than $2.8 million in cash bonuses to its own employees. Additionally, it gave more than 27,000 paid time-off award hours and 175 step enhancements to those 2,800 employees between October 1, 2010 and December 31, 2012. Of course, there is nothing inherently wrong with awarding bonuses, paid time off and other types of compensation to high-performing employees. But in the case of the IRS, 1,100 of these employees were actually “problem” workers who received more than 10,000 paid time-off award hours, 69 step quality awards, and more than $1 million in cash bonuses.

The problem? Noncompliance on filing and/or paying federal income taxes – including willful underreporting of income and tax liabilities and late payment of income taxes. In plain English: a significant number of tax cheating employees received cash bonuses, paid time-off awards and other perks. These bonuses and time-off awards were issued despite a 1998 federal statute that makes it mandatory for IRS employees who commit certain types of misconduct, including willful failure to pay income taxes to be dismissed from their jobs.

Misconduct? Not a Bar to Performance Awards for IRS Workers

The report cited an additional 1,400 workers who received $1.8 million in performance-related bonuses for performance that could hardly be categorized as stellar. Among the serious infractions listed by the report were violent threats, credit card fraud, illicit drug use and unemployment benefits fraud. In one case cited by the report, an IRS employee received a 10 calendar-day calendar suspension in September 2011, but was still awarded a $1,300 performance bonus in August 2012. During the two-year period cited by the report, bonuses totaling more than $38,000 along with 400+ bonus paid time-off hours were even awarded to 48 employees who were subsequently dismissed from their jobs for “willful misconduct.”

The IRS Promises to Get Its Act Together

Although astonishing, these circumstances do not represent an official violation of IRS regulations. According to a press release issued by George, there is no prohibition against the issuance of awards by the IRS to employees who are guilty of bad conduct or infractions against IRS policy. Even so, the press release pointed out that issuing bonuses under such circumstances creates the appearance of “a conflict with the IRS’s charge of ensuring the integrity of tax administration.”

The report recommended that the IRS Human Capital Officer should reconsider IRS policy concerning bonus compensation. Specifically, the report urged the IRS to consider the overall conduct of employees – especially incidents such as tax noncompliance – that result in disciplinary action – before issuing performance and discretionary awards. For its part, the IRS agreed with the recommendations of the report and announced plans to conduct a study by the end of June 2014 to determine how to implement such a change in policy.