IRS takes new hit: Report finds agency gave bonuses to tax evaders

The Internal Revenue Service faces negative publicity again, with a report showing that the agency paid out more than $1 million in bonuses to IRS employees known to have failed to meet their own tax obligations. 

“More than 1,100 IRS employees with substantiated Federal tax compliance problems received more than $1 million in cash awards,” plus extra time off and, in some cases, pay raises, says a newly released report by the US Treasury’s Inspector General for Tax Administration.

For an agency already struggling to recover from criticism over its targeting of tea party political groups for special scrutiny regarding tax exemptions, this latest report is one more damaging blow to public confidence.

Public trust, important to any branch of government, is a particularly vital currency for the IRS. Paying taxes is a not-so-fun obligation under any circumstances, after all, and the collecting job can get harder if Americans perceive that the agency doesn’t play fair.

The inspector general’s report makes this point up front: “Providing awards to employees with conduct issues, especially those who fail to pay Federal taxes, appears to create a conflict with the IRS’s charge of ensuring the integrity of the system of tax administration.”

The IRS Restructuring and Reform Act of 1998 calls for the mandatory removal of employees for certain kinds of misconduct, including willful failure to pay federal taxes, but the act doesn’t set rules regarding cash awards.

The IRS has already agreed with the inspector general’s recommendation to consider conduct issues that result in disciplinary action before making performance awards. The report says the IRS will complete a study by the end of June to set the new policy. 

But the pledge still leaves the tax agency struggling to recover public confidence.

A May 2013 Gallup poll found the IRS at the bottom of the heap in public esteem among nine prominent federal agencies. Also included in the survey were the Federal Reserve, CIA, FBI, Department of Homeland Security, Environmental Protection Agency, Food and Drug Administration, NASA, and the Centers for Disease Control.

The IRS got a “poor” grade from 42 percent of respondents, and was the only one in the survey for which poor ratings outnumbered grades of excellent or good.

The new Treasury report, prepared a few weeks ago and released Tuesday, says that $2.8 million in monetary awards went to about 2,800 employees with recent conduct problems. Within that group were 1,100 workers with substantiated tax-compliance problems. The report covered a period from late 2010 through the end of 2012.

The report said tax-compliance problems included "willful understatement of tax liabilities over multiple tax years, late payment of tax liabilities, and underreporting of income."

Awards averaged about $1,000 per person, whether the recipients had failed to pay their taxes, had other conduct problems, or had no conduct issues at all. In all, cash awards went out to 68,000 of 98,000 IRS employees in 2012.

Along with the cash bonuses, many IRS employees – tax cheats or not – were rewarded with extra hours of time off, and a smaller number got salary boosts within their pay grades.

The report notes that the IRS put a freeze on awards for most employees – including those who review organizations seeking tax-exempt status – in 2013.

The 1998 IRS Restructuring and Reform Act was designed to make the agency more accountable and more efficient during a previous era of severe criticism. The office of Treasury Inspector General for Tax Administration was created under that law.

According to polling by the Pew Research Center, the agency regained some ground in public opinion following that legislation. But in 2010, the IRS still lagged behind many other federal agencies, with a “favorable” rating below 50 percent.