IRS gave bonuses to employees who owed back taxes. And that’s not all.


The Internal Revenue Service (IRS) headquarters in Washington, D.C. (Bloomberg)

So, where do you work? That’s a question Internal Revenue Service employees must dread. Besides the fact that nobody like paying taxes, the agency’s reputation has suffered in the past year because of accusations that it subjected applications for tax exempt status from tea party groups to greater scrutiny.

But things got worse for the IRS yesterday.

report from the Treasury Inspector General for Tax Administration shows that between Oct. 1, 2010, and Dec. 31, 2012, the IRS paid $2.8 million in bonuses to employees cited in the past year for such things as drug use, making violent threats, fraudulently claiming unemployment benefits, misusing government credit cards and — get this — failing to pay their taxes.

The report said more than 1,100 employees who failed to pay their taxes received discretionary awards of more than $1 million in cash bonuses and more than 10,000 hours in extra paid vacation.

At least five employees received performance awards after being disciplined for intentionally under-reporting their tax liabilities for multiples years, paying taxes late and under-reporting income.

Like many companies and government agencies, the IRS sweetens the deal for its employees by giving bonuses based on performance. But at the IRS, breaking the federal tax laws you were hired to enforce and running afoul of other agency rules aren’t considered relevant to performance-based awards.

You have to do something really bad before the IRS will take conduct into account, bad enough to be suspended for 14 days or more. Even then, conduct is only deemed relevant to awards of permanent pay increases, not for bonuses or extra vacation time.

None of this apparently violated federal guidelines or any internal policies related to rewarding employees. 

In fact, the agency cut performance-based payments beyond what was required by a 2011 federal policy instructing agencies to limit incentive payments to 2010 levels. Everyone who got an award received a performance rating of “fully successful” as required by federal guidelines.

The IRS’s contract with the National Treasury Employees Union bars the agency from considering bad conduct when making performance-based awards. As for non-union employees, federal guidelines are silent on the subject.

More than 2,800 employees out of 98,000 got performance-based awards within a year of disciplinary action.

“While not specifically prohibited by IRS policies, providing awards to employees with conduct issues, especially the failure to pay taxes owed to the Federal Government, appears to be in conflict with the IRS’s charge of ensuring the integrity of the system of tax administration,” the report said. “In addition, awards provided to these employees could be put to better use by providing employees who are compliant additional opportunities for awards.”

In response to the report, the IRS said it was in the process of developing a policy linking conduct to performance awards for executives and senior management and will consider extending such a policy to the entire workforce if possible, noting that such a change would be subject to union approval.

NTEU President Colleen Kelley told USA Today that the union would review any proposed changes to its contract for the “relatively small number of employees who may have had some overlap between a performance award review period and a conduct issue.”

If the IRS does adopt a policy tying conduct to performance-based awards, it will be among the first to do so it says. “Of the 15 federal and 13 state policies we examined, only one agency specifically prohibited granting an award if conduct issues were present,” the agency wrote in a letter to the Inspector General’s office.

Gail Sullivan covers business for the Morning Mix blog.

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