While some taxpayers are worried about getting steep fines for fudging on their tax returns, a new government watchdog’s report found that the Internal Revenue Service paid $1 million in bonuses to employees who owed back taxes.

In addition, the IRS’s inspector general found that the tax agency had been granting cash and time-off rewards to employees who had faced disciplinary action in the past.

All told, the Treasury Inspector General for Tax Administration (TIGTA) survey found that between October 1, 2010 and December 31, 2012, more than 2,800 employees with recent documented “conduct issues resulting in disciplinary action” received more than $2.8 million in monetary bonuses and more than 27,000 hours in time-off awards. More than 1,100 IRS employees with federal “tax compliance problems” received more than $1 million in cash awards and more than 10,000 hours in time-off awards.

“These awards are designed to recognize and reward IRS employees for a job well done, and that is appropriate, because the IRS should encourage good performance,” said Inspector General J. Russell George. But “providing awards to employees who have been disciplined for failing to pay federal taxes appears to create a conflict with the IRS’s charge of ensuring the integrity of the system of tax administration,” he added.

Americans for Tax Reform President Grover Norquist expressed outrage over the watchdog’s latest revelations about the IRS‘ rewards programs.

“This is the IRS playing exactly into the narrative that many Americans already accept, which is that the IRS has one set of rules for themselves and another set for the taxpayers,” the anti-tax activist said. “The idea that they set up two classes with different sets of rules is a problem. This is not the way they should be operating.”

The inspector general’s report recommended that the IRS personnel officials consider new policies that would require management to consider prior-conduct issues when issuing performance awards.

The watchdog did commend the IRS for its overall award program and said that it generally complied with federal regulations.

“We appreciate TIGTA’s acknowledgment that the audit did not find any violations with the awards program’s compliance with federal regulations,” IRS spokesman Bruce Friedland said in an interview. “The IRS takes seriously our unique role as the nation’s tax administrator. We strive to protect the integrity of the tax system, and we recognize the need for proper personnel policies.”

The agency has developed a policy “linking conduct to performance awards for executives and senior-level employees,” Mr. Friedland added. “Even without a formal policy in place, over the past four years, the IRS has not issued awards to any executives who were subject to a disciplinary action.”

He said the IRS is considering a similar policy covering all of the agency’s workforce, but that must be negotiated with the National Treasury Employees Union.

For fiscal year 2012, the IRS awarded $86 million in cash and almost 490,000 hours of time off to 67,870 employees, out of a total workforce of approximately 98,000 employees.

TIGTA conducted the audit in compliance with new federal rules which require decreased spending on employee-award programs starting in fiscal 2012.

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