Issuing Tax Refunds During Gov't Shutdown May Be Unlawful

Author: Vidya Kauri


The Trump administration's decision to permit tax refunds to be issued during a federal government shutdown could be deemed an unlawful exercise of the executive branch's powers if IRS employees are forced to work without pay.


The IRS said it would recall furloughed employees as the government remained shut down in a dispute between President Donald Trump and Congress over funding for a security wall on the Mexican border. (AP) The office of Management and Budget on Monday reversed a position it has held since at least 2011 that issuing tax refunds amid a shutdown would be an impermissible activity not funded by Congress. Instead, it agreed with the IRS that Section 1324 under Title 31 of the U.S. Code grants a permanent and indefinite appropriation of funds that would allow tax refunds to be paid.


The IRS announced that it will "will be recalling a significant" number of its employees who are currently furloughed because of the shutdown-now in its third week-in a dispute between President Donald Trump and Congress over funding for a security wall along the Mexican border.


It is not known whether the recalled employees will be paid to process tax refunds, and forcing them to work without pay could violate Section 1324 of the Anti-Deficiency Act, which prohibits the government from accepting voluntary services except during emergencies involving the safety of human life or the protection of property.


Stuart Bassin, a Washington tax attorney and former tax litigator at the U.S. Department of Justice, said that the Anti-Deficiency Act is quite straightforward in barring volunteer service, under Section 1324, as well as expenditures without appropriate under Section 1342.


"Fundamentally, if it is in the executive's power to require government employees to come in and do their jobs without pay, that sounds like slavery, "Bassin said. "You can't promise to pay after the shutdown ends because a promise to pay in the future is obligating (the U.S. Department of the Treasury) to spend money that Congress hasn't appropriated.


Observers generally agree that the timing of the OMB's reversal eases pressure on the president to accept a budget proposal that does not include funding for his promised wall. The director of the OMB, Mick Mulvaney, is also the acting White House chief of staff, and allowing the issuance of tax refunds which many taxpayers eagerly await around this time of year to pay down debt and make major purchases, lets Trump and the House democrats prolong their impasse.


IRS staffers are all the more crucial this year because this is the first year that tax returns are being filed following the overhaul of the federal tax code under the December 2017 Tax Cuts and Jobs Act. The services of furloughed employees are needed to review tax returns under a set of new rules before they can issue instructions to the Treasury Department to write refund checks.


Daniel Hemel, an assistant professor at the University of Chicago Law School, said the claim that Section 1324 appropriates funds to process tax refunds is novel.


"Once we read Section 132 as allowing expenditures incident to the payment of refunds, then it seems like the IRS could hire a whole bunch of additional employees without further congressional appropriation." he said.


The National treasury Employees Union, which represents federal employees at 33 departments and agencies including the IRS, has not yet publicly taken a position of the legality of recalling furloughed employees to process tax refunds.


"We are still waiting for a Treasury-approved filing season contingency plan to be issued, which will tell us how many people are being called back to work and then we will go from there." a union spokesperson said in an email to Law360.


The IRS contingency plan for the non-filing season which expired Dec. 31 but remains in effect, indicates that approximately 70,000 IRS employees, or 87.5 percent of the agency's staff, are shut out of work as the dispute over the border wall drags on.  A new plan for the filing season beginning Jan. 28 will be released "in the coming days" the agency said Monday.


The IRS interpretation of Section 1324 and the Anti-Deficiency Act may not be far-fetched, even if it is a brad reading, according to Ann Murphy, a professor at Gonzaga University School of Law and a tax litigator for the IRS for 15 years until 2000.


Murphy explained that activities necessary to protect government property are expectations to the Anti-Deficiency Act, and the IRS has taken the position that voluntary compliance with tax laws will be threatened if tax refunds are not issued during a shutdown.


"It's definitely arguable that if refunds were not issued, but tax payments were collected, it might undermine our voluntary tax system." Murphy said.


The penalties for violating Sections 1341 and 1342 are step. Disciplinary actions could include suspensions from duty without pay, removal from office, fines up to $5,000 and a maximum of two years behind bars.


However, those responsible for recalling IRS employees to process tax refunds may not be found to be acting in bad faith if courts find that the agency's reading of the Anti-Deficiency Act is plausible, Murphy said.


"Ultimately it seems to me this will delay any solution to the stalemate on the shutdown." she said.


T. Keith Fogg, a clinical law professor at Harvard Law School, said there could be a potential basis for categorizing IRS employees who process tax refunds as essential since "making the filing season work is the one truly essential job at the IRS."


"If the IRS does not issue refund checks 45 days after April 15, interest starts running against the government." he said.


Neither the IRS nor the U.S. Office of personnel Management, the human resources agency for the federal government, was able to confirm if IRS employees would be paid if they were recalled to work during the shutdown.


If the OMB's previous stance is correct, that the IRS cannot undertake tax refund duties in advance of an appropriation. House Democrats may be able to mount a legal challenge to stop the processing of refunds during the shutdown. However, getting the way of taxpayer receiving their refunds would not bode well politically for the party.


Bassin also surmised that one branch of the administration is unlikely to prosecute another, even if "that's the way the system is supposed to work."


"If we are going to be a government by and for the people, things cannot operate without the approval of the people's representatives: the Congress." Bassin said, "If the president can issue money, spend money and tell employees what to do without lawful appropriation, that's monarchy. That's what's lost in all of this"