IRS Treats Religious Discrimination Differently, Why?

OPINION

Our Founding Fathers built a nation founded on religious freedom.

Now, 250 years later, the IRS seems to have forgotten that and perversely penalizes Americans of faith who suffer from illegal employment discrimination stemming from their religious practices.

A Christian American working at a boat yard requested Sundays off to attend worship services but was told he had to work whenever scheduled.

His employer never provided a week-to-week schedule, told him at the last minute to work on a Sunday, and when he asked for accommodation to attend church, he lost his job for practicing his faith.

A Jewish American working for a diamond company observed Sabbath starting at sundown on Friday evenings, but when new owners announced that he no longer could leave work early on Fridays, he had to choose between his faith, his family, and his livelihood.

He refused to work during the Sabbath and his employer fired him.

These true stories reflect a troubling trend of employment discrimination against people of faith in the United States.

But it gets worse: when victims of religious discrimination sue their employers for illegal discrimination and win in court, they fall victim to the tax collector.

Why? Because even though employment discrimination awards are capped by law, the IRS reats discrimination damage awards as fully taxable income.

The Christian fired by the boatyard, for example, sued his employer and won a settlement of $125,000. The IRS took 37%, the top tax rate at the time.

After attorney's fees (typically 33% on contingency) and state taxes, the man who lost his job for being an observant Christian only received about $30,000, hardly enough to make up for his loss of income, not to mention his pain and suffering.

The Jewish diamond worker's case is still ongoing, but will likely suffer similar results.

By contrast, unlike in employment discrimination cases, the IRS does not tax employees who win restitution for physical injuries at the workplace.

So, if you get hurt on the job, sue your employer and win, you get the full amount of your damages award without paying any federal taxes.

Prove that you suffered from religious discrimination, though, and Uncle Sam comes knocking.

This double standard makes no sense.

Workers are not the only ones impacted.

Small businesses suffer collateral damage from the tax code's inequitable treatment of employment discrimination.

Current taxation of damages awards incentivizes plaintiffs to sue for more than their actual harm, hoping that their award, net of taxes, is enough to compensate for their losses.

Employment liability insurance premiums therefore rise as plaintiffs sue to make up for federal taxes, burdening small businesses.

The good news is that we can do something about it.

Congress should eliminate the federal tax on discrimination awards. Specifically, Congress can amend Section 104 of the Internal Revenue Code to make damage awards in discrimination cases tax-free, just like physical injury awards have been for over a century.

Workers would be better compensated for suffering religious discrimination on the job, small businesses would save money, but perhaps most important, just as Amos 5:11 warns us against excessive taxation of workers ("a straw tax on the poor"), Congress and the Trump Administration should end the excessive taxation on working Americans who endure religious discrimination.

Alan Crone, an employment attorney in Memphis, Tennessee, founded The Crone Law Firm, served as Chairman of the Shelby County Republican Party, was the Inaugural Recipient of the Holy Family Award presented by the Catholic Charities of West Tennessee, and serves as Knight of Magisterial Grace: Sovereign Military Hospitaller Order of St. John of Jerusalem, of Rhodes and of Malta (Order of Malta).