Bonuses to the tune of $165 million — in a company that just received $180 billion of taxpayers’ money?

“Horrible, outrageous, ” storms Sen. Richard Shelby, R-Ala. “Rewarding incompetence,” fumes Rep. Barney Frank, D-Mass., chair of the House Financial Services Committee.

President Obama joined the chorus today, saying he’s “choked up with anger” and calling on Treasury Secretary Timothy Geithner to pursue “every single legal avenue” to cancel the AIG giveaways.

The question is: How much can Geithner do?

The treasury secretary pressed AIG chairman Edward Liddy last week to scale back the awards. Geithner “stepped in and berated them and got them to reduce the bonuses following every legal means he has to do this,” according to a White House staffer cited in this AP report.

But the berating doesn’t seem to have achieved a whole lot. In a letter to Geithner dated March 14, Liddy insisted that AIG’s “hands are tied” by contractual obligations. He also claimed that the bonuses are a business necessity: “Given the trillion-dollar portfolio at AIG Financial Products, retaining key traders and risk managers is critical to our goal of repayment. … Needless to say, in the current circumstances, I do not like these arrangements and find it distasteful and difficult to recommend to you that we must proceed with them.”

Whatever you might think of the talent retention argument, the legal one carries some force. As Larry Summers, director of the White House’s National Economic Council, noted in an interview on CBS’s Face the Nation this morning, the bonus packages are “binding contracts that were entered into long before the government put any money into AIG — we’re not a country where contracts just get abrogated willy-nilly.”

But that doesn’t mean that Geithner’s hands are completely tied, says Aaron Zelinsky in this op-ed piece in the Huffington Post. His solution? Wheel out the big guns: the IRS.

The Internal Revenue Code, Zelinsky notes, includes the following verbiage: “There shall be allowed as a deduction all the ordinary and reasonable expenses paid or incurred during the taxable year in carrying on any trade or business, including … a reasonable allowance for salaries or other compensation for personal services actually rendered.”

Geithner should direct the Commissioner of the IRS to challenge the payouts as failing the “reasonable” test. If AIG can’t deduct the bonuses, taxpayers can rake back at least some of the money.

Ordinarily, it’s not a great idea to encourage treasury to interfere in the IRS, Zelinsky points out. But “these are abnormal times, and the AIG bonuses present extraordinary circumstances,” he insists.

True — almost by definition. There are no precedents when you’re talking about a company that just posted the biggest quarterly loss in history while sucking down a boatload of bailout cash.

But to sic the IRS onto a company — however richly deserving — because you don’t like its compensation policies? That might be a precedent we’d all live to regret. ###