Government Watchdog Questions Transparency Of IRS Penalty Regime

by Mike Godfrey, Tax-News.com, Washington

10 July 2009

The US Internal Revenue Service (IRS) does not comprehensively evaluate the administration of tax penalties, nor their impact on tax compliance, but a plan could help it to do so, the Government Accountability Office (GAO) has concluded.

According to the report, the IRS assessed USD29.5bn in penalties in 2007, but about one-third of that, or USD11.1bn, was later rescinded.

It is the job of the Office of Servicewide Penalties (OSP) to administer penalty programs and determine the action necessary to promote voluntary compliance. IRS policy stipulates that the OSP should collect information to evaluate penalties and penalty administration and to determine the effectiveness of penalties in promoting voluntary compliance. This policy is consistent with positions expressed in 1989 by both an IRS Task Force report and by Congress when reforming penalties in 1989, and more recently by the National Taxpayer Advocate. However, the GAO report concluded that the “OSP does not fulfill the responsibilities specified in IRS policy.”

“Rather, OSP analysts focus on short-term issues, such as sudden spikes in assessments or abatements,” the report noted. “OSP officials said that they have not done more to evaluate the administration of penalties and their effect on voluntary compliance because of resource constraints, methodological barriers, and limitations in available databases.”

“A plan could help IRS focus its efforts and address the constraints to evaluating penalties,” the report stated.

Commenting on the report, Senator Chuck Grassley, ranking member of the Senate Committee on Finance, said that it was “impossible to know” whether the penalties rescinded by the IRS in 2007 were fair and justified, something he said could have a knock-on effect for voluntary compliance.

“The IRS has a lot of discretion over assessing and rescinding tax penalties,” Grassley observed.

“The IRS promises to do a better job of evaluating tax penalties, and it needs to,” he added. “Fair administration from one taxpayer to the next is critical to the integrity of the tax system.”

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