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NEW YORK – A task force of the American Institute of CPAs has told legislators that the system of civil tax penalties needs reform with better administration and oversight of penalty administration, a curb on the automated assessment of penalties, more training for Internal Revenue Service personnel and greater education of taxpayers and professional tax preparers.

IRS logoThe AICPA’s Penalty Reform Task Force, chaired by Rochelle Hodges, issued the report on Friday and cited the increase in automated assessment of penalties as a problem that leads to taxpayer dissatisfaction with the system. With more than 6 million taxpayers subject to automated penalties in 2008, many pay the levies rather than go to the expense of fighting them.

“Taxpayers should not be in a position where penalties are paid merely because it is less costly to do so than to expend the resources to contest them,” the report stated.
It also found a wide range of problem areas in the use of penalties and their impact on both taxpayers and professional preparers. These were as follows:

*A trend away from voluntary compliance as the primary purpose of penalties;
*Penalties that do not articulate clear standards of behavior;
*Disproportionate penalties;
*Penalties that are overbroad, deter remedial and other good conduct, and punish innocent conduct;
*An unwelcome trend toward strict liability;
*Provisions that do not provide basic procedural due process
*Penalty standards that are not consistent with the role of tax professionals.

The report cited a number of areas of shortcomings in penalty administration, calling for greater coordination and oversight of penalty administration and in particular called for the Internal Revenue Service to study its structure. It also found that the penalty administration system has developed biases in favor of asserting penalties

“In addition, the IRS should evaluate whether the Servicewide Penalties Group is the best office to have overall responsibility for penalty administration and if so, whether the placement of that office within the IRS organizational structure is optimal to allow that office to perform its mission, including evaluating and coordinating penalty administration throughout the major Operating Divisions,”

The report noted the existence of policies that decrease the ability of IRS agents to exercise discretion, and concluded these create an unfair bias in favor of the assertion of penalties that undermine the appearance of impartiality. These include penalties that prohibit a decrease in penalties in exchange for an increase in tax or assessment of penalties in exchange for a reduction of tax. Other policies, the report continued, require separate consideration of certain penalties (e.g., accuracy-related penalties) and written justification when these penalties are not asserted.

Better IRS guidance and training were also called for, including equal emphasis on training IRS personnel not to use penalties as a lever and on skills for dealing effective with taxpayers and taxpayers’ representatives. The tax force cited the use of section 6694 and 6676 penalties. The tax force stated that many field employees do not understand rules in applying 6694 or how to protect the preparer’s 6103 information from the taxpayer. The reported also cited the application of the section 6676 penalty “as another example of a new provision where sufficient training has not been provided, resulting in inappropriate assertion of the penalty in the field.”

In terms of education, the committee also called for the IRS to "help taxpayers and tax professionals understand penalties and related procedural rights, such as appeal rights and the ability to go to the Taxpayer Advocate for assistance. The IRS should issue clear, concise, and timely guidance when there are changes in laws or policies that impact penalties." .

Bob Scott
Bob Scott has provided information to the tax and accounting community since 1991, first as technology editor of Accounting Today, and from 1997 through 2009 as editor of its sister publication, Accounting Technology. He is known throughout the industry for his depth of knowledge and for his high journalistic standards.  Scott has made frequent appearances as a speaker, moderator and panelist and events serving tax and accounting professionals. He  has a strong background in computer journalism as an editor with two former trade publications, Computer+Software News and MIS Week and spent several years with weekly and daily newspapers in Morris County New Jersey prior to that.  A graduate of Indiana University with a degree in journalism, Bob is a native of Madison, Ind
Last modified on Sunday, 02 June 2013
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