Tax Administration:

Effectiveness of IRS' Return Preparer Penalty Program Is Questionable

GGD-91-12: Published: Jan 7, 1991. Publicly Released: Jan 7, 1991.

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Pursuant to a congressional request, GAO reviewed the Internal Revenue Service's (IRS) administration of its return preparer penalty program, focusing on whether IRS: (1) opened preparer penalty cases when warranted; (2) imposed return preparer penalties appropriately and consistently; and (3) followed requirements to refer penalized preparers to the Department of the Treasury's Director of Practice or local district directors for possible disciplinary action.

GAO found that: (1) IRS generally made correct penalty determinations but did not always open cases that warranted preparer penalties, which hindered exposure of problem preparers; (2) most examiners and group managers did not open more preparer penalty cases because the low penalties did not justify the time and effort required to assess them; (3) difficulty in distinguishing between penalties for intentional disregard of the rules and for willful understatement, differing IRS district policies, and differing interpretations of the Internal Revenue Code (IRC) caused inconsistent penalty assessment among district offices; (4) legislative changes enacted in 1989 revised penalty provisions, but still did not clearly distinguish among the penalties; and (5) IRS did not make required referrals of penalized preparers to Treasury's Director of Practice due to a lack of familiarity with the referral process, unclear guidance, and poor internal controls.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The penalty handbook is expected to be issued in 1993, and the 1992 Continuing Professional Education course included all the new penalty rules. This recommendation is addressed in the penalty handbook under IRM 20(11)12:(5)(a) and (b), 20(11)17:(7), and 20(11)22. The penalty management information system now being established will capture this information.

    Recommendation: To ensure that referrals are made when required, the Commissioner of Internal Revenue should assign the district return preparers coordinators the responsibility for ensuring that required referrals are made to the proper authority when penalties are assessed.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: IRS revised the Internal Revenue Manual to clarify that the examining official is responsible for preparing the referral, and to recommend that these referrals be transmitted through the Return Preparer Coordinator. Form 4318 has been revised to include a reminder to examiners that IRM 1297.9 deals with referrals to the Director of Practice.

    Recommendation: To ensure that referrals are made when required, the Commissioner of Internal Revenue should clarify the Internal Revenue Manual to clearly state that referrals are required when preparer penalties are assessed and designate responsibility for making them.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed - Implemented

    Comments: The Assistant Commissioner (Exam) is requesting a computer change that will reject an assessment if it exceeds the maximum collectible under the statute. IRS has issued instructions to abate assessments upon collection if necessary, and this information will be in the penalty handbook, due to be issued in 1993. IRS will advise the revenue officers about what can be collected. In IRM 20(11)32:3(d) and 20(11)33:(2)(f), the maximum amounts allowable are clearly spelled out. This penalty handbook is the controlling directive nationwide.

    Recommendation: To ensure compliance with IRC, IRS should adopt procedures to ensure that no more than the maximum amount allowable under IRC is collected for those penalties. If IRS determines the problem cannot be eliminated administratively, IRS should request Congress to modify the statute to limit the total amount IRS can assess, rather than collect, for those penalties.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  4. Status: Closed - Implemented

    Comments: Any local items issued after the penalty handbook is in place will have to conform with the nationally mandated policy directives in the handbook. The final penalty handbook is expected in 1993. The IRM 20 (penalty handbook) is the controlling directive, and local items now have to conform.

    Recommendation: To ensure that preparer penalties are assessed appropriately and consistently, the Commissioner of Internal Revenue should review district office policies on return preparer penalties to ensure that those policies are consistent with national office guidance.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  5. Status: Closed - Implemented

    Comments: Guidance was contained in regulations to implement the 1989 Omnibus Budget Reconciliation Act. Interim guidance was issued as part of the 1992 Continuing Professional Education course. Guidance will be in the penalty handbook, which should be issued in 1993. Guidance is contained in IRM 20(11)34, 20(11)64, and 20(11)65.

    Recommendation: To ensure that preparer penalties are assessed appropriately and consistently, the Commissioner of Internal Revenue should develop national office guidance that to the greatest extent possible differentiates between the section 6694(b) penalty for willful or reckless conduct and the section 6701 penalty for aiding and abetting an understatement of tax liability.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  6. Status: Closed - Implemented

    Comments: Guidance was included in regulations to implement the 1989 Omnibus Budget Reconciliation Act. Interim guidance was issued as part of the 1992 Continuing Professional Education course. Final guidance will be contained in the penalty handbook, which should be issued in 1993. Chapter 11 of the IRM (penalty handbook) includes guidance for defining and differentiating between preparer penalties (IRM 20(11)32, 20(11)33, 20(11)38)).

    Recommendation: To ensure that preparer penalties are assessed appropriately and consistently, the Commissioner of Internal Revenue should develop national office guidance that to the greatest extent possible clearly defines and differentiates between the preparer penalties as defined in section 6694(a) for taking an unrealistic position and section 6694(b) for willful or reckless conduct.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  7. Status: Closed - Not Implemented

    Comments: IRS believes that, because of the volume and the time necessary to perform the reviews, it is not practical for coordinators to review all cases where there is a substantial tax increase. Among the items considered by quality review, within its list of auditing standards, is the examiner's consideration of appropriate penalties, including preparer penalties.

    Recommendation: To emphasize the contribution of preparer penalties to future compliance and to help ensure that IRS opens warranted preparer penalty cases, the Commissioner of Internal Revenue should ensure that district office return preparers coordinators are opening program action cases where appropriate against preparers who demonstrate patterns of misconduct. In particular, the coordinators should be directed to review examination cases where there is a substantial adjustment to the taxpayer's liability to determine if a preparer penalty case is warranted.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  8. Status: Closed - Implemented

    Comments: IRS plans that the Assistant Commissioner (Exam) will issue a memorandum to the Assistant Regional Commissioners (Exam) emphasizing the existing penalty requirements. Preparer penalties will also be covered in a penalty handbook, which should be finalized in 1993. IRS included a training module in the 1992 Continuing Professional Education course. A memorandum was issued in 1992 in which the existing penalty requirements were emphasized. Most sections of the penalty handbook have been issued, including the preparer and accuracy sections. The manual (handbook) is provided to outside stakeholders.

    Recommendation: To emphasize the contribution of preparer penalties to future compliance and to help ensure that IRS opens warranted preparer penalty cases, the Commissioner of Internal Revenue should take actions to ensure that examiners consider the penalties and document their decisions regarding the opening of preparer penalty cases. Those actions could include a memorandum to examiners and group managers emphasizing existing penalty requirements as well as other communications.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  9. Status: Closed - Implemented

    Comments: The penalty handbook is expected to be issued in 1993. The Assistant Commissioner (Exam) ensured that all of the new penalty rules, including preparer penalties and the referral procedures, were included in the 1992 Continuing Professional Education course. Most sections of the penalty handbook, IRM 20(11), have been issued, including the preparer and accuracy sections.

    Recommendation: To further ensure that referrals are made when required, examiners need to become more familiar with the referral requirements. To increase examiners' familiarity, the Commissioner of Internal Revenue should ensure that examiners receive training that clearly communicates the referral requirements.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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