Tax Compliance: Inflation Has Significantly Decreased the Real Value of Some Penalties

GAO-07-1062 Published: Aug 23, 2007. Publicly Released: Sep 24, 2007.
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Civil tax penalties are an important tool to encourage taxpayer compliance with the tax laws. A number of civil tax penalties have fixed dollar amounts--a specific dollar amount, a minimum or maximum amount--that are not indexed for inflation. Because of Congress's concerns that civil penalties are not effectively achieving their purposes, we agreed to (1) determine the potential effect of adjusting civil tax penalties for inflation on the Internal Revenue Service's (IRS) assessment and collection amounts and (2) describe the likely administrative impact of regularly adjusting civil tax penalties on IRS and tax practitioners. GAO examined IRS data on civil tax penalties and conducted interviews with IRS employees and tax practitioners.

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Matter for Congressional Consideration

Matter Status Comments
Congress may wish to consider requiring IRS to periodically adjust for inflation, and round appropriately, the fixed dollar amounts of the civil penalties to account for the decrease in real value over time and so that penalties for the same infraction are consistent over time.
Closed – Implemented
In August 2007, we reported that civil tax penalties are not indexed for inflation and recommended that Congress consider requiring IRS to periodically adjust penalties for inflation to account for the decrease in real value over time. In 2010, Congress required the IRS to periodically inflation adjust two penalties-- the failure to file correct information returns--and the intentional failure to file a certain information return form. This is consistent with the intent of our recommendation that Congress should consider requiring IRS to periodically adjust fixed penalty amounts for inflation.

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