Tax Policy: Options for Civil Penalty Reform

Highlights

Pursuant to a congressional request, GAO analyzed changes to the civil penalty provisions of the Internal Revenue Code proposed in a congressional bill and an Internal Revenue Service (IRS) report, focusing on whether the economic value of the penalty, its potential coverage, and its assessment criteria could effectively motivate taxpayer compliance and deter noncompliance.

Recommendations

Matter for Congressional Consideration

Matter	Status	Comments
To support the statutory requirement that all taxpayers timely file a tax return, Congress should establish a time-sensitive failure-to-file penalty that would be assessed against all delinquent taxpayers regardless of whether or not they had a tax liability, unless the failure is due to reasonable cause.	Closed – Not Implemented	The penalty reform adopted did not address this issue. No further action is anticipated in the foreseeable future.
Congress should retain an underreporting penalty similar to the existing presumptive negligence penalty, but that would be subject to abatement for reasonable cause. With regard to penalty rates, Congress should consider setting higher rates than the House bill or reducing the threshold of understated tax liability that would trigger the substantial understatement penalty to at least partly restore the economic value of the penalties.	Closed – Not Implemented	The GAO position was rejected. Congress does not intend to take any action.
To bolster taxpayer confidence in the fairness and equity of these penalties, Congress should add the following changes: (1) eliminating stacking of the accuracy/conduct penalties; (2) targeting the application of the negligence penalty; (3) establishing reasonable cause as the abatement/waiver criterion, except for fraud; and (4) statutorily defining substantial authority.	Closed – Implemented	The statute revision reflected the majority of GAO recommendations.
Congress should increase the monetary value of return preparer penalties to improve their economic deterrent value and use a two-tier penalty, with the first tier consisting of negligence and the second tier consisting of willful understatement or intentional disregard.	Closed – Implemented	The statutory revision increased penalty amounts.
Congress should not establish a statute of limitations, as in the case of fraud.	Closed – Not Implemented	A statute of limitation was set, but the GAO position remains valid.

See All 5 Recommendations

Recommendations for Executive Action

Agency Affected	Recommendation	Status
Internal Revenue Service	To simplify administration, IRS should treat all types of information returns consistently. Within that context, all caps should be eliminated, there should be a single abatement criterion, magnetic media filing thresholds should be set administratively, and only returns exceeding thresholds should be penalized.	Closed – Not Implemented Congress rejected all but a single abatement criterion.
Internal Revenue Service	Making information return penalties time-sensitive is a good idea; however, IRS should administratively set the penalty dates. Further, to promote voluntary correction of returns, penalties should not be assessed against payors who voluntarily correct their returns.	Closed – Not Implemented Congress rejected the GAO position on dates.

Full Report

Full Report (52 pages)

Office of Public Affairs

Chuck Young

Managing Director

youngc1@gao.gov

(202) 512-4800

Topics

Human Capital

Federal taxesFines (penalties)Government collectionsProposed legislationTax administrationTax evasionTax nonpaymentTax returnsTax sheltersTaxpayers