Tax Administration: Negligence and Substantial Understatement Penalties Poorly Administered
GGD-91-91
Published: Jul 03, 1991. Publicly Released: Jul 03, 1991.
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Highlights
Pursuant to a congressional request, GAO reviewed the Internal Revenue Service's (IRS) administration of the negligence and substantial understatement penalties, focusing on whether IRS: (1) correctly assessed such penalties when warranted; and (2) adequately explained to taxpayers the reasons for assessing those penalties.
Recommendations
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Internal Revenue Service | The Commissioner of Internal Revenue should establish a national quality improvement program project in the exam function to clarify the root causes of the problems found and identify and implement effective solutions. |
IRS has a major task force in Examination working on these issues, so it is using this group instead of establishing a quality improvement program project. Any directives will be screened by this task force.
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| Internal Revenue Service | The Commissioner of Internal Revenue should determine the effectiveness of the solutions through a subsequent review of selected exam cases, both with and without penalty assessments. These reviews should focus on the documentation and appropriateness of the penalty decisions so as to determine how well penalties are being administered by the district and the effectiveness of existing internal controls. |
The July 1992 "IRS Penalty Handbook" addresses the need for more-accurate and better-documented negligence and substantial understatement penalties. No data were readily available to determine whether these corrective measures were successfully implemented across IRS.
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| Internal Revenue Service | The Commissioner of Internal Revenue should take actions to ensure that the negligence and substantial understatement penalty explanations in IRS examination reports provide taxpayers with the specific facts, circumstances, and criteria that warrant the assessment of the penalty. Standard paragraphs should be augmented with written comments that relate the specific conduct and circumstances of taxpayers to the assessment of the penalty. The substantial understatement penalty standard paragraph should be expanded to include information on the penalty's criteria and the substantial authority and adequate disclosure provisions. |
Portions of the IRS Penalty Handbook issued in July 1992 addressed this recommendation. The paragraphs have been augmented and expanded for field offices and office audit functions. Service Center letters, which are computer generated, were changed in December 1992.
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Agency missionsEmployee turnoverFines (penalties)Income taxesInternal auditsInternal controlsNoncomplianceTax administrationTax nonpaymentTax return audits