IRS Does Not Comprehensively Evaluate the Administration of Tax Penalties or Their Impact on Voluntary Compliance, but a Plan Could Help It Do So

Although IRS policies state that IRS should collect information to evaluate  the administration of penalties and their impact on voluntary compliance,  and IRS is collecting some relevant information, OSP is not  comprehensively evaluating penalty administration or penalties’ impact on  voluntary compliance. According to IRS policies, OSP is to do the  following:    Administer the penalty statutes in a manner that is fair and impartial to  both the government and the taxpayer, is consistent across taxpayers, and  ensures the accuracy of the penalty computation. Collect statistical and demographic information to evaluate penalties and  penalty administration and to determine the effectiveness of penalties in  promoting voluntary compliance. These policies are consistent with positions expressed in the 1989 IRS  Task Force report and by Congress when reforming penalties in 1989 and  with more recent views expressed by the National Taxpayer Advocate. However, OSP generally does not fulfill the responsibilities specified in  IRS policy or as envisioned by the 1989 IRS Task Force report, Congress,  or the National Taxpayer Advocate. Rather, OSP analysts focus most of  their efforts on addressing short-term issues, such as sudden spikes in  assessments or abatements. OSP officials said that they have not done more to evaluate the  administration of penalties and their effect on voluntary compliance  primarily because of resource constraints both within OSP and IRS’s  various research units, methodological barriers that impede their ability to  research the effect of penalties on voluntary compliance, and limitations in  available databases. A Plan Could Help Identify Needed Resources and Support Resource Requests

OSP does not have a plan for fulfilling its responsibilities. Thus, by  focusing on what it is attempting to accomplish by developing a plan, OSP  would be better positioned to determine what resources within IRS are  available to assist it. Thus, analyses  that determine whether penalties are being consistently applied across IRS  so that similarly situated taxpayers receive the same penalties could  provide pertinent information. Data Limitations Could Be Addressed in a Plan

Finally, in developing a plan, OSP could assess options for overcoming the  limitations in available data that officials say impede its ability to both  assess the effect of penalties on voluntary compliance and perform more  sophisticated reviews of IRS’s administration of penalties. The Enforcement Revenue Information System (ERIS) contains  substantial data on all IRS enforcement activities, including penalties. For example, ERIS does not include readily usable  information related to taxpayer income or practitioner representation that  could be used to determine equitable treatment, develop employee  training, or provide taxpayer education outreach. Reportable Transaction Guidance Was Timely Issued, but Could Be More Useful to Affected Parties

IRS issued guidance to implement a new penalty for taxpayers that fail to  disclose a reportable transaction in a timely manner and began assessing  penalties after audits had been conducted. Officials in the Office of Chief Counsel told us that their criterion  for issuing guidance successfully is whether it was released in time to  meet their customers’ needs. The practitioners we spoke with from two  leading practitioner organizations said that issuing the interim guidance in  only 3 months was quick and the guidance included the information they  needed to understand how IRS would implement the penalty. IRS officials recognize the need to further raise awareness with taxpayers. According to IRS officials, as of January 2009, IRS had assessed 98 of the  penalties for $13.7 million and collected $2.7 million. In addition, 1,188  returns had been assigned to field groups and 50 returns were being  reviewed by IRS’s Appeals Division. IRS issued guidance for the reportable transaction penalty in a timely  manner following its passage in 2004. In addition, the Commissioner of Internal Revenue should use IRS’s  standard, low-cost methods of outreach to again alert as many tax return  preparers and taxpayers as possible about the need to properly report loss  transactions to avoid penalties.
Why GAO Did This Study

Civil tax penalties are an important tool for encouraging compliance with tax laws. It is important that the Internal Revenue Service (IRS) administers penalties properly and determines the effectiveness of penalties in encouraging compliance. In response to a congressional request, GAO determined (1) whether IRS is evaluating penalties in a manner that supports sound penalty administration and voluntary compliance and, if not, how IRS may be able to do so, and (2) whether IRS's guidance for a new penalty for failure to disclose reportable transactions was issued in a timely manner and was useful to affected parties, and whether and how IRS has assessed the penalty. GAO reviewed IRS documents and guidance, and interviewed IRS officials and tax practitioners.

What GAO Found

The Office of Servicewide Penalties (OSP) does not comprehensively evaluate the administration of civil tax penalties or their impact on voluntary compliance, but a plan could help it do so. OSP has responsibility for administering penalty programs and determining the action necessary to promote voluntary compliance. According to IRS policy, OSP should collect information to evaluate penalties and penalty administration and to determine the effectiveness of penalties in promoting voluntary compliance. This policy is consistent with positions expressed in 1989 by both an IRS Task Force report and by Congress when reforming penalties in 1989, and more recently by the National Taxpayer Advocate. OSP does not fulfill the responsibilities specified in IRS policy. Rather, OSP analysts focus on short-term issues, such as sudden spikes in assessments or abatements. OSP officials said that they have not done more to evaluate the administration of penalties and their effect on voluntary compliance because of resource constraints, methodological barriers, and limitations in available databases. A plan could help IRS focus its efforts and address the constraints to evaluating penalties. In developing a plan, IRS could identify the analyses it should do and the resources needed to do them. OSP could then determine what resources are available to assist it and what additional resources, if any, are needed. A plan also could lay out feasible research for evaluating the effect of penalties on voluntary compliance. For example, fairness is believed to undergird voluntary compliance. Thus, analyses that determine whether penalties are being consistently applied across IRS would provide pertinent information. Data limitations could be addressed in a plan, as well. The Enforcement Revenue Information System (ERIS) contains substantial data on IRS enforcement activities, but does not include all of the information recommended by the 1989 IRS Task Force report. For example, ERIS does not include readily usable information related to taxpayer income that could be used to determine equitable treatment of taxpayers. IRS issued guidance regarding its implementation of a penalty for failure to disclose reportable transactions-- transactions IRS identified as tax avoidance transactions--within 3 months of the provision's passage. IRS officials said that their criterion for issuing timely guidance is whether it was released in time to meet customers' needs. Tax practitioners from two leading practitioner organizations said the guidance was issued timely and included information they needed. However, the practitioners said more targeted outreach about the penalty was needed, specifically regarding reportable loss transactions caused bythe current economic climate in which many taxpayers may experience losses that could trigger the reportable transaction requirements. IRS officials recognize the need to further raise awareness of the penalty, but their planned efforts would reach only a small portion of tax return preparers and taxpayers. As of January 2009, IRS has assessed 98 penalties for $13.7 million.In addition, 1,188 returns had been assigned to field groups.