Tax Lawyer's Blog

Paul Caron reported last week that the Treasury Inspector General for Tax Administration (TIGTA) has released Accuracy-Related Penalties Are Seldom Considered Properly During Correspondence Audits (2010-30-059) in which it states (emphasis is mine):

The IRS must take additional steps to ensure that accuracy-related penalties are appropriately considered when assessing correspondence audits….

A TIGTA review of 229 correspondence audits closed in Fiscal Year 2008 found that 211 (92%) of the audits were not considered and assessed in accordance with IRS procedures for accuracy-related penalties….

Appropriately assessing this penalty would have resulted in estimated increased revenues of $3.5 million.

It may be true that the IRS is not assessing the accuracy-related penalty frequently enough in correspondence audits, but to the extent TIGTA is suggesting that it should increase the number of penalty assessments in order to raise revenue it does so in violation of the law and the IRS’s own policy (see IRS Policy Statement 20-1 where the IRS specifically and unequivocally acknowledges that revenue raising is not a proper goal of its penalty regime).

Revenue raising is not and should never be a proper consideration in determining whether or not to assess the accuracy-related penalty.

The IRS Internal Revenue Manual specifically lists the purposes of the IRS penalty regime, none of which is the raising of additional revenues:

20.1.5.1  (07-01-2008) – Penalty Policy

Appropriate administration of penalties seeks to ensure fairness and consistency in the administration of the tax law and seeks to effectively discourage noncompliant behavior. Penalties should be considered and developed simultaneously with the examination of the tax shelter transaction, and not at the conclusion of the audit. Proper consideration and application of penalties will:

• Encourage voluntary compliance;
• Conserve IRS resources due to early disposition of tax shelter issues;
• Provide clear guidance to taxpayers and practitioners;
• Ensure consistent and fair treatment of the issues; and
• Ensure that non-compliant behavior is penalized in appropriate circumstances. 

All penalties including the accuracy-related and fraud penalties are important deterrents to non-compliance.

These goals were echoed by the IRS’s Office of Chief Counsel in Notice CC-2004-036:

When properly developed and applied, penalties assist the Service in promoting sound tax administration by increasing the economic costs of noncompliance. In the context of corporate taxpayers, the required disclosure of penalties creates an additional deterrent effect.

Again, nary a word about revenue raising.

This is how the penalty process is supposed to operate, but how does it really work?

Congress has mandated that the IRS monitor and enforce public compliance with our newly enacted $1 trillion healthcare bill. In addition to this enormous new burden, the IRS has chosen to institute and implement a wide-ranging plan to license, regulate and discipline tax return preparers.

Naturally, to do all of this properly the IRS will need money. Lots of it. But since raising taxes while the American economy sluggishly tries to recover from a recession is unwise and, thankfully, seems unlikely to happen, the money will have to come from other sources. Which means, even if TIGTA and the IRS get smart and stop publicly licking their chops at the additional revenues to be raised by increasing the assessments of IRS penalties, revenue raising will in fact be an important covert consideration in future decisions whether or not to assess those penalties.

Although I am opposed to the IRS’s using the penalty regime for revenue raising purposes, the increased disputes that will inevitably arise between taxpayers and the IRS as a result of the increased assessment of penalties will mean more business for me.

Let’s get ready to rumble.

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