Treasury Inspector General for Tax Administration
July 22, 2010
TIGTA - 2010-37
Contact: Karen Kraushaar
WASHINGTON -- The Internal Revenue Service (IRS) must take additional steps to ensure that accuracy-related penalties are appropriately considered when assessing correspondence audits, according to a report publicly released today by the Treasury Inspector General for Tax Administration (TIGTA).
To encourage voluntary tax compliance, Congress has implemented numerous penalty provisions in the Internal Revenue Code, including the accuracy-related penalty. That penalty cites taxpayer negligence and substantial understatement of income as criteria for imposing fines on those who choose not to comply with the tax law. The penalty for both negligence and substantial understatement on an individual's tax return is 20 percent of the underpayment.
TIGTA found that despite an emphasis on documentation and layers of management controls, the IRS ultimately relies on its examiners to properly consider and assess when penalties are warranted during audits. A TIGTA review of 229 correspondence audits closed in Fiscal Year 2008 found that 211 (92 percent) of the audits were not considered and assessed in accordance with IRS procedures for accuracy-related penalties.
"Our report found that opportunities may have been missed to promote compliance among more than 1,800 taxpayers in the population we reviewed," said J. Russell George, the Treasury Inspector General for Tax Administration. "Appropriately assessing this penalty would have resulted in estimated increased revenues of $3.5 million."
TIGTA recommended that the IRS ensure that correspondence examiners and their managers complete planned training to address specific components of the accuracy-related penalty assessment process. TIGTA also recommended that the IRS require managers and examiners to properly complete required documentation forms for audits that may be subject to such penalties. The IRS agreed with TIGTA's recommendations and plans to take appropriate corrective actions.
To view the report, including the scope, methodology, and full IRS response, go to: https://www.treasury.gov/tigta/auditreports/2010reports/201030059fr.pdf.
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