Treasury Inspector General for Tax Administration
March 1, 2011
TIGTA - 2011-10
Contact: Karen Kraushaar
WASHINGTON – The Internal Revenue Service (IRS) should improve its procedures for processing cases involving taxpayers who fail to properly disclose reportable transactions, according to a report publicly released today by the Treasury Inspector General for Tax Administration (TIGTA).
Taxpayers must report certain transactions to the IRS under the Internal Revenue Code’s Section 6707A (§ 6707A), which was enacted in 2004 to help detect, deter, and shut down abusive tax shelter activities. For example, reportable transactions may include transfers of stock options, lease arrangements, and trust distributions. Taxpayers must disclose their participation in these and other transactions by filing a Reportable Transactions Disclosure Statement (Form 8886) with their income tax returns. Failure to report the transactions could result in monetary penalties ranging from $10,000 to $200,000.
TIGTA evaluated the IRS’s effectiveness in identifying, developing, and applying the § 6707A penalty. Based on its review of 114 assessed § 6707A penalties, TIGTA determined that many of these files were incomplete or did not contain sufficient audit evidence. TIGTA also found a need for better coordination between the IRS’s Office of Tax Shelter Analysis and other functions.
“As penalties are meant to encourage voluntary taxpayer compliance, it is important that IRS procedures for documenting and assessing them be well developed and fully documented,” said J. Russell George, the Treasury Inspector General for Tax Administration. “Any failure to do so raises the risk that taxpayers will not receive consistent and fair treatment under the law, and could further reduce their willingness to comply voluntarily.”
TIGTA recommended that the IRS fully develop, document, and properly process § 6707A penalties. The IRS agreed with TIGTA’s recommendation and plans to take appropriate corrective actions.
To view the report, including scope, methodology, recommendations and IRS response, go to: http://www.treas.gov/tigta/auditreports/2011reports/201130004fr.pdf.
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