May 1999 Issue


Taxpayers are too often the victims of a tax penalty and interest system that is administered unfairly and arbitrarily, said the AICPA in response to a request for comments on the tax penalty and interest system by Congress and the Department of Treasury.

"Inconsistent administration is the crux of the problem," said David A. Lifson, chair of the AICPA Tax Executive Committee and an NYSSCPA vice president. "Right now, how the tax code's penalty and interest provisions are enforced varies between and within IRS service centers and districts. That means taxpayers in similar situations are often treated differently. The inequities are further aggravated by the IRS's practice of using penalties as a bargaining tool during taxpayer audits.

"The major reason relatively few taxpayers take on the IRS with respect to penalty issues is that the area is so confusing. Many taxpayers choose to pay the penalty rather than to understand the problem," he added. "Taxpayer anger and resentment are the consequence of such inconsistent administration, and, in the long run, increasingly resentful taxpayers are less likely to voluntarily comply with our tax laws."

Poor communication from the IRS to the taxpayer is the root of many of the problems identified by the AICPA. Penalty and interest notices to taxpayers are general in nature and difficult to interpret. The notices generally do not clearly explain why the penalty or interest was assessed and calculated, or what the taxpayer can do in the future to avoid it.

"Taxpayers need a penalty hotline so they may discuss these issues with a knowledgeable IRS representative," Lifson said. "The hotline number should be on all penalty notices. We support taxpayer education, not retribution. Congress needs to provide citizens with a tax law that is more understandable and easier to comply with."

"First-time offenders should get a break," he added. "Given the current complexity of the tax law, it's not fair to impose a penalty on normally compliant taxpayers that make an occasional innocent mistake. We need to establish safe harbors for penalty abatement; it would make the system simpler and fairer. We can protect against abuse of safe harbors by limiting their application to those that have been compliant in the past."

IRS personnel need more training, the AICPA said, about appropriate assessment of penalties and interest, proper application of the reasonable cause exception, and correct method of calculating interest. One recommendation made was to provide taxpayers with the opportunity to attend IRS-approved tax compliance training programs in order to obtain penalty relief. This could be especially effective in improving compliance among small and emerging business enterprises. *

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