Tax Administration

Pursuant to a congressional request, GAO reviewed the Internal Revenue Service's (IRS) administration of the negligence and substantial understatement penalties, focusing on whether IRS: (1) correctly assessed such penalties when warranted; and (2) adequately explained to taxpayers the reasons for assessing those penalties.

GAO found that: (1) one-third of the cases reviewed included erroneous penalty determinations, and IRS reviewed over 60 percent of the cases at least once without correcting errors; (2) such IRS internal controls as supervisory and quality assurance reviews and district office penalty screening committees did not effectively detect or correct inadequate and incorrect penalty decisions; (3) 85 percent of the erroneous cases reviewed were in the taxpayers' favor; (4) there appeared to be little, if any, incentive for examiners, supervisors, and others accountable for penalty decisions to make correct decisions or to document the bases for decisions; (5) IRS cited such factors as heavy work load, emphasis on other areas of examination, employee turnover, quality, and inexperience, and the limited scope of penalty screening committee reviews to explain why employees did not always follow IRS guidelines on penalty administration; (6) in 76 percent of the cases assessed penalties, the penalty explanations in IRS examination reports provided to taxpayers did not adequately explain why they were assessed penalties or how to avoid future penalties; and (7) standard paragraphs in examination reports were too general to effectively relate the negligence penalty to the circumstances of specific cases and omitted important information about the penalty's criteria and the adequate disclosure and substantial authority provisions.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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