Tax Administration

In 1996, about 5.9 million taxpayers were assessed almost $1.1 billion in estimated tax penalties. The Internal Revenue Service's (IRS) Taxpayer Advocate's Annual Report to Congress that same year described the estimated tax penalty rules as extraordinarily complex and characterized Form 2210, which is used to calculate estimated tax penalties, as one of the most difficult forms that taxpayers have to complete. This report identifies (1) the Internal Revenue Code and IRS administrative requirements that cause some of the complexity associated with estimated penalty calculations and (2) the likely effects of corresponding changes to the requirements that could make it easier for taxpayers to calculate their estimated tax penalties.

GAO noted that: (1) to help ensure compliance with the Internal Revenue Code and IRS administrative requirements, form 2210 requires numerous calculations to track individual ES underpayments and to determine precise ES penalty amounts; (2) GAO identified three requirements where the additional calculations did not seem to be justified because they resulted in either little or no effect on ES penalty amounts; (3) the form 2210 underpayment schedule, which currently requires that taxpayers track each underpayment individually, results in a complicated procedure, involving numerous calculations, to comply with the definition of underpayment in the Code; (4) GAO found that if taxpayers were allowed to track the accumulated underpayment amounts rather than if individual amounts and if a corresponding change were made to the ES penalty underpayment period, taxpayers could reduce the number of calculations without affecting ES penalty amounts; (5) taxpayers currently have to make additional ES penalty calculations to account for three of the four 15-day periods between ES interest rate effective dates and ES payment dates; (6) if interest rates change, this requirement increases the number of calculations taxpayers must make but only increases or decreases the penalties by small amounts; (7) in 1986, Congress eliminated this requirement for the 15-day period between April 1 and April 15 by aligning the interest rate effective date with the ES payment date; (8) similar alignments for the other three 15-day periods during the year would eliminate the calculations taxpayers must make for the 15-day periods and have little effect on ES penalty amounts; (9) to account for leap years, taxpayers currently have to make additional ES penalty calculations when underpayment balances extend either through the end of the leap year or the end of the year preceding a leap year; and (10) GAO found that, if taxpayers were allowed to use a 365-day year in all ES penalty calculations, they could eliminate the additional calculations and the penalties for the periods affected would increase by a very small amount--only 0.3 percent.

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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