The American Institute of CPAs has sent congressional leaders a set of legislative proposals for reforming the civil tax penalty provisions of the Tax Code, arguing that some penalties are disproportionately severe and punish innocent conduct.
“The AICPA Report covers our concern that the government’s understandable interest in combating abusive tax shelters has resulted in a civil tax penalty regime that is not sufficiently geared toward encouraging voluntary compliance,” the AICPA said in the document. “In the AICPA Report, we express our concerns about the current state of civil tax penalties and offer general suggestions for improvement.”
The AICPA asked Congress to address the following issues:
• The trend away from voluntary compliance as the primary purpose of civil tax penalties;
• The lack of clear standards in some penalties;
• The fact that some penalties are disproportionate both in amount and severity;
• The fact that some penalties are overly broad, deter remedial and other good conduct, and punish innocent conduct;
• The trend toward strict liability;
• An erosion of basic procedural due process;
• Inconsistencies between penalty standards and the role of tax professionals;
• The increase in automated assessment of penalties that can lead to unwarranted assessments;
• The need for better coordination and oversight of penalty administration;
• The bias in favor of asserting penalties;
• The need to improve IRS guidance and training; and
• The need for the IRS to increase its efforts to educate taxpayers and tax professionals.
In a letter to the chairmen and ranking minority members of the Senate Finance and House Ways and Means Committees, Jeffrey A. Porter, CPA, chair of the AICPA Tax Executive Committee, wrote, “There are many aspects of the civil tax penalty regime that concern our members. Our highest priorities are to ensure that the penalties are sufficiently calibrated to the level of noncompliance, address the inconsistent application of reasonable cause in civil penalty administration, and minimize the presence of strict liability penalties in the Code.”
Porter noted that the AICPA has a long history of advocating for reform of the civil tax penalty provisions in the Internal Revenue Code, which resulted in the legislative proposals the AICPA sent to lawmakers and the 2013 AICPA Report on Civil Tax Penalties: The Need for Reform, revised from 2009, by the AICPA Penalty Reform Task Force.
“As comprehensive tax reform proposals are developed in the coming months, we encourage Congress to consider and include in such legislation the points covered in our attached report and proposals to revise elements of statutory penalty provisions relating to reportable avoidance transactions, reasonable cause exception, foreign information reporting for certain foreign trusts, and tax shelters,” Porter added.
The AICPA letter, report and legislative proposals were submitted “with an eye toward improving overall tax policy and administration,” Porter said. “To that end, we strongly encourage an inclusive and transparent framework for approaching this difficult task, similar to the collaborative efforts that culminated in the 1989 penalty reform legislation. We urge Congress, Treasury and the Internal Revenue Service to work with taxpayers, practitioners, professional organizations and other stakeholders in developing a systematic and thoughtful approach to civil tax penalty reform and penalty administration.”