The American Institute of CPAs criticized overly broad and disproportionate tax penalties levied on both tax preparers and taxpayers in a report submitted to Congresss tax-writing committees, the Treasury Department and the IRS.
The report points out that in the 20 years since the civil tax penalty system was last overhauled in the Improved Penalty and Compliance Tax Act, numerous penalty provisions have been enacted that do not encourage voluntary compliance by taxpayers. The AICPA criticized the lack of clear standards in some penalties and the fact that some penalties are disproportionate in both amount and severity.
It is unfair to have a provision that is undefined if it is crucial to determining rights, obligations and potential penalties, said the report. In the case of penalties imposed on tax professionals, the less clear the underlying tax rules, the greater the need for the penalty to accommodate professional judgment.
Among the terms the AICPA found to be ill defined were tax shelter and significant purpose.
The AICPA also complained about how penalties are sometimes stacked in such a way that they become disproportionate to the amount of misconduct or harm. Willful misconduct generally should be penalized more harshly than negligent noncompliance, but this is not always so, said the report. For instance, in the case of preparer penalties, both willful and non-willful conduct are subject to the exact same monetary penalty once fees hit $10,000, and referrals to the Office of Professional Responsibility are mandatory in both cases regardless of the severity of the conduct.
The AICPAs Penalty Reform Task Force said in the report that it saw too much of a trend toward strict liability, coupled with erosion in basic procedural due process. Penalties should apply prospectively to future conduct and not retroactively to conduct that was appropriate at the time the conduct occurred, said the report.
The AICPA also complained of inconsistencies between penalty standards and the role of tax professionals. Penalties imposed on tax professionals should be based on facts and circumstances known (or which should be known) by the professional and over which the tax professional has control, said the report. The standards applicable to tax professionals should not create a conflict with taxpayers. Penalties should not discourage taxpayers from seeking tax advice from a professional.
The report pointed to an increase in the automated assessment of penalties, and claimed that some taxpayers are forced to pay the penalties because it was cheaper to pay the penalties than to contest them. The institute called for better coordination and oversight of penalty administration, noting that several government studies have concluded there is significant room for improvement in the IRSs oversight and collection of data regarding penalty administration.
The AICPA criticized what it sees as a bias in favor of asserting penalties, and said the IRS needs to improve its internal guidance and training. The report also recommended that the IRS increase its efforts to educate both taxpayers and tax professionals.
The AICPA urged Congress, the Treasury and the IRS to work with practitioners, professional organizations, taxpayers and others on reforming civil tax penalties and penalty administration.
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