An audit of the Internal Revenue Service's program for examining and penalizing tax return preparers by the Treasury Department's inspector general could not be completed because the IRS was unable to provide most of the documents.

The Treasury Inspector General for Tax Administration said in its report that the IRS could not provide documentation on 59 percent of the examination cases and 80 percent of the preparer penalty cases it requested for review. As a result, TIGTA was able to review just 17 examination cases and 10 penalty cases.

Despite its inability to assess the overall effectiveness of the program, TIGTA found that penalties were not pursued in three of the 17 examinations that had apparent preparer violations.

In eight of the 17 examinations, the work papers did not include the required documentation to show that a preparer penalty case was not warranted.

TIGTA believes that preparer penalties were warranted in the 10 penalty cases it reviewed, but eight of the cases did not appear to have been reviewed by the return preparer coordinators and three cases included "inappropriate comments about the preparer that could indicate that the preparer might be subject to a penalty investigation," according to the report. TIGTA also reviewed 30 program action cases in two area offices and found that the cases in one office did not include activity logs for the cases.

In response to the report, the IRS plans to analyze its quality review data and remind examiners about the importance of separating preparer penalty information from client examination work papers. All area directors will have to provide confirmation that the return preparer coordinators are following procedures for documenting key events in each case.

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