The Internal Revenue Service’s Office of Appeals has the authority to abate certain taxpayer penalties when the abatement has been denied by other IRS offices, but a new report questions whether the office is providing enough justification for its decisions.
In fiscal year 2013, the Appeals office abated approximately $127 million in penalties, according to a new report from the Treasury Inspector General for Tax Administration. The report said it is important that Appeals personnel apply a consistent methodology when deciding whether or not to abate penalties in order to promote fair and impartial resolutions to taxpayers.
TIGTA found that in most cases the Appeals office properly accepted cases in which the IRS operating divisions had previously denied the taxpayer’s request for abatement and sufficiently documented the reasons for penalty abatements in case files. However, TIGTA found that 59 out of the 140 penalty appeal cases it sampled for its report were not abated in accordance with Appeals criteria because the operating divisions had not denied the abatement or because case files did not support the abatement.
Based on these results, TIGTA estimates that in fiscal year 2013, 1,411 penalty appeal cases and more than $39 million in penalty abatements did not comply with Appeals criteria.
For 57 cases, TIGTA could not determine the justification that Appeals personnel used to abate the penalties. For example, Appeals used its authority to abate penalties based on the hazards of litigation, which reflects the uncertainty of the court’s decision if the taxpayer were to take his or her case to trial. However, for some cases, Appeals did not document how it arrived at its determination by outlining the hazards of litigation.
TIGTA also identified a small number of other processing errors and control weaknesses affecting taxpayer accounts. For example, Appeals managerial case review policy does not specify that high-dollar abatements by appeals officers and settlement officers must be reviewed by a manager. Specifically, in four cases, Appeals officers abated a total of more than $580,000 in penalties without managerial approval. Appeals officers did not violate IRS policy because they have been delegated the authority to abate unlimited penalty amounts without managerial approval, TIGTA noted.
TIGTA recommended that the chief of the Appeals office provide training to Appeals personnel on the requirements, instructing them to clearly document the reasons for abatement decisions and review the delegated settlement authority of Appeals officers to determine whether changes are needed to address the risk of allowing unlimited abatements without managerial approval.
The IRS agreed with TIGTA’s recommendations. The IRS plans to provide additional training to Appeals technical employees who work on penalty abatement cases and to review the existing delegated settlement authority and evaluate any risk associated with the current delegation.
“As a general matter, Appeals employees endeavor to handle all cases appropriately,” wrote Kirsten Wielobob, chief of the IRS’s Appeals office, in response to the report. “To a couple of specific points in your report, we agree that we should document adequately our reasons for decisions. We believe, however, that weighing the value of taxpayer testimony is crucial to resolving cases without litigation and is consistent with Appeals’ approach to analyzing hazards of litigation.”
She added that she believes the outcome measure in the TIGTA report is overstated, as it incorrectly assumes that all penalty abatement determinations lacking proper documentation should be rejected. “Inadequate documentation does not necessarily equate to an improper abatement determination,” she noted.
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