IRS to Check More for Accuracy-Related Penalties

The Internal Revenue Service plans to check more often for accuracy-related penalties in future correspondence audits with taxpayers.

A report by the Treasury Inspector General for Tax Administration found that the IRS seldom considers accuracy-related penalties during correspondence audits, which could add up to millions of dollars in revenue every year. The TIGTA report encourages the IRS to take additional steps to ensure the penalties are considered during correspondence audits.

To encourage voluntary tax compliance, Congress has implemented numerous penalty provisions in the Tax Code, including the accuracy-related penalty. That penalty cites taxpayer negligence and substantial understatement of income as criteria for imposing fines on those who choose not to comply with the tax law. The penalty for both negligence and substantial understatement on an individual's tax return is 20 percent of the underpayment.

TIGTA found that despite an emphasis on documentation and layers of management controls, the IRS ultimately relies on its examiners to properly consider and assess when penalties are warranted during audits. A TIGTA review of 229 correspondence audits closed in fiscal year 2008 found that 211 (or 92 percent) of the audits were not considered and assessed in accordance with IRS procedures for accuracy-related penalties.

“Our report found that opportunities may have been missed to promote compliance among more than 1,800 taxpayers in the population we reviewed,” said TIGTA Inspector General J. Russell George in a statement. “Appropriately assessing this penalty would have resulted in estimated increased revenues of $3.5 million.”

TIGTA recommended that the IRS ensure that correspondence examiners and their managers complete planned training to address specific components of the accuracy-related penalty assessment process. TIGTA also recommended that the IRS require managers and examiners to properly complete required documentation forms for audits that may be subject to such penalties.

The IRS agreed with TIGTA's recommendations and plans to take appropriate corrective actions. The agency will conduct accuracy-related penalty training and emphasize managerial reviews for penalty assertion and nonassertion. In addition, IRS management plans to submit a programming request to add the penalty lead sheets to the IRS’s Campus Report Generating System and ensure the accuracy-related penalty is considered in Program Analysis System quality reviews.