The Internal Revenue Service may start adjusting tax penalties for inflation to make sure the penalties retain their bite.

A newly released report from the Government Accountability Office found that inflation has significantly decreased the real value of some civil tax penalties that have fixed dollar amounts. The GAO said the decline in value could weaken the deterrent effect of the penalties and result in inconsistent treatment of taxpayers over time.

The report estimated that if the fixed dollar amounts of the penalties had been adjusted for inflation from 2000 to 2005, the IRS would have been able to increase its collections between $38 million and $61 million per year. The bulk of that increase would come from penalties for the failure to file tax returns, partnership returns, and correct information returns, and various penalties on returns by exempt organizations and certain trusts.

The IRS would have little trouble in implementing the increased penalties. "Officials from all but one unit we spoke to within the IRS said that regularly adjusting civil tax penalties for inflation would not be burdensome," said the report. The GAO also talked to a "limited number of tax practitioners" who said the impact on their work from the adjustments would be relatively low. The report recommended that Congress should consider requiring the IRS to periodically adjust the penalties for inflation.

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