IRS
failed to provide penalty relief to millions of taxpayers who qualified for it
Penalty Abatement Procedures Should Be Applied Consistently to All
Taxpayers and Should Encourage Voluntary Compliance (Audit Report No.
2012-40-113, seehttp://www.treasury.gov/tigta/auditreports/2012reports/201240113fr.pdf)
The Treasury Inspector General for Tax
Administration (TIGTA) has reported that IRS failed to inform about 1.45
million taxpayers that they qualified for relief from penalties totaling close
to $181 million under a little known program—“First-Time Abate” relief.
Background. IRS imposes penalties on taxpayers who are required to file a
return and fail to do so and who fail to timely pay the full tax shown on any
tax return.
The Code Sec. 6651(a)(1) failure to file penalty is usually 5% of the
unpaid taxes for each month or part of a month that a tax return is late. This
penalty will not exceed 25% of the unpaid taxes. If a taxpayer files his tax
return more than 60 days after the due date or extended due date, the minimum
penalty is the smaller of $135 or 100% of the unpaid tax.
If a taxpayer doesn't pay all taxes owed by
the due date, he will generally have to pay a failure to pay penalty of
one-half of one percent of the unpaid taxes for each month or part of a month
after the due date that the taxes aren't paid. This penalty can be as much as
25% of the unpaid taxes. The failure to pay penalty will continue to accrue
after the initial assessment if the taxpayer fails to pay the total tax due
when the tax return was due. (Code Sec. 6651(a)(2), Code Sec. 6651(a)(3))
Beginning in 2001, IRS began granting penalty
relief under an Administrative Waiver known as the First-Time Abate. Under its
First-Time Abate relief, to reward past tax compliance and promote future tax
compliance, IRS waives these two penalties for taxpayers who have demonstrated
full compliance over the prior three years. However, the relief is provided
only if the taxpayers request penalty relief. IRS doesn't widely publicize the
opportunity to request this waiver.
IRS can also abate both the failure to file
and failure to pay penalties where taxpayers show that they exercised ordinary
care and prudence, and failure to file or pay was due to reasonable cause and
not due to willful neglect.
Failure to communicate. TIGTA reports that taxpayers with compliant
tax histories are not offered and do not receive the waiver. For the 2010 tax
year, TIGTA estimated that approximately 250,000 taxpayers with failure to file
penalties and 1.2 million taxpayers with failure to pay penalties did not
receive penalty relief even though they qualified under First-Time Abate waiver
criteria. TIGTA estimated that the unabated penalties totaled more than $181
million.
In addition, TIGTA found that the First-Time
Abate waiver was not used to its full potential as a compliance tool because it
was granted before taxpayers demonstrated full compliance by paying their
current tax liability.
Recommendations. To make better use the First-Time Abate waiver
as a compliance tool, TIGTA recommended that IRS ensure that taxpayers are
aware of their potential to receive the waiver based on their past compliance
history, and that IRS make the grant of the waiver contingent upon taxpayers
paying their current tax liability.
TIGTA also recommended that a process be
developed to address the negative impact to taxpayers who qualify for abatement
of the failure to file and failure to pay penalties based on reasonable cause,
but are given First-Time Abate waivers instead. This may preclude these
taxpayers from being granted the First-Time Abate waiver in future years, and
may reduce the portion of their penalties abated.
Illustration : Taxpayer, who had a clean compliance history,
asked to have his failure to file penalty abated in tax year 2010 for
reasonable cause (serious illness). IRS would first consider the First-Time
Abate waiver and Taxpayer would be granted penalty relief under First-Time
Abate criteria. The following year, Taxpayer was late paying his tax year 2011
taxes, but did not have reasonable cause. He will be assessed a failure to pay
penalty, which can't be waived because he had been granted a First-Time Abate
waiver for the prior tax year. Had the failure to file penalty for tax year
2010 been excused on the basis of reasonable cause, he would have qualified for
a First-Time Abate waiver for the failure to pay penalty for tax year 2011.
(Audit Report No. 2012-40-113)
IRS reaction. In response to the TIGTA report, IRS officials
agreed with the recommendations and are taking appropriate corrective actions.
IRS plans to study how best to use the First-Time Abate waiver as a compli
TREASURY INSPECTOR GENERAL FOR TAX
ADMINISTRATION Penalty Abatement
Procedures Should Be Applied Consistently to All Taxpayers and Should Encourage
Voluntary Compliance September 19, 2012 Reference Number: 2012-40-113
Phone Number | 202-622-6500 E-mail Address
| TIGTACommunications@tigta.treas.gov
Website | http://www.tigta.gov
PENALTY ABATEMENT PROCEDURES TIGTA estimated the unabated penalties totaled SHOULD BE
APPLIED CONSISTENTLY more than $181 million.
Further, the FTA waiver TO ALL TAXPAYERS AND SHOULD is not used to its full potential as a compliance ENCOURAGE
VOLUNTARY tool because it is granted to
taxpayers before they demonstrate full compliance by paying their COMPLIANCE
current tax liability.
Highlights Taxpayer requests for penalty abatements were not
always processed accurately. The IRS took immediate corrective action to
address this Final Report issued on issue.
September 19, 2012 In addition,
taxpayers who qualify for penalty relief based on reasonable cause may receive
Highlights of Reference Number: 2012-40-113 FTA waivers instead, which can
negatively affect to the Internal Revenue Service Commissioners some taxpayers.
for the Small Business/Self-Employed Division and the Wage and Investment
Division.
WHAT TIGTA RECOMMENDED IMPACT ON
TAXPAYERS TIGTA recommended that the
FTA waiver be better used as a compliance tool by ensuring The Internal Revenue
Code imposes a Failure to taxpayers are aware of their potential to receive
File (FTF) penalty for failing to file a tax return the waiver based on their
past compliance and a Failure to Pay (FTP) penalty for failing to history.
Receipt of the waiver should be pay the tax shown on any tax return by the date
contingent upon taxpayers paying their current prescribed. The IRS can abate
both penalties tax liability. under certain circumstances. If the IRS does not
administer these and other penalties fairly TIGTA also recommended that a
process be and accurately, taxpayers’ confidence in the tax developed to
address the negative impact to system will be jeopardized. taxpayers who
qualify for abatement of the FTF and FTP penalties based on reasonable
WHY TIGTA DID THE AUDIT cause, but are given FTA waivers instead. This audit
was initiated to determine whether In their response to the report, IRS
officials abatements of the FTF and FTP penalties were agreed with the
recommendations. The IRS applied consistently and accurately. This audit plans
to study how best to use the FTA waiver addresses the major management
challenge of as a compliance tool. It also plans to review the Providing
Quality Taxpayer Service Operations. current process for application of an FTA
waiver
WHAT TIGTA FOUND prior to reasonable cause and its impact on taxpayers who qualify for
reasonable cause, but The IRS waives FTF and FTP penalties for instead are
given an FTA waiver. some taxpayers who have demonstrated full compliance over
the prior three years. The purpose for granting the waiver, called a First-Time
Abate (FTA), is to reward past tax compliance and promote future tax compliance.
However, most taxpayers with compliant tax histories are not offered and do not
receive the FTA waiver. TIGTA estimated that for Tax Year 2010, approximately
250,000 taxpayers with FTF penalties and 1.2 million taxpayers with FTP
penalties did not receive penalty relief even though they qualified under FTA
waiver criteria
September 19, 2012
MEMORANDUM
FOR COMMISSIONER, SMALL BUSINESS/SELF-EMPLOYED
DIVISION COMMISSIONER, WAGE AND INVESTMENT DIVISION FROM: Michael E. McKenney Acting Deputy Inspector General
for Audit
SUBJECT:
Final Audit Report – Penalty
Abatement Procedures Should Be Applied Consistently to All Taxpayers and Should
Encourage Voluntary Compliance (Audit # 201140026)
This report presents the
results of our review to determine whether Failure to File and Failure to Pay
penalty abatements were applied consistently and accurately. We focused our
review on tax returns filed by individual taxpayers. This audit was included in
our Fiscal Year 2011 Annual Audit Plan and addresses the major management
challenge of Providing Quality Taxpayer Service Operations. Management’s
complete response to the draft report is included as Appendix VI. Copies of
this report are also being sent to the Internal Revenue Service managers
affected by the report recommendations. Please contact me at (202) 622-6510 if
you have questions or Augusta R. Cook, Acting Assistant Inspector General for
Audit (Returns Processing and Account Services), at (770) 617-6434.
Penalty Abatement
Procedures Should Be Applied Consistently to All Taxpayers and Should Encourage
Voluntary Compliance
Table of
Contents Background ..........................................................................................................
Page 1
Results of Review ...............................................................................................
Page 3 Not All Taxpayers With Compliant Tax Histories Received the First-Time
Abate Waiver. ....................................................... Page 3 Recommendation
1: ..........................................................
Page 4 Controls Were Not Adequate to Identify Employee Errors When Processing
Abatement Requests .............................................. Page 5
Taxpayers With Reasonable Cause for Penalty Abatements May Be Burdened by
Current Procedures .................................................... Page 6 Recommendation
2: ..........................................................
Page 8
Appendices Appendix I – Detailed Objective, Scope, and
Methodology ........................ Page 9 Appendix II – Major Contributors to
This Report ........................................ Page 12 Appendix III –
Report Distribution List
....................................................... Page 13 Appendix IV –
Outcome Measure
................................................................ Page 14
Appendix V – Individual Master File Transcript for Computer Assessed Failure to
Pay Tax Penalty
............................................................................
Page 16 Appendix VI – Management’s Response to the Draft Report
...................... Page 18
Abbreviations
FTA First-Time Abate FTF Failure to File
FTP Failure to Pay IRS Internal Revenue Service
Background The Internal
Revenue Code imposes a penalty for failing to file a tax return1 or to pay the
tax shown on any tax return2 by the date prescribed for filing (including
extensions). Both the Failure to File (FTF) and Failure to Pay (FTP) penalties
are calculated based on figures taken from the tax return. Therefore, neither
penalty is assessed until after the tax return is filed. The purpose of these
penalties is to promote compliance with tax laws. In administering these and
all penalties, the Internal Revenue Service’s (IRS) internal guidelines provide
the following four principles:
Consistency:
The IRS should apply penalties equally in similar situations.
Taxpayers base their perceptions about the fairness of the system on their own
experience and the information they receive from the media and others. If the
IRS does not administer penalties uniformly, overall confidence in the tax
system is jeopardized.
Accuracy: The IRS must arrive at the correct penalty
decision. Accuracy is essential. Erroneous penalty assessments and incorrect
calculations confuse taxpayers and misrepresent the overall competency of the
IRS.
Impartiality: IRS employees are responsible for
administering the penalty statutes and regulations in an even-handed manner
that is fair and impartial to both the Government and the taxpayer.
Representation: Taxpayers must be given the opportunity
to have their interest heard and considered. Employees need to take an active
and objective role in case resolution so that all factors are considered.3
The FTF penalty is usually 5 percent of the unpaid taxes for
each month or part of a month that a tax return is late. This penalty will not
exceed 25 percent of the unpaid taxes. If a taxpayer files his or her tax
return more than 60 days after the due date or extended due date, the minimum
penalty is the smaller of $135 or 100 percent of the unpaid tax. If a taxpayer
does not pay all taxes owed by the due date, he or she will generally have to
pay an FTP penalty of one-half of one percent of the unpaid taxes for each
month or part of a month after
the due date that the taxes are not paid. This penalty can be as much as 25 percent
of the unpaid taxes. The FTP penalty will continue to accrue after the initial
assessment if the taxpayer fails to pay the total tax due when the tax return
was due. The IRS can abate both penalties under certain circumstances. Relief
from these penalties is
Beginning
in Calendar Year 2001,
the IRS
began granting the
FTA waiver
to taxpayers who
receive an
FTF or FTP penalty but
have a
compliant tax history for the
prior
three years. The FTA waiver
applies
only to a single tax year.
generally
granted to taxpayers who show they exercised ordinary care and prudence, and
failure to file or pay was due to reasonable cause and not due to willful
neglect.4 However, beginning in Calendar Year 2001, the IRS began granting
penalty relief under an Administrative Waiver5 known
as the First-Time Abate (FTA). Using the FTA waiver, the IRS grants relief to
taxpayers who receive an FTF or FTP penalty but have a compliant tax history
for the prior three years. The FTA waiver applies only to a single tax year.6
This
review was performed at the Office of Servicewide Penalties and the Accounts
Management function in Atlanta, Georgia; Ogden, Utah; and Washington, D.C.;
during the period May 2011 through July 2012. We conducted this performance
audit in accordance with and conclusions
based on our audit objective. Detailed information on our audit objective,
scope, and methodology is presented in Appendix I. Major contributors to the
report are listed in Appendix II. 4 and conclusions based on our audit objective. Detailed
information on our audit objective, scope, and methodology is presented in
Appendix I. Major contributors to the report are listed in Appendix II. 4 and conclusions
based on our audit objective. Detailed information on our audit objective,
scope, and methodology is presented in Appendix I. Major contributors to the
report are listed in Appendix II. 4 generally
accepted government auditing standards. Those standards require that we plan
and perform the audit to obtain sufficient, appropriate evidence to provide a
reasonable basis for our findings and conclusions based on our audit objective.
We believe that the evidence obtained provides a reasonable basis for our
findings
1 I.R.C. §6651(a)(1). 2 I.R.C.
§6651(a)(2) and (3). 3 Internal Revenue Manual 20.1.1.2.2. Page
1
To promote
compliance with tax laws, the IRS administers a system of penalties. The IRS
strives to ensure consistency,
and conclusions based on our
audit objective. Detailed information on our audit objective, scope, and
methodology is presented in Appendix I. Major contributors to the report are
listed in Appendix II. 4
Penalty relief can also
be granted for other reasons such as statutory
exceptions
or to correct IRS errors.
5 The IRS may formally interpret
or clarify a provision
to provide administrative relief from a penalty that
would
otherwise be assessed.
6 A 12-month accounting period
for
keeping records on income and expenses used
as the basis for calculating the
annual
taxes due. For most individual
taxpayers, the tax year is synonymous with the calendar year.
Page 2
Penalty
Not All
Taxpayers With Compliant Tax Histories Received the First-Time Abate Waiver The FTA waiver
is not being granted to most taxpayers who qualify for the waiver. From the
IRS’s Individual Master File,7 we identified 278,840 taxpayers who had been
assessed an FTF penalty and 1,367,750 taxpayers who had been assessed an FTP
penalty for Tax Year 2010 and appeared to qualify for the FTA waiver because
they: Had compliant tax histories for the three prior years. Had not been
granted abatements of either penalty for Tax Year 2010. From a statistically
valid sample of 500 of these accounts – 250 assessed FTF penalties and 250 assessed
FTP penalties – we found 225 (90 percent) and 231 (92 percent) of the taxpayers
qualified for penalty relief under FTA criteria but were not granted waivers.
Taxpayers are not considered for FTF or FTP penalty relief under FTA criteria
unless they request their penalties be abated. The IRS does not widely
publicize the opportunity to request an FTA waiver.
Form 1040, U.S.
Individual Income Tax Return, and its instructions do not include
information on the FTA waiver. IRS.gov, the IRS’s public Internet site, web
page, Eight Facts on Penalties, does not state that the penalties are
waived if the taxpayer has been compliant for three years. The eighth fact on
the web page states: You
will not have to pay a failure-to-file or failure-to-pay penalty if you can
show that you failed to file or pay on time because of reasonable cause and not
because of willful neglect. The balance due notices do not include
information on the FTA waiver. One of the IRS’s four principles when
administering penalties is consistency – that penalties should be applied
equally in similar situations. Additionally, the United States tax system is a
system of self-assessment and payment is based on the principle of voluntary
compliance. Compliant self-assessment requires a taxpayer to know the rules for
filing returns and paying 7
The
IRS database that stores various types of taxpayer account information. This
database includes individual, business, and employee plans and exempt
organizations data. Page
www.irstaxattorney.com (212) 588-1113 ab@irstaxattorney.com
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