Tax Lawyer's Blog

The GAO recently issued a report to the U.S. Senate Finance Committee titled Tax Administration – IRS Should Evaluate Penalties and Develop a Plan to Focus its Efforts.

Here is what ranking member Senator Chuck Grassley (R-Iowa) said about the issue:

The IRS has a lot of discretion over assessing and rescinding tax penalties. The IRS promises to do a better job of evaluating tax penalties, and it needs to.

Fair administration from one taxpayer to the next is critical to the integrity of the tax system.

I agree with the Senator.

It is absolutely true that the IRS is inconsistent with respect to both the initial assessment and subsequent abatement of penalties.

Because of this inconsistency we feel duty-bound to challenge all but the most obviously sustainable penalty assessments.

And when we do we are as often surprised by the penalties the IRS chooses to abate as we are by the penalties it chooses not to abate.

Under the current regime whether a particular taxpayer is or is not granted penalty relief depends far too much on the mood and temperament of the IRS official making the judgment and not enough on the substantive merits of the claim.

This, of course, leads to disparate treatment of similarly situated taxpayers.

The IRS’s lack of consistency in the assessment and abatement of penalties is just one of the many messy attributes of a distended bureaucracy that’s the size of the Kingdom of Tonga.

We have seen, for example, similar inconsistencies with regard to the IRS’s Offer-in-Compromise program.

It’s very difficult to trust an institution when its right hand is showing you its palm and its left hand is waving you in.

For more on this issue see Paul Caron.

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