Tax Lawyer's Blog

Under current law if a taxpayer can show that his failure to comply with a tax law was due to reasonable cause (i.e. not the result of willful negligence), the penalties will be abated.

James Peaslee in a column written for the Wall Street Journal says that there are provisions hidden in the House’s healthcare reform bill that may change all that:

In a broad range of circumstances, the health-care bill would change the law to impose strict liability penalties for income-tax underpayments, meaning that taxpayers will no longer have the luxury of making an honest mistake. The ability of even the IRS to waive penalties in sympathetic cases would be sharply curtailed.

Here’s Mr. Peaslee, an attorney with the New York law firm of Cleary, Gottlieb Steen & Hamilton LLP, on why making tax penalties automatic and irrebuttable is a bad idea:

In [an] example of bad lawmaking, in 2007, Congress stuck into a supplemental appropriations bill a major change in the way penalties are computed for people in the business of preparing tax returns. Congress acted without consulting with the IRS. The IRS chief counsel at the time, Donald Korb, said publicly that the service had been “blindsided” by the change.

The change created a conflict of interest for tax professionals. It subjected them to a higher penalty standard than their clients, which encouraged them to give tax advice that protected the tax preparer more than the taxpayer. The IRS and tax professionals tore their hair out trying to sort through the mess until 2008, when Congress changed the law again

Here’s Peaslee’s advice to Congress:

There are lessons here …. Don’t take away the ability of the IRS to waive penalties. Also, don’t tinker with penalties without thinking through the effect on the overall penalty regime.

(Hat Tip: Eugene Volokh)

Related Posts:

• IRS Penalties: How to Make them go Away
• IRS Needs to Fix Penalty Regime, GAO Report Says

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