The Taxpayer Advocate’s Annual Report directs some well-deserved fire on two of the worst IRS practices: the penalty-happy approach to examinations and the shoot-the-jaywalkers approach to offshore enforcement.
The report says this about penalties:
The IRS’s decision not to abate inapplicable penalties illustrates its resource-driven approach to them. As we have described in prior reports, the IRS too often proposes accuracy-related penalties automatically when they might potentially apply — before performing a careful analysis of the relevant facts and circumstances — and then burdens taxpayers by requiring them to prove the penalties do not apply.
The IRS should identify and abate all of the accuracy-related penalties that should not apply. It should minimize taxpayer burden when administering the IRC § 6676 penalty (e.g., by not proposing it automatically) and work with the Treasury Department to support a reasonable cause exception.
Amen. The tax law is hard, and when a taxpayer does what a reasonable person — not a reasonable tax lawyer — should do to pay the right amount, there shouldn’t be an automatic 20% mistake penalty. Too bad the advocate doesn’t seem to have embraced my “sauce for the gander” penalty, which would make the IRS pay taxpayers the same 20% penalty when the IRS makes an unjustified assessment.
Regarding foreign account enforcement, the report faults the IRS shoot-the-jaywalker approach (my emphasis):
In the 2009 OVD program, the median offshore penalty paid by those with the smallest accounts ($87,145 or less) was nearly six times the tax on their unreported income. Among unrepresented taxpayers with small accounts it was nearly eight times the unpaid tax. The penalty was also disproportionately greater than the amount paid by those with the largest accounts (more than $4.2 million) who paid a median of about three times their unreported tax. When the IRS audited taxpayers who opted out (or were removed), on average, it assessed smaller, but still severe, penalties of nearly 70 percent of the unpaid tax and interest. Given the harsh treatment the IRS applied to benign actors, others have made quiet disclosures by correcting old returns or by complying in future years without subjecting themselves to the lengthy and seemingly-unfair OVD process. Still others have not addressed FBAR compliance problems, and the IRS has not done enough to help them comply.
The IRS should expand the self-correction and settlement options available to benign actors so that they are not pressured to opt out or pay more than they should; do more to educate persons with foreign accounts (e.g., recent immigrants) about the reporting requirements; consolidate and simplify guidance; and reduce duplicative reporting requirements.
The IRS should follow the lead of the states that allow non-resident taxpayers who voluntarily disclose past non-compliance to file and pay five years of prior taxes, with only interest and no penalties — reserving the penalties for those who wait until they are caught. Tax Analysts quotes one lawyer as saying this would be unfair to the already-wounded jaywalkers:
“It’s very hard to make the program more lenient now without going back and adjusting thousands of [prior] taxpayers’ resolutions since 2009,” he said. That is something the IRS is likely unwilling to do, he added.
Too bad. That’s exactly what they should do.
Lynnley Browning, IRS top cop says the agency is too hard on offshore tax dodgers. I can’t imagine she wrote that headline. Any lazy headline writers who call an inadvertent FBAR violator a “tax dodger” should have half their bank account balances seized if they ever forget to report a 1099.
The IRS has released Fiscal Year 2013 Enforcement and Service Results, showing among other things:
Individual audit rate: 0.96% (lowest since 2005)
Large corporation audit rate: 15.8% (lowest since 2009)
Revenue from audits: $9.8 billion (lowest since 2003)
Number of IRS agents: 19,531 (lowest since pre-2000)
Conviction rate: 93.1% (highest since pre-2000)
It’s hard to see where the IRS has the resources for making compliant preparers waste their time on preparer regulation busywork.
William Perez, Fourth Estimated Tax Payment for 2013 Due on January 15
Paul Neiffer, How Low is Too Low For A Rental Arrangement? “We had a reader ask the following question: ‘Does leasing cropland to a family member for substantially less than fair market value become “gifting” subject to taxes for value above gifting limit?'”
Leslie Book, NTA Annual Report Released (Procedurally Taxing)
Christopher Bergin, The Tax Code in 2014 – It Still Stinks (Tax Analysts Blog):
I’ve always believed in progressive income taxation. This isn’t it. The conservatives have sold us on the notion that tax is a dirty word, and the liberals have sold us on the notion that class envy is a healthy state of mind.
And that, folks, is why the tax code stinks. And it won’t get any better in the new year.
There’s more to the stink than that, but it’s a good start.
Scott Hodge, Millionaire Taxpayers Tend to be Older. Well, that’s one good thing about aging, I guess.
Howard Gleckman, Pay to Extend Unemployment Benefits? Why Not Pay to Extend Temporary Tax Breaks Too? (TaxVox)
Robert D. Flach brings the Friday Buzz!
Career Corner: This Year, Resolve to Finally Decide What You Want To Be When You Grow Up in Public Accounting (Going Concern)
Tags: cavalcade of risk, TaxProf, Kay Bell, Robert D Flach, William Perez, FBAR, Christopher Bergin, Taxpayer Advocate, Going Concern, shooting jaywalkers, Jack Townsend, Jason Dinesen, Nina Olsen, Tax Justice Blog, Leslie Book