Penalty proliferation - tax penalties

Nation's Business, May, 1989 by Gerald W. Padwe

Penalty Proliferation

Experienced tax practitioners would find it difficult to list more than 20 or 25 of the more than 150 penalties in the Internal Revenue Code. This great array of penalties has grown from myriad tax acts, statutory provisions, and perceptions by the government of abuses for which sanctions must be applied. Each one, at its time of enactment, probably made good sense to the governmental force behind it.

Penalty proliferation has been particularly acute during the 1980s, and over the years the result has been "penalty chaos."

As a result, several groups, both in and out of government, have been reviewing the code's penalty structure with an eye to reform.

Perhaps the most interesting report to date is one released recently by a special Internal Revenue Service task force reporting directly to the IRS commissioner. The task force has recommended a substantial number of changes for the IRS and, presumably, the Congress to consider. Any alternation in tax penalties would have to be enacted by the Congress.

Perhaps the most dramatic recommended changes are in the area of taxpayer conduct. The present structure, involving a 5 percent penalty for neglignece, a 25 percent penalty for taking an aggressive position on a return without disclosure, and a 75 percent penalty for civil fraud, would be replaced with a different three-tiered penalty approach.

Under the proposal, failure to exercise reasonable care in filing a return or making disclosure would be subject to a 20 percent penalty, willfully or intentionally filing an incorrect return would produce a 50 percent penalty, and civil fraud would cause a penalty of 100 percent.

Congress will not enact penalty reform overnight. But this is an area that will be receiving increased scrutiny, and the task force report will certainly be influential as the debate proceeds.