Summary: Pursuant to a congressional request, GAO analyzed changes to the civil penalty provisions of the Internal Revenue Code proposed in a congressional bill and an Internal Revenue Service (IRS) report, focusing on whether the economic value of the penalty, its potential coverage, and its assessment criteria could effectively motivate taxpayer compliance and deter noncompliance.
GAO found that: (1) both the legislation and IRS report recommended changes to restructure and better rationalize the existing penalty system; (2) the existing penalty system was not time-sensitive, since it penalized late filers by the same amount regardless of when they submitted their returns; (3) although both the legislation and IRS report proposed a new compliance incentive to encourage more prompt information return filing, eliminating the penalty for underreporting taxable income on information returns could weaken the compliance effort; (4) although both proposals made penalty provisions more consistent and better coordinated penalties to avoid overly harsh assessments against taxpayers, they needed to provide for more equitable treatment of similarly situated taxpayers; and (5) the federal tax deposit penalty may not effectively promote compliance because of complex program regulations.
