Popular search terms:

MSP #08: PENALTY STUDIES

The IRS Does Not Ensure Penalties Promote Voluntary Compliance, as Recommended by Congress and Others

 

 

TAS Recommendations and IRS Responses

1
1.

TAS RECOMMENDATION #8-1

Finalize a plan for OSP (or a successor organization) to ensure that all parts of the IRS are administering penalties to promote voluntary compliance in accordance with congressional directives and the IRS policy statement.

IRS RESPONSE TO RECOMMENDATION: During the recent realignment in the Small Business/Self Employed division, it was recognized that a repositioning of the Office of Servicewide Penalties (OSP) was appropriate.  This fundamental infrastructure change provides for the revitalization of OSP and places it on a path to bring about an effective achievement of its penalty-related objectives.  In addition, the new positioning will facilitate OSP’s efforts in completing the development of a plan to comprehensively evaluate penalty administration.  The OSP is continuing its efforts to develop a plan to comprehensively evaluate penalty administration to promote voluntary compliance.

Update: Specific Actions taken: OSP partnered with RAAS and SB/SE Research to develop a comprehensive Penalty Performance Assessment Program (PPAP) plan .  The PPAP plan was finalized on March 7, 2017.   The PPAP plan includes the development of a framework for monitoring the penalty program performance, a robust and statistically valid quality assurance program, and a longitudinal research plan for assessing the effect of penalties on taxpayer behavior.

CORRECTIVE ACTION: OSP will continue to develop and finalize a plan to comprehensively evaluate penalty administration.

TAS RESPONSE: The IRS response indicates it reorganized OSP and that OSP will continue its efforts to develop a plan to ensure all parts of the IRS are administering penalties to promote voluntary compliance.  These are steps in the right direction.  Although OSP has not committed to work with TAS or other stakeholders as it develops this plan, it should do so.  OSP should also set a specific date by which it will finalize the plan because without a target date, it may never actually complete it.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

2
2.

TAS RECOMMENDATION #8-2

Provide OSP with sufficient authority, resources, staffing, training, and access to data and systems to ensure the IRS is achieving its penalty-related objectives.

IRS RESPONSE TO RECOMMENDATION: With the recent realignment in the Small Business/Self Employed division, OSP was realigned.  The new placement provides for better positioning of the office where issues can be elevated faster to the correct level of leadership.  As the NTA has noted, the IRS and OSP have been significantly impacted by IRS budgetary constraints which affected our staffing.  Recognizing the importance of OSP’s responsibilities, OSP is currently in the process of adding additional personnel to the staff.  We agree for OSP to be effective, it must have sufficient resources and training as well as access to data and systems. The hiring of additional staff should assist OSP in achieving its penalty-related objectives and ensure that training needs are met.  Despite resource limitations, OSP continues to work with other parts of the IRS, such as SB/SE Research and RAS, in order to conduct research.  OSP will continue to work with these other functions to obtain necessary data and research and will continue to develop necessary training.  While we disagree with TAS’s assessment that OSP does not have sufficient authority, OSP will undertake to evaluate whether an MOU with IRS Business Operating Divisions would be beneficial for clarifying OSP’s role in ensuring that the IRS is achieving its penalty-related objectives.

Update: OSP has hired additional staff.  However, OSP requires additional time in order to complete the evaluation of an MOU with the IRS Business Operating Divisions.

2nd Update: Actions taken: OSP developed a two-year Business Plan which was approved on March 7, 2016. The Plan’s objectives focus on stakeholder engagement, performance assessments, and resource needs. As support to the Business Plan, OSP partnered with RAAS and SB/SE Research to develop a comprehensive Penalty Performance Assessment Program (PPAP) plan.  The PPAP plan was also finalized on March 7, 2017.  The PPAP plan includes the development of the framework for monitoring the penalty program performance, a robust and statistically valid quality assurance program, and a longitudinal research plan for assessing the effect of penalties on taxpayer behavior.

3rd Update: OSP hired additional staff, six analysts in FY2015 and an additional four in FY2016 which were outlined as mission critical hires in the Business Plan. OSP determined that an MOU with IRS BODs is not needed to clarify OSP’s role in achieving IRM penalty-related objectives.  The Business Plan, and supporting PPAP plan, directs OSP in partnering with SB/SE Research to map the network of penalty stakeholder interactions, document roles and responsibilities, and conduct various communication forums. The need for individual MOUs with the BODs/functions will be further considered, on an as needed basis, as part of the Business and PPAP plan delivery.

CORRECTIVE ACTION: OSP is in the process of developing announcements to hire additional staff. OSP will undertake to evaluate whether an MOU with IRS Business Operating Divisions would be beneficial for clarifying OSP’s role in ensuring that the IRS is achieving its penalty-related objectives.

TAS RESPONSE: The IRS response says OSP will be moved in connection with the reorganization, will hire additional staff, will work with research functions to develop training, and will revisit its agreements with other business units.  However, it is not clear if these changes will empower OSP with the authority, resources, staffing, training, and access to data and systems it needs to ensure the IRS is achieving its penalty-related objectives.  The response suggests it will continue to rely on IRS research functions for penalty-related analyses and training.  These functions have other priorities and may not focus on the IRS’s penalty policy statement or voluntary compliance.  OSP should develop internal expertise and partner with outside researchers to ensure it addresses these concerns.  Other parts of the IRS have ignored OSP in developing penalty guidance, as demonstrated by their issuance of offshore voluntary disclosure programs and guidance without consulting OSP.  This may suggest OSP lacks authority over penalty policies adopted by IRS business units and functions.  Establishing or revisiting agreements (MOUs with other IRS business units), as OSP plans to do, could address this concern.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

3
3.

TAS RECOMMENDATION #8-3

Require that all penalty policies and initiatives owned by other IRS business units be incorporated into the IRM and substantively reviewed by OSP for consistency with IRS-wide penalty policy before they are implemented. OSP should also review all previously-adopted policies.

IRS RESPONSE TO RECOMMENDATION: OSP’s mission is to provide coordination of policy and procedures concerning the administration of all IRS Civil Penalty programs.  OSP supports the mission by working with all IRS Business Operating Divisions.  OSP is responsible for issuing civil penalty policy as provided in IRM 1.2.20.1.1(11), Policy Statement 20-1 (Formerly P-1-18), and is responsible for prescribing guidelines in a Penalty Handbook (IRM 20.1) that all operating divisions and functions are to follow.  Each operating division and function develops its IRMs to administer OSP’s respective penalty policies accordingly.  OSP works with all functions within the IRS to provide consistent penalty policy, but does not direct how each function is to carry out its penalty related procedures.  Contingent upon resources, OSP will review all previously-adopted policies.  In addition, the NTA’s recommendation will be taken under advisement while OSP undertakes to evaluate whether an MOU with IRS Business Operating Divisions would be beneficial for clarifying OSP’s role in ensuring that the IRS is achieving its penalty-related objectives.

Update: OSP has compiled a list of IRMs that contain penalty policy and/or guidance.  OSP  provided the list of IRMs to each of the affected functions and IMD coordinators to ensure OSP is included in the circulation of IRM updates.  In addition, OSP has begun to review current IRMs and will continue to do so as resources permit.

CORRECTIVE ACTION: OSP will identify the IRMs that it should review and prepare a list of the same.  OSP will provide this list to the affected functions and IMD coordinators to ensure OSP is included in the circulation of any IRM updates.  OSP will review existing identified IRMs as resources permit.

TAS RESPONSE: The IRS response suggests OSP will review other business units’ penalty policies incorporated into the IRM only if it has sufficient resources.  However, the IRS does not commit OSP to addressing penalty-related procedures other business units have not incorporated into the IRM, such as the FAQs and memos that describe the offshore voluntary disclosure programs.  As previously recommended, OSP should be given the resources and authority needed to review all penalty-related guidance whether incorporated into the IRM or not.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Partially Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

4
4.

TAS RECOMMENDATION #8-4

Direct OSP to partner with private-sector researchers to study the effect of penalties on voluntary compliance.

IRS RESPONSE TO RECOMMENDATION: OSP works with other parts of the IRS in order to conduct research that is necessary for the IRS to achieve its penalty-related objectives.  Such research allows for data driven recommendations to improve work processes and services and to determine the effect of penalties on voluntary compliance.  For example, RAS has begun studying the impact of penalties on voluntary compliance, including a review of current research from both the public and private sectors, as well as a description of the degree to which taxpayers are repeatedly subjected to Failure to Pay penalties and Accuracy Related penalties.  A more detailed program of study is currently underway, and RAS is continuing that line of research by following up on questions raised about the income and filing characteristics of taxpayers who receive penalties, and by further evaluating how often taxpayers repeat behaviors associated with the penalty assessment.  RAS have also begun research to focus specifically on Partnerships and S-Corporations.  OSP will take responsible and appropriate action with input and advice from RAS and SB/SE research with regard to whether private sector research is necessary and will continue to work with SB/SE Research and RAS to study the effects of penalties on voluntary compliance.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The IRS response indicates OSP will work with internal IRS research functions but does not actually commit to undertake any studies by a particular date or indicate OSP will work with outside researchers.  Outside researchers may offer unique insight and a potentially broader perspective than internal IRS research functions.  Resource and capacity constraints also limit the penalty-related research that internal IRS research functions can conduct. Thus, OSP should consider partnering with outside researchers.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

5
5.

TAS RECOMMENDATION #8-5

Direct OSP to compile, review, and consider current and historical internal and external penalty studies (including TAS studies) in connection with any reevaluation of (or change to) IRS penalty policy or administration.

IRS RESPONSE TO RECOMMENDATION: OSP works with other parts of the IRS, such as SB/SE Research and RAS, in order to conduct research that is necessary for OSP to achieve its penalty-related objectives.  OSP will continue to work with these other functions to obain necessary data and research in connection with any reevalutaion of IRS penalty policy or administration.  While not compiling all historical penalty studies or conducting an exhaustive search for the same, OSP takes responsible and appropriate action with input and advice from RAS and SB/SE research with regard to the review and consideration of historical studies.  OSP will also look at Penalty studies, including those conducted by TAS.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The IRS has declined to publish the studies OSP considers and the conclusions it reaches, so that internal and external IRS stakeholders can build on and contribute to its analysis.  It has declined to cite any reasons for this decision.  Its lack of transparency also silences the usual public discourse that helps researchers avoid blind spots and errors in their analysis.  As a result, the IRS is more likely to continue to formulate and apply its penalty policies based on incomplete information and unexamined assumptions.  Moreover, this lack of transparency is inconsistent with the taxpayer’s right to be informed, which includes the right to “clear explanations.”  Finally, OSP’s secret penalty analysis is also likely to reduce the public’s trust for the IRS and its penalty policies.  Research suggests trust in government and the IRS drives voluntary compliance.  Thus, OSP’s lack of transparency is likely to undermine voluntary compliance – a result inconsistent with the reason for OSP’s existence.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Partially Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

6
6.

TAS RECOMMENDATION #8-6

Direct OSP to publish the studies it considers and the conclusions it reaches after any such review, so that internal and external IRS stakeholders can build on and contribute to its analysis.

IRS RESPONSE TO RECOMMENDATION: OSP’s mission is to provide coordination of policy and procedures concerning the administration of all IRS Civil Penalty programs.  OSP supports the mission by working with all IRS Business Operating Divisions.  OSP also works with other parts of the Service, such as SB Research and the IRS Research, Analysis and Statistics Division (RAS), in order to develop studies and make recommendations. RAS publishes various studies related to tax administration and certain information related to civil penalties.  For example, the IRS Data Book, Table 17, contains information specific to civil penalties and is available on IRS.gov.  IRS.gov also includes several sources of information to assist taxpayers such as Tax Topics, an online self-help tool to assist with a penalty appeal, and special notices regarding penalty relief.  There is also a page providing an email link for external stakeholders to submit comments to help the IRS shape the Future of Civil Penalties.  OSP will continue to work with other parts of the Service to develop studies to determine the extent that civil penalties promote voluntary compliance, but will not commit to publish reviews of such studies.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The IRS has declined to publish the studies OSP considers and the conclusions it reaches, so that internal and external IRS stakeholders can build on and contribute to its analysis.  It has declined to cite any reasons for this decision.  Its lack of transparency also silences the usual public discourse that helps researchers avoid blind spots and errors in their analysis.  As a result, the IRS is more likely to continue to formulate and apply its penalty policies based on incomplete information and unexamined assumptions.  Moreover, this lack of transparency is inconsistent with the taxpayer’s right to be informed, which includes the right to “clear explanations.”  Finally, OSP’s secret penalty analysis is also likely to reduce the public’s trust for the IRS and its penalty policies.  Research suggests trust in government and the IRS drives voluntary compliance.  Thus, OSP’s lack of transparency is likely to undermine voluntary compliance – a result inconsistent with the reason for OSP’s existence.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

en English
X