The Government Accountability Office today released IRS Should Evaluate Penalties and Develop a Plan to Focus Its Efforts (GAO-09-567):

Why GAO Did This Study:

Civil tax penalties are an important tool for encouraging compliance with tax laws. It is important that the IRS administers penalties properly and determines the effectiveness of penalties in encouraging compliance.

In response to a congressional request, GAO determined (1) whether IRS is evaluating penalties in a manner that supports sound penalty administration and voluntary compliance and, if not, how IRS may be able to do so, and (2) whether IRS’s guidance for a new penalty for failure to disclose reportable transactions was issued in a timely manner and was useful to affected parties, and whether and how IRS has assessed the penalty. GAO reviewed IRS documents and guidance, and interviewed IRS officials and tax practitioners.

What GAO Recommends:  

The Commissioner of Internal Revenue should direct the Office of Servicewide Penalties (OSP) to evaluate penalty administration and penalties’ effect on voluntary compliance and develop a plan to focus its efforts. The Commissioner also should use IRS’s standard outreach methods to again alert taxpayers of the need to disclose reportable loss transactions.

In commenting on a draft of this report, IRS concurred with GAO’s recommendations, and summarized the actions it plans to take.

Senate Finance Committee Ranking Member comments here.