Information Returns: Administration of Selected Filing Penalty Cases at Austin Service Center

Published by the Government Accountability Office on 1990-09-28.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

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GAO                                                       Iiep( wt, t,c)the Assistant Cornrni ssioner
                                                          (,Exarnin;zt,ion), Inkrnal Revenue

--      ---. “-~.-
St”~~lAwlt)t’r 1!I!10
                                                         Administration of
                                                         Selected Filing Penalty
                                                         Casks at Austin
                                                         Service Center

_.-_   .._   ..__ ---_   ._-.~-   _--_.-.-   _-.._-.   --...-.-~-   ^_._ - ~.   I/
                   United States
GAO                General Accounting Office
                   Washington, DG. 20548

                   General Government   Division


                   September 28,199O

                   David G. Blattner
                   Assistant Commissioner (Examination)
                   Internal Revenue Service

                   Dear Mr. Blattner:

                   In February 1989, we initiated a review of the Internal Revenue Ser-
                   vice’s (IRS) administration of the information return filing penalty which
                   is to be assessed when a return is filed late, not filed on magnetic media
                   when required, or filed in an improper format. The objective of this
                   effort was to evaluate whether IRS is assessing and abating the penalty
                   in accordance with the Internal Revenue Code (Code) and IRS’ assess-
                   ment and abatement criteria.

                   During 1988, IRS assessed 39,669 information return filing penalties
                   against 27,986 filers. Abatements were granted to 22,829 filers for
                   36,261 penalties during the same time period. The dollar value of the
                   assessments and abatements was $1.1 billion and $ .99 billion

                   As a part of our review, we analyzed 295 information return filing pen-
                   alty assessment and abatement case files from the Austin Service
                   Center. While the results of our review are directly applicable only to
                   the case files we analyzed, the results provide insights into problems
                   facing the Austin Service Center and potentially other IRS service cen-
                   ters in administering the information return filing penalty. We briefed
                   IRSNational Office and Austin Service Center program officials on April
                   17, 1990, regarding the results of our case file review. These officials
                   said our information was useful in assessing program operations. There-
                   fore, we have summarized the information provided to these officials in
                   this report for your use as IRS makes anticipated changes to the informa-
                   tion returns filing civil penalty program to increase its efficiency and

                   In general, we found that while the vast majority of the computer-gener-
Results in Brief   ated penalty assessments we reviewed at the Austin Service Center were
                   appropriate based on IRS’ assessment and abatement criteria, in the
                   cases we reviewed problems frequently occurred when IRS staff manu-
            Y      ally assessed the penalty or made penalty abatements. Over half of the
                   68 manual assessments we reviewed were erroneous according to IRS’
                   guidelines, including 26 cases where the penalty was not warranted and

                   Page 1                          GAO/GGIM@99   Austin   Service Center Filing Penalties


                            another 10 where other errors were made, such as, miscalculation of the
                            penalty amount.

                            IRSalso erroneously granted abatements to some taxpayers, while other
                            taxpayers needlessly paid a penalty because they failed to request an
                            abatement that they were entitled to. Specifically, of the 221 abatements
                            we reviewed, more than half were erroneous including 67 where no
                            abatement should have been granted for the taxpayer. On the other
                            hand, 78 percent of the unabated penalty assessments had an abatement
                            request that was either erroneously denied or could have been abated if
                            taxpayers had requested this action; instead, most of them paid the

                            The Omnibus Budget Reconciliation Act of 1989 modified the informa-
                            tion returns filing penalty. Changes included varying the penalty rate to
                            reflect different degrees of lateness and establishing a consistent abate-
                            ment criteria for all types of information returns. While these events do
                            not specifically address the issues covered in our review, actions taken
                            by an IRStask force established to implement the 1989 Act provide IRS
                            with an opportunity to improve the efficiency and effectiveness of the
                            Information Returns Program, including the penalty administration
                            problems we identified.

                            Payors of wages, interest, dividends, and certain other types of income
Background                  are required to file information returns annually with IRS to report these
                            payments. Over one billion information returns are filed each year
                            reporting income paid exceeding $500 billion dollars. In the Information
                            Returns Program (IRP), IRS computers match income reported as paid on
                            information returns against income tax returns to identify taxpayers
                            who have potentially underreported their income or who have poten-
                            tially failed to file. Timely, accurate, and properly formatted informa-
                            tion returns are critical to the success of this program.

Information Return Filing   To support the IRP, Congress has enacted information return civil penal-
Penalty                     ties, including a $50 per return filing penalty that can be assessed if the
                            return is late, not filed on magnetic-media if required, or not filed in the
                            proper format. Under the Code, for tax year 1988, the penalty could be
                            abated on returns reporting interest and dividend income if the payor

                            Page 2                          GAO/GGD99-99   Austin   Service Center Piling Penalties

                             could demonstrate due diligence. For all other information returns the
                             abatement standard was reasonable cause.’

                             While the information return filing penalty can be assessed against
                             returns filed on magnetic-media as well as on paper, in 1988 due to com-
                             puter processing problems, IRS did not assess any penalties against mag-
                             netic-media returns. All of the reported penalties were assessed against
                             paper returns which represented less than 10 percent of the total
                             returns filed.

                             The vast majority of information return penalties are computer-gener-
                             ated at IRS service centers; the penalty can also be assessed manually by
                             IRS service center tax examiners. The reverse is true for abatements.
                             While the penalty can be computer abated, most abatements are done
                             manually by examiners.

Recent Legislative Actions   In December 1989, Congress passed the Omnibus Budget Reconciliation
                             Act of 1989. This act included changes to information return penalties.
                             Changes included making the penalty rate time sensitive to reflect
                             varying degrees of late filing and making all filing penalties on informa-
                             tion returns subject to the reasonable cause abatement criteria. The
                             Commissioner has appointed a task force to guide the implementation of
                             the civil penalty reforms contained in the 1989 act.

                             We reviewed IRS’ administration of the information return civil filing
Objectives, Scope,and        penalty assessed against late filed returns, returns not filed on magnetic
Methodology                  media when required, or returns not filed in the proper format. Our
                             objective was to determine whether penalty assessments and abate-
                             ments were appropriate based on the Code and IRS assessment and
                             abatement criteria.

                             To meet our objective, we had originally planned to analyze information
                             return penalty case files at three IRS Service Centers. Subsequently how-
                             ever, the 1989 IRS Commissioner’s Civil Penalty Task Force report pro-
                             posed changes to the Information Returns Program; also, the Omnibus

                             ‘The due diligence standard requires that the filer take steps that a reasonable and prudent person
                             would take to meet the filing requirements. These steps include such items as having systems ln place
                             to provide IRS with timely, correct, and properly formatted returns. The reasonable cause standard
                             allows for forgiveness of non-compliant behavior for good reasons, such as factors beyond the filers
                             control, such as loss of records in a fire. Due diligence is a more stringent standard than reasonable

                             Page 2                                     GAO/GGD90-99      Austin   Service Center Filing Penalties
                        B240249                                                                      ,

                        Budget Reconciliation Act of 1989 revised the information return pen-
                        alty. To provide IRS with the information we had obtained from our case
                        file review as soon as possible for consideration as changes are contem-
                        plated to the Information Returns Program, including civil penalties, we
                        terminated our work after completing a review of 295 of 8,631 fiscal
                        year 1988 penalty case files from the Austin Service Center.

                        These cases were randomly selected and included cases for 180 penalty
                        assessments from the Individual Master File (IMF) and Business Master
                        File (BMF) and 115 penalty abatements from the BMF made during fiscal
                        year 1988 at the Austin Service Center, Austin, Texas, We selected fiscal
                        year 1988 because it included returns for tax year 1986--the first tax
                        year for which the filing penalty we examined was assessed on all types
                        of returns subject to the penalty.

                        We selected our sample to assure we reviewed cases reflecting all three
                        penalty conditions (late filing, failure to file on magnetic media, and
                        failure to file in the proper format.) We selected the Austin Service
                        Center because, according to IRS data, it had more information return
                        penalty assessments and abatements in fiscal year 1988 than any of the
                        other nine IRS Service Centers.

                        Since we terminated our work after doing only a limited number of cases
                        which we did not attempt to estimate to the total universe of cases, our
                        results reflect only the actual penalty decisions we analyzed. They
                        cannot be generalized either to other cases from the Austin Service
                        Center or cases from other service centers. Our review was done in
                        accordance with generally accepted government auditing standards. We
                        did the work from February 1989 through April 1990. Additional infor-
                        mation on our methodology is contained in appendix I. Profile data on
                        the filers we reviewed are contained in appendix II.

                        Over half of the manual penalty actions-both assessments and abate-
Manual Assessments      ments-that we reviewed were erroneous in some fashion. In the cases
and Abatements          we analyzed, IRS examiners at the Austin Service Center demonstrated
Problematic for         difficulties both in determining when a penalty should be assessed and
                        in appropriately applying the abatement criteria.
Exarniners at the
Austin Service Center   For assessments, the penalty was not warranted in 38 percent (26 cases)
          Y             of the 68 manually assessed penalties we reviewed. For example, in 6 of
                        the 26 cases where we determined a penalty was not warranted, the
                        filer had obtained a waiver from the requirement to file on magnetic

                        Page 4                        GAO/GGD-90-99   Austin   Service Center Filing Penalties

media but was still assessed a penalty for not filing on magnetic media
for the paper returns submitted.

Penalty assessments were warranted in 15 percent of the cases we
received (10 cases) but were erroneous due to some other error. For
example, in 6 of the 10 cases, the amount of the penalty was incorrectly
calculated. The amount was incorrect in several instances because the
examiner miscounted the number of documents that should have been
penalized. Additional information on the assessment decisions we
reviewed is provided in appendixes III and IV.

Our findings related to abatements were similar. Based on IRS require-
ments for an abatement, no abatement was warranted in 67 of the 221
cases (30 percent) we analyzed. For example, in several instances an
abatement was granted due to hardship without the filer demonstrating
the hardship criteria had been met. More troubling, 45 of these 67 cases
had been reviewed and approved by supervisors, but the errors were not

In an additional 51 cases (23 percent), information in the cases file indi-
cated that an abatement was warranted but not for the reasons cited by
the examiner. For example, an abatement was granted based on the
filer’s statement that the returns had been timely filed and therefore the
penalty was not justified. In fact, the returns were late filed and a late
filing penalty was warranted, but because it was a first time filer, the
filer was eligible for an abatement under IRS criteria. Additional infor-
mation on the abatements we reviewed is provided in appendixes V, VI,
and VII.

We found that erroneous abatement decisions by IRS examiners were
also frequently missed by IRS internal controls-specifically supervisory
reviews. Forty-five or 67 percent of the abatements we determined were
not warranted, had been managerially reviewed and the error was still
present. The percentage was 66 for cases where an abatement was war-
ranted but other errors were also present. See appendix VIII for more
detailed information.

For the 74 assessments in our sample that had not been abated, we
determined that in 20 percent (15 cases) the abatement was erroneously
denied. In addition, we determined that 58 percent (43 cases) could have
been abated had the filer requested such an action. Most of these filers
were either filing for the first time or had been historically compliant.

Page 6                         GAO/GGD99-99   Austin Service Center Filing Penalties

                       Both of these conditions are grounds for an abatement, based on IRScri-
                       teria. In 81 percent of these cases the filer paid the penalty. See appen-
                       dixes IX and X for additional information.

                       To rectify perceived problems in the administration of the information
Recent Changes Will    returns filing penalty, the Omnibus Budget Reconciliation Act of 1989
Not Correct Problems   revised the penalty to make the provisions of the penalty consistent
                       across all types of information returns. However, these changes will not
                       rectify the assessment and abatement problems we noted. For example,
                       many abatements were erroneously granted when IRS examiners did not
                       follow IRS’established abatement criteria in abating a penalty and super-
                       visors in reviewing the examiners work did not identify and correct the
                       problems. Even though the Act established reasonable cause as the
                       abatement criteria for all types of information returns, such changes
                       will not ensure that examiners will follow the reasonable cause criteria
                       set forth in the Internal Revenue Manual or that supervisors’ reviews
                       will ensure that decisions are correct. The failure of IRSsupervisors to
                       discover the errors in most of the 67 erroneous abatement cases we
                       reviewed suggests the need to address internal controls to better assure
                       successful implementation of the new criteria.

                       The same is true for changes made in the act to magnetic media filing
                       thresholds. Under the act, all types of information returns must now be
                       filed on magnetic media if the filer files more than 250 returns. Previ-
                       ously, the threshold was 50 for interest and dividend returns and 250
                       for all other types. Making the filing threshold consistent, while perhaps
                       eliminating some confusion for filers and examiners, will not assure that
                       the examiners obtain the documentation necessary to demonstrate hard-
                       ship under IRS requirements, before providing a hardship abatement for
                       not filing on magnetic media.

                       While the scope of our review was limited and our results are directly
Conclusions            applicable only to the case files we analyzed, the results provide insights
                       into problems facing the Austin Service Center and, potentially, other
                       IRS Service Centers in administering the information return filing pen-
                       alty. Whether our findings are symptoms of service-wide problems
                       remains a key question for IRS as it develops guidance for implementing
                       the legislative changes and considers modifications to IRS’ processing
                       procedures and internal controls to increase the efficiency and effective-
                       ness of the program.

                       Page 6                          GAO/GGD90-99   Austin   Service Center FUing Penalties

We appreciate the assistance provided by your staff, particularly those
at the Austin Service Center, on this effort. Major contributors to this
report are listed in appendix XI. Please contact me on 272-7904 if you
have any questions concerning the report.

Sincerely yours,

Paul L. Posner
Associate Director, Tax Policy and
  Administration Issues

Page 7                         GAO/GGD-SOQS   Austin   Service Center Nling   Penalties

Appendix I
Appendix II
Profile of Filers in
Sample Penalty Cases
Appendix III
GAO Evaluation of
by Assessment Method
Appendix IV                                                                            16
Appendix V
GAO Evaluation of
Abatement Decisions
Appendix VI                                                                            18
Criteria Cited by IRS
for Abatement

                        Page 0   GAO/GGD-99-99   Austin   Service Center Filing Penalties
Appendix VII                                                                                                  19
Examples of             IRS Cited Abatement Criteria                                                          19
Situations Where GAO
Abatement Not
Appendix VIII                                                                                                 20
Supervisory Review of
Penalty Abatement
Appendix IX
GAO Evaluation of
Unabated Assessment
Appendix X
Comparison of
Characteristics in
Abated and Unabated
Penalty Cases
Appendix XI                                                                                                  23
Major Contributors to
This Report

                        Pyle9                          GAO/GGJ%90-99   Austin   Service Center FSling Penalties

Tables   Table 1.1: Austin Service Center Universe and GAO                                      12
             Sample of Information Return Civil Penalties
             Assessed and Abated in Fiscal Year 1988
         Table IX. 1: Cases Which Had Not Been Abated                                           21
         Table 1X.2: Cases That Should Have or Could Have Been                                  21


         BMF         Business Master File
         IMF         Individual Master File
         IRP         Information Returns Program
         IRS         Internal Revenue Service

         Page 10                        GAO/GGD-90-99   Austin   Service Center Filing   Penalties
Page 11   GAO/GGMtO-99   Austin   Service Center Filing Penalties
Appendix I


                                           Our sampling universe was derived from IRS’Business Master File (BMF)
                                           and Individual Master File (IMF) Non-Return Civil Penalties Extracts for
                                           fiscal year 1988. Table 1.1 displays the sample strata which include each
                                           of the three penalty conditions and their related universes.

Table 1.1:Austin Service Center Universe
and GAO Sample of InformatIon Return                                                    Universe                              Sample
Civil Penalties Assessed and Abated in     Penelty conditton                   ASSessed            Abated        Assessed            Abated’
Fiscal Year 1988                           Late filina                             2.962             1.565               100                  50
                                           Failure to file on magnetic media         1,261           1,360                60                  50
                                           Filing in improper format                   998             385                20               15
                                           Total                                    5.221           3.310                180              115
                                           *Abetement sample ceses selected from BMF only. Assessment sample and universe counts combine
                                           IMF and BMF cases.

                                           Since we terminated our work before completing a representative
                                           sample, our results are applicable only to the actual penalty decisions
                                           we analyzed. They cannot be generalized either to other cases from the
                                           Austin Service Center or cases from other service centers.

                                           While we selected cases separately from the assessment and abatement
                                           universes, we analyzed each sample case in its entirety. By reviewing
                                           both the assessment and then the related abatement case files, we
                                           obtained a better understanding of both decisions. Accordingly, we eval-
                                           uated 295 assessment decisions-180 from the assessment universe and
                                           all 116 from the abatement universe. For abatements, we evaluated 221
                                           abatement decisions-116 from the abatement universe and 106 of the
                                           180 from the assessment sample where the penalty had been abated at
                                           the time of our review.

                                           We excluded from the universes penalties assessed and abated against
                                           paper submissions of Forms W-2 (Wage and Earnings Statement) for
                                           failure to file on magnetic media. In these cases, IRSerroneously assessed
                                           duplicate penalties against filers who had submitted both paper docu-
                                           ments and a proper magnetic media submission. This resulted in over
                                           21,000 penalties totaIIing about $870 milhon. When IRS discovered the
                                           erroneous penalty assessment, IRSused the computer to abate the pen-
                                           alty, even though a penalty on some submissions may have been appro-
                                           priate because another penalty condition could have existed. Because
                                           the penalties were assess4 by computer and abated en masse by com-
                                           puter, we believe that detailed examination of those cases would have
                                           yielded little or no insight into IRS’penalty administration.

                                           P8ge 12                                 GAO/GG~          Austin   Service center    Filing Pen&h
We collected selected data from each penalty case for analysis and dis-
cussed questioned cases with Austin Service Center officials. We
examined applicable laws, Internal Revenue Code sections and Internal
Revenue Manuals for information return abatement criteria and
processing and review procedures. We also interviewed Center and
Headquarters officials regarding the information return civil penalties
program, including interpretations of criteria, changes in returns
processing, guidance and training provided to tax examiners, and
reviews of the tax examiners’ abatement decisions.

Page 13                        GAO/GGD99-99   Austin   Service Center FNng Penalties
Appendix II

Profile of Filers in SamplePenalty Cases                                                                                                                       ’ ,

                                                                                                              Assessed                                Abated
Profile characteristic                                                                              Cases                Percent         Cases                 Percent
hype of returns _filed     ..- ...___-._
1099 MISC                                                                                               189                   64            127                     57
i 099 INT                                                                                                50                   17             46                     21
1099 DIV                            .----~                                                               23                    8             21                     10
iO98 -       -. ..^ -. .~.~... .                                                                          9                    3              6                      3
Others                    -...- _-.- .---     ____                                                       24                    8             21                      9
TotaG                                                                                                  295                   100            221                    100

Number of returns payor required to file
i io io           .-_-    -..----.-----.--__                                                             40                   14             29                     13
i ;. to i5                                                                                               89                   30             51                     23
26 to 50                                                                                                 30                   10             17                      8
51 to25d’      . . .-. ~-_-~                                                                             47                   16             42                     19
over    i50-
  ..__.__.....   ._ ..- ~~~~~~~
                             -..-. ----                        ____--                                    89                   30             82                     37
Totals                                                                                                 295                   100            221                    100

Amount of penalty
$50a    .._     -..       -~. --.---.                                                                    24                    8             13                      6
$100 to $500                                 .----                                                       28                   IO             26                     12
$550 to $1,250                                                                                           98                   33             57                     25
$1,300 and over                                                                                         145                   49            125                     57
Totals                                                                                                 295                   100            221                    100

Month delinquent returns filed
                                                                                                                                                  b                       b
AfGil                                                                                                    93                   62
                                                                                                                                                  b                       b
May-July                                                                                                 35                   23
                                                                                                                                                  b                       b
August-December                                                                                          22                   15
Totals                                                                                                  150c                 100

Filer historically compliant                _-_____.---             -__
Yes . first time filer                    ___---                                                         94                   32             60                     27
Yes - previous filer with no penalties                                      ___-                        175                   59            143                     65
No - .filer .f.xeviously assessed penalty                                                                20                    7             13                     -_6
Cannot determine                                     -------                                              6                    2              5                       2
Totals                                                                                                 295                   100            221                    100
                                                         ‘The penalty amount is always a multiple of $50 because that is the rate per return.

                                                         bThis characteristic   does not pertain to abatements.

                           Y                             COnly 150 of the 295 assessments decisions we reviewed pertained to a late filing penalty condition

                                                         Page 14                                        GAO/GGD90-99       Austin   Service Center Filing Penalties

~~~E-vduation of AssessmentDecisionsby

                                                                                  Method of assessment
                                                        Total                  Computer           Manual
              GAO evaluation                        Cases Percent            Cases Percent Cases Percent
              Assessment    appropriatea                237          80        205           90        32          47
              Assessment erroneousb
                Penalty not warranted                    45          15         19            9        26          38
                Penalty warranted, but some
                  error present                          13              5       3            1        10          15
              Totals                                   295         100         227         100         68         100
              BAppropriate means that the penalty was warranted according to IRS guidelines and the law and all
              aspects of the assessment were correct.

              bAll but seven of the erroneous assessments were abated.

              Page 16                                    GAO/GGD-QQ-99 Austiu        Service Center Filing Penalties
Appendix IV

R&eons Why AssessmentsWereErroneous *

                                                                                                                                         Assessment method
--~      --.--.-                                                                                                      Total            Computer        Manual
Aaaeclsmenta not warranted per IRS guidelines
Filer corrected bad format within 30 days                                                                                 9                       0                    9
_““... ._...--- returns
                   .__.---..  incorrectly assessed for lateness
                           -.---.--.-~                                                                                    8                       1                    7
IRS incorrectly prepared Form lo96 caused penalty8                                                                        8                       7                    1
-.       had
              -- -.- .._.__.____...-.-                                                                                    5                       5                    0
Transcription        error
        .. _._..-_.____        in.-__-_~--
                       - -...___-  number of returns filed in Optical Character Reader edit                               5                       5                    0
Penalty incorrectly assessed on liquidation dividends                                                                     3                       0                    3
Wrong filer assessed                                                                                                      3                       0                    3
Duplicate assessed                                                                                                        2                       0                    2
Filer uncertain; no requirement to file                                                                                  1                        0                    1
._-.- .._____ --.-.-... assessedb
             agency       ..-.--_. --._-.__---.                                                                          1                        1                    0
Subtotal                                                                                                                45                       19                   26

Assessments warranted, but some error present
..^. __._.amount        incorrect
                     _-._.__- .--           .___- -                                                                       7                       1                       6
Multiple      penalties;
                     - _.._late
 . ..._-._-...-._ .___               penalty unwarranted
                              - .---_..-_.-.-_-                                                                           5                       2                       3
__.._ ._--.-reference     codeC
                 ..___-_-.__- -.. ..---.---       ----~_                                                                 1                        0                       1
Subtotal                                                                                                                13                        3                   10
Tot&r                                                                                                                   58                      22                    36
                                                           aForm 1096 is the return transmittal document which the filer usually prepares to accompany the return
                                                           when filed with IRS.

                                                           bFederal agencies are not subject to penalty assessment.

                                                           ‘Penalty was assessed for late filing; should have been for not filing on magnetic media.

                                                           Page 16                                      GAO/GGD-99-99         Austin   Service Center Filing   Penakie~
Appendix V

GAO Evdwtion of Abatement Decisions

             (UO l valuaUon                                                            Casesb        Percent
             Abatement appropriate0                                                         103                      47
             Abatement  Erroneous
               Abatement     not warranted                                                    67                     30
               Abatement    warranted,   but some error presentd                              51                     23
             Total                                                                          221                  100

             @AlIpenalty abatements were manually processed.

             “Excludes aeven partial abatements that we believe could have or should have been fully abated

             “Appropriate means that the abatement was warranted according to IRS guidelines, and all aspects of
             the abatement were correct.
             +lhio category includes cases such as where the filer was entitled to an abatement but not for reason
             the examiner cited.

             Page 17                                     GAO/GGDfM%J       Austin Service Center F’iling Penalties
Appendix VI

Criteria Cited by IRS for Abatement Decisioti I

Number of penalty cases                                              -
                                                                                                                 GAO evaluation of abatement
                                                                                                                         Warranted but
                                                                                                                             some error
Abatement criteria cited in case file                                                   Total        Not warranted’            presentb      Appropriate
First time/one time filer                                                                  28                         4                         5                       19
Errofieous assessment                                                                      28                         2                         1                       25
Hardship to file on magnetic media                                                         18                        IO                         2                        6
Amended         returns/bad
           .- ^_-..._--            format corrections                                      18                         5                         5                        8
Taxpayer filed timely                                                                      15                         5                        10                        0
Late due to reliance on third party                                                        12                         7                         5                        0
Inco;re&/$Timelyhp                  from IRS                                               10                         4                         2                        4
Pap& ._returns
            _         under~--tolerance                                                    10                         2                         0                        8
No_specific _ .._.criterion
                       -.-.. .statedC
                               ---_..                                                       9                         7                         2                        0
Did not expect to file >threshold                                                           8                         3                         0                        5
Form 1096 missing/incorrect --                                                              7                         3                         3                        1
Unable to obtain records      ._.._.-.~to report                                            7                         2                         3                        2
Filed &thin number/time tolerance                                                           7                         1                         1                        5
. . . ..,.    filed   on .magnetic
                      ._~    ----..- media                                                  7                         2                         0                        5
Major problems with computer system                                                         5                         1                         2                        2
piI& bankrupt/liquidated                                                                    5                         0                         4                        1
  ^__ -. of ..-. litigation
                     ._. -.-.---_appeals
                                     ..__-.. ..-                                            4                         2                         0                        2
Forms      not  required
      - . . -.-..-_---       to   be   filed ...-.--_____--                                 4                         0                         0                        4
Filer geographically remote                                                                 3                         2                         0                        1
Death or serious illness                                                    -               3                         0                         1                        2
FDIC/FSLIC takeover                                           -__-                          3                         0                         1                        2
Ot_ herd                -       .      -                                                  10                          5                         4                        1
Total                                                                                    221                         67                        51                      102
                                                              ‘Evidence in case file did not justify an abatement based on cited criteria ?r any other criteria. See
                                                              appendix VII for examples of situations where GAO deemed the abatemeflt to be not warranted.
                                                              bThis category includes cases such as where the filer was entitled to an abatement but not for the
                                                              reason the examiner cited.
                                                              ‘In these cases, the examiner granted an abatement but did not document the IRS criteria under which
                                                              the abatement was granted.

                                                              dThese included various criteria cited no more than two times

                                                              Page 18                                      GAO/GGD!WBB         Austin Service Center Filing Penalties
Appendix VII

Ekxmples of Situations Where GAO Deemed
IRSAbawment Not WarraMed

                      Hardship to file on magnetic media- Case file showed that the filer sub-
- _
    Cited Abatement   mitted two cost estimates-one above and one below IRS’ dollar
Uiteria               threshold for economic hardship to file on magnetic media.

                      Late due to reliance on a third party-The  third party cited by the filer
                      was an employee of the filer which according to IRScriteria does not
                      qualify as a third party.

                      No specific abatement criteria cited-Tax examiner did not document
                      what criteria the filer satisfied for the abatement and the case file con-
                      tained no evidence that the filer provided sufficient justification why
                      they thought an abatement was justified for any IRS approved reason.

                      Taxpayer filed timely-Taxpayer       submitted a copy of a signed, dated
                      transmittal document which supported his claim for having timely filed.
                      However, IRS files contained another signed and dated transmittal docu-
                      ment from the taxpayer for the same information returns which showed
                      the taxpayer had filed late and the transmittal was stamped showing
                      late receipt. IRS accepted the taxpayer’s explanation and granted the
                      abatement without reconciling these conflicting documents.

                      Page 19                        GAO/GGD-9089   Austin   Service Center Fillug Penalties
Appendix VIII

Supervisory Review of Penalty                                                                                                      4
Abatement Cases

                                                     GAO evaluation of abatement using IRS’ guidelines
                                                                                 Warranted but
                                                                                   some error
                                        Total             Not warranted              presentb            Appropriat#
Managerial    review conducted’
    ---..-_.---_-_“_-             Cases      Percent    Cases      Percent     Cases       Percent     Cases     Percent
Yes                                  145            66            45             67            34               66           66                 64
No                                    46            21             9             13            11               22           26                 25
  ._--.-..-.- -..-_______            30             13           13              20              6              12           11                 11
Total                               221           100            67             100            51             100           103             100
                                       ‘These reviews are the responsibility of the tax examiner’s supervisor, and for the cases in our sample
                                       were required on all abatements over $500. The threshold for required review has since been raised to
                                       $2,600. We were unable to do this type of analysis for assessments as most assessments we reviewed
                                       were computer assessed. Computer assessments are not subject to managerial review. Manual assess-
                                       ments are subject to managerial review only on a sample basis,

                                       bThis category includes cases such as where the filer was entitled to an abatement but not for the
                                       reason the examiner cited.

                                       CAppropriate means that the abatement was warranted according to IRS guidelines, and all aspects of
                                       the abatement were correct.

                                       Page 20                                    GAO/GGLMO-99       Austin   Service Center Filing Penalties
Appendix IX

GAO Evaluation of UnabatedAssessmentCases

Table 1X.1: Cases Which Had Not Been
Abated                                                                                                                      Assessments
                                        OAO evaluation                                                                   Cases”     Percent
                                        Penalty appropriately should not have been abatedb                                    16                22
                                        Should have been abated i.e., filer’s request for abatement was
                                          erroneously denied                                                                  15                20
                                        Could have been abated if requested by filer                                          43                58
                                        Total                                                                                 74              100
                                        ‘Includes seven partial abatements that we believe should have or could have been fully abated.

                                        bCase file contained no evidence showing that abatement was warranted.

Table 1X.2: Case8 That Should Have or
Could Have Been Abated@
                                                                                                                 Should have        Could ,“:::
                                        Applicable criteria                                          Total       been abated           abatedb
                                        Filed within number/time tolerances                             24                     5                19
                                        First time filer                                                23                     1                22
                                        Erroneous assessments                                            7                     7                 0
                                        Death/illness of responsible party                               2                     2                 0
                                        Paoer returns under tolerance                                    2                     0                 2
                                        Totals                                                          58                    15                43
                                        %cludes   seven partial abatements GAO believes should have been or could have been fully abated.

                                        blncludes penalties not abated because the filers did not respond in writing to the penalty notices or did
                                        not ask for abatement; however, the filers met abatement criteria that IRS could determine without
                                        contacting filers.

                                        Page 21                                      GAO/GGD-99-99     Austin   !Service Center Filhg   Penalties
Appendix X

Comparisonof !3electedF’iler Characteristicsin I
Abated and Unabated Penalty Cases

                                                                                                 Abated                             Unabated
Filer characterlstlc
-_-.-  ..-.. _--~--..                                                                  Cases              Percent         Cases             Percent

Number of returns filed
1 to10 xI_-..-_______.___.
-___.                                                                                       29                 13             11                   15
11 to25
.-.__ “.“_l~_.-
              _..-...-.__ -__-._                                                            51                 23             38                   51
_----to 50..-..-.-_ --..- -.-                                                               17                  8             13                   18
51   to250
        - ..-- .._.  “-_.”
                          -.-- .-...---                                                     42                 19              5                    7
-- ___.  250
         - -......-- ---       -_--                                                         82                 37              7                    9
Total                                                                                     221                 100             74                  100

Filer- ____
__....  historically
            - ---.___.-.compliant
Yes - first time filer                                                                      60                 27              34                  46
Yes _ previous
---.       --1 ----. filer with
                            - . - no penalties                                             143                 65              32                  43
No.    filer
-_~---__-    previously     assessed
                            -.          penalty                                             13                  6               7                  10
-.__-_      determine
               ~--           ..--                                                            5                  2               1                   1
Total                                                                                     221                 100              74                 100

-._.-_-of -.._..
                   -._~-. to assessment
                                .       notice
Written      response
 -..-.-- ..--_..._  -- -.                                                                  213                 96             21                   28
_--   response
        I_-..-.-_ -_-__.-.-- ..-. --.--                                                      7                  3             53                   72
-.-          determine
             -.. ..-.-----    ..--                                                           1                  1              0                    0
Total                                                                                     221                 100             74                  100

    .___-- of- penaltya
_“._~           .__.__.- ... --..-_-.
   -. .           -..-~~ ~- .~-.-.- _____                                                  19                   9             60                   81
No                                                                                        202                  91             14                   19
Total                                                                                     221                 100             74                  100
                                                  aPayments were refunded when penalties were abated.

                                                  Page 22                                  GAO/GGD90-99     Austin   Service Center F’iling Penaltim
Appendix XI

Major Contributors to This Report

                         Lynda Willis, Assistant Director, Tax Policy and
General Government         Administration Issues
Division, Washington,    Charlie Daniel, Assignment Manager

                         Ron Berteotti, Assistant Regional Manager
Dallas Regional Office   Louis G. Tutt, Deputy Project Manager
                         Gordon A. Socher, Evaluator
                         Sandra Ham, Evaluator
                         Cheryl R. Amos, Evaluator

                         Tom Wolters, Project Manager
Kansas City Regional

(262897)                 Page 23                        GAO/GGD-9@99   Austin Service Center Filing Penalties
_   __   .   .   ..-.   _.“.--   ..~   .._.   ..-...-..-.   .l_.“-l.._   ““““.1‘-_   ”   l.ll.ll.-~“.~,.l,l,.“.l^_l       .I--_   -.-.-   -   .-,-   ---_--~-.~--1--------               --.---   -.----

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