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AICPA Submits US Civil Tax Penalty Reform Proposals

Tuesday, April 16, 2013

The American Institute of Certified Public Accountants (AICPA) has sent its legislative proposals to the United States Congress for reforming the civil tax penalty provisions of the Internal Revenue Code at the same as comprehensive tax reform proposals are developed in the coming months.

In a letter sent on April 11 to the bipartisan Chairmen and Ranking Members of the House of Representatives Ways and Means Committee and the Senate Finance Committee, the AICPA looked for tax penalties that are clearer and fairer and, consequently, do a better job of encouraging voluntary compliance with the nation's tax laws.

Jeffrey Porter, Chair of the AICPA Tax Executive Committee, said: "There are many aspects of the civil tax penalty regime that concern our members. Our highest priorities are to ensure that the penalties are sufficiently calibrated to the level of noncompliance, address the inconsistent application of reasonable cause in civil penalty administration, and minimize the presence of strict liability penalties in the Code."

"As comprehensive tax reform proposals are developed in the coming months," he added, "we encourage Congress to consider and include in such legislation the points covered in our attached Report and Proposals to revise elements of statutory penalty provisions relating to reportable avoidance transactions, reasonable cause exception, foreign information reporting for certain foreign trusts, and tax shelters."

Porter pointed out that the AICPA letter, report and legislative proposals were submitted "with an eye toward improving overall tax policy and administration. To that end, we strongly encourage an inclusive and transparent framework for approaching this difficult task, similar to the collaborative efforts that culminated in the 1989 penalty reform legislation."

The specific issues addressed by the AICPA include the trend away from voluntary compliance as the primary purpose of civil tax penalties; the lack of clear standards in some penalties; the fact that some penalties are disproportionate both in amount and severity; the fact that some penalties are overbroad, deter remedial and other good conduct, and punish innocent conduct; and the trend toward strict liability.

In addition, it believes that there are inconsistencies between penalty standards and the role of tax professionals; an increase in automated assessment of penalties that can lead to unwarranted assessments; a needed to improve Internal Revenue Service (IRS) guidance and training; and the need for the IRS to increase its efforts to educate taxpayers and tax professionals.

In particular, as part of AICPA's Proposals there is a legislative proposal on tax shelters that includes an addendum with an in-depth analysis on the definition of the term "tax shelter" for purposes of the taxpayer accuracy-related penalty in the Code. It has found that the broad and uncertain definition of tax shelter in the Code and the Treasury Regulations is an impediment to the goal of voluntary compliance that the civil tax penalties are designed to achieve.