An Internal Revenue Service task force recommended a substantial reduction in the number and size of some IRS penalties to make the federal tax code more fair, understandable and effective.
Although the hearing Tuesday involved a proposed simplification of tax penalties, the chairman of a House committee that monitors the IRS called attention to a proposed "user fee" hidden deep in an IRS budget document.Rep. J.J. Pickle, D-Texas, strongly criticized the IRS for advocating a study of charging a 25-cent "user fee" every time a taxpayer calls the toll-free taxpayer information line. The idea is contained in the recesses of the 1990 proposed IRS budget.
"We can't ask people to call in and then sock them with a charge at the same time," Pickle said. "That exploration has already been declared a dry hole."
A similar proposal by the Treasury Department for a 25-cent fee per $1,000 deposit on savings and loan accounts - to pay for the huge savings and loan crisis - was swiftly abandoned last month in the face of an angry public and congressional reaction.
On the issue of tax penalties, IRS Commissioner Lawrence Gibbs, in his last congressional appearance before returning to the private sector, said the agency was concerned that the "rapid expansion of civil sanctions in the Internal Revenue code was occurring on an ad hoc basis."
"During the last two decades, we have seen a decline in compliance, the rise of abusive tax shelters and tax protesters, and increasing participation in the audit lottery," Gibbs said.
The response by the IRS and Congress often has been to impose new penalties as each abuse sprang up, Gibbs said.
"While the merit of each individual penalty can be defended, when taken together they sometimes produce unintended results and have a combined impact that can be too severe," Gibbs said.
Gibbs said the number of penalties would be "substantially reduced" if the task force recommendations are eventually approved by the IRS, the Treasury Department and Congress.
A year-long study by the IRS group recommended a three-tier system of tax penalties. The least serious would involve the lack of reasonable care in filing tax documents, followed by gross negligence and then outright fraud. Penalties would range from 20 percent to 100 percent of the unpaid tax.
Under this system, lack of reasonable care would involve simple mistakes such as deducting all the interest paid on bank credit cards, when the tax form clearly states that only 40 percent is actually deductable.
An example of gross negligence would be deducting one's dog as a dependent, Pickle said. An example of fraud would be failure to report illegal drug trafficking income, he said.