If you return a book to the library past its due date, you'll likely have to pay a late fee. But if you're connected to a foreign company and lag behind on filing paperwork, the Internal Revenue Service might just give you a free pass.
Investigators think the nation's tax collection agency could be missing out on an annual $31 million payday because it's incorrectly revoking late fees it assesses to corporate individuals.
Taxpayers are supposed to fill out special paperwork — Form 5471 — to provide information on their connections to foreign businesses. But that comes with a $10,000 fine if they don't submit the paperwork on time. Investigators found that the IRS was largely applying the late fee correctly, but then sometimes revoking it when taxpayers complained.
"One of the major management challenges facing the IRS is accelerating globalization," said J. Russell George, the head of the IRS internal watchdog, the treasury inspector general for tax administration. "The increased use of late-filed penalties could be an effective tool to help improve compliance with international information return filing requirements."
For missing out on a payday that could help ease the burden on taxpayers, the IRS wins the Golden Hammer this week, a distinction given by The Washington Times to mark examples of fiscal waste and abuse.
IRS officials said they were pleased the inspector general thought the penalties were being awarded properly, and they would work on changing the process for canceling the fees — known as abatement.
"We agree that improving controls over the abatement process could potentially protect revenue," a statement from the IRS said. "We will enhance controls on abatement of systemic penalties on late filed Forms 5471 to ensure they are processed correctly and timely. We will also improve the abatement request process, including documentation of abatement-request decisions, and we will deliver refresher training to employees."
The late-fee penalty was started in 2009 to ensure that taxpayers are accurately reporting their involvement with foreign companies such as business deals or stock ownership. The inspector general said it has been an effective incentive. After being hit with the penalty, most people turn in all their information on time the following year.
The IRS process for assessing the penalties have been so successful, the inspector general suggested the agency expand it to other types of tax forms. What has been less successful are the IRS attempts to collect on those fees.
Investigators found the agency removed about 20 percent of its late fees simply because taxpayers asked. Taxpayers can fill out a form petitioning to have the fee revoked if they have a good reason for being late, but investigators said the IRS removed the penalties without any proof.
Another 10 percent of the penalties were removed because taxpayers said they did not understand the law or forgot to request a filing extension, reasons the inspector general said are unacceptable for revoking the fee. About 10 percent more were related to various mistakes in administrative law committed by the IRS.
About 60 percent of the fees were removed appropriately and for good reasons, investigators found.
But officials haven't been documenting their decisions, the inspector general said, and 86 percent of the rulings on whether to revoke a fee had no reasoning or explanation on how IRS employees reached their conclusion.
The IRS also occasionally managed to create a burden on taxpayers and more work for itself. Several people were penalized with late fees despite having filed extension requests, the inspector general said.
This "ultimately resulted in these taxpayers being unnecessarily assessed $6.4 million in late-filed Form 5471 penalties that were ultimately abated," inspectors said.
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