Pushing for Tax Reform – Civil Tax Penalties

Your Guide to State, Local, Federal, Estate + International Taxation

The American Institute of Certified Public Accountants (AICPA) has recently been participating in U.S. House of Representatives, Committee on Small Business hearings on tax reform with the goal of ensuring that main street isn’t left behind. One area of focus in this regard has to do with rules relative to civil tax penalties.

Over the past several decades, there has been an exponential increase in the complexity of the tax laws and a proliferation of increasingly severe civil tax penalties. For example, take the automatic $10,000 penalty for each late filed Form 5471 (Information Return of U.S. Persons with Respect to Certain Foreign Corporations). Penalty provisions imposed by the IRS do not distinguish between: a) large public multinational companies, b) small companies, and c) companies that may only have insignificant overseas operations, or loss companies. Such a blanket approach to imposition of penalties can place undue hardship on smaller corporations that do not have the same financial resources as larger corporations. While for a larger corporation, $10,000 may not be much more than petty cash to them.

IRS discretion to waive and abate penalties where the taxpayer demonstrates reasonable cause and good faith is needed most when the tax laws are complex and the potential penalty is overly punishing, especially where the taxpayer’s state of mind is central to the conduct subject to penalty. Because it is not feasible to anticipate every possible situation to which a penalty might apply, permitting a reasonable cause defense and avoiding fixed-dollar amount penalties help ensure that a disproportionately large penalty is not applied to an unforeseen and/or unintended set of facts.

By Dale F. Jensen, CPA