Working to Correct Excessive Penalties, IRS Chief Says

The nation’s chief tax collector, questioned about horror stories of excessive fines levied against taxpayers for minor mistakes or abuses, told Congress Monday that the Internal Revenue Service is working to overhaul its complex array of penalties.

IRS Commissioner Lawrence B. Gibbs said widespread “frustration, anxiety and distrust” on the part of the public are undermining confidence in the nation’s voluntary income tax reporting system. The IRS last year penalized 27 million taxpayers $14.2 billion, more than twice the amount assessed the year before.

At present, the tax code includes 154 statutory penalties, many of them overlapping. Gibbs pointed out that, in the last 10 years alone, Congress changed the tax code seven times and enacted “a seemingly endless array of ad hoc penalties.”

“Constant changes in the tax law cause confusion; confusion creates distrust; and, ultimately, distrust leads to disrespect of our tax law,” Gibbs told David Pryor (D-Ark.), chairman of the Senate Finance subcommittee that oversees the IRS.

“If you take the tax acts of 1981, 1982, 1984, 1986 and as recently as last December,” Gibbs said, “you see that Congress has added penalty after penalty after penalty, and, in many cases, has increased them substantially. And IRS agents in the field have administered these in a strong and forceful manner.”

Other witnesses cited horror stories of taxpayer treatment at the hands of the IRS.

Former Rep. W. Henson Moore (R-La.), now representing the U.S. Chamber of Commerce, testified that an unnamed small businessman was assessed $400 for paying the IRS 2 cents less than he owed. That penalty, he said, was almost certainly generated by the IRS computer system, which in 1986 assessed $5.6 billion in penalties--of which $3 billion were in error and had to be abated.

‘Stacked’ Penalties Cited

Pryor, who for the last two years has been pushing legislation that in many cases would shift the burden of proof from citizens to IRS agents, told Gibbs of an unnamed taxpayer whose payment was short by $6.52, “and the IRS attached ‘stacked’ penalties that amounted to more than $400.”

Pryor cited also “the example of Donna Todd, a grandmother from Montana, who sent in a correctly filed return to the IRS and wrote on the form, ‘Signed involuntarily under penalty of involuntary punishment.’ ” Pryor said the IRS imposed a $500 penalty against her for filing a frivolous return.

“When she refused to pay . . . “ Pryor said, “the IRS seized her bank account and placed a lien on her husband’s life insurance policy. A federal court later threw out the fine.”

“We’ve created some kind of monster here,” Pryor told Gibbs. “But, one way or another, we’re going to change that--to restore the confidence and support you speak of.”

Gibbs, who last year testified against Pryor’s “Taxpayer Bill of Rights”--which is due for final Finance Committee action later this month--this time said he not only supported Pryor’s plan to overhaul the penalty system but had already set up an IRS task force to review the issue. He said he expects a final report by late summer.

Revenue Motive Seen

O. Donaldson Chapoton, assistant Treasury secretary for tax policy, agreed that the penalty system had grown in an uncoordinated way and should be reviewed.

But, when Pryor complained that IRS agents seemed to be imposing penalties in order to raise extra revenue for the government rather than to deter taxpayer cheating, Chapoton replied: “We certainly hope there is not any attitude on the part of IRS agents in the field . . . that penalties should be used as a means of raising revenue.”

Other witnesses were not persuaded. Cynthia M. Davis, a member of the University of Akron tax clinic, pointed out that the IRS has frequently assessed serial penalties, with interest owed during the period when the penalty is not paid.