The National Taxpayer Advocate has verified something I’ve suspected:

The IRS Miscalculates Interest and Penalties But Fails to Correct These Errors Due to Restrictive Abatement Policies.

A TAS study has found that the IRS is miscalculating the failure to pay penalty and could be negatively impacting about two million taxpayer accounts annually. Moreover, the IRS’s manual calculations of interest yields an accuracy rate of only 67.7 percent, which means nearly one out of three restricted interest accounts are incorrectly computed. The IRS is aware of, but has failed to correct, certain systemic problems that cause penalty and interest miscalculations. These incorrect calculations lead numerous taxpayers to believe they have fully paid what the IRS says they owe, only to receive subsequent bills for accruals of interest, penalties, or both. The IRS bears the cost of these inaccurate calculations, not only through rework by employees but also by taxpayers’ reduced confidence in the IRS. The National Taxpayer Advocate recommends that the IRS consider allocating adequate resources toward planning and programming to resolve common penalty and interest computation issues, revising pertinent Internal Revenue Manual sections so all taxpayers are entitled to accuracy reviews of interest and penalty calculations, and re-evaluating the overly complex restricted interest procedures to make certain that all taxpayers receive accurate interest charges.

I know in my case I’ve suspected that the IRS has been figuring the penalties & interest incorrectly — in part because they have incorrectly wrapped the first dose of penalties & interest into the initial assessment. However, the process isn’t transparent enough for me to verify my suspicions.

Among the other things in the TAS report were a call to eliminate the outsourcing of delinquent tax collection and a recommendation that the IRS develop some way to tax transactions taking place in virtual worlds such as multi-player on-line video games.

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