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The federal
government loses hundreds of millions of dollars every year because
Internal Revenue Service computers don't record the interest due on
penalties for unpaid taxes, a Treasury Department auditor said
Tuesday.
But
thousands of taxpayers whose accounts are managed by hand, not by
computer, do pay the interest. The discrepancy raises questions about
how the tax agency meets its mission to apply the tax law "with
integrity and fairness to all," said a report by the Treasury
Department's inspector general for tax administration, J. Russell
George.
"This
practice results in inconsistent treatment of some taxpayers who have
to pay interest on the penalties," the report concluded.
The
inspector general's office, which provides independent oversight of
the IRS, studied taxpayer accounts that showed penalties for unpaid
taxes in 2002.
Taxpayers
must pay the fine, known as a failure-to-pay penalty, when they don't
meet the deadline for paying taxes. The charge accrues monthly until
the taxes are paid or the penalty equals 25 percent of the unpaid tax.
The taxpayer also owes interest on the mounting penalties.
IRS
computers keep track of the building failure-to-pay penalty, but the
charges aren't applied to the taxpayer's account. That means IRS
computer systems do not calculate and charge interest owed on the
unpaid penalties.
The
investigators estimated that the IRS could have charged more than $817
million in interest in 2002 if its computers applied the penalties to
taxpayer accounts quarterly.
But some
taxpayers do pay interest. The auditors estimated that more than
125,000 taxpayers in special circumstances, whose accounts are
tracked by hand, were charged more than $8.7 million in interest
through 2003 on penalties applied in 2001 and 2002.
They
included taxpayers who got special extensions on tax filing and
payment deadlines, such as people affected by natural disasters and
military personnel serving in combat zones.
In its response
to the Treasury auditors, the IRS said it must follow a law that
requires the tax agency to mail a notice each time the failure-to-pay
penalty increases in order for the interest to be legally due.
The IRS said
it doesn't have the capacity to send monthly notices to taxpayers as
those penalties and interest charges accrue. It would also mean a huge
volume of telephone calls that would swamp customer service employees.
The IRS
agreed to start applying the penalties annually beginning in 2006,
which would allow the agency to start recording interest charges on
those unpaid penalties. The agency already sends annual notices
reminding taxpayers of taxes due.
The Treasury
auditors strongly suggested that Congress rewrite the law to allow the
IRS to charge interest once a taxpayer has been notified that he owes
the penalties for failing to pay without sending additional notices.
Sen. Max
Baucus of Montana, the top Democrat on the Senate Finance Committee,
said lawmakers should take a look.
"Congress
shares in the responsibility to ensure that similarly situated
taxpayers are treated similarly," he said. "If we have to clarify the
law, then let's do so to maintain the fairness and integrity of our
tax system."
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