“As penalties are meant to encourage voluntary taxpayer compliance, it is important that IRS procedures for documenting and assessing them be well developed and fully documented,” Russell George, tax administration inspector general, said in a statement. “Any failure to do so raises the risk that taxpayers will not receive consistent and fair treatment under the law, and could further reduce their willingness to comply voluntarily.”
Generally speaking, reportable transactions are exchanges that the government requires be disclosed on a tax return or statement because they could lead to tax evasion.
In its audit, the inspector general, after reviewing 114 assessed penalties, found files that did not contain enough evidence and, at times, insufficient coordination between government offices.
The inspector general also recommended, among other things, that the IRS ensure processes for reportable transaction penalty cases are formalized and that all documentation for those cases are properly maintained.
IRS officials generally agreed with those recommendations.