Add Wrong? You're Screwed.
James M. Peaslee writes in the WSJ about a revenue provision in the health-care bill, voted on by the House Ways and Means Committee earlier in the summer, mandating that the IRS slap penalties on honest taxpayers who make mistakes in their taxes -- penalties the IRS has had the power to waive:
Predictably, the result was some taxpayers getting hit with penalties they didn't deserve.
Last June, the Small Business Council of America sent some compelling tales of woe to Congress, including one in which a 72-year-old owner of a coin operated car wash set up retirement plans for his seven employees and got socked for his good deed with a $900,000 penalty for not reporting the plans properly. The company and its owner are now headed for bankruptcy. In another case, a penalty of $100,000 each was imposed on the six minor children of an owner of a small business in Utah for not filing the right tax forms.
In response, some members of Congress sent a letter to the IRS asking it to suspend collecting the penalties in similar cases while Congress debated what to do.
However, Congress should not be surprised by these stories. The IRS was only enforcing the law exactly as Congress wrote it.
In another example of bad lawmaking, in 2007, Congress stuck into a supplemental appropriations bill a major change in the way penalties are computed for people in the business of preparing tax returns. Congress acted without consulting with the IRS. The IRS chief counsel at the time, Donald Korb, said publicly that the service had been "blindsided" by the change.
The change created a conflict of interest for tax professionals. It subjected them to a higher penalty standard than their clients, which encouraged them to give tax advice that protected the tax preparer more than the taxpayer. The IRS and tax professionals tore their hair out trying to sort through the mess until 2008, when Congress changed the law again.
There are lessons here for Congress. Don't take away the ability of the IRS to waive penalties. Also, don't tinker with penalties without thinking through the effect on the overall penalty regime.