Statement on the Improved Penalty Administration and Compliance Tax Act (H.R. 2528), June 6, 1989.

• Position: Written statement of testimony presented by Charles W. Rau for Tax Executives Institute before the House Committee on Ways and Means

Statement on The Improved Penalty Administration and Compliance Tax Act (H.R. 2528)

June 6, 1989

Mr. Chairman and Members of the Subcommittee: I am Charles W. Rau, Vice President - Taxes for MCI Communications Corporation. I am here today, in my capacity as the Chair of Tax Executives Institute's (TEI's) Task Force on Penalties, to present the Institute's views on H.R. 2528, the Improved Penalty Administration and Compliance Tax Act. I am accompanied by the Institute's Tax Counsel, Timothy McCormally, and together we will endeavor to answer any questions you might have about TEI's position on this very important subject.

1. Introductory Comments

   Mr. Chairman, TEI is the principal association of corporate tax executives in North America. Our members have a little different perspective from some of the other organizations here today. The difference is this: TEI members are not tax advisers or return prepares; they are employed directly by corporations to manage their tax affairs. Thus, although we share the same goals and the same commitment to professionalism as the ABA,AICPA, and other associations of professional tax practitioners, the penalty issue hits a little closer to home. Our members are the ones that must struggle, on a day-to-day basis, to contend with an extremely complicated tax system - those who must discern what the tax law is and to institute practices and procedures to ensure compliance with it. It is our members who, in those cases where penalties are asserted, must face our senior management and explain why at times - despite our best professional efforts - a penalty is being asserted.

   As an organization that has been involved in this issue from the outset - which testified before the Subcommittee on penalty reform more than a year ago and which you permitted to actively participate in the Subcommittee's very worthwhile roundtable discussions - TEI is extremely pleased with the introduction of H.R. 2528. We agree with the Chairman that the bill sets forth a credible framework for obtaining true reform of the tax law's penalty provisions. We further agree that a consensus on the major issues posed by penalty reform is clearly within reach. We commend the Chairman, the other members of the Subcommittee, and the staff for their efforts to date: the bill represents a definite improvement over current law and, although we urge the Subcommittee to consider some modifications and clarifications, we firmly believe H.R. 2528 represents a long and much needed step forward.

   Mr. Chairman, before turning to our specific comments on H.R. 2528, I wish to note for the record that TEI filed detailed comments on penalty reform with the Subcommittee on May 24. (Those comments were reprinted in the May-June issue of TEI News.) Those comments set forth our specific recommendations for penalty reform. We are extremely pleased that certain of our recommendations have been incorporated into H.R. 2528. I ask that those comments be associated with the record for this hearing, and affirm our continued willingness to respond to any questions - from members of the Subcommittee or the staff - about our specific recommendations. Finally, I ask that, given the short time period between the introduction of H.R. 2528 and this hearing, the Institute be allowed, if necessary, to supplement our statement today with further written comments.

2. Information-Reporting

   Penalties

   1. General Comments. Mr. Chairman, section 102 of the bill contains proposed amendments to the penalty provisions relating to the document and information reporting requirements of the Internal Revenue Code. Because of the retention of a reasonable cause exception in respect of penalty assertions, the introduction of a de minimis exception, and the addition of a time-sensitivity concept, TEI believes the proposed changes are generally excellent.

      We say this, moreover, even though the bill would increase some of the maximum penalties that can be asserted against taxpayers. We feel compelled to comment, however, on the dramatic increase proposed in respect of the penalty to provide correct payee statements. Under the bill (proposed new section 6722(a)), a standardized penalty of $50 will be imposed in respect of a failure to provide a correct payee statement to a taxpayer; with respect to certain failures, such a penalty will represent a 1,000 percent increase from the penalty under current law. Although the establishment of a uniform penalty in respect of all such failures is desirable, we must question whether such an exponential increase is necessary.

   2. Time Sensitivity and De Minimis Exception. Any concerns TEI has about the level of the proposed information reporting penalties (and the new, higher maximums) are greatly assuaged by the introduction of time sensitivity into the calculation of the penalty and the inclusion of a de minimis exception. By structuring the penalty under proposed new section 6721, the bill properly places the emphasis not on penalizing inadvertent or short-term failures to provide information returns but rather on obtaining the information necessary to ensure the payee's compliance with the income tax laws.

      We note, however, that the penalty in respect of incorrect payee statements does not in its current form feature a time-sensitivity provision. Although recognizing that the August 1 date contained in proposed new section 6721(b)(2) would need to be adjusted to reflect the fact that payees must generally file their income tax returns by April 15, we recommend that the penalty for failing to provide correct payee statements be coordinated with the time-sensitivity provision of the penalty for failing to provide correct information returns. We also recommend that a de minimis exception, such as that set forth in proposed new section 6721(c), be made applicable in respect of failures to furnish correct payee statements.(1)

      Similarly, we believe that closer coordination between the proposed failure-to-file-correct-information-returns penalty and proposed new section 6723 (relating to the failure to comply with other information reporting requirements) would be beneficial. Specifically, we believe that the inclusion of a time-sensitivity provision would encourage taxpayers to correct errors or otherwise satisfy the statutory requirements even after the due date (perhaps when inadvertent errors or failures are discovered); thus, the information necessary to ensure compliance would "enter the system." A de minimis exception also seems appropriate in respect of proposed new section 6723, and we recommend that such an exception be added to the bill.

      Finally, we note that certain failures (e.g., the failure to include a correct taxpayer identification number) might give rise to the assertion of a penalty under both proposed new section 6721 and proposed new section 6723. We recommend that the committee report on the bill make it clear whether this is the case; if it is not, the bill could simply provide that, where a failure might give rise to a penalty under both provisions, only the proposed new section 6721 penalty would be asserted. Such a provision would not only eliminate the possibility...