IRS computer error leaves small firms at risk

Computer programming problems at the Internal Revenue Service are short-circuiting protections in the tax law designed to shield small-business taxpayers from runaway interest and penalties on tax debts, according to an announcement from U.S. Sen. Kit Bond. Bond called on the IRS to speed up a plan to correct the problem.

Bond is the ranking member of the Senate Committee on Small Business and Entrepreneurship. He is concerned about the fact that, although the IRS has acknowledged the problem, portions of the plan to fix it will not be brought on line until 2004.

"Congress provided this taxpayer protection to help taxpayers settle their tax debts and move on with their lives starting with their 1998 tax returns. It is difficult to understand why it will take nearly six years for the IRS' computers to apply it correctly," Bond said.

Under tax reforms enacted as part of the "IRS Restructuring and Reform Act of 1998," the IRS is required to notify taxpayers of additional taxes due within 18 months of filing incorrect returns. If the IRS fails to notify the taxpayers in such cases, accumulation of interest and penalties is supposed to stop at the end of the 18-month period.

The problem is highlighted in a new report by the Treasury Inspector General for Tax Administration, which confirmed that certain computer-programming errors and omissions are preventing the provision from being applied in a timely fashion to help taxpayers as Congress envisioned.

TIGTA estimates that out of a sample of 43,220 1998 tax returns with additional taxes due, 24 percent, or 10,506, had incorrect or missing notification dates listed in their accounts. The report also pointed out that without that information, the IRS' computer programming would not be able to recognize that the additional assessment qualified for the suspension of interest and would not suspend interest as required by law.

Perhaps more troubling, though, is TIGTA's projection that out of those 10,506 taxpayers, 8,651 cases, or 82 percent, resulted in an over- or under- assessment of interest. For the 1998 returns that TIGTA sampled alone, the over-assessed interest amounted to $536,280 and the under-assessed interest totaled $120,585.

In light of those assessments, Bond urged the IRS to identify the taxpayers who have been over- or under-assessed interest, and if the statute of limitations permits, provide appropriate refunds or abatements.

In a letter to IRS Commissioner Charles O. Rossotti, Bond wrote, "For many small businesses, such interest and penalties can mean the difference between satisfying their tax liability and the death of the enterprise. Interest and penalties can quickly increase a tax debt to the point that it becomes virtually impossible for the average taxpayer to satisfy the unpaid tax liabilities."