(MONEY Magazine) – You might think that the worst possible experience for a taxpayer is already behind you -- filing your 1987 return under tax reform's complicated new rules. But you'd be wrong. Far worse will be the plight of the roughly 10% or so of individual taxpayers who will receive notices from the Internal Revenue Service this year saying they owe more taxes -- plus penalties. Their offenses will range from failing to provide a valid Social Security number (penalty: $5) to criminal fraud (penalty: up to five years in prison). The experience can be a Kafkaesque nightmare even for seemingly inconsequential offenses. Consider the plight of Donna Todd, 58, of Billings, Mont. The IRS levied a $500 frivolous-return penalty on her because she wrote on her 1040, ''signed involuntarily under penalty of statutory punishment.'' When Todd refused to pay the fine, the IRS seized her $106 checking account and placed a lien on her husband's life insurance policy and their house. After she complained and sued the IRS, the government canceled the penalty. Such infuriating fights are becoming increasingly common. Reason: the number of penalties has proliferated from 65 in 1975 to 150 today. Most have been added by Congress since 1980, partly because lawmakers have been desperately seeking new revenues lately; the government's take from civil penalties against individuals and corporations has increased by 119% in those years, to $3.5 billion in 1986. Tax experts and a growing number of lawmakers think that many of the penalties are unfair and unnecessarily complex. Says Democratic Senator David Pryor of Arkansas, chairman of a Senate subcommittee investigating the penalty patchwork: ''I think we've created some sort of monster.'' The system's most serious flaws: Erroneous fines. In 1986, the IRS levied 11.6 million in penalties on individual taxpayers totaling nearly $2.5 billion. But the agency later nullified $890 million of that amount, or an alarmingly large 36%. Explains W. Henson Moore, a member of the U.S. Chamber of Commerce's taxation committee and a former Republican representative from Louisiana on the House Ways and Means Committee: ''Those figures indicate that the IRS is either being overzealous or inappropriately assessing penalties, perhaps using them as bargaining tools in an audit.'' Moreover, because computers now assess about 90% of all penalties, a notice / may be mailed before a taxpayer has a chance to explain a valid deficiency or discrepancy. Take the 25% penalty for substantial understatement of a tax liability. It applies if you underreport your tax liability by 10% or $5,000, whichever is greater. When the computer detects the discrepancy, the IRS automatically imposes the penalty. But by law, the fine does not apply if a taxpayer can show that his calculation was based on a reasonable interpretation of the tax code. Citing any legitimate support for your interpretation such as a related tax court ruling may be an adequate defense. Disproportionate fines. The penalty sometimes far exceeds the offense. That's because fines are often computed in quirky ways. Suppose the IRS determines that you owe an additional $2,000 in taxes and that $50 of your underpayment is because of your negligence. In that case, the 5% negligence fine and interest will apply to the entire $2,000, not just the $50. In addition, sometimes penalties overlap, resulting in several fines for the same mistake. Let's say a taxpayer erroneously overestimates the value of business property and takes too large a depreciation deduction. The penalty is a maximum of 30% of the extra taxes owed because of the error. But if the IRS also says he was negligent, the 5% negligence penalty and interest would be assessed on the same amount. So a $5,000 underpayment could carry, in effect, a 35% penalty, which when combined with interest, could total another $4,000. That's a hefty price to pay for one error. Confusing legal guidelines. Some 13 different standards now determine whether a taxpayer is liable for various penalties. In many cases, those guidelines are ambiguous. For example, taxpayers charged with certain negligence penalties must show that they did not ''carelessly, recklessly or intentionally disregard rules and regulations,'' while others fined for overstating the value of business property must show that there was a ''reasonable basis'' for their figures, that they were made in good faith and that there was a ''reasonable attempt to comply'' with the law. Because few taxpayers know which standards apply to them, even the most well- intentioned can end up penalized. The Senate subcommittee is one of at least five panels currently examining tax penalties. But the system is so convoluted that they all will likely be working until next year before recommending reforms to Congress. Meantime, if the IRS should throw a penalty flag your way unfairly, fight!