06-19-2009 - Lawmakers Ask IRS to Temporarily Halt Small Business Penalties

Lawmakers from the Senate Finance Committee and House Committee on Ways and Means have asked IRS Commissioner Douglas H. Shulman to suspend certain penalties assessed on small businesses while Congress works on legislation to address what they term an inequitable and unintended consequence in the tax code. The lawmakers argue that small businesses with investments in listed tax shelter transactions that are generating modest tax benefits have received tax penalties significantly larger than the tax benefits received.

In a letter dated June 12, the lawmakers requested that Shulman "use the discretion provided to the IRS with its effective tax administration authority to suspend efforts to collect IRC [Internal Revenue Code] section 6707A liabilities ... while Congress acts to remedy this situation." Code Sec. 6707A was enacted in the American Jobs Creation Act of 2004 (P.L. 108-357) as part of a package of provisions intended to help the IRS detect, deter and shut down tax shelters.

"When I advanced the legislation to shut down tax shelters, I did not intend to bankrupt small businesses that had no ill intent. I was focused on the big corporations that were actively seeking to hide their participation in tax shelters," said Senate Finance Committee ranking member Charles E. Grassley, R-Iowa.

Treasury regulations require taxpayers to tell the IRS if they invest in "listed" tax shelter transactions, and Code Sec. 6707A imposes large, strict liability penalties on taxpayers who fail to disclose this information to the IRS. For listed transactions, the penalties are $100,000 for natural persons and $200,000 for others, including Subchapter C and Subchapter S corporations. The impacted companies have reported that they were never informed that their transactions were considered abusive tax shelters by the IRS

Grassley, along with Senate Finance Committee Chairman Max Baucus, D-Mont., Ways and Means Oversight Subcommittee Chairman John Lewis, D-Ga., and ranking member Charles Boustany, R-La., pointed out that the inequitable consequences were unexpected at the time the penalty was enacted, and they plan to introduce legislation that would result in penalty amounts in more reasonable proportion to the tax benefits. They further claimed that while the penalty has helped the IRS end many abusive deals, many of the shelters being examined by the Service involve significantly smaller dollar amounts, and current penalty levels may be excessive in some circumstances.

"I don't condone investments in tax shelters, but I also want to make sure our small businesses survive and thrive," said Baucus. "It's important we get this done as soon as possible and I urge and expect the IRS to comply with our request." Grassley was even more succinct. "The penalty should be commensurate with the transgression," he said. None of the lawmakers offered a timetable as to when they might advance legislation to change tax code.