IRS Suspends Some Tax Shelter Penalties

by Mike Godfrey, Tax-News.com, Washington

13 July 2009

The US Internal Revenue Service (IRS) is suspending collection of certain penalties to allow Congress time to work on legislation to help small businesses that invested in listed tax shelter transactions that generated modest tax benefits, but resulted in tax penalties significantly larger than the tax benefits received.

The agency’s unusual offer of clemency to certain businesses who find themselves facing penalties way out of proportion to any tax benefits they may have received from tax shelters comes after a bipartisan group of lawmakers wrote to IRS Commissioner Doug Shulman last month requesting the agency’s assistance while Congress legislates to solve the matter.

“I’m pleased the IRS complied with our request so that Congress can do its part to ensure the tax code treats small businesses fairly,” said Senate Finance Committee Chairman Max Baucus, who signed the letter along with committee ranking member Chuck Grassley, House Ways and Means Oversight Subcommittee Chairman John Lewis and subcommittee ranking member Charles Boustany.

"We are working – both sides of the aisle and the capitol – to ensure assessed tax penalties fall in line with received tax benefits. Until we reach that goal, we require cooperation from the IRS so that millions of American small businesses don’t get another chip stacked against them in the lagging economy,” Baucus added.

The penalties in question are assessed under section 6707A of the tax code and were enacted by Congress in 2004 as part of the then administration’s drive to neutralize abusive tax shelters. The penalties amount to USD100,000 for individuals and USD200,000 for other classes of taxpayer, per year. But even Commissioner Shulman concedes that in some cases the penalties are “way out of line” with those dished out for similar transgressions.

“I am concerned that because the current statute applies uniformly without exceptions and without regard to the amount of tax in question, some taxpayers are caught in a penalty regime that the legislation did not intend,” Shulman wrote in his response to the Congressmens’ letter.

“I am dismayed by the feedback that I have received from some of the most seasoned IRS examination professionals that this statutory provision, in certain cases, requires them to assess penalties that are way out of line with penalties for other similar cases of noncompliance,” Shulman reported.

To allow Congress time to fix this problem, the IRS has taken the step of suspending collection enforcement action on cases where the annual tax benefit from the transaction is less than USD100,000 for individuals or USD200,000 for other taxpayers per year, until September 30, 2009.

Grassley, while welcoming Shulman’s response, is of the view that Congress will probably need longer to fix the problem.

“It’s good to have the reprieve from the IRS, though the suspension will probably need to be longer in order to get necessary changes through Congress,” he said.

“The IRS should also do the right thing by studying why only small businesses have been hit with the penalties since they’re less likely to have the expensive lawyers that big corporations do. It’s a matter of tax fairness for both the IRS and Congress,” Grassley added.

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