US Lawmakers Seek To Fix Unfair Tax Penalties

by Mike Godfrey, Tax-News.com, Washington

19 November 2009

Legislation has been introduced in the United States Congress to help ensure penalties assessed by the Internal Revenue Service (IRS) on tax shelter investments are in proportion to the tax benefits received.

The bipartisan, bicameral group of lawmakers proposed the measure after discovering some small businesses that unknowingly invested in listed tax shelter transactions suffered tax penalties as high as USD300,000 per year in some cases, but received a tax benefit for as little as USD15,000 from the transaction.

The Small Business Penalty Relief Act of 2009 proposes to revise Internal Revenue Code section 6707A so that the penalty for failure to disclose a reportable transaction to the IRS is commensurate with the tax benefit received from the transaction.

Reportable transactions are transactions that the IRS has identified as listed tax shelters or that have characteristics of tax shelters, including large losses or confidentiality agreements. Under the new proposal, the penalty would be 75% of the tax benefit received, with a minimum penalty of USD10,000 for corporations and USD5,000 for individuals, and a maximum penalty of USD200,000 for corporations and USD100,000 for individuals.

The proposal also requires the IRS to submit a report annually to the Senate Finance Committee and the Committee on Ways and Means in the House of Representatives – the Congressional committees with jurisdiction over tax matters – on various tax shelter penalties assessed by the IRS during the preceding year.

"Our proposal would ensure that tax penalties are in line with the received tax benefits in an effort to avoid any extra burden on businesses already strapped in the down economy,” stated Senate Finance Committee Chairman Max Baucus (D-Mont). “This is an issue of tax fairness and we need to move forward on this bill as quickly as possible.”

Ways and Means Oversight Subcommittee Chairman John Lewis (D-Ga.) said that although these tax penalties are aimed at large businesses, over 94% of the taxpayers that were assessed penalties are actually small businesses. "This is not fair," he stated. "Small businesses should not be run out of business by tax shelter penalties aimed at big corporations."

The lawmakers sent a letter to IRS Commissioner Doug Shulman in June requesting he use the agency’s tax administration authority to suspend efforts to collect these penalties imposed on small businesses under Internal Revenue Code section 6707A while Congress moved forward on the new legislation.

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