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Small Business Bill Offers Tax Shelter Penalty Relief

September 15, 2010

One little publicized provision of the Small Business Jobs Act grinding its way through Congress aims to help small business owners who have been hit with huge penalties for investing in benefit plans that the IRS deemed to be tax shelters.

According to a summary of the bill, it aims to promote tax fairness by preventing small businesses from incurring large tax penalties aimed at large corporations and wealthy individuals investing in tax shelters. The bill would revise Section 6707A of the Tax Code to make the penalty for failing to disclose a reportable transaction proportionate to the underlying tax savings.

Congress has held hearings about the issue and has heard from some small business owners who have been faced with hundreds of thousands of dollars in penalties for investing in plans and trusts that their CPAs and in some cases the IRS itself had earlier given a blessing upon. The Senate had even passed such a bill in February to fix the penalties, but it never seems to have gone the whole way in both chambers in such a form that it actually got signed into law. The IRS temporarily suspended its efforts last year to collect the penalties, and then extended and re-extended a moratorium on the tax shelter penalties until June 1 of this year while awaiting final congressional action (see IRS Extends Moratorium on Tax Shelter Penalties).

The Tax Court has been hearing a series of cases about a multi-employer welfare benefit trust, known as the Benistar 419 Plan & Trust, which was supposed to provide pre-retirement life insurance to employees, but ran afoul of the IRS rules and penalties on “listed transactions.” In one such case, the IRS assessed deficiencies in federal taxes and penalties against a family clinic and two of its shareholders totaling roughly $40,000. The Tax Court ruled in favor of the IRS on Wednesday.

It’s unclear if the small business bill now making its way through the Senate would be able to provide relief to the taxpayers and business owners in such a situation, but let’s hope it does.

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