The Internal Revenue Service has extended its moratorium on collecting penalties on listed tax shelter transactions from small businesses after an influential senator threatened to block the nominations of key Treasury Department nominees.

Charles Grassley

The move came after Senate Finance Committee ranking member Charles Grassley, R-Iowa, sent a sharply worded letter to Treasury Secretary Timothy Geithner and IRS Commissioner Douglas Shulman pledging to hold up the confirmation process if they don’t extend a moratorium on collecting the penalties from small businesses (see Grassley Pressures IRS on Small-Biz Tax Penalties).

The Treasury Department has been awaiting confirmation of four key appointees: Michael Mundaca as assistant undersecretary for tax policy, Lael Brainard as undersecretary for international affairs, Mary Miller as assistant undersecretary for financial markets and Charles Collyns as deputy undersecretary for international finance. After the IRS moved to extend the moratorium Wednesday to March 1, the Senate Finance Committee approved the four nominations, along with those of other administration officials.

In July, Shulman extended the moratorium on the tax shelter penalties until Sept. 30 after hearing complaints from Grassley and others that the penalties, which Congress had originally aimed at wealthy taxpayers and large companies, were often levied against small businesses (see IRS Suspends Some Small Biz Tax Shelter Penalties).

In some cases, Grassley pointed out, small businesses were assessed fines of $300,000 a year on transactions that had yielded tax benefits of as little as $15,000. Some of the tax transactions were pitched to small businesses as legal ways to provide employees with benefits such as pension plans, but were later classified by the IRS as “listed transactions.”

The IRS has since extended the moratorium until the end of December and stopped filing tax liens earlier this month. The agency traditionally avoids filing tax liens during the holiday season. On Wednesday night, in response to Grassley’s letter, the IRS has now extended the moratorium to March 1. Grassley said he is working on legislation with Senate Finance Committee Chairman Max Baucus, D-Mont., and colleagues in the House that would provide a more permanent solution to the problem.

“These actions are highly unusual for the IRS, and we have exercised significant administrative discretion in providing temporary relief,” said the IRS in a statement quoted by the Washington Post. “Our actions have been undertaken in the spirit of helping to mitigate the impact on small businesses and individuals affected.”