The Internal Revenue Service has agreed to extend until the end of the year a grace period for collecting penalties from small businesses accused of engaging in certain types of tax shelters.

Douglas Shulman

The IRS said in July that it would temporarily suspend until Sept. 30 its efforts to collect penalties from some listed tax transactions (see IRS Suspends Some Small Bix Tax Shelter Penalties). The suspension applied to cases in which the IRS would try to collect Section 6707A liabilities where the annual tax benefits resulting from the listed transactions are less than $100,000 for individuals and $200,000 for businesses. The penalties for such transactions can be as high as $300,000 per year.

The suspension came in response to complaints from members of Congress and National Taxpayer Advocate Nina Olson about the disproportionate penalties on some small business owners who had never intended to set up tax shelters, but instead thought they were engaging in legal activities such as setting up pension plans for their employees. In some cases, the business owners who had been hit with the heavy penalties had received preliminary approval from the IRS on their plans after receiving advice from qualified accountants. They faced the prospect of going out of business or laying off the employees if they had to pay the penalties.

In July, Sen. Charles Grassley, R-Iowa, ranking member of the Senate Finance Committee, said that Congress would need to act to remedy the situation with a more permanent fix, but Congress has not yet passed the legislation. With the deadline now approaching in a few days’ time, IRS Commissioner Douglas Shulman wrote a letter Thursday to the chairmen and ranking members of the tax-writing committees to inform them that the IRS would suspend collection of the penalties until Dec. 31.

“Clearly a number of taxpayers have been caught in a penalty regime that the legislation did not intend,” he wrote, according to Dow Jones Newswires. “I understand that Congress is still considering this issue, and that a bipartisan, bicameral bill may be in the works.”