A bipartisan bill introduced in the Senate and House would reduce the penalties assessed by the IRS on tax shelter investments by small businesses to put them in proportion with the tax benefits received.

The measure was proposed after Congress found that some small businesses that unknowingly invested in listed tax shelter transactions were assessed tax penalties as high as $300,000 per year, even if they received a tax benefit of as little as $15,000 from the transaction.

“Congress needs to do its part to make sure the Tax Code treats the affected businesses fairly,” said Senate Finance Committee Chairman Max Baucus, D-Mont. “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. This is an issue of tax fairness and we need to move forward on this bill as quickly as possible.”

Baucus introduced the bill, known as the Small Business Penalty Relief Act of 2009, along with Senate Finance Committee ranking member Charles Grassley, R-Iowa; Sen. Mike Crapo, R-Idaho; House Ways and Means Oversight Subcommittee Chairman John Lewis, D-Ga.; and ranking member Charles Boustany, R-La.

“The intent of the original legislation was to get at the big corporations that were working hard to hide their participation in tax shelters,” said Grassley in a statement. “Small businesses that have no ill intent shouldn’t get caught in the same net. The penalty should be in proportion to the transgression. This legislation makes that fix, and it’s a matter of fairness to get it done.”

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 Section 6707A of the Tax Code while Congress moved forward on this legislative solution. Shulman agreed to do so.

The proposed bill revises 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.

The penalty would be 75 percent of the tax benefit received, with a minimum penalty of $10,000 for corporations and $5,000 for individuals, and a maximum penalty of $200,000 for corporations and $100,000 for individuals. The proposal also requires the IRS to submit a report annually to the Senate Finance Committee and House Ways and Means Committee on various tax shelter penalties assessed by the IRS during the preceding year.

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