Under pressure from Congress, the Internal Revenue Service has agreed to temporarily suspend until Sept. 30 its efforts to collect penalties for some listed tax shelter transactions.

The suspension applies 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 other cases. Sen. Charles Grassley, R-Iowa, ranking member of the Senate Finance Committee, said that Congress would act to remedy the situation with a more permanent fix.

He had sought the suspension from the IRS, writing a letter last month to IRS Commissioner Doug Shulman co-signed by Senate Finance Committee Chairman Max Baucus, D-Mont., House Ways and Means Oversight Subcommittee Chairman John Lewis, D-Ga., and House Ways and Means Oversight Subcommittee ranking member Charles Boustany, R-La. (see Lawmakers Ask IRS to Ease Tax Shelter Penalties on Small Business).

The legislators said at the time that they planned to introduce a bill in Congress to end what they considered to be “disproportionate” penalties imposed on small businesses after the IRS began outlawing some types of tax shelters. The penalties were imposed in 2004 as part of the American Jobs Creation Act.

Shulman wrote a letter back to Lewis on Monday agreeing to the suspension. "I am concerned that because the current statute applies uniformly without exceptions and without regard to the amount of tax in question, some taxpayers are caught in a penalty regime that the legislation did not intend," he said.

Grassley praised the IRS’s suspension, but added that it would probably need to be extended. “It’s good to have the reprieve from the IRS, though the suspension will probably need to be longer in order to get necessary changes through Congress,” said Grassley in a statement. “The IRS should also do the right thing by studying why only small businesses have been hit with the penalties since they’re less likely to have the expensive lawyers that big corporations do. It’s a matter of tax fairness for both the IRS and Congress.”

Baucus also praised the IRS’s move. “I’m pleased the IRS complied with our request so that Congress can do its part to ensure the Tax Code treats small businesses fairly,” he said. “We are working — both sides of the aisle and the Capitol — to ensure assessed tax penalties fall in line with received tax benefits. Until we reach that goal, we require cooperation from the IRS so that millions of American small businesses don’t get another chip stacked against them in the lagging economy.”

However, Baucus cautioned that the penalty suspension would not leave the way clear for businesses to cheat on their taxes. “Make no mistake, I will continue to go after tax cheats and tax shelter investments, but these are disproportionate and undue penalties on honest, hardworking American business owners and their employees,” he said. “I appreciate the IRS’s help on this, and I will move this forward until the issue is resolved.”

On Monday, the Government Accountability Office released a report recommending that the IRS develop a plan to better focus its penalty efforts (see GAO Says IRS Should Re-evaluate Taxpayer Penalties). In response to the report, Grassley said the IRS should look into evaluating the penalties.

“The IRS has a lot of discretion over assessing and rescinding tax penalties,” he said. “This report shows the IRS rescinded about one-third of the penalties assessed in 2007. It assessed $29.5 billion in penalties and later rescinded $11.1 billion of that. It’s impossible to know whether that amount was fair and justified because the IRS doesn’t comprehensively evaluate tax penalty administration or the impact of penalties on voluntary tax compliance. The IRS promises to do a better job of evaluating tax penalties, and it needs to. Fair administration from one taxpayer to the next is critical to the integrity of the tax system.”

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