The Senate has unanimously approved a bill that would prevent small businesses from incurring large tax penalties aimed at large corporations and wealthy individuals who invest in tax shelters.

The Small Business Penalty Fairness Act, S. 2917, introduced Dec. 18, 2009, by the leaders of the Senate Finance Committee and three other senators, would require the Internal Revenue Service to assess penalties for failure to disclose such investments in proportion to the benefits received and ensure small businesses don’t suffer excessive fines.

The Finance Committee leaders originally developed legislation in November along with House Ways and Means Committee leaders after discovering some small businesses that unknowingly invested in transactions of listed tax shelters suffered tax penalties as high as $300,000 per year, but received tax benefits of as little as $15,000 (see Congress Introduces Bill to Curb Tax Shelter Penalties on Small Businesses). In December, Senate Finance Committee ranking member had threatened to hold up the confirmation of all nominees to Treasury Department posts unless the Treasury and the IRS did more to ease tax penalties on small business (see Grassley Pressures IRS on Small-Biz Tax Penalties).

Last year, the IRS temporarily suspended its efforts to collect penalties on some listed tax transactions until Sept. 30, and later until the end of the year, after hearing complaints from members of Congress and National Taxpayer Advocate Nina Olson about the disproportionate penalties levied on small business owners who had arranged the transactions with tax experts for purposes such as setting up pension plans for their employees (see IRS Extends Moratorium on Small Business Tax Shelter Penalties).

“These penalties are intended to punish big corporations who attempt to skirt their tax obligations by investing in abusive transactions, not break the backs of small businesses who unknowingly fail to disclose the proper information,” said Senate Finance Committee Chairman Max Baucus, D-Mont., in a statement. “This legislation will protect small businesses from excessive and unfair tax burdens by bringing tax penalties in line with tax benefits.”

The Small Business Penalty Fairness Act revises Section 6707A of the Tax Code to set the penalty for failure to disclose reportable transactions to the IRS at 75 percent of the tax benefit received.

Reportable transactions are defined as investments in transactions that the IRS has identified as listed tax shelters or that have characteristics of tax shelters, including large losses or confidentiality agreements. The minimum penalty under the legislation is $10,000 for corporations and $5,000 for individuals, while the maximum penalty is $200,000 for corporations and $100,000 for individuals.

The bill also requires the IRS to submit an annual report to the Senate Finance Committee and the House Ways and Means Committee regarding tax shelter penalties assessed during the preceding year.

“The intent of the original tax shelter legislation was to get at the big corporations that were working hard to hide their participation in tax shelters,” Grassley said 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 Small Business Penalty Fairness Act is paid for by allowing the IRS to apply penalties for insufficient funds to electronic payments along with bad checks. Additionally, the bill will clarify the Treasury Department’s authority to withhold payments to federal contractors who owe back taxes on amounts paid for property, as well as payments for goods and services. Both of these proposals are included in President Obama’s fiscal year 2011 budget recommendations.

The bill passed Tuesday evening improved upon the “Small Business Penalty Relief Act of 2009,” introduced by Baucus, Grassley, Crapo and House Ways and Means leaders Nov. 16, 2009, by including these provisions to fully offset the cost of the package.


The House has not yet voted on the legislation, but the measure enjoys bipartisan support and is expected to be approved there as well.


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