Lawmakers Want IRS to Suspend Excessive Tax Shelter Penalty Imposed on Small Businesses

Some lawmakers have asked the IRS to stop imposing what they say are excessive penalties on small businesses that use questionable tax shelters.

These businesses are being hit with big fines – an unintended consequence of a law aimed at corporations that use the shelters to avoid taxes. The IRS penalties, which can reach $300,000 a year, are automatic under the law.

The 2004 law setting up the automatic penalties was designed to stop large corporations from exploiting tax shelters known to be illegal. But the lawmakers said some small businesses have been penalized for using the tax shelters to reap tax savings that are smaller than the penalties.

The lawmakers, led by Sen. Max Baucus, chairman of the Senate Finance Committee, said they are crafting legislation to reduce the penalties. The lawmakers said some small businesses have been penalized for using the tax shelters to reap tax savings that are smaller than the penalties.

According to a recent article in the Associated Press:

  • Internal Revenue Service spokeswoman Michelle Eldridge said the agency was reviewing the lawmakers’ request.
  • The existing law imposes reporting requirements on businesses and individuals who use tax shelters that the IRS has identified as abusive. The goal is to red flag these ”listed transactions” so IRS agents could more closely examine them.
  • The penalties for failing to disclose the transactions on tax forms are $100,000 a year for individuals and $200,000 a year for businesses. Taxpayers who use the tax shelters for both individual and business purposes face penalties of $300,000 a year.
  • The penalties cannot be appealed, National Taxpayer Advocate Nina Olsen said in her 2008 annual report. Olsen, an independent watchdog within the IRS, cited a case in which a small business owner saved $45,000 over three years from a tax shelter and was fined $900,000 by the IRS.

More Tax Help, IRS News and Tax Relief Tips:

  1. Obama’s Efforts to Eliminate Loopholes and Bolster IRS Compliance Fall Short of Closing Tax Gap
  2. IRS Hunt for Tax Cheats Accelerates as Swiss Banks Shut American Accounts
  3. In Bad Economy, Tax Enforcement and Convictions of Tax Defiers Are on the Rise
  4. Is there a Double Standard for Delinquent Taxpayers and Tax Cheats That Favors Powerful Individuals?
  5. Voluntary Disclosure Offers Income Tax Relief and Chance to Avoid Criminal Prosecution to Off Shore Account Holders

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