The United States Senate has approved legislation that would prevent small
businesses from incurring undue tax penalties aimed at large corporations and
wealthy individuals investing in tax shelters.
The Small Business Penalty Fairness Act, (S. 2917), introduced by a bipartisan
group of Senators on December 18, 2009, will require the Internal Revenue Service
(IRS) 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 legislation was developed by members of the Senate Finance Committee and
the House Ways and Means Committee, both of which have jurisdiction over tax legislation,
after it was discovered that some small businesses that unknowingly invested
in transactions of listed tax shelters suffered tax penalties as high as USD300,000
per year, but received tax benefits of as little as USD15,000.
The Small Business Penalty Fairness Act revises section 6707A of the IRS code
to set the penalty for failure to disclose reportable transactions to the IRS
at 75% 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 new legislation is USD10,000 for corporations and
USD5,000 for individuals, and the maximum penalty is USD200,000 for corporations
and USD100,000 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 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 Department of Treasury’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 by the Senate was an improved version of the “Small
Business Penalty Relief Act of 2009,” introduced on November 16, 2009,
with the updated bill including the provisions to fully offset the cost of the
package.
The companion bill in the House of Representatives (H.R. 4068) was introduced
on November 16 and awaits votes by the Ways and Means Committee and then the
full House.
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