IRS Extends Moratorium on Tax Shelter Enforcement

By Paul Bonner December 28, 2009

IRS Commissioner Doug Shulman announced in a letter to Sen. Chuck Grassley, R-Iowa, that the IRS is extending until March 1, 2010, a moratorium on collection enforcement of the IRC § 6707A penalty for failure to disclose tax shelters and other reportable transactions.

Shulman first announced the moratorium July 6 in response to congressional concerns that the penalty amounts—$100,000 for individuals and $200,000 for other taxpayers—in many instances far exceed the tax benefit of the targeted transactions. The moratorium, which applies to cases in which the annual tax benefit from the transaction is less than the otherwise applicable penalty, initially ran until Sept. 30, 2009, which Shulman said would give Congress time to amend the statute. Shulman later extended the moratorium to Dec. 31, 2009.

On Nov. 16, 2009, Rep. John Lewis, D-Ga., introduced the Small Business Penalty Relief Act of 2009, HR 4068. An identical bill, S. 2771, was introduced in the Senate by Sen. Max Baucus, D-Mont.

The bills would limit the penalty for listed transactions to the lesser of the current statutory amounts or 75% of the tax benefit shown on the return as a result of the transaction. Listed transactions would carry a minimum penalty of $5,000 for individuals and $10,000 for other taxpayers. The 75%-of-tax-benefit limit would also apply to other reportable transactions, for which the maximum penalty would be the current statutory penalty amounts under section 6707A(b)(1) of $10,000 for individuals or $50,000 for other taxpayers (with no minimum penalty amounts). The bills would apply to penalties assessed after Dec. 31, 2006.

Both bills were still in committee as Congress adjourned last week.

In a letter last week to Shulman and Treasury Secretary Timothy Geithner, Grassley protested what he said was the IRS’ continuing to place liens on small businesses despite the moratorium, and he threatened in a press release to block nominations of Treasury officials until the issue was resolved.

Shulman responded on Dec. 23, further extending the moratorium.  He also said that earlier in December, the IRS stopped filing new lien notices where the amount due was solely related to a section 6707A penalty and would refrain from placing such liens through the latest extension period. Grassley’s office has told the The Washington Post that he will allow the Treasury nominations to go forward.