Senate Finance Chairman Max Baucus, along with Ranking Member Chuck Grassley, Senator Mike Crapo, Ways & Means Oversight Subcommittee Chairman John Lewis and its Ranking Member Charles Boustant introduced the Small Business Penalty Relief Act of 2009 today “to help ensure penalties assessed … are in proportion to the tax benefits received.”  Under Code Sec. 6707A added by the American Jobs Creation Act of 2004, any taxpayer that fails to include information on a "reportable transaction" that is also a "listed transaction," is subject to a minimum, no-fault penalty of $100,000 in the case of a natural person, and $200,000 in any other case.  According to lawmakers, more than 94 percent of the taxpayers that have been assessed were small businesses, despite the fact that Congress had originally aimed the penalty at “big corporation tax shelters.”

The proposed fix would lower the penalty to 75 percent of the tax benefit received, with a minimum penalty of $10K for corporations and $5K for individuals and a maximum penalty of $200K for corporations/$100K for individuals. Although the press release accompanying the proposal complained that the penalty was being applied to “some small businesses that unknowingly invested in listed tax shelter transactions” and to “some businesses that [had] no ill intent,” it appears that the proposal gives the IRS no rescission authority nor other deference to “intentions,” continuing the no-fault approach when listed transactions are involved. 

This legislation has been promised by Congressional leadership since last June. On that basis, the IRS Commissioner ordered collection of those penalties at the $100K/$200K level suspended first through Sept. 30 and then through December 31 after the first deadline was blown. The IRS apparently is continuing to assess the penalty, without collection, to preserve limitations periods.