Senate Passes Bill to Limit Reportable Transaction Penalties

The Senate passed a bill (S. 2917) Tuesday that would modify the amount of the penalty for failure to report tax shelter transactions under IRC § 6707A. The Small Business Penalty Fairness Act of 2009 passed by unanimous consent.

The bill would set the amount of the penalty under section 6707A at 75% of the decrease in tax that resulted from the reportable transaction, subject to new minimum and maximum amounts.

The bill would turn the current penalty amounts into the maximum penalty and would institute a new minimum penalty amount of $10,000 ($5,000 for individuals).

The current penalty amounts under section 6707A have been criticized because they bear no relation to the tax savings from the transaction. Currently the penalty is $10,000 for individuals and $50,000 for other taxpayers or, in the case of listed transactions, $100,000 for individuals and $200,000 in all other cases.

The IRS has a moratorium in place on collection enforcement under section 6707A. The moratorium applies to cases in which the annual tax benefit from the transaction is less than the otherwise applicable penalty. The moratorium is scheduled to run until March 1. The IRS is also refraining from placing liens on taxpayers’ property where the amount due solely relates to the section 6707A penalty.

Under the bill, the new penalty amounts would apply retroactively to penalties assessed after Dec. 31, 2006.

A similar bill in the House of Representatives (H.R. 4068) was referred to the Ways and Means Committee in November.