IRS extends collection moratorium on tax-shelter disclosure penalties in smaller cases

To the relief of many small business owners currently caught in what has become a "legislative language nightmare", IRS Commissioner Douglas Shulman has extended once again - this time until December 31, 2009 - enforcement of the so-called Code Sec 6707A penalty for failure to disclose a listed tax-shelter transaction. Enforcement had been suspended once, until September 30, 2009, but more time was needed by Congress to move forward on corrective legislation.

In an effort to prevent the use of tax shelters, the American Jobs Creation Act of 2004 drafted tough penalty provisions for non-disclosure of tax-shelter related deductions taken on any tax return. To put real teeth into the penalty, Congress set it at an automatic $100,000 ($200,000 for corporations) and required mandatory application. In what federal lawmakers realize now was a mistake, however, mandatory application did not take into account either some taxpayers' confusion over what constituted a tax shelter or the low dollar amounts for the deductions that could be involved.

What ensued became a nightmare for many small business owners. Certain "tax planning" packages sold to gullible small business owners several years back turned out to fit the penalty's definition of a tax shelter. As a result, the IRS was put in a position of being required by the law as written to collect the $100,000 or $200,000 penalty from many small businesses that would have benefited far less than the $100,000 or $200,000 penalty amount in the first place. Many small businesses would have gone bankrupt if the IRS had followed through on collection.

Leaders in Congress promised the IRS Commissioner back in July that they would pass corrective legislation to remove the harsh penalties for the smaller transactions that have been unintentionally caught in its web. In reliance, the IRS Commissioner suspended collection of those penalties until September 30. Now, days before that deadline passed, the IRS extended the suspension again, until December 31, 2009, upon renewed reassurance by Congressional leaders that they would pass the necessary relief by year end.

(Rev. Proc. 2009-37)