IRS extends moratorium on collecting tax shelter penalties from small business

Much to the relief of many small businesses, the IRS has extended until June 1 its current moratorium on collecting penalties under Code Sec. 6707A for undisclosed tax shelter transactions. Additionally, the IRS will continue to hold off, until June 1, on filing new notices of federal tax lien for collecting amounts due solely because of Code Sec. 6707A penalties. The IRS's moratorium on collection action is designed to give Congress time to devise a legislative fix to the automatic imposition of the Code Sec. 6707A penalties.

Code Sec. 6707A imposes strict penalties on taxpayers who fail to disclose their participation in a "reportable" transaction. The penalties for failing to disclose a reportable transaction are $10,000 for an individual and $50,000 for any other taxpayer. If the taxpayer fails to report a listed transaction, the penalties jump to a mandatory $100,000 for an individual and $200,000 for other taxpayers.

Legislation

On February 9, the Senate approved Sen. 2917, which would reduce the Code Sec. 6707A penalty to 75 percent of the tax benefits received from the reportable or listed transaction. The bill would apply to penalties assessed after December 31, 2006. The House has not yet acted on Code Sec. 6707A relief.

We will keep you posted on any further developments.