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Sep 25, 2009 
The IRS said Thursday it will extend a moratorium on collecting penalties from some small businesses that were hit with big fines for not disclosing the use of questionable tax shelters.
The moratorium began in July at the request of lawmakers who wanted time to change the law to make the penalties more reasonable. It was scheduled to end Sept. 30. But with Congress preoccupied by the health care issue, IRS Commissioner Doug Shulman is extending the moratorium to the end of the year.
The fines, which can reach $300,000 a year, were an unintended consequence of a 2004 law aimed at big corporations that use the shelters to avoid taxes.
“Clearly, a number of taxpayers have been caught in a penalty regime that the legislation did not intend,” Shulman said in a letter Thursday to lawmakers.
Lawmakers from both political parties have said they would work to change the law. Shulman said he wanted to give them more time to finish their work.
The existing law imposes reporting requirements on businesses and individuals who use tax shelters that the IRS has identified as abusive. The goal is to red flag these “listed transactions” so IRS agents can more closely examine them.
The penalties for failing to disclose the transactions on tax forms are $100,000 a year for individuals and $200,000 a year for businesses. Taxpayers who use the tax shelters for both individual and business purposes face penalties of $300,000 a year.
The penalties cannot be appealed, National Taxpayer Advocate Nina Olson said in her 2008 annual report. Olson, an independent watchdog within the IRS, cited a case in which a small business owner saved $45,000 over three years from a tax shelter and was fined $900,000 by the IRS.
The IRS has agreed to suspend collections on cases in which businesses gained less than $200,000 a year from the tax shelters.
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