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TAX NEWS - DECEMber 2009

Taxwriters propose modification to reportable transaction nondisclosure penalty

Leaders of the Senate Finance Committee and the House Ways and Means Subcommittee on Oversight, following through on earlier promise, introduced identical legislation on November 16 that would amend the penalty for failure to disclose a reportable transaction to make the amount of the penalty commensurate with the tax benefit received from the transaction.

Section 6707A imposes a penalty on any taxpayer that fails to disclose required information on a return regarding a reportable transaction. The amount of the penalty is $10,000 for individuals and $50,000 for other taxpayers. If the transaction was identified by the IRS in published guidance as an abusive tax-avoidance transaction (a listed transaction), the penalty amount increases to $100,000 for individuals and $200,000 for other taxpayers, and it is a strict liability penalty.

Concerned that the section 6707A penalty could be excessive when applied to certain small business owners who had unknowingly invested in listed transactions and were unaware of their disclosure obligations, Senate Finance Chairman Max Baucus, D-Mont., and ranking member Charles Grassley, R-Iowa, along with House Ways and Means Oversight Subcommittee Chairman John Lewis, D-Ga., and ranking member Charles Boustany, R-La., asked the IRS in June to temporarily suspend collection of the penalty in cases where the annual tax benefit resulting from the listed transaction is less than $100,000 for individuals and $200,000 for other taxpayers. They said a bipartisan, bicameral effort was underway to enact a legislative fix for the problem. In July, the IRS announced that it would suspend collection of the penalties until October 1, 2009.

This proposed legislation, the Small Business Penalty Relief Act of 2009, amends section 6707A so that the penalty for failing to disclose any reportable transaction would be 75 percent of the tax benefit received from the transaction. It would cap the penalty for an undisclosed listed transaction at $100,000 for individuals and $200,000 for other taxpayers, and cap the penalty for any other undisclosed reportable transaction at $10,000 for individuals and $50,000 for other taxpayers. An undisclosed listed transaction also would be subject to a minimum penalty of $5,000 for individuals and $10,000 for businesses. These changes would be effective for penalties assessed after December 31, 2006.

In addition to the modifications to the section 6707A penalty, the legislation includes provisions requiring the IRS to submit annual reports to Congress on the various tax shelter penalties assessed during the preceding year. The first report must be submitted no later than June 1, 2010.
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