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July 8, 2009

Federal Headlines

Lawmakers Applaud IRS's Decision to Suspend Collection of Tax Shelter Penalties on Small Business

 

IRS Commissioner Douglas H. Shulman announced that the Service will not undertake any collection enforcement action of penalties assessed under Code Sec. 6707A through September 30, 2009, on cases where the annual tax benefit from the transaction is less than $100,000 for individuals or $200,000 for other taxpayers per year. Shulman made the announcement in a July 6 letter responding to a request by House Ways and Means Oversight Subcommittee Chairman John Lewis, D-Ga., and other lawmakers to suspend these collection activities.

 

"I am dismayed by the feedback that I have received from some of the most seasoned IRS examination professionals that this statutory provision, in certain cases, requires them to assess penalties that are way out of line with penalties for other similar cases of non-compliance," said Shulman in his letter.

 

However, Shulman added that, since the penalty determination is related to the underlying transaction, and the IRS can only determine the amount of tax benefit through examination, the Service will continue its examination of such cases.

Lawmakers' Concerns

 

In a letter dated June 12 (TAXDAY, 2009/06/16, C.1), lawmakers from the Senate Finance Committee (SFC) and House Ways and Means Committee had asked Shulman to direct the IRS to suspend the collection of tax shelter penalties under Code Sec. 6707A assessed on small businesses while Congress works to create legislation to lessen the significant financial impact of these penalties on small businesses. According to lawmakers, small businesses with investments in listed tax shelter transactions that created modest tax benefits were faced with tax penalties that were significantly larger than the tax benefits received. This situation was sparked, according to lawmakers, by business owners who bought benefit plans that actually were prohibited tax shelters without realizing it, then were hit with large penalties on audit. In their June 12 letter, the lawmakers asked Shulman to "use discretion provided to the IRS with its effective administration authority to suspend efforts to collect [Code Sec.] 6707A liabilities...while Congress acts to remedy this situation."

 

CCH Comment. During a June 4 subcommittee hearing in Washington, D.C., in which Shulman testified, some subcommittee members had questioned whether Shulman's initiative to crack down on tax shelters was disproportionately geared toward small businesses (TAXDAY, 2009/06/05, C.1). At that time, Shulman had responded that it was Congress that enacted such a draconian provision and that the IRS had little discretion in enforcing the penalty.

Disproportionate Penalties

 

When the Code Sec. 6707A penalties were enacted in the American Jobs Creation Act of 2004 (2004 Jobs Act) (P.L. 108-357), the disproportionate consequences were not anticipated. However, many transactions now under IRS examination "involve tax benefits that are minor when compared to the statutory penalty amounts of $100,000 (for individuals) and $200,000 (for other taxpayers) per year," said Shulman in his July 6 letter to Congressman Lewis. SFC ranking member Charles E. Grassley, R-Iowa, stated that, when he advanced legislation to shut down tax shelters as part of the 2004 Jobs Act, he "did not intend to bankrupt small businesses that had no ill intent." Grassley's focus, on the other hand, had been "big corporations that were actively seeking to hide their participation in tax shelters."

Forthcoming Legislation

 

Members of the Ways and Means Committee intend to introduce bipartisan, bicameral legislation to modify the law and make the penalties more proportionate to the tax benefits. This legislative effort was the catalyst for the lawmakers' request that the IRS suspend collection actions against small businesses. The Small Business Tax Relief Bill of 2009 (Sen 1381), introduced by Grassley, contains provisions to amend the tax code to provide relief to small businesses. The relief would be applied retroactively to cover situations now in collection.

 

"I'm glad the IRS has decided to do what is fair and to allow Congress to correct the unintentional consequences of a law intended to target big corporations," said Lewis.

 

By H. Goehausen, CCH News Staff

Ways and Means Oversight Subcommittee Press Release: Lawmakers Applaud IRS Decision to Suspend Collection of Penalties on Small Businesses

Letter from IRS Commissioner Shulman

SFC Press Release: Grassley Comments on IRS Suspension of Certain Penalties

SFC Press Release: Baucus, Grassley Applaud IRS Suspension of Certain Penalties on Small Businesses

 

Physician Had Reasonable Cause for Failure to File and Pay Tax, Penalties Not Imposed (Humes, TCS)

 
Code Secs. 6651 and

6654

 

A self-employed physician who received significant income and incurred expenses for the tax years in issue was not liable for additions to tax for failure to file a return, failure to timely pay tax or failure to pay estimated taxes for one of the years in issue. She established through testimony that her failure to file and to pay tax was due to her illness. She testified that she stopped working because of emotional problems and that she was unable to manage her finances. The taxpayer did not establish reasonable cause for the other tax year, however because she provided no evidence that she suffered from any illness or incapacity when that return was due. Back references: 2009FED ¶39,475.55 and ¶39,560.665.

K.A. Humes,

TC Summary Opinion 2009-100

 

Tax Research Consultant

 

CCH Reference - TRC PENALTY: 3,062.20

 

State Headlines

Delaware --Multiple Taxes: Voluntary Tax Compliance Initiative Authorized

 

The Delaware Division of Revenue is authorized to establish a voluntary tax compliance initiative to encourage the voluntary disclosure and payment of corporate and personal income, gross receipts, realty transfer, public utilities, lodging, use, estate, gift, income on estate and gift taxes, occupational license fees and tax, contractors' license fees and tax, manufacturers' license fees and tax, retail and wholesale merchants' license fees and tax, and tobacco products license fees and tax. The initiative is applicable to the period that runs from September 1, 2009 through October 30, 2009.

 

A taxpayer who has a current outstanding liability for tax periods before January 1, 2009, and makes payment during the initiative period or enters into a payment plan and makes payment before June 30, 2010, will have the penalty and interest for late return filing waived. A non-filer who files returns will have any tax, penalty and interest for non-filed returns for any period prior to January 1, 2004, waived. Provisions concerning the 50% limitation on the penalty for failure to file timely tax returns and the 75% limitation on the penalty for any fraudulent tax returns are removed, effective for tax years beginning after December 31, 2009. In addition, the period for which interest accrues on an amended refund is changed to 46 days after the receipt of the amended tax return (formerly, 46 days after the original return was filed), also effective for tax years beginning after December 31, 2009.

H.B. 268, Laws 2009, effective as noted above

 

Delaware --Franchise Tax: Franchise Tax Rate Increase Enacted

 

Delaware Gov. Jack Markell has carried out another of his 2009 budget priorities (TAXDAY, 2009/03/20, S.4), by signing legislation that increases the corporate franchise tax. The legislation also raises various fees paid to the Delaware Secretary of State.

 

Effective for tax years beginning on January 1, 2009, the tax multiplier to compute the franchise tax using the assumed capital value method is increased from $250 to $350 on each $1,000,000, or fractional part, in excess of $1,000,000 of capital value. The maximum tax computed using either the authorized shares method or the assumed capital value method is increased from $165,000 to $180,000. The tax rate for regulated investment companies (RICs) that compute the tax based on average gross assets is increased from $250 to $350 on each $1,000,000, or fractional part, in excess of $1,000,000 of average gross assets. The maximum tax for RICs is increased from $75,000 to $90,000.

 

Effective January 1, 2010, the minimum tax computed using the assumed capital value method is increased from $75 to $350. The minimum tax based on the authorized shares method remains at $75.

 

The penalty imposed for failure to file an annual franchise tax report is increased from $100 to $125 effective August 1, 2009.

 

The changes to the franchise tax rates are scheduled to sunset January 1, 2014.

H.B. 267, Laws 2009, effective as noted

 
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