section 6707A enforcement change

IRS won't enforce Sec. 6707A penalty for smaller transactions through May 31, 2009
On Mar. 3, 2010, IRS Commissioner Doug Shulman notified Congress that IRS is extending until June 1, 2010 the current moratorium on collection enforcement actions relating to tax shelter penalties assessed under Code Sec. 6707A . In addition, IRS will continue to hold off on filing new notices of lien on amounts due solely related to Code Sec. 6707A penalties until June 1, 2010.
Background. Code Sec. 6707A , an anti-tax-shelter provision added by the American Jobs Creation Act of 2004, imposes a penalty of $100,000 per individual and $200,000 per entity for each failure to make special disclosures with respect to a transaction that IRS characterizes as a “listed transaction” or “substantially similar” to a listed transaction. The penalty provision has been criticized by many groups.
In a June 12 letter to Commissioner Shulman, Congressional leaders complained that Code Sec. 6707A can result in disproportionate penalties for small businesses that thought they were investing in legitimate benefits plans, but unknowingly invested in listed tax shelter transactions. Upon audit, these businesses were assessed substantial penalties for failing to disclose the transactions on their tax returns, even though the transactions produced modest tax benefits. The taxwriters said a “bipartisan, bicameral commitment” was under way to enact legislation that would ease Code Sec. 6707A 's application. In the meantime, they asked Commissioner Shulman to use the discretion provided to IRS with its effective tax administration authority to suspend efforts to collect Code Sec. 6707A liabilities in cases where the annual tax benefits resulting from the listed transactions are less than $100,000 for individuals and $200,000 for other cases.
In a July 6 letter to Congressional leaders, Commissioner Shulman said that in view of Congressional leaders' commitment to enact legislation to address the issue, and to provide the Congress that opportunity, IRS wouldn't undertake any Code Sec. 6707A collection enforcement action through Sept. 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 (see Weekly Alert ¶ 5 07/09/2009 ). However, because the penalty determination is related to the underlying transaction, and IRS can only determine the amount of tax benefit through examination, Commissioner Shulman said IRS would continue its examination on these cases and thus be able to identify cases meeting the collection suspension threshold. In September of 2009, Commissioner Shulman extended the suspension through Dec. 31, 2009 (see Weekly Alert ¶ 2 10/01/2009 ), and then in January of this year, extended the suspension yet again through Feb. 28, 2010. Now, IRS has again extended the suspension through May 31, 2010.

Congressional fix is in the works. On Feb. 9, 2010, the Senate by unanimous consent passed S. 2917, the Small Business Penalty Fairness Act of 2009. The House of Representatives is likely to approve the legislation as well. The main purpose of this bill is to put new limits on Code Sec. 6707A , an anti-tax-shelter provision that has been strongly criticized as imposing draconian penalties on small businesses and other taxpayers that unwittingly invest in transactions that turn out to be tax shelters.
Click here for the text of S. 2917, the Small Business Penalty Fairness Act of 2009.
Under the Senate-passed S. 2917, Code Sec. 6707A(b) would be amended to provide that the amount of the penalty under Code Sec. 6707A(a) for any reportable transaction would be equal to 75% of the decrease in tax shown on the return as a result of the transaction (or which would have resulted from the transaction had it been respected for federal tax purposes). The minimum penalty would be $10,000 ($5,000 for a natural person). The maximum penalty would in the case of a listed transaction be $200,000 ($100,000 for a natural person) or, in the case of any other reportable transaction, $50,000 ($10,000 for a natural person).
The changes to Code Sec. 6707A would apply for penalties assessed after Dec. 31, 2006.
RIA observation: Thus, some taxpayers who were assessed and paid the penalty before IRS halted collection efforts could qualify for a refund.
S. 2917 also would provide that:
... IRS would have to issue an annual report to the House Ways & Means Committee and Senate Finance Committee on the penalties imposed during the preceding year under a number of tax shelter penalty provisions. The first report would be due no later than June 1, 2010.
... Effective for instruments tendered after the enactment date, the Code Sec. 6657 penalty for tendering a bad check to IRS would apply to any commercially acceptable payment instrument (including electronic payments), not just to checks or money orders.
... Effective for levies approved after the enactment date, the Code Sec. 6331(h)(3) continuous tax levy on payments to vendors for goods and services sold or leased to the federal government would be extended to include payments for property, goods, or services sold or leased to the federal government.
IRS suspends enforcement of Sec. 6707A penalty for smaller transactions through Sept. 30, 2009
Click here for the text of Commissioner Shulman's July 6 letter to Rep. John Lewis about IRS's suspended enforcement of Sec. 6707A penalties for smaller transactions. This letter is identical to the letters he sent to other Congressional leaders.
Click here for the text of a June 15 press release titled “Lawmakers Concerned About Unfair Penalties on Small Business,” and the taxwriters' June 12 letter to the IRS Commissioner about Sec. 6707A.
In a July 6, 2009, letter to Congressional leaders, IRS Commissioner Doug Shulman acquiesced to their request that IRS suspend collection enforcement action on Code Sec. 6707A issues where the annual tax benefit from the transaction is less than $100,000 for individuals or $200,000 for other taxpayers. Enforcement action will be suspended through Sept. 30, 2009. Commissioner Shulman wrote in response to a June 12 letter on the subject from Senate Finance Chair Max Baucus (D-MT), Ranking Member Chuck Grassley (R-IA), Ways and Means Oversight Subcommittee Chair John Lewis (D-GA) and Ranking Member Charles Boustany (R-LA).
Background. Code Sec. 6707A , an anti-tax-shelter provision added by the American Jobs Creation Act of 2004, imposes a penalty of $100,000 per individual and $200,000 per entity for each failure to make special disclosures with respect to a transaction that IRS characterizes as a “listed transaction” or “substantially similar” to a listed transaction. The penalty provision has been criticized by, among others, the Small Business Council of America, the American Bar Association Section of Taxation, and National Taxpayer Advocate Nina Olson, for its harsh rules. For example, the Taxpayer Advocate said the penalty imposes strict liability (it applies without regard to whether the taxpayer has knowledge that the transaction has been listed and without regard to whether the transaction is reported correctly on the taxpayer's return) and applies even if the taxpayer derived little or no tax savings from the transaction. The penalty, which must be imposed by IRS and cannot be rescinded under any circumstances, may not be appealed in court.
In their June 12 letter to Commissioner Shulman, Congressional leaders complained that Code Sec. 6707A can result in disproportionate penalties for small businesses that thought they were investing in legitimate benefits plans, but unknowingly invested in listed tax shelter transactions. Upon audit, these businesses were assessed substantial penalties for failing to disclose the transactions on their tax returns, even though the transactions produced modest tax benefits. The taxwriters said a “bipartisan, bicameral commitment” was under way to enact legislation that would ease Code Sec. 6707A 's application. In the meantime, they asked Commissioner Shulman to use the discretion provided to IRS with its effective tax administration authority to suspend efforts to collect Code Sec. 6707A liabilities in cases where the annual tax benefits resulting from the listed transactions are less than $100,000 for individuals and $200,000 for other cases.
Reprieve from the Commissioner. In his July 6 letter, Commissioner Shulman said that in view of Congressional leaders' commitment to enact legislation to address the issue, and to provide the Congress that opportunity, IRS won't undertake any Code Sec. 6707A collection enforcement action through Sept. 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. However, because the penalty determination is related to the underlying transaction, and IRS can only determine the amount of tax benefit through examination, Commissioner Shulman said IRS would continue its examination on these cases and thus be able to identify cases meeting the collection suspension threshold.
Commissioner Shulman also reiterated that while his letter relates to certain taxpayers who were caught up in a penalty regime in a way that the legislation did not intend, the basic underlying premise of the statute applying severe penalties where taxpayers employ abusive tax shelters in an attempt to avoid paying tax remains “sound and critically important” to IRS.



§ 6707A Penalty for failure to include reportable transaction information with return.
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(a) WG&L Treatises Imposition of penalty.
Any person who fails to include on any return or statement any information with respect to a reportable transaction which is required under section 6011 to be included with such return or statement shall pay a penalty in the amount determined under subsection (b).
(b) WG&L Treatises Amount of penalty.
(1) WG&L Treatises In general.
Except as provided in paragraph (2), the amount of the penalty under subsection (a) shall be—
(A) $10,000 in the case of a natural person, and
(B) $50,000 in any other case.
(2) WG&L Treatises Listed transaction.
The amount of the penalty under subsection (a) with respect to a listed transaction shall be—
(A) $100,000 in the case of a natural person, and
(B) $200,000 in any other case.
(c) WG&L Treatises Definitions.
For purposes of this section —
(1) WG&L Treatises Reportable transaction.
The term “reportable transaction” means any transaction with respect to which information is required to be included with a return or statement because, as determined under regulations prescribed under section 6011, such transaction is of a type which the Secretary determines as having a potential for tax avoidance or evasion.
(2) Listed transaction.
The term “listed transaction” means a reportable transaction which is the same as, or substantially similar to, a transaction specifically identified by the Secretary as a tax avoidance transaction for purposes of section 6011.
(d) Authority to rescind penalty.
(1) In general.
The Commissioner of Internal Revenue may rescind all or any portion of any penalty imposed by this section with respect to any violation if—
(A) the violation is with respect to a reportable transaction other than a listed transaction, and
(B) rescinding the penalty would promote compliance with the requirements of this title and effective tax administration.
(2) No judicial appeal.
Notwithstanding any other provision of law, any determination under this subsection may not be reviewed in any judicial proceeding.
(3) Records.
If a penalty is rescinded under paragraph (1), the Commissioner shall place in the file in the Office of the Commissioner the opinion of the Commissioner with respect to the determination, including—
(A) a statement of the facts and circumstances relating to the violation,
(B) the reasons for the rescission, and
(C) the amount of the penalty rescinded.
(e) Penalty reported to SEC.
In the case of a person—
(1) which is required to file periodic reports under section 13 or 15(d) of the Securities Exchange Act of 1934 or is required to be consolidated with another person for purposes of such reports, and
(2) which—
(A) is required to pay a penalty under this section with respect to a listed transaction,
(B) is required to pay a penalty under section 6662A with respect to any reportable transaction at a rate prescribed under section 6662A(c), or
(C) is required to pay a penalty under section 6662(h) with respect to any reportable transaction and would (but for section 6662A(e)(2)(B)) have been subject to penalty under section 6662A at a rate prescribed under section 6662A(c),
the requirement to pay such penalty shall be disclosed in such reports filed by such person for such periods as the Secretary shall specify. Failure to make a disclosure in accordance with the preceding sentence shall be treated as a failure to which the penalty under subsection (b)(2) applies.
(f) Coordination with other penalties.
The penalty imposed by this section shall be in addition to any other penalty imposed by this title.