6707A Penalties You Should Know About

The moratorium on collection has been extended for two additional months until March 1, 2010

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If you are a small business owner, accountant or insurance professional you may be in big trouble and not know it.  IRS has been fining people like you $200,000.  Most people that have received the fines were not aware that they had done anything wrong.  What is even worse is that the fines are not appeal-able.  This is not an isolated situation.  This has been happening to a lot of people.

Currently, the Internal Revenue Service (“IRS”) has the discretion to assess hundreds of thousands of dollars in penalties under §6707A of the Internal Revenue Code (“Code”) in an attempt to curb tax avoidance shelters. This discretion can be applied regardless of the innocence of the taxpayer and was granted by Congress.  It works so that if the IRS determines you have engaged in a listed transaction and failed to properly disclose it, you will be subject to a potentially draconian penalty regardless of any other facts and circumstances concerning the transaction. For some, this penalty has been assessed at almost a million dollars and for many it is the beginning of a long nightmare.

The following is an example:  Pursuant to a settlement with the IRS, the 412(i) plan was converted into a traditional defined benefit plan.  All of the contributions to the 412(i) plan would have been allowable if they had initially adopted a traditional defined benefit plan.  Based on negotiations with the IRS agent, the audit of the plan resulted in no income and minimal excise taxes due.   This is because as a traditional defined benefit plan, the taxpayers could have contributed and deducted the same amount as a 412(i) plan.

Towards the end of the audit the business owner received a notice from the IRS.  The IRS assessed the client penalties under the §6707A of the Code in the amount of $900,000.00.  This penalty was assessed because the client allegedly participated in a listed transaction and allegedly failed to file the form 8886 in a timely manner.

The IRS may call you a material advisor and fine you $200,000.00. The IRS may fine your clients over a million dollars for being in a retirement plan, 419 plan, etc. As you read this article, hundreds of unfortunate people are having their lives ruined by these fines. You may need to take action immediately. The Internal Revenue Service said it would extend until the end of March 1, 2010 a grace period granted to small business owners for collection of certain tax-shelter penalties.

"Clearly, a number of taxpayers have been caught in a penalty regime that the legislation did not intend," wrote Shulman. "I understand that Congress is still considering this issue, and that a bipartisan, bicameral, bill may be in the works."  The issue relates to penalties for so-called listed transactions, the kinds of tax shelters the IRS has designated most egregious. A number of small business owners that bought employee retirement plans so called 419 and 412(i) plans and others, that were listed by the IRS, and who are now facing hundreds and thousands in penalties, contend that the penalty amounts are unfair.

Leaders of tax-writing committees in the House and Senate have said they intend to pass legislation revising the penalty structure.

The IRS has suspended collection efforts in cases where the tax benefit derived from the listed transaction was less than $100,000 for individuals, or less than $200,000 for firms. They are still however sending out notices that they intend to fine.