Tax Shelters (Section 6707A)

Relief from Penalties Imposed by Section 6707A

The Small Business Jobs Act of 2010 (“SBJA”), signed into law in September of last year provides enormous relief for those who would have suffered penalties from not disclosing certain tax shelters to the IRS. Internal Revenue Code section 6707A imposes strict penalties for nondisclosure of tax shelters and transactions it considers “abusive,” whether previously “listed” as abusive by the IRS or not. “Listed” transactions carry the highest penalties when not disclosed on a Form 8886. Prior to the passage of the SBJA, the penalty for each year of nondisclosure was $100,000 for an individual and $200,000 for a corporation or other entity.

New Caps for Penalties

The SBJA decreases the penalties to a minimum of $5,000 for individuals and $10,000 for corporations.  Fortunately for taxpayers, the penalties will be capped at 75% of the tax benefits the shelter would have given the taxpayer if it was allowed by the IRS.  Also, this change is retroactive and will apply to any penalties imposed after December 31, 2006.

Victims were Often Unknowing Taxpayers

Many of those penalized for not disclosing allegedly abusive tax shelters were not purposefully trying to commit tax fraud or “scam the system.” Small businesses or high-income individuals were sold pension plans, for instance, that both their insurance agents and CPAs deemed acceptable, only to find out that because the plans were funded by life insurance they should have been disclosed.  But unknowing taxpayers are subject to harsh penalties even if they didn’t know the transaction was “listed” or “substantially similar” to a listed one.

Section 6707A does not allow the IRS to reduce or waive the penalty in most cases. Even the IRS’ Revenue Agents thus have their hands tied when they want to extend mercy to unknowing taxpayers who had been fallen victim to abusive tax shelters.

Waiting on the IRS

The IRS is working to implement these new 6707A penalties and is reopening cases with penalties assessed beginning in 2007 in order to retroactively change the amount. As with many IRS processes, it can be a lengthy ordeal for many waiting taxpayers.  If you are waiting to pay your penalty until the new amount has been assessed under the SBJA, you can consider the advantages and disadvantages to paying any estimated amount due as the IRS may be calculating interest from the date of the first assessment.

The experienced tax lawyers at the Law Office of Steve Moskowitz, LLP can help you understand whether the changes under the SBJA favorably impact your tax situation. Call us today for a free attorney-client privileged consultation if you have this or any other tax issue. We can help you.