Washington, D.C. – Today, a small business tax fix championed by Congressman Joe Donnelly passed the House of Representatives as a part of the Small Business and Infrastructure Jobs Tax Act of 2010, H.R. 4849. Many folks have never heard of 6707A, and until two years ago, neither had Congressman Donnelly. That was when he learned that a small business owner in his district was facing business-ending fines because he failed to disclose to the IRS for payments he made to a type of insurance policy which the IRS would list two years after he initially started the policy.
The owner of an asphalt paving company employing four people, he was assessed $600,000 in penalties for unknowingly failing to alert the IRS of the transaction that resulted in a total tax savings of $38,000 over two years. While he has since fully paid his back taxes to the IRS, these mandatory penalties, which the IRS is required by law to enforce without exception, would now bankrupt him for a simple filing error. In response, last spring Congressman Donnelly introduced legislation supported by 13 Republicans and Democrats to make 6707A penalties proportionate and fair, and it earned the support of the U.S. Chamber of Commerce, the National Federation of Independent Businesses, and the Small Business Council of America.
“Today, we’ve taken a big step forward in fixing a tax penalty that is inherently unfair to small businesses that make a simple mistake,” said Donnelly. “I have worked closely with Congressman John Lewis, the Chairman of the House Ways and Means Oversight Subcommittee, to get this fixed. He also introduced legislation to fix this problem and guided it through committee. His bill, which I strongly support, was included in today’s small business relief package. We would not have come this far without his leadership and assistance. If signed into law, this bill will allow countless small business owners to stay in business, keeping thousands of Americans on the job.”
“I want to thank Rep. Joe Donnelly,” said Oversight Chairman John Lewis, “for his support on this issue. The people of Indiana’s 2nd District have sent a champion for their issues to the Congress, and he represents them well.”
"We appreciate Representative Donnelly’s efforts to fix an onerous penalty on small business owners who inadvertently failed to file a form with the IRS,” said Brad Close, National Federation of Independent Businesses (NFIB) vice president, federal public policy. “The ‘listed transactions’ fix in H.R. 4849 will reduce excessive penalties on small business owners, which is especially important as small firms struggle to keep their doors open. Rep. Donnelly has worked tirelessly to provide relief to small businesses wrongfully impacted by this unfair penalty, and we appreciate his efforts on this important issue."
Background on the 6707A IRS Penalty
Created in response to legislation passed by Congress in 2004, Internal Revenue Code section 6707A imposes a strict penalty of $100,000 per individual and $200,000 per entity for failing to report a number of financial transactions identified by the IRS as potentially abusive. The penalty is not for the activity “listed” by the IRS, per se, but for failing to notify the IRS that a taxpayer has entered such a transaction. At the time, it was common that such transactions involved hundreds of millions of dollars, which is why the mandated penalties are so high. Since enforcement began, many larger corporations have curtailed their abusive use of the most common listed transactions. Unfortunately, compliance with this particular law requires a special knowledge of the tax code that many average small business owners may not possess. The list of transactions is regularly amended, and as a result, a growing number of small businesses have unknowingly violated this provision resulting in massive penalties that are wildly disproportionate to any tax benefit they accrued.
The author of the original provision, Senator Charles Grassley, has since stated: “I did not intend to bankrupt small businesses that had no ill intent…the penalty should be commensurate with the transgression.” In its 2008 Annual Report to Congress, the IRS Taxpayer Advocate urged Congress to fix the inherently unfair structure of the penalty, stating: “It is rare that a tax provision is found to violate the United States Constitution, but we believe the imposition of such a large penalty on a taxpayer who entered into a transaction that produced little or even no tax savings and without regard to the taxpayer’s knowledge or intent raises significant constitutional concerns.” Further, on July 6, 2009, IRS Commissioner Douglas Shulman wrote to the Ways and Means Committee that he was “dismayed” to hear of the impact of 6707A on small business owners and that certain taxpayers “were caught up in a penalty regime in a way that the legislation did not intend…”
The legislation passed today by the House of Representatives would make IRS Section 6707A penalties proportional to the amount of tax benefit accrued as a result of the activity “listed” by the IRS. This will bring 6707A penalties more in line with traditional IRS penalty structures. Specifically, the penalty would be 75 percent of the tax benefit received, with a minimum penalty of $10,000 for corporations and $5,000 for individuals, and a maximum penalty of $200,000 for corporations and $100,000 for individuals. The Small Business and Infrastructure Jobs Tax Act of 2010 is now sent to the Senate for its consideration.
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To watch a video of Congressman Donnelly’s floor speech in support of the Small Business and Infrastructure Jobs Tax Act of 2010, please click here.