More on Section 6707A Penalties

I receive quit a few calls about 412(i) plans and the subject of 6707A penalties seems to be an issue that is on the minds of almost every accountant, attorney, or individual who contacts me. It is for this reason that I wanted to post some additional information on this issue. Let me begin by saying that I am not an accountant or tax attorney.

I am a litigation attorney who represents individuals and small business against the entities or individuals involved in selling or promoting what I consider to be inappropriate, improper, or fraudulent plans. As part of that endeavor, I have come to learn quite a bit about 412(i) and 6707A penalties.

BACKGROUND ON 6707A

The American Jobs Creation Act of 2004 created Section 6707A of the Internal Revenue Code which was intended to stop the proliferation of multi-million-dollar abusive tax shelters. Pursuant to the Act, a strict liability penalty was imposed on "listed transactions" not reported to the IRS.

A listed transaction is a transaction the IRS has determined, through audits and reviews of other returns, has the potential for avoidance or evasion. The strict liability penalty applies if the taxpayer fails to disclose a listed transaction. The penalty is $100,000 per year for individuals and $200,000 per year for corporations and these penalties are stackable.

6707A penalties are in addition to the 30% accuracy related penalty imposed on the tax understatement under section 6662A. The 6707A penalties apply regardless of the amount of the understatement and regardless of whether the taxpayer can show a "reasonable cause" for the failure to make a disclosure AND regardless of whether the taxpayer amends prior to audit. Furthermore, the Commissioner of the IRS has no discretion to abate the listed transaction penalty. As if it could not get any worse, 6707A does not grant due process of law because there is no judicial review in the Tax Court.

WHAT IS BEING DONE ABOUT THIS PROBLEM

Currently, there are bills pending in both houses of Congress to address the 6707A problem. The National Taxpayer Advocate and the IRS Commissioner have both indicated the need for change and the IRS is currently in a stand down position on some of these penalties (for more information, see prior post http://412ilitigation.blogspot.com/2009/07/irs-suspends-6707a-penalites-until.html). The Small Business Council of America is releasing a position paper on the legislation and I will review and post it shortly.

In my opinion, despite what happens in Congress, Taxpayers need to understand that there are going to be penalties. There is not going to be a magic bullet. We are not going to wake up one day and these plans are going to be "legal" and the penalties are going to magically disappear. The penalties may become proportionate to the tax understatement, the pass- through penalties may be reduced, the Commissioner may be allowed discretion to review, and the taxpayer may get judicial review---BUT---taxpayers should not think that this is all simply going to go away.

Taxpayers who are confronted with these penalties need to evaluate a realistic strategy to include to include claims against the individuals responsible for promoting and selling of these plans, and the insurance companies who sold them after being advised of the ultimate result.

Chris Hellums can be reached at Chrish@pdkhlaw.com or toll free at 1-866-515-8880.