A bipartisan quartet of leading Congressmen and Senators has called on the IRS to stop collecting stiff penalties from small firms investing in illegal tax shelters, when those investments generated only "modest" tax benefits. The lawmakers say they hope to write new legislation that would ease the penalty schedule these small firms would face.

The penalties stem from a 2004 law that requires companies and individuals to disclose on their tax return any tax shelters that the IRS has listed as abusive. For individuals, the penalty is $100,000, for corporations, it's $200,000.

But Max Baucus and Charles Grassley (chairman and ranking member, respectively, of the Senate Finance Committee) and Reps. John Lewis and Charles Boustany (chairman and ranking member of the Ways and Means Committee's Oversight Subcommittee) say, in effect, that they only intended to go after large corporations when they crafted that 2004 law. In a letter (pdf) released yesterday, the quartet insists ("would very much appreciate your acquiescence with our request") the IRS give small businesses a pass in cases where the tax benefits are less than the applicable penalties. "We recognize that many of the shelters now being examined by the IRS involve significantly smaller dollar amounts," they write, "and the $100,000/$200,000 penalty levels may be excessive in some circumstances."

The lawmakers say that they were moved to intervene when they learned that "many small business owners who thought they were investing in legitimate benefits plans unknowingly have invested in listed tax shelter transactions" that landed these firms "substantial penalties." The business in question "were not advised by the parties selling them the benefits packages that the plans had been identified by the Internal Revenue Service (IRS) as abusive transactions" and didn't find out until the inevitable audit. Even so, the letter-writers don't appear to exclude those who knowingly violated the law from the relaxed enforcement -- they simply ask the IRS to suspend collection efforts "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 while Congress acts to remedy this situation."

Now this strikes the Agenda -- heresy alert! -- as needlessly generous, particularly now. CQ reports that it's not clear when, or even if, Congress will act, or what a remedy might look like. These are difficult times for cutting taxes, and even sacred small business might not be immune. Why, as we wait for an indefinite future, should we let small firms get away scot-free when they knowingly break the law? Or unknowingly -- aren't we told that ignorance of the law is no excuse?

Perhaps the IRS can find a middle ground: if it has the discretion to waive the penalties for failure to report altogether, then maybe it has the discretion to merely limit the penalties, and make them commensurate to the benefits. Tax attorneys, weigh in!


This marks the Entrepreneurial Agenda's last post at Inc.com. These two years have been invigorating: we've broken some news in this space, and have had enlightening conversations with policy makers, advocates, and you. My editors here have been great; they've granted me the freedom to learn by doing, and perhaps by making the occasional mistake, and I'm grateful for that. I look forward to working with them in other venues.

On Wednesday, this blog, rechristened as The Agenda, will appear in the virtual pages of the New York Times as part of a new blog called "You're The Boss". The Agenda posts will be collected at boss.blogs.nytimes.com/author/robb-mandelbaum.

I hope to see you there.