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Senate Passes Bill Softening Tax Penalties

February 10, 2010 - by Eric Naing

The Senate yesterday unanimously approved the Small Business Penalty Fairness Act (S. 2917), which, according to Sen. Ben Nelson [D, NE] “will protect small businesses that were acting in good faith from harsh IRS penalties.”

The bill amends Section 6707A of the tax code, which currently imposes a fine of $100,000 for individuals and $200,000 for businesses for failing to disclose some “reportable transactions.” Nelson’s bill would replace the flat fine with a penalty that is proportional to the tax savings from the transaction.

In a press release, Nelson argued that the current law was meant to target corporate tax shelters and the wealthy, but ended up saddling small business with hefty fines for making small tax mistakes:

This penalty has ended up snagging small businesses that weren’t advised of their responsibility to disclose. The least we can do is make the punishment fit the crime – otherwise, the penalty could put people out of business.

The list of co-sponsors for the bill reads like who’s who of conservative Democrats: Sen. Nelson, Sen. Blanche Lincoln [D, AR] and Sen. Max Baucus [D, MT], the bill’s main sponsor. Some prominent Republicans such as Sen. Chuck Grassley [R, IA] and Sen. Orrin Hatch [R, UT] also co-sponsored the bill.

This issue has been somewhat of a cause célèbre for Sen. Nelson in recent years. Last April, he introduced a similar bill (S.765), that failed to gain traction.

Baucus’s bill made it out of the Senate by unanimous consent. It now faces a vote in the House.

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