Grassley Pressures IRS on Small-Biz Tax Penalties

Senate Finance Committee ranking member Charles Grassley, R-Iowa, threatened to hold up the confirmation of all nominees to Treasury Department posts unless the Treasury and the IRS do more to ease tax penalties on small businesses.

Grassley wrote a letter to Treasury Secretary Timothy Geithner and IRS Commissioner Douglas Shulman to put them “on notice” about his intentions. He complained about the favorable tax treatment given to Citigroup after the IRS issued a revenue ruling that allows the bank to deduct $38 billion in losses as part of a deal aimed at encouraging Citigroup to repay its share of funds from the Troubled Asset Relief Program (see U.S. to Lose Billions on Citigroup’s Tax Breaks).

“Treasury is quick to help out big banks but slow to act when small businesses need fair treatment,” said Grassley. “There seems to be a double standard and a failure to recognize that small businesses are just as critical to the economy as big banks, if not more critical. Small businesses create 70 percent of all net new jobs. If we don’t recognize that, we’re shooting ourselves in the foot.”

Grassley noted that he has been working for months with Senate and House counterparts to enact legislation to moderate the amount of penalties assessed on small businesses that unknowingly invested in prohibited tax shelter transactions. The IRS announced in July that it would temporarily suspend its efforts to collect penalties for some listed tax shelter transactions (see IRS Suspends Some Small Biz Tax Shelter Penalties). Some of the businesses were assessed tax penalties as high as $300,000 per year but received a tax benefit for as little as $15,000 from the transaction.

Grassley and his colleagues asked the IRS to provide temporary relief to small businesses facing these penalties until they can enact the bipartisan legislation. As a result, IRS agreed to suspend collection enforcement action through Dec. 31, 2009.

Nevertheless, Grassley pointed out, the IRS continues to place liens on small businesses that engaged in the transactions. While the liens are not yet being enforced, they are a threat to the small businesses’ operations, Grassley argued.

He criticized the Treasury Department and the IRS for giving a tax break to Citigroup that may generate billions of dollars of tax savings for the bank. In the House, Rep. Dennis Kucinich, D-Ohio, chairman of the domestic policy subcommittee of the House Committee on Oversight and Government Reform, has called the tax break an “outrage” and pledged to investigate the reason for the tax break.

In November 2008, the Treasury and the IRS came under fire from Grassley and others for giving a tax break that allowed banks to acquire one another. The Treasury ruling helped to accommodate the sale of Wachovia Bank to Wells Fargo. Grassley questioned whether the Treasury had the authority to bestow such a tax break independent of congressional action. Meanwhile, he warned that Congress would soon take action on legislation to help small businesses escape the tax penalties.

“The quick and immediate relief provided to Citigroup Inc. stands in stark contrast to the Treasury and the IRS’s position on providing relief to small-business owners who have been assessed penalties under IRC Section 6707A,” he wrote. “As you know, Chairman [Max] Baucus and I have been working throughout this year with our counterparts in the House of Representatives to provide relief that can only be accomplished through legislation and we expect that legislation to be enacted very soon.”