Senate Response: Senator Ben Nelson (D-Nebraska) has sponsored legislation (S.765) to curtail the IRS and its nearly unlimited authority and power under Code section 6707A. Senator Nelson is actively seeking co-sponsors of the bill. The bill seeks to scale back the scope of the section 6707A reportable and/or listed transaction nondisclosure penalty to a more reasonable level.
The current law provides for penalties that are draconian by nature and offer no flexibility to the IRS to reduce or abate the imposition of the 6707A penalty. This has served as a weapon of mass destruction for the IRS and has hit many small businesses and their owners with unconscionable results.
Internal Revenue Code 6707A was enacted as part of the American Jobs Creation Act on October 22, 2004. It imposes a strict liability penalty for any person that failed to disclose either a listed transaction or reportable transaction per each occurrence.
Reportable transactions usually fall within certain general types. For example; confidential transactions, transactions with tax protection, certain loss generating transactions and transactions of interest arbitrarily so designated by the IRS that have the potential for tax avoidance.
Listed transactions are specified transactions that have been publicly designated by the IRS, including anything that is substantially similar to such a transaction (a phrase which is given very liberal construction by the IRS).
There are currently 34 listed transactions, including certain retirement plans under Code section 412(i) and certain employee welfare benefit plans funded in part with life insurance under Code sections 419A(f)(5), 419(f)(6) and 419(e). Many of these plans were implemented by a small business seeking to provide retirement income or health benefits to their employees.