During the past four years, the IRS has increased its auditing of small employers with pension and health and welfare plans to make sure they comply with a 2004 tax code change that requires these companies to notify the agency that they have plans that act as tax shelters. The fines for failing to do so are $200,000 per business per year the plan has been in place and $100,000 per individual.
Not only are the penalties exorbitant, but many companies say they were never told by their advisors that they had to file with the IRS, said Alex Brucker, an employee benefits attorney and a director at the Small Business Council of America, a Wilmington, Delaware-based association that represents small firms on pension, tax and health care issues.
“These penalties will put companies out of business,” Brucker said. “And these are people who are innocent of any wrongdoing and who were listening to advisors.”
The IRS had originally set September 30 as the date to start collecting the penalties. But on September 24, the agency extended the deadline to year-end in hopes that Congress would pass legislation to address the issue, according to a letter from IRS Commissioner Douglas H. Shulman to Sens. Max Baucus, D-Montana, Charles Boustany Jr., R-Louisiana, and Charles Grassley, R-Iowa.
In June, Senate Finance Committee leaders Grassley and Baucus issued statements saying they hoped to change the law mandating the fines and asked the IRS to stop collection on the penalties.
“I understand that Congress is still considering this issue and that a bipartisan, bicameral bill may be in the works,” Shulman said in the letter. “To give Congress time to address the issue, I am writing to extend the suspension of collection enforcement actions through December 31, 2009.”
Experts and attorneys are concerned, however, that with Congress’ focus on health care reform, this issue might not get addressed in time.
“Discourse around health care is taking Congress’ attention,” said Kathleen Barrow, a partner in the Houston office of Jackson Lewis. However, Barrow has heard that Congress may attach legislation to the estate tax bill, which is expected to be passed this year.
A Finance Committee aide said Baucus is working on the issue but couldn’t say whether legislation would be attached to the estate tax bill. The current repeal on the estate tax is scheduled to conclude by the end of the year.
In the meantime, some financial advisors and experts are worried that the stigma around these pension and health and welfare plans will scare off small employers from offering benefits to their employees.
“I had a small-business client call me earlier this week who is now scared of getting involved in a retirement plan,” said Bill Norwalk, a partner with Ireland San Filippo, a San Jose, California-based accounting firm. “I’m scared that the news about these fines is going to keep companies away from offering retirement plans.”