Tax Shelter Users Can Be Victims Too?

Federal officials are reportedly considering easing rules that require the IRS set mandatory heavy penalties on companies and individuals who purchase certain illegal tax shelters, according to the Wall Street Journal.

The law imposes penalties for making use of any of 34 different types of tax shelters listed by the IRS.

Under the law, the IRS doesn't have the ability to waive the fines. The penalties also aren't reviewable in court, so there is no chance of having them reduced. The Journal tells the story of one small business owner ensnared:

"One such taxpayer is Robert Mathew, who owns a small Indiana asphalt-paving company. In 2002, Mr. Mathew purchased a type of life-insurance policy known as a 'springing cash value' plan as an alternative to a straightforward pension plan for his employees. Two years later, the IRS added this type of plan to its list of abusive tax shelters, and Mr. Mathew should have disclosed his purchase to the IRS. But he says the financial adviser who sold him the insurance plan at no point told him he needed to make such a disclosure. Now, Mr. Mathew says, the IRS is demanding taxes and interest totaling $60,000. On top of that, the IRS has set penalties in the amount of $600,000, but has so far granted him several extensions, he says."

National Taxpayer Advocate Nina E. Olson, who last June addressed CPAs at a FAE conference, called these penalties "unconscionable" in her annual report to Congress.