Washington (AP) - A bipartisan group of lawmakers asked the IRS Monday to stop imposing what they say are excessive penalties on small businesses that use questionable tax shelters.
 
The lawmakers, led by Sen. Max Baucus, chairman of the Senate Finance Committee, said they are crafting legislation to reduce the penalties, which can reach $300,000 a year.
 
A 2004 law setting up the automatic penalties was designed to stop large corporations from exploiting tax shelters known to be illegal. But the lawmakers said some small businesses have been penalized for using the tax shelters to reap tax savings that are smaller than the penalties.
 
"We're asking the IRS to temporarily suspend the collection of certain penalties while we work on legislation," said Baucus, D-Mont. "I don't condone investments in tax shelters, but I also want to make sure our small businesses survive and thrive."
 
The lawmakers sent a letter Monday to IRS Commissioner Doug Shulman, asking him to temporarily suspend efforts to collect penalties that exceed the tax benefits achieved through the tax shelter.
 
The letter also was signed by Sen. Chuck Grassley of Iowa, the top Republican on the Senate Finance Committee; Rep. John Lewis, D-Ga., chairman of the House Ways and Means Subcommittee on Oversight; and Rep. Charles Boustany of Louisiana, the top Republican on the subcommittee.
 
Internal Revenue Service spokeswoman Michelle Eldridge said the agency was reviewing the lawmakers' request.
 
The existing law imposes reporting requirements on businesses and individuals who use tax shelters that the IRS has identified as abusive. The goal is to red flag these "listed transactions" so IRS agents could more closely examine them.
 
The penalties for failing to disclose the transactions on tax forms are $100,000 a year for individuals and $200,000 a year for businesses. Taxpayers who use the tax shelters for both individual and business purposes face penalties of $300,000 a year.
 
The penalties cannot be appealed, National Taxpayer Advocate Nina Olsen said in her 2008 annual report. Olsen, an independent watchdog within the IRS, cited a case in which a small business owner saved $45,000 over three years from a tax shelter and was fined $900,000 by the IRS.
 
"The statute as written can impose unconscionable hardship on taxpayers," she wrote. "In practice, the requirement that this penalty be imposed without regard to culpability may have the effect of bankrupting middle class families who had no intention of entering into a tax shelter, an outcome that has dismayed even hardened IRS enforcement personnel."