The Internal Revenue Service announced it’s extending the grace period allotted for small business owners to pay certain tax-shelter penalties –  as Congress prepares to write legislation to address the issue.

The deadline was supposed to be the end of September, but Congress is looking at a bill that would change small-business responsibility regarding the tax-shelter penalties. IRS held off the penalties — until Dec. 31 — to give legislators a little extra time to pass the bill, which would create long-term protection for small-business owners from being responsible for the penalties.

What’s it mean?
Most of the penalties, some as high as $1 million, were associated with small-business pension or benefits plans. Business owners are howling because some of the plans were set up as shelters on the advice of tax experts who said they had IRS’s approval.

The main problem for small business involves so-called “listed transactions,” tax shelters the IRS now has designated as suspect. Many small-business owners bought such retirement plans, which were listed by the IRS, but are now facing fat penalties.

IRS Commissioner Doug Shulman wrote a letter to the chairmen and ranking members of the Congressional tax-writing committees, announcing the reprieve on penalties.

In that letter, Shulman also noted, “Clearly, a number of taxpayers have been caught in a penalty regime that the legislation did not intend. I understand that Congress is still considering this issue, and that a bipartisan, bicameral, bill may be in the works.”