Lance Wallach Tax Audit Pro

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Small Business Retirement Plans Fuel Litigation


Maryland Trial Lawyer

Dolan Media Newswires                              January

 

Small businesses facing audits and potentially huge tax penalties over certain types of retirement plans are filing lawsuits against those who marketed, designed and sold the plans. The 412(i) and 419(e) plans were marketed in the past several years as a way for small business owners to set up retirement or welfare benefits plans while leveraging huge tax savings, but the IRS put them on a list of abusive tax shelters and has more recently focused audits on them.

The penalties for such transactions are extremely high and can pile up quickly.

 There are business owners who owe taxes but have been assessed 2 million in penalties. The existing cases involve many types of businesses, including doctors’ offices, dental practices, grocery store owners, mortgage companies and restaurant owners. Some are trying to negotiate with the IRS. Others are not waiting. A class action has been filed and cases in several states are ongoing. The business owners claim that they were targeted by insurance companies; and their agents to purchase the plans without any disclosure that the IRS viewed the plans as abusive tax shelters. Other defendants include financial advisors who recommended the plans, accountants who failed to fill out required tax forms and law firms that drafted opinion letters legitimizing the plans, which were used as marketing tools.

A 412(i) plan is a form of defined benefit pension plan. A 419(e) plan is a similar type of health and benefits plan. Typically, these were sold to small, privately held businesses with fewer than 20 employees and several million dollars in gross revenues. What distinguished a legitimate plan from the plans at issue were the life insurance policies used to fund them. The employer would make large cash contributions in the form of insurance premiums, deducting the entire amounts. The insurance policy was designed to have a “springing cash value,” meaning that for the first 5-7 years it would have a near-zero cash value, and then spring up in value.

Just before it sprung, the owner would purchase the policy from the trust at the low cash value, thus making a tax-free transaction. After the cash value shot up, the owner could take tax-free loans against it. Meanwhile, the insurance agents collected exorbitant commissions on the premiums – 80 to 110 percent of the first year’s premium, which could exceed million.

Technically, the IRS’s problems with the plans were that the “springing cash” structure disqualified them from being 412(i) plans and that the premiums, which dwarfed any payout to a beneficiary, violated incidental death benefit rules.

Under §6707A of the Internal Revenue Code, once the IRS flags something as an abusive tax shelter, or “listed transaction,” penalties are imposed per year for each failure to disclose it. Another allegation is that businesses weren’t told that they had to file Form 8886, which discloses a listed transaction.

According to Lance Wallach of Plainview, N.Y. (516-938-5007), who testifies as an expert in cases involving the plans, the vast majority of accountants either did not file the forms for their clients or did not fill them out correctly.

Because the IRS did not begin to focus audits on these types of plans until some years after they became listed transactions, the penalties have already stacked up by the time of the audits.

Another reason plaintiffs are going to court is that there are few alternatives – the penalties are not appeasable and must be paid before filing an administrative claim for a refund.

The suits allege misrepresentation, fraud and other consumer claims. “In street language, they lied,” said Peter Losavio, a plaintiffs’ attorney in Baton Rouge, La., who is investigating several cases. So far they have had mixed results. Losavio said that the strength of an individual case would depend on the disclosures made and what the sellers knew or should have known about the risks.

In 2004, the IRS issued notices and revenue rulings indicating that the plans were listed transactions. But plaintiffs’ lawyers allege that there were earlier signs that the plans ran afoul of the tax laws, evidenced by the fact that the IRS is auditing plans that existed before 2004.

“Insurance companies were aware this was dancing a tightrope,” said William Noll, a tax attorney in Malvern, Pa. “These plans were being scrutinized by the IRS at the same time they were being promoted, but there wasn’t any disclosure of the scrutiny to unwitting customers.”

A defense attorney, who represents benefits professionals in pending lawsuits, said the main defense is that the plans complied with the regulations at the time and that “nobody can predict the future.”

An employee benefits attorney who has settled several cases against insurance companies, said that although the lost tax benefit is not recoverable, other damages include the hefty commissions – which in one of his cases amounted to 400,000 the first year – as well as the costs of handling the audit and filing amended tax returns.

Defying the individualized approach an attorney filed a class action in federal court against four insurance companies claiming that they were aware that since the 1980s the IRS had been calling the policies potentially abusive and that in 2002 the IRS gave lectures calling the plans not just abusive but “criminal.” A judge dismissed the case against one of the insurers that sold 412(i) plans.

The court said that the plaintiffs failed to show the statements made by the insurance companies were fraudulent at the time they were made, because IRS statements prior to the revenue rulings indicated that the agency may or may not take the position that the plans were abusive. The attorney, whose suit also names law firm for its opinion letters approving the plans, will appeal the dismissal to the 5th Circuit.

In a case that survived a similar motion to dismiss, a small business owner is suing Hartford Insurance to recover a “seven-figure” sum in penalties and fees paid to the IRS. A trial is expected in August.

But tax experts say the audits and penalties continue. “There’s a bit of a disconnect between what members of Congress thought they meant by suspending collection and what is happening in practice. Clients are still getting bills and threats of liens,” Wallach said. “Thousands of business owners are being hit with million-dollar-plus fines. … The audits are continuing and escalating. I just got four calls today,” he said. A bill has been introduced in Congress to make the penalties less draconian, but nobody is expecting a magic bullet.

“From what we know, Congress is looking to make the penalties more proportionate to the tax benefit received instead of a fixed amount.”

Lance Wallach can be reached at: WallachInc@gmail.com

For more information, please visit www.taxadvisorexperts.org Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, abusive tax shelters, financial, international tax, and estate planning.  He writes about 412(i), 419, Section79, FBAR, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Pubic Radio’s All Things Considered, and others. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education’s CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation, as well as the AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxadvisorexperts.com.

 

 

 

Lance Wallach
68 Keswick Lane
Plainview, NY 11803
Ph.: (516)938-5007
Fax: (516)938-6330
www.vebaplan.com

National Society of Accountants Speaker of The Year



The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

 

Retirement plans for self-employed workers

By Lance Wallach

Self-employed workers have the same retirement needs as anyone else, and maybe they have more money to invest and deduct. The problem is that they don’t have a beneficent employer who offers carrots in the form of retirement benefits so they have to grow their own. Below are a few ideas.

 SIMPLE IRA

A SIMPLE IRA is just that – simple. The name is an acronym for Savings Incentive Match Plan for Employees.

SIMPLE IRA plans are designed for small businesses with no more than 100 employees who earned $5,000 or more on the payroll for the previous calendar year, but some advisers and tax professionals think these plans are more suited for much smaller companies. They typically recommend them for employers that have seven or less employees and for someone who is not making a lot of money, and who consequently don’t have a lot to put into retirement. Even those advisors agree, however, that they are easy and simple. Including instructions, the account application is about four pages to fill out, and you can probably do it in 10 minutes.

Q & A

  • Who can open one? Generally an employer with no more than 100 employees.
  • Cost and complexity? Low.
  • Employer contribution limit? Three percent of employees' pay, matching, or two percent nonelective.
  • Employee contribution limit? $11,500 for 2009.
  • Annual reporting requirements? None.

 

SEP IRA

A SEP IRA, or Simplified Employee Pension plan, is as easy and low cost to set up and maintain as the SIMPLE IRA. But instead of the employee making contributions to the plan with a match from the employer, the employer makes the entire contribution.

Self-employed workers may find the SEP ideal due to its low setup and maintenance costs. Business owners can save quite a bit more in a SEP than the SIMPLE or other IRAs. For 2009, the contribution limit is 25 percent of net income up to $49,000.

Q & A

  • Who can open one? Any employer or self-employed person.
  • Cost and complexity? Low.
  • Employer contribution limit? 25 percent of employees' net income up to $49,000.
  • Employee contribution limit? Not applicable.
  • Annual reporting requirements? None.

Solo 401(k)

Similar to a 401(k), a Solo 401(k) lets small-business owners share the fun and benefits in a slightly different way. The business must be very small, limited to the owners of the business and their spouses.

The Solo 401(k) allows business owners to put away more money than a SIMPLE or SEP IRA, and there is some flexibility when it comes to contributions. You can contribute more or less every year, but a maximum of $16,500 for 2009, and a profit sharing component can also be added to the Solo-K.

Business owners can add the profit sharing part to maximize contributions to the plan. The employer can make a maximum tax-deductible contribution to the plan of up to 25 percent of compensation.

Q & A

  • Who can open one? Self-employed business owners with no employees other than a spouse.
  • Cost and complexity? Medium.
  • Employer contribution limit? $16,500 of salary deferral plus 25 percent of compensation, or $49,000, whichever is less, if a profit sharing component is added to the plan.
  • Employee contribution limit? Not applicable.
  • Annual reporting requirements? Yes.

Defined benefit plan

The most expensive and complicated retirement plan for the self-employed, the defined benefit plan is most appropriate for someone looking for a large tax deduction.

Employers can save a maximum of $195,000 per year. But you usually need an actuary to determine the amount that can be contributed.

It is worth noting that the defined benefit plan will give you your largest contributions, but it comes with strings attached. For instance, you have to have a plan document and probably with an actuary. It will be the most expensive to do and will usually require you to make a contribution every year.

In contrast, the Solo-K, SEP and SIMPLE IRAs allow more flexibility by allowing employers to reduce contributions in a year with poor cash flow.

Defined Benefit plans can still be a good option for business owners who want to save the most money on a tax-deferred basis as possible.

You need to be careful with most retirement plans. The IRS is cracking down on many plans sold by insurance agents and stockbrokers that have life insurance in them. If they call your retirement plan a listed, or similar transaction you will have big problems. Not only will the IRS disallow your deductions and charge you interest and penalties, but you will also be fined for not telling on yourself.

 


Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters.  He writes about 412(i), 419, and captive insurance plans. He speaks at more than ten conventions annually, writes for more than 20  publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Pubic Radio's All Things Considered, and others. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education's CPA's Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and his side has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com, or visit www.taxaudit419.com or www.taxlibrary.us.

 

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

 

California Broker, June 2011

 

Employee Retirement Plans

By Lance Wallach

 

412i, 419, Captive Insurance and Section 79 Plans; Buyer Beware

 

The IRS has been attacking all 419 welfare benefit plans, many 412i retirement plans, captive insurance plans with life insurance in them, and Section 79 plans.  IRS is aggressively auditing various plans and calling them “listed transactions,” “abusive tax shelters,” or “reportable transactions,” participation in any of which must be disclosed to the Service. The result has been IRS audits, disallowances, and huge fines for not properly reporting under IRC 6707A. 

In a recent tax court case, Curico v. Commissioner (TC Memo 2010-115), the Tax Court ruled that an investment in an employee welfare benefit plan marketed under the name “Benistar” was a listed transaction.  It was substantially similar to the transaction described in IRS Notice 95-34.  A subsequent case, McGehee Family Clinic, largely followed Curico, though it was technically decided on other grounds.  The parties stipulated to be bound by Curico regarding whether the amounts paid by McGehee in connection with the Benistar 419 Plan and Trust were deductible.  Curico did not appear to have been decided yet at the time McGehee was argued.  The McGehee opinion (Case No. 10-102) (United States Tax Court, September 15, 2010) does contain an exhaustive analysis and discussion of virtually all of the relevant issues.

Taxpayers and their representatives should be aware that the Service has disallowed deductions for contributions to these arrangements.  The IRS is cracking down on small business owners who participate in tax reduction insurance plans and the brokers who sold them.  Some of these plans include defined benefit retirement plans, IRAs, or even 401(k) plans with life insurance.

In order to fully grasp the severity of the situation, you have to understand Notice 95-34.  It was issued in response to trust arrangements that were sold to companies designed to provide deductible benefits, such as life insurance, disability and severance pay benefits.  The promoters of these arrangements claimed that all employer contributions were tax-deductible when paid.  They relied on the 10-or-more-employer exemption from the IRC § 419 limits. They claimed that the permissible tax deductions were unlimited in amount.

In general, contributions to a welfare benefit fund are not fully deductible when paid.  Sections 419 and 419A impose strict limits on the amount of tax-deductible prefunding permitted for contributions to a welfare benefit fund. Section 419(A)(F)(6) provides an exemption from Section 419 and Section 419A for certain “10-or-more-employers” welfare benefit funds.  In general, for this exemption to apply, the fund must have more than one contributing employer of which no single employer can contribute more than 10% of the total contributions.  Also, the plan must not be experience-rated with respect to individual employers.

According to the Notice, these arrangements typically involve an investment in variable life or universal life insurance contracts on the lives of the covered employees.  The problem is that the employer contributions are large relative to the cost of the amount of term insurance that would be required to provide the death benefits under the arrangement.  Also, the trust administrator can cash in or withdraw the cash value of the insurance policies to get cash to pay benefits other than death benefits.  The plans are often designed to determine an employer’s contributions or its employees’ benefits based on a way that insulates the employer to a significant extent from the experience of other subscribing employers.  In general, the contributions and claimed tax deductions tend to be disproportionate to the economic realities of the arrangements.

Benistar advertised that enrollees should expect the same type of tax benefits as listed in the transaction described in Notice 95-34.  The advertising packet listed the following benefits of enrollment:

· Virtually unlimited deductions for the employer.

· Contributions could vary from year to year.

· Benefits could be provided to one or more key executives on a selective basis.

· No need to provide benefits to rank-and-file employees.

· Contributions to the plan were not limited by qualified plan rules and would not interfere with pension, profit sharing or 401(k) plans.

· Funds inside the plan would accumulate tax-free.

· Beneficiaries could receive death proceeds free of both income tax and estate tax.

· The program could be arranged for tax-free distribution at a later date.

· Funds in the plan were secure from the hands of creditors.

The Court said that the Benistar Plan was factually similar to the plans described in Notice 95-34 at all relevant times.  In rendering its decision, the court heavily cited Curico, in which the court also ruled in favor of the IRS.  As noted in Curico, the insurance policies, which were overwhelmingly variable or universal life policies, required large contributions compared to the cost of the amount of term insurance that would be required to provide the death benefits under the arrangement.  The Benistar Plan owned the insurance contracts.

Following Curico, the Court held that the contributions to Benistar were not deductible under section 162(a) because participants could receive the value reflected in the underlying insurance policies purchased by Benistar.  This is despite the fact that payment of benefits by Benistar seemed to be contingent upon an unanticipated event (the death of the insured while employed).  As long as plan participants were willing to abide by Benistar’s distribution policies, there was never a reason to forfeit a policy to the plan.  In fact, in estimating life insurance rates, the taxpayers’ expert in Curico assumed that there would be no forfeitures, even though he admitted that an insurance company would generally assume a reasonable rate of policy lapses.

            The McGehee Family Clinic had enrolled in the Benistar Plan in May 2001 and claimed deductions for contributions to it in 2002 and 2005. The returns did not include a Form 8886, Reportable Transaction Disclosure Statement, or similar disclosure.

            The IRS disallowed the latter deduction and adjusted the 2005 return of shareholder Robert Prosser and his wife to include the $50,000 payment to the plan.  The IRS also assessed tax deficiencies and the enhanced 30% penalty totaling almost $21,000 against the clinic and $21,000 against the Prossers.  The court ruled that the Prossers failed to prove a reasonable cause or good faith exception.

 

More You Should Know

 

· In recent years, some section 412(i) plans have been funded with life insurance using face amounts in excess of the maximum death benefit a qualified plan is permitted to pay. Ideally, the plan should limit the proceeds that could be paid as a death benefit in the event of a participant’s death.  Excess amounts would revert to the plan.  Effective February 13, 2004, the purchase of excessive life insurance in any plan is considered a listed transaction if the face amount of the insurance exceeds the amount that can be issued by $100,000 or more and the employer has deducted the premiums for the insurance.

· By itself, a 412(i) plan is not a listed transaction; however, the IRS has a task force auditing 412(i) plans.

· An employer has not engaged in a listed transaction simply because it is a 412(i) plan.

· Just because a 412(i) plan was audited and sanctioned for certain items, does not necessarily mean the plan engaged in a listed transaction. Some 412(i) plans have been audited and sanctioned for issues not related to listed transactions.

Companies should carefully evaluate proposed investments in plans such as the Benistar plan.  The claimed deductions will not be available and penalties will be assessed for lack of disclosure if the investment is similar to the investments described in Notice 95-34.  In addition, under IRC 6707A, IRS fines participants a large amount of money for not properly disclosing their participation in listed, reportable, or similar transactions; an issue that was not before the Tax Court in either Curico or McGehee.  The disclosure needs to be made for every year the participant is in a plan.  The forms need to be filed properly even for years that no contributions are made.  I have received numerous calls from participants who did disclose and still got fined because the forms were not filled in properly.  A plan administrator told me that he helps hundreds of his participants file forms, and they all still received very large IRS fines for not filling in the forms properly.

 

 

Lance Wallach is National society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals.  He does expert witness testimony and has never lost a case. Contact him at 516-938-5007, wallachinc@gmail.com, or visit www.taxaudit419.com or www.lancewallach.com.  The information provided herein is not intended as legal, accounting, financial, or any other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice. 


Lance Wallach Newsletter

July 2011

419, 412i, Captive Insurance and section 79 plans continue to get large IRS fines. 

By Lance Wallach

Life insurance agents recently have started pushing the newest variety of high ticket items. After the IRS has almost put 419 plans out of business and severely curtailed abusive 412i plans they needed another way to sell large commission life insurance policies. Many of the promoters of the 419 and 412i plans are now promoting section 79 and captive insurance plans. They claim that these plans allow businesses to tax deduct life insurance. These promoters as in the past claim, that most of the benefits would be for the business owners. I have been an expert witness in many cases against these abusive plans and my side has never lost a case.

Recently my office has been receiving over fifty calls per month from people that are being threatened with large IRS fines. Most of these people (including CPAs) do not understand why this is happening. These fines are primarily the result of greed. Insurance company, insurance agent, plan promoter and even IRS greed. Insurance companies are always looking for ways to sell large amounts of life insurance. Taxpayers are constantly looking for larger tax deductions. Insurance agents want to earn large life insurance commissions. The IRS has started additional enforcement action against taxpayers and accountants.

 

Taxpayers must report certain transactions to the IRS under Section 6707A of the tax code, to help detect, deter, and shut down abusive tax shelter activities. For example, reportable transactions may include participants in 419,412i, or other insurance plans sold by insurance agents for tax deduction purposes. Other abusive, listed or reportable transactions could include captive insurance and Section 79 plans, which are usually sold by insurance agents for tax deductions. Taxpayers must disclose their participation in these and other transactions by filing a Reportable Transactions Disclosure Statement (Form 8886) with their income tax returns. People that sell these plans are called material advisors and must file form 8918 properly. Failure to report the transactions could result in huge potentially heinous monetary penalties. Accountants who sign tax returns that claim these deductions can also be called material advisors and should also file form 8918 properly. Not all 412i,captive insurance and Section 79 plans are abusive, listed or reportable transactions but almost all the Section 79 and captive insurance plans that I have recently seen are abusive. Recently I have had discussions with IRS personnel on point. But even as far back as 2002, I spoke at the annual national convention of the American Society of Pension Actuaries on potential abuses. I also was asked by the then acting IRS commissioner to meet with high level IRS executives to further discuss these issues.  At this meeting with senior IRS officials, there was a speakerphone so that high level Treasury officials could listen in on the conversation.  Within a year of this meeting, the IRS escalated attack on participants in 419 Welfare Benefit Plans.

 

The IRS has fined hundreds of taxpayers who did file under 6707A. They said that they did not fill out the forms properly, or did not file correctly. The plan administrator or a 412i advised over 200 of his clients how to file. They were then all fined by the IRS for filling out the forms wrong. The fines averaged about $200,000 per taxpayer.

 A report by the Treasury Inspector General for Tax Administration (TIGTA) found that the procedures for documenting and assessing the Section 6707A penalty were not sufficient or formalized, and cases often are not fully developed.

TIGTA evaluated the IRS’s effectiveness in identifying, developing, and applying the Section 6707A penalty. Based on its review of 114 assessed Section 6707A penalties, TIGTA determined that many of these files were incomplete or did not contain sufficient audit evidence. TIGTA also found a need for better coordination between the IRS’s Office of Tax Shelter Analysis and other functions.

The Section 6707A penalty is a stand-alone penalty and does not require an associated income tax examination; therefore, it applies regardless of whether the reportable transaction results in an understatement of tax. TIGTA determined that, in most cases, the Section 6707A penalty was substantially higher than additional tax assessments taxpayers received from the audit of underlying tax returns. I have had phone calls from taxpayers that contributed less than $100,000 to a listed or reportable transaction and were fined over $500,000. I have had phone calls from taxpayers that went into 419 or 412i plans, made no contributions, but nevertheless were fined a large amount of money for being in a listed transaction and not properly filing forms under IRC section 6707A. The IRS claims that the fines are non-appealable.

If you are, or were in a 412i, 419, captive insurance or section 79 plan you should immediately file under 6707A protectively. If you have already filed you should find someone who knows what he is doing to review the forms. I only know of two people who know how to properly file. The IRS instructions are vague and are useless if you are filing late since they presume a timely file. If a taxpayer files wrong, or fills out the forms wrong he still gets the fine. I have had hundreds of phone calls from people in that situation.

Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters.  He writes about 412(i), 419, and captive insurance and section 79 plans. He speaks at more than ten conventions annually, writes for more than 20  publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Pubic Radio's All Things Considered, and others. Lance has written numerous books including Protecting Clients from Fraud,
Incompetence and Scams
published by John Wiley and Sons, Bisk Education's CPA's Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and his side has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com, or visit www.taxaudit419.com or www.taxlibrary.us.

 

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

 

Retirement today                                Sept. 2011

                                                                                                                      

Participate in a 419 or 412i Plan or Other Abusive Tax Shelter You could be fined a large amount of Money

Lance Wallach

 

Did you get a letter from the IRS threatening to impose this fine? If you haven’t already, you still may. Consider yourself lucky if you have not because this means that you have more time to straighten this situation out. Do not wait for this letter to come from the IRS before you call an expert to help you. Even if you have been audited already, you could still get the letter and/or fine. One has nothing to do with the other, and once the fine has been imposed, it is not able to be appealed.

Many businesses that participated in a 412i retirement plan or the IRS is auditing a 419-welfare benefit plan. Many of these plans were not in compliance with the law and are considered abusive tax shelters. Many business owners are not even aware that the welfare benefit plan or retirement plan that they are participating in may be an abusive tax shelter and that they are in serious jeopardy of huge IRS penalties for each year that they have been in this type of plan.

Insurance companies, CPAs, sellers of these 419 welfare benefit plans or 412i retirement plans, as well as anyone that gave tax advice or recommended participation in one or more of these plans, also known as a material advisor, is in danger of being sued, fined by the IRS, or both.

There is help available if you think you may be involved with one of these 419 welfare benefit plans, 412i retirement plans, or any abusive tax shelter. IRS penalty abatement is an option if you act now. Feel free to contact me for more information. www.lancewallach.com

 

Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, abusive tax shelters, financial, international tax, and estate planning.  He writes about 412(i), 419, Section79, FBAR, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Pubic Radio’s All Things Considered, and others. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education’s CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation, as well as the AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxadvisorexpert.com.

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

 

 

 



Massachusetts Society of Certified Public Accounts, Inc.
Winter 2010

IRS Attacks Business Owners in 419, 412, Section 79 and Captive Insurance Plans Under Section 6707A


By Lance Wallach

 

Taxpayers who previously adopted 419, 412i, captive

insurance or Section 79 plans are in big trouble.

 

In recent years, the IRS has identified many of these arrangements as abusive devices to funnel tax deductible dollars to shareholders and classified these arrangements as listed transactions." These plans were sold by insurance agents, financial planners, accountants and attorneys seeking large life insurance commissions. In general, taxpayers who engage in a “listed transaction” must report such transaction to the IRS on Form 8886 every year that they “participate” in the transaction, and you do not necessarily have to make a contribution or claim a tax deduction to participate. Section 6707A of the Code imposes severe penalties for failure to file Form 8886 with respect to a listed transaction. But you are also in trouble if you file incorrectly. I have received numerous phone calls from business owners who filed and still got fined. Not only do you have to file Form 8886, but it also has to be prepared correctly. I only know of two people in the U.S. who have filed these forms properly for clients. They tell me that was after hundreds of hours of research and over 50 phones calls to various IRS personnel. The filing instructions for Form 8886 presume a timely filling. Most people file late and follow the directions for currently preparing the forms. Then the IRS fines the business owner. The tax court does not have jurisdiction to abate or lower such penalties imposed by the IRS.

 

"Many taxpayers who are no longer taking current tax deductions for these plans continue to enjoy the benefit of previous tax deductions by continuing the deferral of income from contributions and deductions taken in prior years."

 

Many business owners adopted 412i, 419, captive insurance and Section 79 plans based upon representations provided by insurance professionals that the plans were legitimate plans and were not informed that they were engaging in a listed transaction. Upon audit, these taxpayers were shocked when the IRS asserted penalties under Section 6707A of the Code in the hundreds of thousands of dollars. Numerous complaints from these taxpayers caused Congress to impose a moratorium on assessment of Section 6707A penalties.

 

The moratorium on IRS fines expired on June 1, 2010. The IRS immediately started sending out notices proposing the imposition of Section 6707A penalties along with requests for lengthy extensions of the Statute of Limitations for the purpose of assessing tax. Many of these taxpayers stopped taking deductions for contributions to these plans years ago, and are confused and upset by the IRS’s inquiry, especially when the taxpayer had previously reached a monetary settlement with the IRS regarding its deductions. Logic and common sense dictate that a penalty should not apply if the taxpayer no longer benefits from the arrangement. Treas. Reg. Sec. 1.6011-4(c)(3)(i) provides that a taxpayer has participated in a listed transaction if the taxpayer’s tax return reflects tax consequences or a tax strategy described in the published guidance identifying the transaction as a listed transaction or a transaction that is the same or substantially similar to a listed transaction.

 

Clearly, the primary benefit in the participation of these plans is the large tax deduction generated by such participation. Many taxpayers who are no longer taking current tax deductions for these plans continue to enjoy the benefit of previous tax deductions by continuing the deferral of income from contributions and deductions taken in prior years. While the regulations do not expand on what constitutes “reflecting the tax consequences of the strategy,” it could be argued that continued benefit from a tax deferral for a previous tax deduction is within the contemplation of a “tax consequence” of the plan strategy. Also, many taxpayers who no longer make contributions or claim tax deductions continue to pay administrative fees. Sometimes, money is taken from the plan to pay premiums to keep life insurance policies in force. In these ways, it could be argued that these taxpayers are still “contributing,” and thus still must file Form 8886.

 

It is clear that the extent to which a taxpayer benefits from the transaction depends on the purpose of a particular transaction as described in the published guidance that caused such transaction to be a listed transaction. Revenue Ruling 2004-20, which classifies 419(e) transactions, appears to be concerned with the employer’s contribution/deduction amount rather than the continued deferral of the income in previous years. Another important issue is that the IRS has called CPAs material advisors if they signed tax returns containing the plan, and got paid a certain amount of money for tax advice on the plan. The fine is $100,000 for the CPA, or $200,000 if the CPA is incorporated. To avoid the fine, the CPA has to properly file Form 8918.

 

Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, Wallach is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters. He is also a featured writer and has been interviewed on television and financial talk shows including NBC, National Pubic Radio’s All Things Considered and others. Lance authored Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education’s CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling books including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots.

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

Contact him at:

516.938.5007,

wallachinc@gmail.com, or

www.taxadvisorexperts.org, or

www.taxlibrary.us.

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