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.
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Lance Wallach, CLU, ChFC, CIMC, speaks and writes
extensively about financial planning, retirement plans, and tax reduction
strategies. He is an American Institute
of CPA’s course developer and instructor and has authored numerous best selling
books about abusive tax shelters, IRS crackdowns and attacks and other tax
matters. He speaks at more than 20 national conventions annually and writes for
more than 50 national publications. For
more information and additional articles on these subjects, visit www.vebaplan.com, www.taxlibrary.us,
lawyer4audits.com or call 516-938-5007.
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.
Material Advisors & 419 Plans Litigation
ReplyDelete412i, 419e plans litigation and IRS Audit Experts for abusive insurance based plans deemed reportable or listed transactions by the IRS.emely 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.
The U.S. Tax Court recently ruled in Avrahami v. Commissioner, the first litigated Tax Court case involving an 831(b) captive insurance company.
ReplyDeleteThe Tax Court held that two of the key factors that define "insurance" for federal income tax purposes – risk distribution and meeting commonly accepted notions of insurance – were not satisfied. Therefore, the risk purported to be insured was deemed not to be insurance.
On its face, the long-awaited Tax Court opinion was a victory for the IRS, although the Court seemed, at least implicitly, to approve of the use of risk pools. But taxpayers and their advisors should review a few key action items in regards to their captive insurance arrangements.