Showing posts with label 412i. Show all posts
Showing posts with label 412i. Show all posts
Business Owners in 419, 412i, Section 79 and Captive Insurance Plans Will Probably Be Fined by the IRS Under Section 6707A
Business Owners in
419, 412i, Section 79 and Captive Insurance Plans Will Probably Be Fined by the
IRS 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 the taxpayer does not
necessarily have to make a contribution or claim a tax deduction to be deemed
to participate. Section 6707A of the Code imposes severe penalties ($200,000
for a business and $100,000 for an individual) for failure to file Form 8886
with respect to a listed transaction. But a taxpayer can also be in trouble if
they file incorrectly. I have received numerous phone calls from business
owners who filed and still got fined. Not only does
the taxpayer have to
file Form 8886, but it has to be prepared correctly. I only know of two people
in the United States who have filed these forms properly for clients. They told
me that the form was prepared after hundreds of hours of research and over
fifty phones calls to various IRS personnel. The filing instructions for Form
8886 presume a timely filing. 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 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
they 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 the deductions
taken in prior
years. 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. It follows that
taxpayers who no longer enjoy the benefit of those large deductions are no
longer “participating” in the listed transaction.
But that is not the
end of the story. 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. This language may provide the taxpayer with a solid argument
in the event of an audit.
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; speaks at more than ten conventions
annually; writes for over fifty publications; is quoted regularly in the press;
and has been featured on TV and radio financial talk shows. Lance has written
numerous books including Protecting Clients from Fraud, Incompetence and
Scams (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 has
never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or
visit www.taxadvisorexperts.org or www.taxlibrary.us.
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.
Help with Common IRS Problems: Section 79 Plans: Section 79, Captive Insurance, I...
Help with Common IRS Problems: Section 79 Plans: Section 79, Captive Insurance, I...: Section 79 Plans: Section 79, Captive Insurance, IRS Audits and Lawsuits on 419 and 412i Plans (click the link to go to the page) Hg Expe...
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Welfare Benefit Plans Funded with Permanent Life Insurance Are Abusive Tax Scams
Similarly, the IRS position on single employer welfare benefit plans invested in permanent life insurance where the employer deducts more than the term cost of insurance is that those plans are also abusive tax scams.
• Millennium Plan
• Insured Security Plan
• Corporate Benefit Services Plan
• Sea Nine Associates VEBA
• Niche National Benefit Plans
• Professional Benefit Trust (PBT)
• Koresko STEP Plan
• Bisys Plan
• Xelan Plan
• Sterling Plan
Question: What is the IRS position on these plans?
Answer: The IRS position appears to be that all multiple employer welfare benefit plans funded with permanent life insurance are abusive tax scams. Their history is to open promoter audits on every such plan and eventually to obtain the client lists from the promoters and then audit their clients. The IRS position on single employer welfare benefit plans that are spin-offs of the multiple employer plans appears to be the same.
Question: Has the IRS approved any multiple or single employer welfare benefit plan invested in permanent life insurance?
Answer: Though an IRS private letter ruling is not immediately public, it is my understanding that the IRS has never “approved” of any multiple or single employer welfare benefit plan where permanent life insurance was used as a funding vehicle and the participating employer took a deduction for anything other than the current term insurance cost.
Question: Are the IRS audits coordinated?
Answer: Yes. The IRS audits are both targeted and coordinated. They are targeted meaning that the IRS obtains a list of the participating employers in a plan promotion and audits the participating employers (and owners) for the purpose of challenging the deductions taken with respect to the plan. The audits are coordinated meaning that there is an IRS Issue Management Team for each promotion that has responsibility for both managing the promoter audit(s) and also developing the coordinated position to be followed by the Examination Agents. Their intention is that all taxpayers under audit will receive the similar treatment in Exam. There are also IRS Offices that specialize in 419 audits. For example, IRS offices in upstate New York and in El Monte California will manage many audits of specific promotions.
Question: What is the general IRS position on these plans?
Answer: Though there can be some differences among plans, the basic IRS position is that the plans are not welfare benefit plans, but really plans of deferred compensation. As such, the contributions remain deductible at the business level but are included in the owner’s 1040 income for every open year and the value of the insurance policy with respect to contributions in closed years is included in the owner’s income either in the first open year or the year of termination or transfer. The IRS will normally apply 20% penalties on the tax applied and 30% with respect to non-reporting cases (see discussion below).
The above sales pitch was not written by Lance Wallach. Lance gets hundreds of phone calls yearly about 419 and other abusive tax shelters. As an expert witness Lance Wallach’s side has never lost a case. The above sales pitch fails to mention that unless the business owner has properly filed under 6707a they will probably receive an additional large IRS fine.
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.
ABOUT THE AUTHOR: Lance Wallach
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 does expert witness testimony and has never lost a case.
Copyright Lance Wallach, CLU, CHFC
More information about Lance Wallach, CLU, CHFC
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
• Insured Security Plan
• Corporate Benefit Services Plan
• Sea Nine Associates VEBA
• Niche National Benefit Plans
• Professional Benefit Trust (PBT)
• Koresko STEP Plan
• Bisys Plan
• Xelan Plan
• Sterling Plan
Question: What is the IRS position on these plans?
Answer: The IRS position appears to be that all multiple employer welfare benefit plans funded with permanent life insurance are abusive tax scams. Their history is to open promoter audits on every such plan and eventually to obtain the client lists from the promoters and then audit their clients. The IRS position on single employer welfare benefit plans that are spin-offs of the multiple employer plans appears to be the same.
Question: Has the IRS approved any multiple or single employer welfare benefit plan invested in permanent life insurance?
Answer: Though an IRS private letter ruling is not immediately public, it is my understanding that the IRS has never “approved” of any multiple or single employer welfare benefit plan where permanent life insurance was used as a funding vehicle and the participating employer took a deduction for anything other than the current term insurance cost.
Question: Are the IRS audits coordinated?
Answer: Yes. The IRS audits are both targeted and coordinated. They are targeted meaning that the IRS obtains a list of the participating employers in a plan promotion and audits the participating employers (and owners) for the purpose of challenging the deductions taken with respect to the plan. The audits are coordinated meaning that there is an IRS Issue Management Team for each promotion that has responsibility for both managing the promoter audit(s) and also developing the coordinated position to be followed by the Examination Agents. Their intention is that all taxpayers under audit will receive the similar treatment in Exam. There are also IRS Offices that specialize in 419 audits. For example, IRS offices in upstate New York and in El Monte California will manage many audits of specific promotions.
Question: What is the general IRS position on these plans?
Answer: Though there can be some differences among plans, the basic IRS position is that the plans are not welfare benefit plans, but really plans of deferred compensation. As such, the contributions remain deductible at the business level but are included in the owner’s 1040 income for every open year and the value of the insurance policy with respect to contributions in closed years is included in the owner’s income either in the first open year or the year of termination or transfer. The IRS will normally apply 20% penalties on the tax applied and 30% with respect to non-reporting cases (see discussion below).
The above sales pitch was not written by Lance Wallach. Lance gets hundreds of phone calls yearly about 419 and other abusive tax shelters. As an expert witness Lance Wallach’s side has never lost a case. The above sales pitch fails to mention that unless the business owner has properly filed under 6707a they will probably receive an additional large IRS fine.
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.
ABOUT THE AUTHOR: Lance Wallach
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 does expert witness testimony and has never lost a case.
Copyright Lance Wallach, CLU, CHFC
More information about Lance Wallach, CLU, CHFC
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
Don't face an audit alone! You can avoid 6707A penalties if you are facing an IRS 419 plan or 412i plan audit. Call these experts today for a free phone consultation.
Don't face an audit alone! You can avoid 6707A penalties if you are facing an IRS 419 plan or 412i plan audit. Call these experts today for a free phone consultation.
http://taxadvisorexperts.com/
http://taxadvisorexperts.com/
Vebaplan.org helps with IRS audit issues of 419e, 412i, tax shelter penalties, IRS fines of listed transactions & material advisors. Retirement, benefit plans experts for small business and CPAs, financial advisors,419 plan,captive Insurance plan
Vebaplan.org helps with IRS audit issues of 419e, 412i, tax shelter penalties, IRS fines of listed transactions & material advisors. Retirement, benefit plans experts for small business and CPAs, financial advisors,419 plan,captive Insurance plan
http://taxaudit419.com/
http://taxaudit419.com/
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