Did you Participate in a 419 or 412i Benefit Plan?
Lance Wallach is the nation's foremost expert on 419 plans, 412i plans, listed transactions, reportable transactions, Section 79 plans, captive Insurance plans
IRS Targets 412(i) Plansed those who sponsored 412(i) plans that were treated as listed transactions to enter a settlement program in which the taxpayer would essentially rescind the plan and pay the income taxes it would have paid if it had not adopted the plan, plus interest and reduced penalties. (Altogether, 20 different types of employee benefit structures were included in this settlement initiative.) Finally, in late 2005, the IRS began an audit campaign targeting 412(i) plans. A sample of the types of information the IRS is requesting in these audits is attached. The following are some key areas of concern: Whether the plan has been funded to produce benefits that exceed the maximums under Code section 415. In defending an audit, it is essential for the taxpayer to obtain actuarial assistance in order to demonstrate that the benefits fall within the 415 limits; Whether the plan complies with the February 2004 guidance, especially the non-discrimination rules; Whether the plan document conforms with current legal requirements; Whether the plan sponsor has complied with applicable deduction limits; and Whether the plan has been operated in accordance with its terms. We have been told in several of the audits we are handling that if the plan contains qualification defects (such as a failure of the plan document to be timely amended for EGTRRA), the plan is not eligible for correction under the IRS Audit CAP program –- even if the defects do not fall within the areas which the IRS considers abusive. Other IRS officials have stated a different view; but the fact that we are getting mixed messages from the Service emphasizes the need to proceed with great care in these cases.
Given the substantial taxes and penalties that may be assessed if the IRS concludes that a 412(i) plan has not been properly structured or administered -– and especially if it concludes that the plan is a listed transaction and the taxpayer failed to file the proper notice –- it is imperative that taxpayers obtain expert assistance from the outset in the handling of an audit. With competent preparation, analysis and presentation, it may be possible to substantially mitigate the damage.
The fact that the IRS is auditing 412(i) plans does not mean that every 412(i) plan is abusive. Indeed, a properly structured and administered 412(i) plan (sometimes called a “safe harbor” plan) can be a valuable structure for many employers. Distinguishing between abusive plans and those that are proper will be the challenge in this audit initiative.
IRS Targets 412(i) Plansed those who sponsored 412(i) plans that were treated as listed transactions to enter a settlement program in which the taxpayer would essentially rescind the plan and pay the income taxes it would have paid if it had not adopted the plan, plus interest and reduced penalties. (Altogether, 20 different types of employee benefit structures were included in this settlement initiative.)
ReplyDeleteFinally, in late 2005, the IRS began an audit campaign targeting 412(i) plans. A sample of the types of information the IRS is requesting in these audits is attached. The following are some key areas of concern:
Whether the plan has been funded to produce benefits that exceed the maximums under Code section 415. In defending an audit, it is essential for the taxpayer to obtain actuarial assistance in order to demonstrate that the benefits fall within the 415 limits;
Whether the plan complies with the February 2004 guidance, especially the non-discrimination rules;
Whether the plan document conforms with current legal requirements;
Whether the plan sponsor has complied with applicable deduction limits; and
Whether the plan has been operated in accordance with its terms.
We have been told in several of the audits we are handling that if the plan contains qualification defects (such as a failure of the plan document to be timely amended for EGTRRA), the plan is not eligible for correction under the IRS Audit CAP program –- even if the defects do not fall within the areas which the IRS considers abusive. Other IRS officials have stated a different view; but the fact that we are getting mixed messages from the Service emphasizes the need to proceed with great care in these cases.
Given the substantial taxes and penalties that may be assessed if the IRS concludes that a 412(i) plan has not been properly structured or administered -– and especially if it concludes that the plan is a listed transaction and the taxpayer failed to file the proper notice –- it is imperative that taxpayers obtain expert assistance from the outset in the handling of an audit. With competent preparation, analysis and presentation, it may be possible to substantially mitigate the damage.
The fact that the IRS is auditing 412(i) plans does not mean that every 412(i) plan is abusive. Indeed, a properly structured and administered 412(i) plan (sometimes called a “safe harbor” plan) can be a valuable structure for many employers. Distinguishing between abusive plans and those that are proper will be the challenge in this audit initiative.