Showing posts with label 419 and 412 Plan. Show all posts
Showing posts with label 419 and 412 Plan. Show all posts
Reportable Transactions .com: 419 Plan, 412i Plan
Reportable Transactions .com: 419 Plan, 412i Plan, Welfare benefit plan assistan...: 419 Plan, 412i Plan, Welfare benefit plan assistance, audits & Abusive tax shelters
Finance Experts Forum: Lance Wallach, Finance Expert Witness, 419, 412i
Finance Experts Forum: Lance Wallach, Finance Expert Witness, 419, 412i: Lance Wallach, Finance Expert Witness, 419, 412i Lance is an expert Get Him On Your Side
Disability and Lawsuits - Lance Wallach: Servicers for 419, 419e, 412i, Section 79, captive...
Disability and Lawsuits - Lance Wallach: Servicers for 419, 419e, 412i, Section 79, captive...: Servicers for 419, 419e, 412i, Section 79, captive insurance, listed transactions
Similarities and Differences Between IRC Section 419A(f)(6) and IRC Section 419(e) Plans CPA’s Guide to Life Insurance
Author/Moderator: Lance Wallach, CLU, CHFC, CIMC
Below is an excerpt from one of Lance Wallach’s new books.
Similarities and Differences Between IRC Section 419A(f)(6) and IRC Section 419(e) Plans
One popular type of listed transaction is the so-called “welfare benefit plan,” which once relied on IRC §419A(f)(6) for its authority to claim tax deductions, but now more commonly relies on IRC §419(e). The IRC §419A(f)(6) plans used to claim that the section completely exempted business owners from all limitations on how much tax could be deducted. In other words, it was claimed, tax deductions were unlimited. These plans featured large amounts of life insurance and accompanying large commissions, and were thus aggressively pushed by insurance agents, financial planners, and sometimes even accountants and attorneys. Not to mention the insurance companies themselves, who put millions of dollars in premiums on the books and, when confronted with questions about the outlandish tax claims made in marketing these plans, claimed to be only selling product, not giving opinions on tax questions.
How Hartford Life and Other Insurance Companies Tricked their Agents and Got People in Trouble with the IRS - HG.org
How Hartford Life and Other Insurance Companies Tricked their Agents and Got People in Trouble with the IRS - HG.org
Agents from Hartford and other insurance companies were shown ways to sell large life insurance policies. This “Welfare Benefit Trust 419 plan or 412i plan should be shown to their profitable small business owners as a cure for paying too much taxes.
A Welfare Benefit Trust 419 plan essentially works like this:
• The business provides a fringe benefit for their employees, such as health insurance and life insurance.
• The benefit is established in the name of a trust and funded with a cash value life insurance policy
• Here is the gravy: the entire amount deposited into the trust (insurance policy) is tax deductible to the company,and
• The owners of the company can withdraw the cash value from the policy in later years tax-free.
• The business provides a fringe benefit for their employees, such as health insurance and life insurance.
• The benefit is established in the name of a trust and funded with a cash value life insurance policy
• Here is the gravy: the entire amount deposited into the trust (insurance policy) is tax deductible to the company,and
• The owners of the company can withdraw the cash value from the policy in later years tax-free.
Read more by clicking the link above!
419 LITIGATION, EXPERT WITNESS, Lance Wallach
419 LITIGATION, EXPERT WITNESS, Lance Wallach: Current issues: 419 Tax Expert Witness Testimony, Abusive Tax Transactions, Captive Life Insurance Problems, IRS Help by Lance Wallach
EP Abusive Tax Transactions - Certain Trust Arrangements Seeking to Qualify for Exemption from Section 419
EP Abusive Tax Transactions - Certain Trust Arrangements Seeking to Qualify for Exemption from Section 419
Notice 95-34 discusses tax problems raised by certain trust arrangements seeking to qualify for exemption from IRC section 419. This transaction involves the claiming of deductions under IRC sections 419 and 419A for contributions to multiple employer welfare benefit funds. In general, an employer may deduct contributions to a welfare benefit fund when paid, but only if the contributions qualify as ordinary and necessary business expenses of the employer and only to the extent allowable under IRC sections 419 and 419A. There are strict limits on the amount of tax-deductible pre-funding permitted for contributions to a welfare benefit fund.
IRC section 419A(f)(6) provides an exemption from IRC sections 419 and 419A for a welfare benefit fund that is part of a 10 or more employer plan. In general, for this exemption to apply, an employer normally cannot contribute more than 10 percent of the total contributions contributed under the plan by all employers, and the plan must not be experience rated with respect to individual employers.
Promoters have offered trust arrangements that are used to provide life insurance, disability, and severance pay benefits. The promoters enroll at least 10 employers in their multiple employer trusts and claim that all employer contributions are tax deductible when paid, relying on the 10-or-more-employer exemption from the limitations under IRC sections 419 and 419A. Often the trusts maintain separate accounting of the assets attributable to each subscribing employer’s contributions.
Notice 95-34 puts taxpayers on notice that deductions for contributions to these arrangements are disallowable for any one of several reasons (e.g., the arrangements may provide deferred compensation, the arrangements may be separate plans for each employer, the arrangements may be experience rated in form or operation, or the contributions may be nondeductible prepaid expenses).
On July 17, 2003, final regulations (T.D. 9079) relating to whether a welfare benefit fund is part of a 10 or more employer plan (as defined in section 419A(f)(6) of the Internal Revenue Code) were published in the Federal Register (68 FR 42254).
In addition, in a case decided by the Third Circuit Court of Appeals, the contributions to the plan were taxable to the owners of the corporate employers as constructive dividends (Neonatology Associates, P.A., Et Al. v. Commissioner, 299 F.3rd 221 - 3rd Cir. 2002).
Notice 95-34 discusses tax problems raised by certain trust arrangements seeking to qualify for exemption from IRC section 419. This transaction involves the claiming of deductions under IRC sections 419 and 419A for contributions to multiple employer welfare benefit funds. In general, an employer may deduct contributions to a welfare benefit fund when paid, but only if the contributions qualify as ordinary and necessary business expenses of the employer and only to the extent allowable under IRC sections 419 and 419A. There are strict limits on the amount of tax-deductible pre-funding permitted for contributions to a welfare benefit fund.
IRC section 419A(f)(6) provides an exemption from IRC sections 419 and 419A for a welfare benefit fund that is part of a 10 or more employer plan. In general, for this exemption to apply, an employer normally cannot contribute more than 10 percent of the total contributions contributed under the plan by all employers, and the plan must not be experience rated with respect to individual employers.
Promoters have offered trust arrangements that are used to provide life insurance, disability, and severance pay benefits. The promoters enroll at least 10 employers in their multiple employer trusts and claim that all employer contributions are tax deductible when paid, relying on the 10-or-more-employer exemption from the limitations under IRC sections 419 and 419A. Often the trusts maintain separate accounting of the assets attributable to each subscribing employer’s contributions.
Notice 95-34 puts taxpayers on notice that deductions for contributions to these arrangements are disallowable for any one of several reasons (e.g., the arrangements may provide deferred compensation, the arrangements may be separate plans for each employer, the arrangements may be experience rated in form or operation, or the contributions may be nondeductible prepaid expenses).
On July 17, 2003, final regulations (T.D. 9079) relating to whether a welfare benefit fund is part of a 10 or more employer plan (as defined in section 419A(f)(6) of the Internal Revenue Code) were published in the Federal Register (68 FR 42254).
In addition, in a case decided by the Third Circuit Court of Appeals, the contributions to the plan were taxable to the owners of the corporate employers as constructive dividends (Neonatology Associates, P.A., Et Al. v. Commissioner, 299 F.3rd 221 - 3rd Cir. 2002).
Captive Insurance Plans, Want to Get Audited? - HG.org
Captive Insurance Plans, Want to Get Audited? - HG.org
The insurance industry have been conjuring ways to make life insurance premiums tax deductible. Over the years we have seen many schemes that have failed IRS scrutiny. Welfare benefit plans set up under I.R.C. section 419, 412(e) plans and Producer Owned Reinsurance Companies (PORCs) are all common examples.
When one scheme fails it isn’t long before a resourceful promoter comes up with a different product. Inevitably promoters find some lawyer or accountant to draft a favorable opinion letter and a new industry is born. In a few years, however, the IRS catches up and declares the arrangement to be a listed transaction and abusive tax shelter. As an expert witness I have never lost a case in this field. It is easy to beat the deep pockets of the insurance companies who provide product to these plans. Even though they have business owners sign fraudulent disclaimers saying that the owners will get their own tax advice. These disclaimers are then used when the inevitable happens, the IRS audits and the business owner sues the insurance company.
The latest entries seeking to find a way to make life insurance premiums deductible is a small business captive insurance company or CIC.
The latest entries seeking to find a way to make life insurance premiums deductible is a small business captive insurance company or CIC.
Abusive Welfare Benefit and Retirement Plans Can Lead to Severe Penalties for Accountants
- By Lance Wallach
- scenario that may play out something like this: you sign a client’s tax return that claims a tax
- deduction for participation in a “welfare benefit plan”. A few years pass, and nothing happens.
- Then, on audit, the deductions are disallowed and your client is hit with back taxes, penalties, and
- interest. He discovers that he may be looking at a large penalty for not disclosing his participation
- in the plan to the IRS.
- Naturally, at this point, your client wants out of the plan. But he discovers that he cannot get the
- money that he has contributed out of the plan. He finds that the money is being used by the plan
- sponsor to fight the IRS; his money is being used to defend a plan that he no longer wants to be
- in. This is claimed to be legal. Or he may even find that the money is simply gone, that it has
- been stolen or otherwise misappropriated.
- And now you find that you are a “material advisor” with respect to your client’s participation in
- the plan. Like your client, you were supposed to disclose your role here; in your case, as a
- “material advisor”. You also may be looking at a large penalty for failing to disclose.
- If you think this could never happen to you, think again.
- Welfare benefit plans are a creation of and are sanctioned by Section 419 of the Internal Revenue
- Code. There are single employer plans and multiple employer plans; the latter rely mostly on IRC
- Section 419A (f) (6) (in the most common cases where there are ten or more employers as part
- of the same plan). The 419A(f)(6) plans are, and perhaps always were, generally regarded as
- abusive, and were substantially curtailed in recent years by harsh IRS regulation. Amazingly,
- however, they refuse to totally die, and are still being marketed. These plans are called listed
- transactions (more on that later).
- While the principle purpose of this article is to discuss the current state of the welfare benefit
- plan, and everything outside of this paragraph will do just that, it is perhaps worth noting that
- welfare benefit plans are not the only subject of current IRS scrutiny and/or regulation. The
- Section 412(i) defined benefit plan, for example, is such a target that a task force has been
- formed internally solely to audit 412(i) plans. Many of them are being deemed listed transactions,
- many of the plans are being involuntarily terminated, and back taxes, penalties, and interest are
- being assessed. Not surprisingly, all of this has resulted in considerable litigation.
- Single employer welfare benefit plans are now more popular than multiple employer plans. All
- welfare benefit plans tend to share certain characteristics, however. They tend to be marketed
- most frequently by insurance agents and financial planners, and sometimes by accountants and
- attorneys. Prospects tend to be professionals and profitable small businesses. The most attractive
- selling point is the ability to claim large tax deductions and remove money tax free. Life insurance
- tends to be the funding vehicle. Often cheap term insurance is purchased for rank and file
- workers and some form of permanent coverage (universal life, variable life, etc., for the owners
- and key employees. But many times workers are completely left out of the plan. For businesses
- looking to do as little as possible for workers, a selling point is that the great majority of benefits,
- in most cases, eventually go to the owners. This type of discrimination was recently addressed
- by IRS Notice 2007-84, which disallowed tax deductions and penalties with respect to welfare
- benefit plans that discriminate. If done correctly, the plans can accomplish things like facilitating
- estate planning, business succession, and asset protection. But the promised tax deduction is
- usually the sizzle that sells the steak.
- In October of 2007, welfare benefit plans were affected by IRS rulings. The two most important
- developments were Revenue Ruling 2007-65, which declared, in essence, that premiums paid
- inside of a welfare benefit plan for cash value life insurance were not tax deductible, and Notice
- 2007-83, which identified the trust within welfare benefit plans involving cash value life insurance
- policies, AND substantially similar arrangements, as listed transactions. In other words, in
- essence, not only are premiums paid for cash value life insurance policies in welfare benefit plans
- not tax deductible, but, and far more importantly, the plans themselves are now listed
- transactions. This, in turn, means that most welfare benefit plans are now listed transactions,
- because most feature cash value life insurance. This designation creates disclosure obligations
- with absurdly harsh penalties both for failure to disclose or incorrectly or incompletely disclosing,
- as we shall soon see.
- A listed transaction, basically, is any transaction identified as such by specific IRS guidance OR
- any transaction substantially similar to the specifically identified transaction. Participants in listed
- transaction must file Form 8886 with both the Service and the Office of Tax Shelter Analysis.
- Failure to timely and completely file leads to penalties of $100,000 for individuals and $200,000
- for corporate taxpayers.
- The practitioner has filing requirements, also, which can lead to equally severe penalties, if the
- practitioner qualifies as a “material advisor” with respect to one of these transactions. What is a
- material advisor? Basically, someone who gives advice, sells, or otherwise plays a significant part
- in the promotion, sale, or paperwork with respect to a taxpayer’s participation in a listed
- transaction. Put simply, from an accountant’s standpoint, you must give advice, the client must
- do it, and you must satisfy a certain income threshold with respect to the transaction, usually
- $10,000. The accountant who signs a return taking a tax deduction with respect to the
- transaction is surely a material advisor, if the income threshold is met.
- A problem is that many accountants are not even aware of these plans. Often it is discovered
- when preparing the client’s tax return, at which point the client expects you to allow the
- deduction and sign the return, since the client was sold a tax deduction. Or worse yet, the
- deduction may already have been disallowed on audit. The point is that, far too frequently, the
- practitioner does not even discover a client’s involvement in a listed transaction until too much
- damage has already been done. This is often the case if the contribution has already been made,
- as it usually has, and irretrievably so if the deductions have already been disallowed on audit. And
- added to all of this is the distaste that most professionals must have for all of these policing types
- of duties, to say nothing of the difficulties that are created with clients and, probably, the loss of
- some clients.
- The material advisor must file Form 8918 describing her exact role in the client’s participation in
- the transaction. Failure to file can lead to penalties imposed on the advisor that are as severe as
- those imposed on taxpayers ($100,000 for individuals and $200,000 for corporations) who fail to
- file Form 8886. The accountant may escape material advisor status by not meeting the $10,000
- income threshold. A problem, however, is the accountant who is paid $10,000 in the aggregate
- by the client, but not that much specifically with respect to the listed transaction. Does such a
- person satisfy the income threshold? The author and his associates have discussed this point,
- among others, directly with IRS personnel who actually wrote published guidance in this area.
- The best we have been able to get is a declaration that any test that would be applied to the
- determination of any of these issues would have to consider all surrounding facts and
- circumstances. This would be unlikely to yield any general rules, for each situation has its own
- facts and circumstances.
- Another section that the practitioner, or at least the prudent one, should be aware of, largely apart
- from what has been discussed so far in this article, is Section 6701, entitled “penalties for aiding
- and abetting understatement of tax liability.” This penalty is imposed upon those who assist in,
- procure, or advise while knowing or having reason to believe that the subject matter will be used
- in connection with any material matter arising under the tax laws and who know that the use
- thereof would result in the understatement of another person’s tax liability. The penalty may be
- applied separately to each occurrence, and it is $1,000 if an individual is the taxpayer and $10,000
- for a corporate taxpayer.
- Three (3) definitions are now in order, which will hopefully help to clarify any confusion that
- may exist in the reader’s mind. A “material advisor” is any person who provides any material aid,
- assistance, or advice with respect to organizing, managing, promoting, selling, implementing,
- insuring, or carrying out any reportable transaction, and who directly or indirectly derives gross
- income in excess of a certain threshold amount. More on threshold soon, but the most common
- one is $10,000 for listed transactions. A “reportable transaction”, basically, is any transaction
- which has been deemed to have a potential for tax avoidance or evasion. That is pretty broad, and
- the reader should consult the regulations under section 6011 for more on this. Finally, a “listed
- transaction” is a reportable transaction which is identical or substantially similar to a transaction
- specifically identified as a tax avoidance transaction.
- As for threshold amounts, in the case of reportable transactions, it is $50,000, if substantially all
- tax benefits are provided to natural persons, and $250,000 in other cases. Natural person is
- construed most broadly, generally ignoring trusts, corporations, and other such entities. For listed
- transactions, the numbers are $10,000 (previously discussed) and $25,000.
- Lance Wallach speaks and writes about benefit plans, and has authored numerous books for the
- AICPA, Bisk Total tape, and others. He can be reached at (516) 938-5007 or
- wallachinc@gmail.com. For more articles on this or other subjects, feel free to visit his website
- at www.taxlibrary.us.
- The information contained in this article is not intended as legal, accounting, financial or any
- other type of advice for any specific individual or entity. You should seek such advice from an
- appropriate professional.
Form 8886 & 419 Plans Litigation: Fbar Reports. LAnce Wallach, Expert Witness.
Form 8886 & 419 Plans Litigation: Fbar Reports. LAnce Wallach, Expert Witness.: Fbar-REPORT OF FOREIGN BANK AND FINANCIAL ACCOUNTS
Form 8886 & 419 Plans Litigation: Small Business Retirement Plans Fuel Litigation
Form 8886 & 419 Plans Litigation: Small Business Retirement Plans Fuel Litigation: Maryland Trial Lawyer Dolan Media Newswires
Lance Wallach helps with 419 problems. 412i 419 abusive tax shelters IRS audits, lawsuits, Lance Wallach will help www.vebaplan.com
419, 412i, IRS audits, Lance Wallach, Google him helps, The following had something to do with this.
Dennis Cunning Steve Toth Randall Smith Paul Kaplan Herb Green Casey Hermansen
Larry Bell Scott Ridge Judy Carsrud Jeffrey Glasberg Herb McDowel
Greg Roper Joseph Donnelly
Norm Bevan Michael Sonnenberg
r Anthony Fakouri
Steve Burgess
Robin Weingast
IRS audits 419 412i captive insurance and section 79 plans. Lance Wallach will help you.
IRS audits section 79 419 412i plans. www.lancewallach.com for help on IRS raids, Niche, Robin Weingast, Lance Wallach helps, Sadi trust, grist Mill trust, nova 419 welfare benefit plan problems and how Lance Wallach helps.www.vebaplan.com for more help. Sea Nine VEBA, 419, 412i, IRS audits,Sea Nine VEBA, are all audited by the IRS and people in them probably need help.
Sea Nine VEBA, 419,412i are all IRS audit targets. Lance Wallach can help, www.tazaudit419.com
419, 412i, IRS audits, Lance Wallach, Google him helps, The following had something to do with this. Author to write about these problems.
Dennis Cunning Steve Toth Randall Smith Paul Kaplan Herb Green Casey Hermansen
Larry Bell Scott Ridge Judy Carsrud Jeffrey Glasberg Herb McDowel
Greg Roper Joseph Donnelly
Norm Bevan Michael Sonnenberg
Anthony Fakouri
Steve Burgess
Robin Weingast
" Lance Wallach will help fix the problems that people have that are or were in the plans.
"Professional Benefits Trust" PBI
"Sea Nine Veba"
Bisys
The "Beta Plan"
The "Millennium Plan"
Niche
The "Ridge Plan"
The "Compass Welfare Benefit Plan"
"Section 79 Plans"
"Captive Insurance"
and other similar "412i retirement plans" and "419 welfare benefit plans
Lance Wallach, www.taxaudit419.com will help you with these problems and more like section 79, captive insurance lawsuits and IRS audits. People in the section 79 plans 419 welfare benefit plans captive insurance and 412i pension plans are getting audited by the IRS and then they sue. Google Lance Wallach for help with this. If you need help Lance Wallach as an expert witness has never lost a case. You need help NOW.
Customers of James Cunningham d/b/a Cunningham Financial or CFG Consulting LLC? We want to speak with you!
IRS audits and lawsuits result from 419 412i captive insurance and section 79 plans. As an expert witness Lance Wallach has never lost a case.
January ...
ts www.lancewallach.com for help (plainview)
(google map) (yahoo map)
compensation: no pay
419, 412i, IRS audits, Lance Wallach, Google him helps, The following had something to do with this.
Dennis Cunning Steve Toth Randall Smith Paul Kaplan Herb Green Casey Hermansen
Larry Bell Scott Ridge Judy Carsrud Jeffrey Glasberg Herb McDowel
Greg Roper Joseph Donnelly
Norm Bevan Michael Sonnenberg
r Anthony Fakouri
Steve Burgess
Robin Weingast
IRS audits 419 412i captive insurance and section 79 plans. Lance Wallach will help you.
IRS audits section 79 419 412i plans. www.lancewallach.com for help on IRS raids, Niche, Robin Weingast, Lance Wallach helps, Sadi trust, grist Mill trust, nova 419 welfare benefit plan problems and how Lance Wallach helps.www.vebaplan.com for more help. Sea Nine VEBA, 419, 412i, IRS audits,Sea Nine VEBA, are all audited by the IRS and people in them probably need help.
Sea Nine VEBA, 419,412i are all IRS audit targets. Lance Wallach can help, www.tazaudit419.com
419, 412i, IRS audits, Lance Wallach, Google him helps, The following had something to do with this. Author to write about these problems.
Dennis Cunning Steve Toth Randall Smith Paul Kaplan Herb Green Casey Hermansen
Larry Bell Scott Ridge Judy Carsrud Jeffrey Glasberg Herb McDowel
Greg Roper Joseph Donnelly
Norm Bevan Michael Sonnenberg
Anthony Fakouri
Steve Burgess
Robin Weingast
" Lance Wallach will help fix the problems that people have that are or were in the plans.
"Professional Benefits Trust" PBI
"Sea Nine Veba"
Bisys
The "Beta Plan"
The "Millennium Plan"
Niche
The "Ridge Plan"
The "Compass Welfare Benefit Plan"
"Section 79 Plans"
"Captive Insurance"
and other similar "412i retirement plans" and "419 welfare benefit plans
Lance Wallach, www.taxaudit419.com will help you with these problems and more like section 79, captive insurance lawsuits and IRS audits. People in the section 79 plans 419 welfare benefit plans captive insurance and 412i pension plans are getting audited by the IRS and then they sue. Google Lance Wallach for help with this. If you need help Lance Wallach as an expert witness has never lost a case. You need help NOW.
Customers of James Cunningham d/b/a Cunningham Financial or CFG Consulting LLC? We want to speak with you!
IRS audits and lawsuits result from 419 412i captive insurance and section 79 plans. As an expert witness Lance Wallach has never lost a case.
January ...
Free Finance Forum: 412i, 412e3, www.412iplans.org Lawline.com Continu...
Free Finance Forum: 412i, 412e3, www.412iplans.org Lawline.com Continu...: http://www.youtube.com/v/xH0q05BAHdM?version=3&autohide=1&showinfo=1&attribution_tag=jk0wDogc68HNpwlCQxp7GA&autoplay=1&a...
Scams & schemes involving Internal Revenue Code Section 412(i) pension plan fraud have taken many business owners by surprise. Told by insurance companies that contributions to their employee retirement plans could be up to ten times more than a traditional plan, and that withdrawing up to 80% of funds could be done on a pre-tax basis, business owners say that they were taken – all for big insurance company commissions.
Read more: http://employment-law.freeadvice.com/employment-law/pensions_benefits/412-i-pension-plan-fraud.htm#ixzz34QP4k8iZ
Under Creative Commons License: Attribution
Follow us: @FreeAdviceNews on Twitter | freeadvice on Facebook
Scams & schemes involving Internal Revenue Code Section 412(i) pension plan fraud have taken many business owners by surprise. Told by insurance companies that contributions to their employee retirement plans could be up to ten times more than a traditional plan, and that withdrawing up to 80% of funds could be done on a pre-tax basis, business owners say that they were taken – all for big insurance company commissions.
What are 412(i) pension plans?
Section 412(i) of the Internal Revenue Code essentially says that you can have a pension plan funded only with guaranteed life insurance or guaranteed annuity products, according to
Read more: http://employment-law.freeadvice.com/employment-law/pensions_benefits/412-i-pension-plan-fraud.htm#ixzz34QP4k8iZ
Under Creative Commons License: Attribution
Follow us: @FreeAdviceNews on Twitter | freeadvice on Facebook
Participated in a Sea Nine VEBA plan_Contact Lance Wallach: Financial Devastation for Clients in 419 Plans
Participated in a Sea Nine VEBA plan_Contact Lance Wallach: Financial Devastation for Clients in 419 Plans: Some of you may remember the bad old days of using 419 welfare benefit plans to help business owners (and doctors specifically) take massi...
Captive Insurance and Other Tax Reduction Strategies รข€“ The Good, Bad, and Ugly
Published: 08th September 2009
Views: 777
NSA: Member Link
Your link to accounting, tax and practice management ideas, tools, news and information.
Captive Insurance and Other Tax Reduction Strategies - The Good, Bad, and Ugly
By Lance Wallach May 14, 2008
Every accountant knows that increased cash flow and cost savings are critical for businesses in 2008. What is uncertain is the best path to recommend to garner these benefits.
Over the past decade business owners have been overwhelmed by a plethora of choices designed to reduce the cost of providing employee benefits while increasing their own retirement savings. The solutions ranged from traditional pension and profit sharing plans to more advanced strategies.
Some strategies, such as IRS section 419 and 412(i) plans, used life insurance as vehicles to bring about benefits. Unfortunately, the high life insurance commissions (often 90% of the contribution, or more) fostered an environment that led to aggressive and noncompliant plans.
The result has been thousands of audits and an IRS task force seeking out tax shelter promotion. For unknowing clients, the tax consequences are enormous. For their accountant advisors, the liability may be equally extreme.
Recently, there has been an explosion in the marketing of a financial product called Captive Insurance. These so called "Captives" are typically small insurance companies designed to insure the risks of an individual business under IRS code section 831(b). When properly designed, a business can make tax-deductible premium payments to a related-party insurance company. Depending on circumstances, underwriting profits, if any, can be paid out to the owners as dividends, and profits from liquidation of the company may be taxed as capital gains.
While captives can be a great cost saving tool, they also are expensive to build and manage. Also, captives are allowed to garner tax benefits because they operate as real insurance companies. Advisors and business owners who misuse captives or market them as estate planning tools, asset protection vehicles, tax deferral or other benefits not related to the true business purpose of an insurance company face grave regulatory and tax consequences.
A recent concern is the integration of small captives with life insurance policies. Small captives under section 831(b) have no statutory authority to deduct life premiums. Also, if a small captive uses lifeinsurance as an investment, the cash value of the life policy can be taxable at corporate rates, and then will be taxable again when distributed. The consequence of this double taxation is to devastate the efficacy of the life insurance, and it extends serious liability to any accountant who recommends the plan or even signs the tax return of the business that pays premiums to the captive.
The IRS is aware that several large insurance companies are promoting their life insurance policies asinvestments with small captives. The outcome looks eerily like that of the 419 and 412(i) plans mentioned above.
Remember, if something looks too good to be true, it usually is. There are safe and conservative ways to use captive insurance structures to lower costs and obtain benefits for businesses. And, some types of captive insurance products do have statutory protection for deducting life insurance premiums (although not 831(b) captives). Learning what works and is safe is the first step an accountant should take in helping his or her clients use these powerful, but highly technical insurance tools.
Lance Wallach speaks and writes extensively about VEBAs, retirement plans, and tax reduction strategies. He speaks at more than 70 conventions annually, writes for 50 publications, and was the National Society of Accountants Speaker of the Year. Contact him at 516.938.5007 or visit www.vebaplan.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.
National Society of Accountants
Your link to accounting, tax and practice management ideas, tools, news and information.
Captive Insurance and Other Tax Reduction Strategies - The Good, Bad, and Ugly
By Lance Wallach May 14, 2008
Every accountant knows that increased cash flow and cost savings are critical for businesses in 2008. What is uncertain is the best path to recommend to garner these benefits.
Over the past decade business owners have been overwhelmed by a plethora of choices designed to reduce the cost of providing employee benefits while increasing their own retirement savings. The solutions ranged from traditional pension and profit sharing plans to more advanced strategies.
Some strategies, such as IRS section 419 and 412(i) plans, used life insurance as vehicles to bring about benefits. Unfortunately, the high life insurance commissions (often 90% of the contribution, or more) fostered an environment that led to aggressive and noncompliant plans.
The result has been thousands of audits and an IRS task force seeking out tax shelter promotion. For unknowing clients, the tax consequences are enormous. For their accountant advisors, the liability may be equally extreme.
Recently, there has been an explosion in the marketing of a financial product called Captive Insurance. These so called "Captives" are typically small insurance companies designed to insure the risks of an individual business under IRS code section 831(b). When properly designed, a business can make tax-deductible premium payments to a related-party insurance company. Depending on circumstances, underwriting profits, if any, can be paid out to the owners as dividends, and profits from liquidation of the company may be taxed as capital gains.
While captives can be a great cost saving tool, they also are expensive to build and manage. Also, captives are allowed to garner tax benefits because they operate as real insurance companies. Advisors and business owners who misuse captives or market them as estate planning tools, asset protection vehicles, tax deferral or other benefits not related to the true business purpose of an insurance company face grave regulatory and tax consequences.
A recent concern is the integration of small captives with life insurance policies. Small captives under section 831(b) have no statutory authority to deduct life premiums. Also, if a small captive uses lifeinsurance as an investment, the cash value of the life policy can be taxable at corporate rates, and then will be taxable again when distributed. The consequence of this double taxation is to devastate the efficacy of the life insurance, and it extends serious liability to any accountant who recommends the plan or even signs the tax return of the business that pays premiums to the captive.
The IRS is aware that several large insurance companies are promoting their life insurance policies asinvestments with small captives. The outcome looks eerily like that of the 419 and 412(i) plans mentioned above.
Remember, if something looks too good to be true, it usually is. There are safe and conservative ways to use captive insurance structures to lower costs and obtain benefits for businesses. And, some types of captive insurance products do have statutory protection for deducting life insurance premiums (although not 831(b) captives). Learning what works and is safe is the first step an accountant should take in helping his or her clients use these powerful, but highly technical insurance tools.
Lance Wallach speaks and writes extensively about VEBAs, retirement plans, and tax reduction strategies. He speaks at more than 70 conventions annually, writes for 50 publications, and was the National Society of Accountants Speaker of the Year. Contact him at 516.938.5007 or visit www.vebaplan.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.
National Society of Accountants
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