By Lance Wallach
“Taxpayers should be wary of scams to avoid paying taxes that seem too good to be true, especially during these challenging economic times,” IRS Commissioner Doug Shulman said. “There is no secret trick that can eliminate a person’s tax obligations. People should be wary of anyone peddling any of these scams.”
Tax schemes are illegal and can lead to problems for both scam artists and taxpayers who risk significant penalties, interest and possible criminal prosecution.
The IRS urges taxpayers to avoid these common schemes.
Abusive Retirement Plans
The IRS continues to uncover abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). The IRS is looking for transactions that taxpayers are using to avoid the limitations on contributions to IRAs as well as transactions that are not properly reported as early distributions. Taxpayers should be wary of advisers who encourage them to shift appreciated assets into IRAs or companies owned by their IRAs at less than fair market value to circumvent annual contribution limits. Other variations have included the use of limited liability companies to engage in activity that is considered prohibited.
419 plans
412i plans
Captive insurance plans
These were listed transactions and then taken off the list. IRS still looks closely at them. They are usually sold by life insurance agents.
Section 79 plans
IRS is looking very closely at section 79 plans. They are usually sold by life insurance agents.
Hiding Income Offshore
The IRS aggressively pursues taxpayers and promoters involved in abusive offshore transactions. Taxpayers have tried to avoid or evade U.S. income tax by hiding income in offshore banks, brokerage accounts or through other entities. Recently, the IRS provided guidance to auditors on how to deal with those hiding income offshore in undisclosed accounts. The IRS draws a clear line between taxpayers with offshore accounts who voluntarily come forward and those who fail to come forward.
Taxpayers also evade taxes by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or life insurance plans. The IRS has also identified abusive offshore schemes including those that involve use of electronic funds transfer and payment systems, offshore business merchant accounts and private banking relationships.
Filing False or Misleading Forms
The IRS is seeing scam artists file false or misleading returns to claim refunds that they are not entitled to. Frivolous information returns, such as Form 1099-Original Issue Discount (OID), claiming false withholding credits are used to legitimize erroneous refund claims. The new scam has evolved from an earlier phony argument that a “strawman” bank account has been created for each citizen. Under this scheme, taxpayers fabricate an information return, arguing they used their “strawman” account to pay for goods and services and falsely claim the corresponding amount as withholding as a way to seek a tax refund.
Abuse of Charitable Organizations and Deductions
The IRS continues to observe the misuse of tax-exempt organizations. Abuse includes arrangements to improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or income from donated property. The IRS also continues to investigate various schemes involving the donation of non-cash assets, including easements on property, closely held corporate stock and real property. Often, the donations are highly overvalued or the organization receiving the donation promises that the donor can purchase the items back at a later date at a price the donor sets. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and new definitions of qualified appraisals and qualified appraisers for taxpayers claiming charitable contributions.
Return Preparer Fraud
Dishonest return preparers can cause many headaches for taxpayers who fall victim to their ploys. Such preparers derive financial gain by skimming a portion of their clients’ refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds. Taxpayers should choose carefully when hiring a tax preparer. As the saying goes, if it sounds too good to be true, it probably is. No matter who prepares the return, the taxpayer is ultimately responsible for its accuracy. Since 2002, the courts have issued injunctions ordering dozens of individuals to cease preparing returns, and the Department of Justice has filed complaints against dozens of others, which are pending in court.
Frivolous Arguments
Promoters of frivolous schemes encourage people to make unreasonable and unfounded claims to avoid paying the taxes they owe. The IRS has a list of frivolous legal positions that taxpayers should stay away from. Taxpayers who file a tax return or make a submission based on one of the positions on the list are subject to a $5,000 penalty. More information is available on IRS.gov.
False Claims for Refund and Requests for Abatement
This scam involves a request for abatement of previously assessed tax using Form 843, Claim for Refund and Request for Abatement. Many individuals who try this have not previously filed tax returns. The tax they are trying to have abated has been assessed by the IRS through the Substitute for Return Program. The filer uses Form 843 to list reasons for the request. Often, one of the reasons given is "Failed to properly compute and/or calculate Section 83-Property Transferred in Connection with Performance of Service."
Disguised Corporate Ownership
Some taxpayers form corporations and other entities in certain states for the primary purpose of disguising the ownership of a business or financial activity. Such entities can be used to facilitate underreporting of income, fictitious deductions, non-filing of tax returns, participating in listed transactions, money laundering, financial crimes, and even terrorist financing. The IRS is working with state authorities to identify these entities and to bring the owners of these entities into compliance.
Zero Wages
Filing a phony wage- or income-related information return to replace a legitimate information return has been used as an illegal method to lower the amount of taxes owed. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer also may submit a statement rebutting wages and taxes reported by a payer to the IRS. Sometimes fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any of the variations of this scheme.
Misuse of Trusts
For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are many legitimate, valid uses of trusts in tax and estate planning, some promoted transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the promised tax benefits and are being used primarily as a means to avoid income tax liability and hide assets from creditors, including the IRS.
The IRS has recently seen an increase in the improper use of private annuity trusts and foreign trusts to divert income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering into a trust arrangement.
Fuel Tax Credit Scams
The IRS is receiving claims for the fuel tax credit that are unreasonable. Some taxpayers, such as farmers who use fuel for off-highway business purposes, may be eligible for the fuel tax credit. But some individuals are claiming the tax credit for nontaxable uses of fuel when their occupation or income level makes the claim unreasonable. Fraud involving the fuel tax credit is considered a frivolous tax claim, potentially subjecting those who improperly claim the credit to a $5,000 penalty.
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 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 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.taxaudit419.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.
419 and 412i Plans
IRS Fines numerous Business Owners, Accountants, Insurance Agents $200k For help with 412i plans, 419 plans, IRS audits, captive insurance, and much more, we have articles, videos, and links that can be useful for your situation. --- National Offices of Lance Wallach: 516-938-5007
IRS Audits Focus on Captive Insurance Plans
IRS Audits 419, 412i, Captive Insurance Plans With Life
Insurance, and Section 79 Scams
By Lance Wallach
June 2011
The IRS started auditing 419 plans in the ‘90s, and then
continued going after 412i and other plans that they considered abusive,
listed, or reportable transactions, or substantially similar to such
transactions.
In a recent Tax Court Case, Curcio v. Commissioner (TC Memo
2010-115), the Tax Court ruled that an investment in an employee welfare
benefit plan was a listed transaction in that the transaction in question was
substantially similar to the transaction described in IRS Notice 95-34. A
subsequent case, McGehee Family Clinic, largely followed Curcio, though it was
technically decided on other grounds. The parties stipulated to be bound by
Curcio on the issue of whether the amounts paid by McGehee in connection with
the 419 Plan and Trust were deductible. Curcio 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, one
must have an understanding of Notice 95-34, which was issued in response to
trust arrangements sold to companies that were 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, by relying on the 10-or-more-employer exemption from
the IRC § 419 limits. It was claimed that 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 419A(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, and 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, and
the trust administrator may obtain cash to pay benefits other than death
benefits, by such means as cashing in or withdrawing the cash value of the
insurance policies. The plans are also often designed so that a particular
employer’s contributions or its employees’ benefits may be determined in 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.
The 419 plan advertised that enrollees should expect to
obtain the same type of tax benefits as listed in the transaction described in
Notice 95-34. The benefits of enrollment listed in its advertising packet
included:
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 419 Plan was factually similar to
the plans described in Notice 95-34 at all relevant times. In rendering its
decision the court heavily cited Curcio, in which the court also ruled in favor
of the IRS. As noted in Curcio, the insurance policies, overwhelmingly variable
or universal life policies, required large contributions relative to the cost
of the amount of term insurance that would be required to provide the death benefits
under the arrangement. The 419 Plan owned the insurance contracts.
The McGehee Family Clinic had enrolled in the 419 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
2004 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 can 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.
A 412(i) plan in and of itself is not a listed transaction;
however, the IRS has a task force auditing 412i 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 419 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 Curcio or McGehee. The disclosure needs to
be made for every year the participant is in a plan. The forms need to be
properly filed 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
assisted hundreds of his participants file forms, and they still all received
very large IRS fines for not properly filling in the forms.
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.
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.
IRS Attacks Business Owners in 419, 412, Section 79 and Captive Insurance Plans Under Section 6707A
Massachusetts Society of Certified Public Accountants, Inc.
Winter 2010
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.
Contact him at:
516.938.5007,
wallachinc@gmail.com, or
www.taxadvisorexperts.org, 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.
Winter 2010
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.
Contact him at:
516.938.5007,
wallachinc@gmail.com, or
www.taxadvisorexperts.org, 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.
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More Problems for 419 Plans
For years, life insurance companies and agents have tried to find ways of making life insurance premiums paid by business owners tax deductible. This would allow them to sell policies at a "discount."
The problem became acute a few years ago with outlandish claims about how §§419A(f)(5) and (6) of the Internal Revenue Code (IRC) exempted employers from any tax deduction limitations. Other inaccurate assertions were made as well, until the Internal Revenue Service (IRS) finally put a stop to such egregious misrepresentations in 2002 by issuing regulations and naming such plans as "potentially abusive tax shelters" (or "listed transactions") that needed to be registered and disclosed to the IRS.This appeared to put an end to the scourge of scurrilous promoters, as many such plans disappeared from the landscape.
And what happened to the providers that were peddling §§419A(f)(5) and (6) life insurance plans a few years ago? We recently found the answer: Most of them found a new life as promoters of so-called "419(e)" welfare benefit plans.
READ THE REST HERE
Section 79 Plans: Section 79, Captive Insurance, IRS Audits and Lawsuits on 419 and 412i Plans
Section 79 Plans: Section 79, Captive Insurance, IRS Audits and Lawsuits on 419 and 412i Plans (click the link to go to the page)
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.
Hg Experts
Legal Experts Directory
By Lance Wallach, CLU, CHFC Abusive Tax Shelter, Listed Transaction, Reportable Transaction Expert Witness
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, 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 more than 50 publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public 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.
"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, 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 more than 50 publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public 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.
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.
Insurance Agents: Help for those who sold 419 and 412i plans.
Insurance Agents: Help for those who sold 419 and 412i plans.
Our team of experienced consulting "tax attorneys", CPAs, and "insurance experts" specializing in 412i" and "419 "IRS
audits" that resulted from plans you sold to your clients, mainly "419 plans", "412i plans", "captive insurance" plans
and "Section 79" plans as well as other similar "employee benefit plans" or "welfare benefit plans" that the IRS is
targeting as "abusive tax shelters".
Our firm has been successful in "defending life insurance agents" and "material advisors" who have participated in
the sale of these "benefit plans".
Our team of experienced consulting "tax attorneys", CPAs, and "insurance experts" specializing in 412i" and "419 "IRS
audits" that resulted from plans you sold to your clients, mainly "419 plans", "412i plans", "captive insurance" plans
and "Section 79" plans as well as other similar "employee benefit plans" or "welfare benefit plans" that the IRS is
targeting as "abusive tax shelters".
Our firm has been successful in "defending life insurance agents" and "material advisors" who have participated in
the sale of these "benefit plans".
Transfer Pricing
By Lance Wallach
The IRS dedicates enormous resources toward dealing with taxpayer’s who are involved with any form of transfer pricing. The transfer pricing provisions of IRC 482 address four general types of transactions between commonly owned or controlled parties.
1- Use or transfer of tangible property
2- Services
3- Loans
4- Use or transfer of intangible property (especially cost sharing agreements)
Use of tangible property: When one member of a controlled group rents or leases property to another member of the group, the price paid for use of such property must equal an arm’s length amount. Per Treas. Reg. 1.482-2(c )(2)(i), the arm’s length amount is determined by reference to the amount that would have been charged between independent parties for use of the same or similar property under similar circumstances.
Determination of what is arm’s length for fair rental value transactions:
a) Period of use
b) Location of use
c) Owner’s investment in property or rent paid
d) Expenses of maintaining the property
e) Type of property
f) Condition of property
Transfer of tangible property: When sales or transfers of tangible property are made between related parties (sales of goods), the arm’s length price generally is the price that an unrelated party would pay for similar property under similar circumstances.
Determination of what is arm’s length for inter-company sales: The regulations specify six methods used to determine whether an arm’s length amount has been charged between members of a controlled group. Treas. Reg.1.482-3(a), states that the “best method” should be used to determine arm’s length price. The IRS views the “best method” as the method that produces the most reliable results based on facts and circumstances. The IRS is well aware of the fact that many transfer pricing studies are prepared with the intention to validate year-end inter-company cost of sales regardless of whether they are arm’s length just to avoid the IRC 6662 penalties. Taxpayer’s would be best served if transfer pricing studies were prepared by knowledgeable experts in the field of transfer pricing.
Inter-company Services: When one member performs services for another member of a controlled group, an arm’s length charge is required. This includes services such as marketing, management, technical services, or any other type of service. Such services can be provided by one party for the joint benefit of all members, or can be provided between two members of the controlled group.
Determination of what is arm’s length for inter-company services: The arm’s length standard for services between related parties is found in Treas. Reg. 1.482-2(b)(3) which states, “ an arm’s length charge for services rendered shall be the amount which was charged or would have been charged for the same or similar services in independent transactions with or between unrelated parties under similar circumstances considering all relevant facts.” The arm’s length charge for services between related parties will depend upon the facts related to the services provided. The pricing rules fall within three categories:
1) An arm’s length charge will be based on the amount that would have been charged by an unrelated party. This generally means that the price should be based on reimbursement of cost, plus a mark-up for profit.
2) An arm’s length charge may be based on only the costs incurred, provided that certain criteria are met.
3) No charge is necessary, if certain criteria are met.
The area that concerns the IRS most with these type transactions are technical services fees provided by larger U.S corporations to its foreign CFC’s which are not charged. In regards to smaller cases, the IRS typically examines management fees in detail to ensure they are arm’s length.
Inter-company Loans: In the context of IRC 482, most of the areas of conflict in this area revolve around interest. When loans are made between members of a controlled group, interest rates charged do not always meet the required arm’s length standard.
Determination of what is arm’s length for inter-company loans: The arm’s length standard for loans between related parties is found in Treas. Reg. 1.482-2(a)(2) which states that “ an arm’s length rate of interest shall be a rate of interest which was charged, or would have been charged, at the time the indebtedness arose, in independent transactions with or between unrelated parties under similar circumstances.”
Factors that are listed in Treas. Reg. 1.482-2(a)(2) that should be considered in determining arm’s length interest are:
a) The principle amount and duration of the loan.
b) The security involved
c) The credit standing of the borrower
d) The prevailing interest rate where the loan was made
The regulations provide further guidance in the following areas:
a) Safe harbor rules
b) Ordering rules
c) Determination of bona fide indebtedness
d) Period for which interest is charged
Transfers of intangible properties: When transfers of intangible property are made between controlled parties, the arm’s length price is often difficult to determine, in part because the property’s value derives from intellectual capital such as ideas, the outcome of research and development or creation of software.
Determination of what is arm’s length for transfer of intangible property: The regulations specify four methods to determine whether an arm’s length amount has been charged between the members of a controlled group with respect to the transfer or use of intangible property. Treas.Reg.1.482-4(a) states that the “best method” should be used to determine the arm’s length price between related parties. Controlled parties may enter into a qualified cost sharing arrangements to share costs related to developing intangibles. They may also contribute existing intangibles for use in further development or for use in developing new and distinct intangibles.
The following general rules of Treas.Reg.1.482-7(a) and (b) apply to qualified cost sharing arrangements:
a) Two or more controlled participants agree to share the costs of developing intangibles.
b) Costs are shared based on each participant’s share of reasonably anticipated benefits from the intangibles to be developed.
c) A “buy-in” must be paid to the participant that contributes pre-existing intangible property to the qualified cost sharing arrangement.
As with transfer pricing reports, cost sharing agreements should be prepared by qualified experts who are knowledgeable in this area. If examined by the IRS, the cost sharing agreement will be reviewed in detail. For further insight refer to the Coordinated Issue Paper utilized as a guideline for the IRS personnel dated June 5th 2009.
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 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 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.taxaudit419.com and 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.
The IRS dedicates enormous resources toward dealing with taxpayer’s who are involved with any form of transfer pricing. The transfer pricing provisions of IRC 482 address four general types of transactions between commonly owned or controlled parties.
1- Use or transfer of tangible property
2- Services
3- Loans
4- Use or transfer of intangible property (especially cost sharing agreements)
Use of tangible property: When one member of a controlled group rents or leases property to another member of the group, the price paid for use of such property must equal an arm’s length amount. Per Treas. Reg. 1.482-2(c )(2)(i), the arm’s length amount is determined by reference to the amount that would have been charged between independent parties for use of the same or similar property under similar circumstances.
Determination of what is arm’s length for fair rental value transactions:
a) Period of use
b) Location of use
c) Owner’s investment in property or rent paid
d) Expenses of maintaining the property
e) Type of property
f) Condition of property
Transfer of tangible property: When sales or transfers of tangible property are made between related parties (sales of goods), the arm’s length price generally is the price that an unrelated party would pay for similar property under similar circumstances.
Determination of what is arm’s length for inter-company sales: The regulations specify six methods used to determine whether an arm’s length amount has been charged between members of a controlled group. Treas. Reg.1.482-3(a), states that the “best method” should be used to determine arm’s length price. The IRS views the “best method” as the method that produces the most reliable results based on facts and circumstances. The IRS is well aware of the fact that many transfer pricing studies are prepared with the intention to validate year-end inter-company cost of sales regardless of whether they are arm’s length just to avoid the IRC 6662 penalties. Taxpayer’s would be best served if transfer pricing studies were prepared by knowledgeable experts in the field of transfer pricing.
Inter-company Services: When one member performs services for another member of a controlled group, an arm’s length charge is required. This includes services such as marketing, management, technical services, or any other type of service. Such services can be provided by one party for the joint benefit of all members, or can be provided between two members of the controlled group.
Determination of what is arm’s length for inter-company services: The arm’s length standard for services between related parties is found in Treas. Reg. 1.482-2(b)(3) which states, “ an arm’s length charge for services rendered shall be the amount which was charged or would have been charged for the same or similar services in independent transactions with or between unrelated parties under similar circumstances considering all relevant facts.” The arm’s length charge for services between related parties will depend upon the facts related to the services provided. The pricing rules fall within three categories:
1) An arm’s length charge will be based on the amount that would have been charged by an unrelated party. This generally means that the price should be based on reimbursement of cost, plus a mark-up for profit.
2) An arm’s length charge may be based on only the costs incurred, provided that certain criteria are met.
3) No charge is necessary, if certain criteria are met.
The area that concerns the IRS most with these type transactions are technical services fees provided by larger U.S corporations to its foreign CFC’s which are not charged. In regards to smaller cases, the IRS typically examines management fees in detail to ensure they are arm’s length.
Inter-company Loans: In the context of IRC 482, most of the areas of conflict in this area revolve around interest. When loans are made between members of a controlled group, interest rates charged do not always meet the required arm’s length standard.
Determination of what is arm’s length for inter-company loans: The arm’s length standard for loans between related parties is found in Treas. Reg. 1.482-2(a)(2) which states that “ an arm’s length rate of interest shall be a rate of interest which was charged, or would have been charged, at the time the indebtedness arose, in independent transactions with or between unrelated parties under similar circumstances.”
Factors that are listed in Treas. Reg. 1.482-2(a)(2) that should be considered in determining arm’s length interest are:
a) The principle amount and duration of the loan.
b) The security involved
c) The credit standing of the borrower
d) The prevailing interest rate where the loan was made
The regulations provide further guidance in the following areas:
a) Safe harbor rules
b) Ordering rules
c) Determination of bona fide indebtedness
d) Period for which interest is charged
Transfers of intangible properties: When transfers of intangible property are made between controlled parties, the arm’s length price is often difficult to determine, in part because the property’s value derives from intellectual capital such as ideas, the outcome of research and development or creation of software.
Determination of what is arm’s length for transfer of intangible property: The regulations specify four methods to determine whether an arm’s length amount has been charged between the members of a controlled group with respect to the transfer or use of intangible property. Treas.Reg.1.482-4(a) states that the “best method” should be used to determine the arm’s length price between related parties. Controlled parties may enter into a qualified cost sharing arrangements to share costs related to developing intangibles. They may also contribute existing intangibles for use in further development or for use in developing new and distinct intangibles.
The following general rules of Treas.Reg.1.482-7(a) and (b) apply to qualified cost sharing arrangements:
a) Two or more controlled participants agree to share the costs of developing intangibles.
b) Costs are shared based on each participant’s share of reasonably anticipated benefits from the intangibles to be developed.
c) A “buy-in” must be paid to the participant that contributes pre-existing intangible property to the qualified cost sharing arrangement.
As with transfer pricing reports, cost sharing agreements should be prepared by qualified experts who are knowledgeable in this area. If examined by the IRS, the cost sharing agreement will be reviewed in detail. For further insight refer to the Coordinated Issue Paper utilized as a guideline for the IRS personnel dated June 5th 2009.
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 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 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.taxaudit419.com and 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.
Business Meals and Entertainment Expenses
Excerpt from FCICA Presents Tax, Insurance, and Cost Reduction Strategies for Small Business by Lance Wallach and Dr. Bart Basi
Summer ‘08
The 1993 tax law changed the amount allowable as a deduction for business meals and entertainment expenses incurred after. In addition, some special rules were enacted into the tax law. The limitation for deducting such expenses incurred after December 31, 1993 is 50%. Accordingly, after the general rules and exceptions are applied to meals and entertainment expenses incurred and the total dollar amount is determined, the 50% rule must then be applied. Business people must keep current with such rules or face the wrath of the IRS. The purpose of this chapter is to explain the general rule, the exceptions, and the special rules that are in effect for all business meals and entertainment expenses.
The General Rule
For purposes of the application of the 50% rule, it should be remembered that generally the entertainment or meal expenses are first determined, and then 50% of such expenses are subtracted prior to the expenses actually being deducted by either the employer or the employee. For example: $100 expense is incurred for meals, tips included (it must first be determined that the expense is a legitimated entertainment expense).
$100 – 50% = $50 which is the deductible portion resulting from the application of the 50% rule.
If an individual is traveling away from home on business, 50% of the cost of his meals is allowed as a deduction. However, if any portion of the meal expenses incurred while away from home is considered to be lavish or extravagant, then this amount must be subtracted first and is not applicable to the deduction. Lavish or extravagant is based upon the circumstances and conditions existing at the time the expenses are incurred.
It is important to note that the deduction is allowable only in the case that the taxpayer or employee of the taxpayer is present at the furnishing of such food or beverages.
The above illustration is a general application of the 50% rule. However, there are numerous exceptions that apply to this rule. Following is a discussion of the exception (It should be noted that the exceptions will either increase or decrease the total amount deductible from the general rule which allows 50% of the expenses to be deducted.)
Exceptions to the 50% Rule
1. If an employer reimburses employees 100% for the cost of meals and entertainment, the employer can deduct the entire 100% of the reimbursement as long as the employer considers the additional 50% as added compensation, subject to withholding taxes. In this case, the employer must add the additional 50% to the W-2 Form provided to the employees.
2. If an employer provides samples or promotional food items to the general public, the employer can take a 100% deduction and not be limited by the 50% rule for such food items provided to employees as well as the general public.
3. If there is a bona fide sale of goods to employees, then the employer is also allowed to deduct 100% of the expense. This is automatic since a sale is said to have taken place.
4. If the employer incur meal expenses as a result of social or recreational activities for the benefit of the employees, the meal expenses would be 100% deductible. For example, this would be true if the employer provided a Christmas party or a summer picnic for its employees each year. The 50% rule does not apply to these traditional social activities that benefit all employees and their families.
5. If food and beverage expenses are provided to employees and are so small as to overshadow the costs involved in record keeping, the employer can deduct 100% of such expenses without charging the employee for the fair market value of the food and beverages. This would be true, for example, if the employer provided coffee and donuts for the employees on a daily basis. The cost of allocation of such expenses would be grater that the benefit derived from the record keeping.
6. If an employer obtains tickets to a sporting activity that was organized to benefit a tax-exempt organization and volunteer substantially performed all of the work during the event, then 100% of the cost of such tickets would be deductible. This rule, however, does not apply to any athletic activities where the referees or coaches receive compensation. Consequently, high school or college football games do not come under this rule and are subject to the 50% rule.
7. Fees paid for what is referred to as “sky boxes” at sports arenas are subject to a special rule. The deductible amount of the cost of a skybox is disallowed to the extent that it exceeds the cost of the highest priced non luxury box. The 50% rule then applies to the remaining amount of the expense; which results in a deduction that is less than 50% of the total expense incurred.
8. If meals provided to employees by the employer on the employee’s premises are for the convenience of the employer, then the cost is considered a ‘de minimis’ fringe benefit. Therefore, the cost is 100% deductible to the employer and excluded from the employee’s wages.
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 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 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.taxaudit419.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.
Summer ‘08
The 1993 tax law changed the amount allowable as a deduction for business meals and entertainment expenses incurred after. In addition, some special rules were enacted into the tax law. The limitation for deducting such expenses incurred after December 31, 1993 is 50%. Accordingly, after the general rules and exceptions are applied to meals and entertainment expenses incurred and the total dollar amount is determined, the 50% rule must then be applied. Business people must keep current with such rules or face the wrath of the IRS. The purpose of this chapter is to explain the general rule, the exceptions, and the special rules that are in effect for all business meals and entertainment expenses.
The General Rule
For purposes of the application of the 50% rule, it should be remembered that generally the entertainment or meal expenses are first determined, and then 50% of such expenses are subtracted prior to the expenses actually being deducted by either the employer or the employee. For example: $100 expense is incurred for meals, tips included (it must first be determined that the expense is a legitimated entertainment expense).
$100 – 50% = $50 which is the deductible portion resulting from the application of the 50% rule.
If an individual is traveling away from home on business, 50% of the cost of his meals is allowed as a deduction. However, if any portion of the meal expenses incurred while away from home is considered to be lavish or extravagant, then this amount must be subtracted first and is not applicable to the deduction. Lavish or extravagant is based upon the circumstances and conditions existing at the time the expenses are incurred.
It is important to note that the deduction is allowable only in the case that the taxpayer or employee of the taxpayer is present at the furnishing of such food or beverages.
The above illustration is a general application of the 50% rule. However, there are numerous exceptions that apply to this rule. Following is a discussion of the exception (It should be noted that the exceptions will either increase or decrease the total amount deductible from the general rule which allows 50% of the expenses to be deducted.)
Exceptions to the 50% Rule
1. If an employer reimburses employees 100% for the cost of meals and entertainment, the employer can deduct the entire 100% of the reimbursement as long as the employer considers the additional 50% as added compensation, subject to withholding taxes. In this case, the employer must add the additional 50% to the W-2 Form provided to the employees.
2. If an employer provides samples or promotional food items to the general public, the employer can take a 100% deduction and not be limited by the 50% rule for such food items provided to employees as well as the general public.
3. If there is a bona fide sale of goods to employees, then the employer is also allowed to deduct 100% of the expense. This is automatic since a sale is said to have taken place.
4. If the employer incur meal expenses as a result of social or recreational activities for the benefit of the employees, the meal expenses would be 100% deductible. For example, this would be true if the employer provided a Christmas party or a summer picnic for its employees each year. The 50% rule does not apply to these traditional social activities that benefit all employees and their families.
5. If food and beverage expenses are provided to employees and are so small as to overshadow the costs involved in record keeping, the employer can deduct 100% of such expenses without charging the employee for the fair market value of the food and beverages. This would be true, for example, if the employer provided coffee and donuts for the employees on a daily basis. The cost of allocation of such expenses would be grater that the benefit derived from the record keeping.
6. If an employer obtains tickets to a sporting activity that was organized to benefit a tax-exempt organization and volunteer substantially performed all of the work during the event, then 100% of the cost of such tickets would be deductible. This rule, however, does not apply to any athletic activities where the referees or coaches receive compensation. Consequently, high school or college football games do not come under this rule and are subject to the 50% rule.
7. Fees paid for what is referred to as “sky boxes” at sports arenas are subject to a special rule. The deductible amount of the cost of a skybox is disallowed to the extent that it exceeds the cost of the highest priced non luxury box. The 50% rule then applies to the remaining amount of the expense; which results in a deduction that is less than 50% of the total expense incurred.
8. If meals provided to employees by the employer on the employee’s premises are for the convenience of the employer, then the cost is considered a ‘de minimis’ fringe benefit. Therefore, the cost is 100% deductible to the employer and excluded from the employee’s wages.
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 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 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.taxaudit419.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.
Using VEBAs For Employer-Owners | LifeHealthPro
Imagine a program that allows large, flexible, tax-deductible contributions to accumulate and compound on a tax-deferred basis. Distributions are received at any age without penalties, regardless of the amount. Assets are protected from creditors' claims. There are income and estate tax-free survivor benefits. The program is fully insured and, by a favorable Letter of Determination, the Internal Revenue Service has granted a tax exemption to the Section 501(c)(9) trust.
The program also can acquire tax-deductible life insurance, provide funds to pay estate taxes and provide tax-deductible educational benefits for children.
These are some of the benefits of a Voluntary Employees' Beneficiary Association (VEBA). VEBAs are tax-exempt trusts (or nonprofit corporations) that are described in Section 501(c)(9) of the Internal Revenue Code of 1986. They require a letter of determination from the IRS granting tax exempt trust status. If the statutory requirements are met and the IRS issues a favorable Letter Of Determination, then, in general, the qualified cost of contributions by an employer to the VEBA that are ordinary and necessary expenses, are deductible for federal income tax purposes.
VEBA Basic Concepts Revisited | LifeHealthPro
Since my last article on Voluntary Employees' Beneficiary Associations, I've received hundreds of phone calls with basic questions which I will attempt to answer in this article.
First and perhaps most important, a VEBA only becomes a tax-exempt organization under Internal Revenue Code Section 501(c)(9) when it has received a Letter of Determination from the Internal Revenue Service granting it tax exempt status.
If a business or professional wants to participate, it joins an existing multiple employer VEBA which has received this determination letter from the IRS. (It is important to note that while several VEBAs have received IRS determination letters, not all programs purporting to be VEBAs have received them.)
VEBAs allow large amounts of tax-deductible contributions for the funding of life insurance, accident insurance, sickness and other benefits for the members of the VEBA, their employees, dependents and beneficiaries. Contribution amounts can be made flexible and benefits are highly favorable to the business owner.
Under the proper conditions, a small business can sometimes put in hundreds of thousands of tax-deductible dollars per year to fund its VEBA.
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