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.
Showing posts with label Section 6707A. Show all posts
Showing posts with label Section 6707A. Show all posts
Be Advised - Everything is Not Fine
BeAdvised - Everything is not fine
By Lance Wallach
A few years ago, I testified as an expert witness in a case where a physician was in an abusive 401(k) plan with life insurance. It had a so-called “springing cash value” policy in it. The IRS calls plans with these types of policies “listed transactions.” The judge called the insurance broker “a crook.”
Keeping that in mind, you should know that 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.
Who is involved
For the business owner, the motivation is a large tax deduction. For the insurance broker and the insurance carrier, the motivation is a substantial commission. Thus, the IRS is cracking down on accountants, insurance brokers and other.
If your client is (or was) in a 412(i), 419, captive insurance, or Section 79 plan, then you may be in big trouble.
If you are an accountant and signed a tax return for a client in one of these plans, you are probably what the IRS calls a “material adviser” and subject to a maximum $200,000 fine.
If you are an insurance professional that sold or advised on one of these plans, the same holds true for you.
What happened
Both business owners and brokers need to file properly under Section 6707A or face large IRS fines. In many cases, the accountant filed the appropriate forms, but the IRS still levied the fine because the accountant made a mistake when filling out the form.
The improper preparation of these forms usually results in the client being fined more quickly than if the form were not filed at all. My office has reviewed many forms and we have not yet seen one that was filled out properly.
The IRS will be soon attacking Section 79 scams as well, I am told. In Section 79 scams, small business owners are told that they can take a tax deduction through their businesses to purchase life insurance. That sounds good, but when you break down the math and sales pitch, it doesn’t make sense.
Predictions come true
In articles I wrote for the American Institute for Certified Public Accountants back in the ‘90s, I predicted attacks by the IRS on 419s. Those predictions came true.
Then I predicted attacks on 412s. They came true too.
Now I’m predicting that these Section 79 scams will be attacked.
How to act
To protects themselves, everyone in these Section 79 plans should file protectively under Section 6707A, and anyone who has not filed protectively in a 419 or 412(i) had better get some good advice from someone who knows what is going on and has extensive experience filing protectively.
The IRS has its task forces auditing these plans now; after that they will move on to the Section 79 scams and the brokers who sold them.
I have been an expert witness in a lot of cases involving 412(i) and 419 issues. They rarely go well for brokers, accountants, plan promoters, or insurance companies.
Watch your back
If you are an insurance professional, it’s important to understand that you should not count on your insurance company to back you up.
Based on what I have seen, insurance companies are more likely to stab you in the back. In an IRS investigation, the insurance companies settle first, leaving the brokers hanging. Then, in many cases, they fire the brokers.
So be careful. If you sold plans, gave tax advice, or signed a tax return and got paid a certain amount of money, you may be a material adviser, and subject to a fine of up to $200,000.
Wallach, a member of the AICPA faculty of teaching professionals, is a frequent speaker and writer on retirement plans, financial and estate planning, and abusive tax shelters. He can be reached at wallachinc@gmail.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.
By Lance Wallach
A few years ago, I testified as an expert witness in a case where a physician was in an abusive 401(k) plan with life insurance. It had a so-called “springing cash value” policy in it. The IRS calls plans with these types of policies “listed transactions.” The judge called the insurance broker “a crook.”
Keeping that in mind, you should know that 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.
Who is involved
For the business owner, the motivation is a large tax deduction. For the insurance broker and the insurance carrier, the motivation is a substantial commission. Thus, the IRS is cracking down on accountants, insurance brokers and other.
If your client is (or was) in a 412(i), 419, captive insurance, or Section 79 plan, then you may be in big trouble.
If you are an accountant and signed a tax return for a client in one of these plans, you are probably what the IRS calls a “material adviser” and subject to a maximum $200,000 fine.
If you are an insurance professional that sold or advised on one of these plans, the same holds true for you.
What happened
Both business owners and brokers need to file properly under Section 6707A or face large IRS fines. In many cases, the accountant filed the appropriate forms, but the IRS still levied the fine because the accountant made a mistake when filling out the form.
The improper preparation of these forms usually results in the client being fined more quickly than if the form were not filed at all. My office has reviewed many forms and we have not yet seen one that was filled out properly.
The IRS will be soon attacking Section 79 scams as well, I am told. In Section 79 scams, small business owners are told that they can take a tax deduction through their businesses to purchase life insurance. That sounds good, but when you break down the math and sales pitch, it doesn’t make sense.
Predictions come true
In articles I wrote for the American Institute for Certified Public Accountants back in the ‘90s, I predicted attacks by the IRS on 419s. Those predictions came true.
Then I predicted attacks on 412s. They came true too.
Now I’m predicting that these Section 79 scams will be attacked.
How to act
To protects themselves, everyone in these Section 79 plans should file protectively under Section 6707A, and anyone who has not filed protectively in a 419 or 412(i) had better get some good advice from someone who knows what is going on and has extensive experience filing protectively.
The IRS has its task forces auditing these plans now; after that they will move on to the Section 79 scams and the brokers who sold them.
I have been an expert witness in a lot of cases involving 412(i) and 419 issues. They rarely go well for brokers, accountants, plan promoters, or insurance companies.
Watch your back
If you are an insurance professional, it’s important to understand that you should not count on your insurance company to back you up.
Based on what I have seen, insurance companies are more likely to stab you in the back. In an IRS investigation, the insurance companies settle first, leaving the brokers hanging. Then, in many cases, they fire the brokers.
So be careful. If you sold plans, gave tax advice, or signed a tax return and got paid a certain amount of money, you may be a material adviser, and subject to a fine of up to $200,000.
Wallach, a member of the AICPA faculty of teaching professionals, is a frequent speaker and writer on retirement plans, financial and estate planning, and abusive tax shelters. He can be reached at wallachinc@gmail.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.
New Transaction of Interest - Potential for Avoidance of Tax Through Sale of Charitable Remainder Trust Interests
From the Lance Wallach Network
Notice 2008-99 identifies a transaction of interest in which a sale or other disposition of all interests in a charitable remainder trust (subsequent to the contribution of appreciated assets to and their reinvestment by the trust), results in the grantor or other noncharitable recipient receiving the value of that person's trust interest while claiming to recognize little or no taxable gain. Persons entering into these transactions on or after November 2, 2006, must disclose the transaction as described in section 1.6011-4. Material advisors who make a tax statement on or after November 2, 2006, with respect to transactions entered into on or after November 2, 2006, have disclosure and list maintenance obligations under sections 6111 and 6112. Persons required to disclose these transactions and/or maintain lists of advisees who fail to do so may be subject to the penalties under sections 6707A, 6707, 6708, 6662, and/or 6662A.
Notice 2008-99 identifies a transaction of interest in which a sale or other disposition of all interests in a charitable remainder trust (subsequent to the contribution of appreciated assets to and their reinvestment by the trust), results in the grantor or other noncharitable recipient receiving the value of that person's trust interest while claiming to recognize little or no taxable gain. Persons entering into these transactions on or after November 2, 2006, must disclose the transaction as described in section 1.6011-4. Material advisors who make a tax statement on or after November 2, 2006, with respect to transactions entered into on or after November 2, 2006, have disclosure and list maintenance obligations under sections 6111 and 6112. Persons required to disclose these transactions and/or maintain lists of advisees who fail to do so may be subject to the penalties under sections 6707A, 6707, 6708, 6662, and/or 6662A.
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