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.
Showing posts with label Welfare Benefit Plan. Show all posts
Showing posts with label Welfare Benefit Plan. Show all posts
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.
Don't Give the IRS Every Last Drop
By Lance Wallach
Have you seen the commercials where certain companies advertise that they can settle an IRS debt for “pennies on the dollar”? Usually the offer is too good to be true. Besides, you never want to have the problem in the first place.
The chances of an individual being audited have approximately doubled since 2000. So you need to be careful with your tax return.
IRS officials say research has shown that tax “noncompliance” typically is highest among people who work for themselves, who deal in large amounts of cash, who don’t have taxes withheld from their pay and whose income isn’t reported separately to the IRS, such as by their employer.
Another area that IRS has been focusing on for noncompliance is S corporations. With a typical S corporation, profits or losses flow through to the individual owners, who in turn are supposed to report those items on their individual returns.
Another are that could command attention is capital gains taxes. The reason: IRS officials suspect the government is losing billions of dollars in tax revenue because many investors inflate the cost basis, or the price they originally paid for stocks and other securities, in order to report lower capital gains when the securities are sold.
There have been some significant changes in the way the IRS targets businesses for audits and how it conducts them. Audits are up this year and will continue to increase,
But the numbers are very misleading, because the IRS is getting much smarter about how it chooses returns for audit and how its examiners conduct their audits.
Over the past few years, the IRS has dramatically stepped up efforts to study specific industries, and to educate examiners about business practices, terminology, accounting methods and common industry practices. It has also identified areas of inquiry that produce audit results.
Examiners are told specifically to look for certain red flags to get at what is really going on in a business or transaction. The result: examinations are more sharply focused on potential areas that will generate increased taxes, penalties and interest. Fortunately, there is a positive side to all of this; it’s very easy to obtain a free copy of this information from the IRS.
When you have a certain medical problem, you go to a specialist. The same rule should be applied to financial problems. Always engage an accountant who specializes in your type of business. One of our long-term retirement plan clients recently retained our firm to perform a self-audit. The client, a successful businessman, was concerned when one of his colleagues was found liable for back taxes and penalties because of some mistakes by his accounting firm. Nervous that he might become an IRS target as well. Our client hired us to do an audit of his income taxes for the last three years, both personally and for his various businesses. What we found was shocking. Even though this client had used an accounting firm for his various returns, the taxes he had paid were far from what he owed. Luckily for him, it was an overpayment. This client will get a refund of almost $200,000
Now let us turn to more positive alternatives, things that you can take the initiative on.
· Cash balance plan: A cash balance plan is a retirement plan that allows large contributions for owners. The deduction for owner sometimes can exceed salary. It can be combined with a 401(k) plan.
· SEP-IRA or basic profit-sharing plan? Think K instead. Many small business owners have used a SEP-IRA or basic profit sharing plan for their retirement needs due to the simplicity and low cost of these designs. However, recent changes to the Internal Revenue Code have made these designs virtually obsolete. The K is a retirement plan for the small business owner that allows him or her to achieve: greater potential contributions; “catch up” deferrals at age 50+; increased current tax savings; plan loans up to $50,000; expand survivor benefits; complete flexibility; and low costs. Unlike SEP-IRA, a K will allow you to borrow up to 50 percent of your account balance (not to exceed $50,000) as long as you pay yourself back. And whereas a typical 401(k) plan may cost $1,000 or more to establish and perhaps more to administer each year, a K can be established and administered for a fraction of that cost.
_________________________
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/TaxHelp.html 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.
Have you seen the commercials where certain companies advertise that they can settle an IRS debt for “pennies on the dollar”? Usually the offer is too good to be true. Besides, you never want to have the problem in the first place.
The chances of an individual being audited have approximately doubled since 2000. So you need to be careful with your tax return.
IRS officials say research has shown that tax “noncompliance” typically is highest among people who work for themselves, who deal in large amounts of cash, who don’t have taxes withheld from their pay and whose income isn’t reported separately to the IRS, such as by their employer.
Another area that IRS has been focusing on for noncompliance is S corporations. With a typical S corporation, profits or losses flow through to the individual owners, who in turn are supposed to report those items on their individual returns.
Another are that could command attention is capital gains taxes. The reason: IRS officials suspect the government is losing billions of dollars in tax revenue because many investors inflate the cost basis, or the price they originally paid for stocks and other securities, in order to report lower capital gains when the securities are sold.
There have been some significant changes in the way the IRS targets businesses for audits and how it conducts them. Audits are up this year and will continue to increase,
But the numbers are very misleading, because the IRS is getting much smarter about how it chooses returns for audit and how its examiners conduct their audits.
Over the past few years, the IRS has dramatically stepped up efforts to study specific industries, and to educate examiners about business practices, terminology, accounting methods and common industry practices. It has also identified areas of inquiry that produce audit results.
Examiners are told specifically to look for certain red flags to get at what is really going on in a business or transaction. The result: examinations are more sharply focused on potential areas that will generate increased taxes, penalties and interest. Fortunately, there is a positive side to all of this; it’s very easy to obtain a free copy of this information from the IRS.
When you have a certain medical problem, you go to a specialist. The same rule should be applied to financial problems. Always engage an accountant who specializes in your type of business. One of our long-term retirement plan clients recently retained our firm to perform a self-audit. The client, a successful businessman, was concerned when one of his colleagues was found liable for back taxes and penalties because of some mistakes by his accounting firm. Nervous that he might become an IRS target as well. Our client hired us to do an audit of his income taxes for the last three years, both personally and for his various businesses. What we found was shocking. Even though this client had used an accounting firm for his various returns, the taxes he had paid were far from what he owed. Luckily for him, it was an overpayment. This client will get a refund of almost $200,000
Now let us turn to more positive alternatives, things that you can take the initiative on.
· Cash balance plan: A cash balance plan is a retirement plan that allows large contributions for owners. The deduction for owner sometimes can exceed salary. It can be combined with a 401(k) plan.
· SEP-IRA or basic profit-sharing plan? Think K instead. Many small business owners have used a SEP-IRA or basic profit sharing plan for their retirement needs due to the simplicity and low cost of these designs. However, recent changes to the Internal Revenue Code have made these designs virtually obsolete. The K is a retirement plan for the small business owner that allows him or her to achieve: greater potential contributions; “catch up” deferrals at age 50+; increased current tax savings; plan loans up to $50,000; expand survivor benefits; complete flexibility; and low costs. Unlike SEP-IRA, a K will allow you to borrow up to 50 percent of your account balance (not to exceed $50,000) as long as you pay yourself back. And whereas a typical 401(k) plan may cost $1,000 or more to establish and perhaps more to administer each year, a K can be established and administered for a fraction of that cost.
_________________________
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/TaxHelp.html 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.
Get a $200,000 IRS Fine and Have Your Client Sue You.
By Lance Wallach
Over the past decade, business owners have been overwhelmed by a plethora of arrangements designed to reduce the cost of providing employee benefits and taxes while simultaneously increasing their own retirement savings. The solutions ranged from traditional pension and profit sharing plans to more advanced strategies.
Some strategies, such as IRS Section 419 and 412(i) plans, used life insurance as vehicles to bring about benefits. Unfortunately, almost all the plans were noncompliant, even though insurance companies vetted them and encouraged their agents to sell them. This fostered an environment that led to numerous IRS crackdowns, disallowing tax deductions, and spurned clients to sue their insurance agents and others.
The result has been thousands of audits and an IRS task force seeking out tax-shelter promotions. In addition, the IRS has been auditing most 412(i) defined benefit retirement plans and all 419 welfare benefit plans -- plans offered by many insurance agents. For unknowing clients, the tax consequences are enormous. Yet for their professional insurance advisors, the liability may be equally extreme. If an insurance professional sells one of these plans, and the client takes a tax deduction on that plan the IRS now considers as abusive, to be a listed transaction or substantially similar to such a transaction, the insurance agent may be called a "material advisor." The fine for being found a material advisor is $200,000 if incorporated, or $100,000 if unincorporated.
Most insurance agents think that they can avoid the fine by filing Form 8918 with the IRS and informing on their clients. But, all of the Form 8918s we have seen have been filled out improperly. In our discussions with the IRS officials who wrote the regulations, the impression that we received was that if the form is filled out improperly, you are lying to the government. That is almost as bad as not filing the form. This has also been a problem with all the forms that we have reviewed for accountants and insurance agents. We have reviewed hundreds of forms, and not a single one has been filled out properly. One of the reasons for this may be that the promoter of the abusive plan sends the form with instructions to the accountant and insurance agent. These instructions tend to protect the promoter, but do not necessarily protect the insurance agent or accountant. So please be careful with this entire situation. We have received hundreds of phone calls from accountants and insurance professionals recently who are in this predicament. But, it is very difficult to help them after the fact.
Recently, there has been an explosion in the marketing of a financial product called "captive insurance." These so-called "captives" are typically small insurance companies designed to insure the risks of an individual business under IRS Code Section 831(b). When properly designed, a business can make tax-deductible premium payments to a related party insurance company. Depending on circumstances, underwriting profits, if any, can be paid out to the owners as dividends, and profits from liquidation of the company may be taxed as capital gains.
While captives can be a great cost-saving tool, they also are expensive to build and manage. Also, captives are allowed to garner tax benefits because they operate as real insurance companies. Advisors and business owners who misuse captives or market them as estate planning tools, asset protection vehicles, for tax deferral purposes or to obtain other benefits not related to the true business purpose of an insurance company face grave regulatory and tax consequences.
A recent concern is the integration of small captives with life insurance policies. Small captives, under Section 831(b), have no statutory authority to deduct life premiums. Also, if a small captive uses life insurance as an investment, the cash value of the life policy can be taxable at corporate rates, and then will be taxable again when distributed. The consequence of this double taxation is to devastate the effectiveness of the life insurance, and it extends serious liability to any accountant who recommends the plan or even signs the tax return of the business that pays premiums to the captive.
The IRS is aware that several large insurance companies are promoting their life insurance policies as investments with small captives. The outcome looks eerily like that of the 419 and 412(i) plans mentioned above.
Remember, if something looks too good to be true, it usually is. There are safe and conservative ways to use captive insurance structures to lower costs and obtain benefits for businesses. And, some types of captive insurance products do have statutory protection for deducting life insurance premiums (although not 831(b) captives). Learning what works and is safe is the first step an accountant should take in helping his or her clients use these powerful, but highly technical insurance tools.
*Source: This article was first published in the January 2009 issue of California Broker magazine.
Lance Wallach, a member of the AICPA faculty of teaching professionals and an AICPA course developer, is a frequent and popular speaker on retirement plans, financial and estate planning, reducing health insurance costs and tax-oriented strategies at accounting and financial planning conventions. He does frequent expert witness work and assists insurance professionals, accountants and others in reviewing 8918 forms so they can avoid the IRS $200,000 penalty that applies to material advisors.
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.
Over the past decade, business owners have been overwhelmed by a plethora of arrangements designed to reduce the cost of providing employee benefits and taxes while simultaneously increasing their own retirement savings. The solutions ranged from traditional pension and profit sharing plans to more advanced strategies.
Some strategies, such as IRS Section 419 and 412(i) plans, used life insurance as vehicles to bring about benefits. Unfortunately, almost all the plans were noncompliant, even though insurance companies vetted them and encouraged their agents to sell them. This fostered an environment that led to numerous IRS crackdowns, disallowing tax deductions, and spurned clients to sue their insurance agents and others.
The result has been thousands of audits and an IRS task force seeking out tax-shelter promotions. In addition, the IRS has been auditing most 412(i) defined benefit retirement plans and all 419 welfare benefit plans -- plans offered by many insurance agents. For unknowing clients, the tax consequences are enormous. Yet for their professional insurance advisors, the liability may be equally extreme. If an insurance professional sells one of these plans, and the client takes a tax deduction on that plan the IRS now considers as abusive, to be a listed transaction or substantially similar to such a transaction, the insurance agent may be called a "material advisor." The fine for being found a material advisor is $200,000 if incorporated, or $100,000 if unincorporated.
Most insurance agents think that they can avoid the fine by filing Form 8918 with the IRS and informing on their clients. But, all of the Form 8918s we have seen have been filled out improperly. In our discussions with the IRS officials who wrote the regulations, the impression that we received was that if the form is filled out improperly, you are lying to the government. That is almost as bad as not filing the form. This has also been a problem with all the forms that we have reviewed for accountants and insurance agents. We have reviewed hundreds of forms, and not a single one has been filled out properly. One of the reasons for this may be that the promoter of the abusive plan sends the form with instructions to the accountant and insurance agent. These instructions tend to protect the promoter, but do not necessarily protect the insurance agent or accountant. So please be careful with this entire situation. We have received hundreds of phone calls from accountants and insurance professionals recently who are in this predicament. But, it is very difficult to help them after the fact.
Recently, there has been an explosion in the marketing of a financial product called "captive insurance." These so-called "captives" are typically small insurance companies designed to insure the risks of an individual business under IRS Code Section 831(b). When properly designed, a business can make tax-deductible premium payments to a related party insurance company. Depending on circumstances, underwriting profits, if any, can be paid out to the owners as dividends, and profits from liquidation of the company may be taxed as capital gains.
While captives can be a great cost-saving tool, they also are expensive to build and manage. Also, captives are allowed to garner tax benefits because they operate as real insurance companies. Advisors and business owners who misuse captives or market them as estate planning tools, asset protection vehicles, for tax deferral purposes or to obtain other benefits not related to the true business purpose of an insurance company face grave regulatory and tax consequences.
A recent concern is the integration of small captives with life insurance policies. Small captives, under Section 831(b), have no statutory authority to deduct life premiums. Also, if a small captive uses life insurance as an investment, the cash value of the life policy can be taxable at corporate rates, and then will be taxable again when distributed. The consequence of this double taxation is to devastate the effectiveness of the life insurance, and it extends serious liability to any accountant who recommends the plan or even signs the tax return of the business that pays premiums to the captive.
The IRS is aware that several large insurance companies are promoting their life insurance policies as investments with small captives. The outcome looks eerily like that of the 419 and 412(i) plans mentioned above.
Remember, if something looks too good to be true, it usually is. There are safe and conservative ways to use captive insurance structures to lower costs and obtain benefits for businesses. And, some types of captive insurance products do have statutory protection for deducting life insurance premiums (although not 831(b) captives). Learning what works and is safe is the first step an accountant should take in helping his or her clients use these powerful, but highly technical insurance tools.
*Source: This article was first published in the January 2009 issue of California Broker magazine.
Lance Wallach, a member of the AICPA faculty of teaching professionals and an AICPA course developer, is a frequent and popular speaker on retirement plans, financial and estate planning, reducing health insurance costs and tax-oriented strategies at accounting and financial planning conventions. He does frequent expert witness work and assists insurance professionals, accountants and others in reviewing 8918 forms so they can avoid the IRS $200,000 penalty that applies to material advisors.
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.
Captive Insurance - Buyer Beware!
Parts of this article are from the book by John Wiley and Sons, Protecting Clients from Fraud, Incompetence and Scams, authored by Lance Wallach.
September 24, 2010
Herol Graham has turned defensive boxing into a poetic art. Trouble is, nobody ever got knocked out by a poem.
—Eddie Shaw
Every accountant knows that increased cash flow and cost savings are critical for businesses in 2009. What is uncertain is the best path to recommend to garner these benefits.
Over the past decade business owners have been overwhelmed by a plethora of choices designed to reduce the cost of providing employee benefits while increasing their own retirement savings. The solutions range from traditional pension and profit sharing plans to more advanced strategies.
Some strategies, such as IRS section 419 and 412(i) plans, used life insurance as vehicles to bring about benefits. Unfortunately, the high life insurance commissions (often 90 percent of the contribution, or more) fostered an environment that led to aggressive and noncompliant plans.
The result has been thousands of audits and an IRS task force seeking out tax shelter promotion. For unknowing clients, the tax consequences are enormous. For their accountant advisors, the liability may be equally extreme.
Recently, there has been an explosion in the marketing of a financial product called Captive Insurance. Small companies have been copying a method to control insurance costs and reduce taxes that used to be the domain of large businesses: setting up their own insurance companies to provide coverage when they think that outside insurers are charging too much. A captive insurance company would be an insurance subsidiary that is owned by its parent business(es). There are now nearly 5,000 captive insurers worldwide. More than 80 percent of Fortune 500 companies take advantage of some sort of captive insurance company arrangement. Now small companies can, too.
These so-called “Captives” are typically small insurance companies designed to insure the risks of an individual business under IRS Code Section 831(b). When properly designed, a business can make tax-deductible premium payments to a related-party insurance company. Depending on circumstances, underwriting profits, if any, can be paid out to the owners as dividends, and profits from liquidation of the company may be taxed as capital gains. Single-parent captives allow an organization to cover any risk they wish to fund, and generally eliminate the commission-price component from the premiums. Jurisdictions in the United States and in certain parts of the world have adopted a series of laws and regulations that allow small non–life insurance companies, taxed under IRC Section 831(b), or as 831(b) companies.
Captives can be a great cost-saving tool, but they can also be expensive to build and manage. Also, captives are allowed to garner tax benefits because they operate as real insurance companies. Advisors and business owners who misuse captives or market them as estate planning tools, asset protection or tax deferral vehicles, or other benefits not related to the true business purpose of an insurance company, face grave regulatory and tax consequences.
A recent concern is the integration of small captives with life insurance policies. Small captives under Section 831(b) have no statutory authority to deduct life premiums. Also, if a small captive uses life insurance as an investment, the cash value of the life policy can be taxable at corporate rates, and then will be taxable again when distributed. The consequence of this double taxation is to devastate the efficacy of the life insurance, and it extends serious liability to any accountant who recommends the plan or even signs the tax return of the business that pays premiums to the captive.
The IRS is aware that several large insurance companies are promoting their life insurance policies as investments within small captives. The outcome looks eerily like that of the 419 and 412(i) plans mentioned above.
Remember, if something looks too good to be true, it usually is. There are safe and conservative ways to use captive insurance structures to lower costs and obtain benefits for businesses. Some types of captive insurance products do have statutory protection for deducting life insurance premiums (although not 831(b) captives). Learning what works and is safe is the first step an accountant should take in helping his or her clients use these powerful, but highly technical insurance tools.
Lance Wallach, 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 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 AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxadvisorexperts.org or www.taxlibrary.us.
The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.
September 24, 2010
Herol Graham has turned defensive boxing into a poetic art. Trouble is, nobody ever got knocked out by a poem.
—Eddie Shaw
Every accountant knows that increased cash flow and cost savings are critical for businesses in 2009. What is uncertain is the best path to recommend to garner these benefits.
Over the past decade business owners have been overwhelmed by a plethora of choices designed to reduce the cost of providing employee benefits while increasing their own retirement savings. The solutions range from traditional pension and profit sharing plans to more advanced strategies.
Some strategies, such as IRS section 419 and 412(i) plans, used life insurance as vehicles to bring about benefits. Unfortunately, the high life insurance commissions (often 90 percent of the contribution, or more) fostered an environment that led to aggressive and noncompliant plans.
The result has been thousands of audits and an IRS task force seeking out tax shelter promotion. For unknowing clients, the tax consequences are enormous. For their accountant advisors, the liability may be equally extreme.
Recently, there has been an explosion in the marketing of a financial product called Captive Insurance. Small companies have been copying a method to control insurance costs and reduce taxes that used to be the domain of large businesses: setting up their own insurance companies to provide coverage when they think that outside insurers are charging too much. A captive insurance company would be an insurance subsidiary that is owned by its parent business(es). There are now nearly 5,000 captive insurers worldwide. More than 80 percent of Fortune 500 companies take advantage of some sort of captive insurance company arrangement. Now small companies can, too.
These so-called “Captives” are typically small insurance companies designed to insure the risks of an individual business under IRS Code Section 831(b). When properly designed, a business can make tax-deductible premium payments to a related-party insurance company. Depending on circumstances, underwriting profits, if any, can be paid out to the owners as dividends, and profits from liquidation of the company may be taxed as capital gains. Single-parent captives allow an organization to cover any risk they wish to fund, and generally eliminate the commission-price component from the premiums. Jurisdictions in the United States and in certain parts of the world have adopted a series of laws and regulations that allow small non–life insurance companies, taxed under IRC Section 831(b), or as 831(b) companies.
Captives can be a great cost-saving tool, but they can also be expensive to build and manage. Also, captives are allowed to garner tax benefits because they operate as real insurance companies. Advisors and business owners who misuse captives or market them as estate planning tools, asset protection or tax deferral vehicles, or other benefits not related to the true business purpose of an insurance company, face grave regulatory and tax consequences.
A recent concern is the integration of small captives with life insurance policies. Small captives under Section 831(b) have no statutory authority to deduct life premiums. Also, if a small captive uses life insurance as an investment, the cash value of the life policy can be taxable at corporate rates, and then will be taxable again when distributed. The consequence of this double taxation is to devastate the efficacy of the life insurance, and it extends serious liability to any accountant who recommends the plan or even signs the tax return of the business that pays premiums to the captive.
The IRS is aware that several large insurance companies are promoting their life insurance policies as investments within small captives. The outcome looks eerily like that of the 419 and 412(i) plans mentioned above.
Remember, if something looks too good to be true, it usually is. There are safe and conservative ways to use captive insurance structures to lower costs and obtain benefits for businesses. Some types of captive insurance products do have statutory protection for deducting life insurance premiums (although not 831(b) captives). Learning what works and is safe is the first step an accountant should take in helping his or her clients use these powerful, but highly technical insurance tools.
Lance Wallach, 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 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 AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxadvisorexperts.org or www.taxlibrary.us.
The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.
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