200k Report Update 419, 412i, Section 79,Captive Insurance 
New Information
 
 
If The IRS Contacts You... 

Keep your mouth shut-take this advice seriously. 

  

LANCE WALLACH 
The Danger of Being Listed
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"Tipping the Scales of Justice In Your Favor"






Important 419 Information


Companies who set up IRS Code Section 419 Welfare Benefit Plans that were funded by life insurance are finding they've got big problems. Although insurance agents told business owners that their contributions would be tax deductible, they're actually reportable transactions - which has left many companies owing taxes they simply can't pay.
THE PROBLEM:
 
What people don't realize is that, again, like 412(i) plans (link to article entitled 412(i) Pension Plan Fraud: Schemes Motivated By Big Insurance Commissions), many of these plans are reportable transactions to the IRS and that they're not always compliant with how a welfare benefit plan is supposed to be set up. They get audited by the IRS who tells them they're not going to allow it and that they're going to have to restate the income and pay taxes on it.

THE SOLUTION:

Contact
Lance Wallach
He has never Lost a case.

If you've been the victim of a fraudulent or abusive tax shelter scheme contact Lance Wallach to discuss your situation and evaluate what remedies may be available to you.


If the IRS Contacts You...
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Abusive Tax Shelter, Listed Transaction, Reportable Transaction Expert Witness 
     

 
       
                   CALL
                 938-5007

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Keep your mouth shut-take this advice seriously.

If you give the agents any opening, you're dead.

They'll start with soft background questions, but before you know it, will have trapped you. And many questions won't be genuine-that is, the agents already know the answers and are asking only to see if you will lie or confess.

Questions typically asked by agents include:

Have you reported all of your income?

Where are your bank accounts and safe deposit boxes?

Can you tell us about the cars, boats, planes, and real estate that you own?

What is the procedure for reporting sales in your business?

Do you keep a lot of cash on hand?

Who are your business associates?

Have you traveled out of the country recently?

Have you or any of your businesses been audited?

Faced with a barrage of questions from trained agents who show up unannounced, most people fall apart. They either blurt out a confession or a transparent lie within five minutes. This gives the Justice Department the rope to hang them with.

Don't Let that happen to you.

Contact Lance Wallach

His side has never lost a case.


A warning for 419, 412i, Sec.79 and captive insurance 
 The dangers of being "listed"

 


Accounting Today: October 25
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 
($200,000 for a business and $100,000 for an individual) 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 has to be prepared correctly. I only know of two 
people in the United States who have filed these forms properly for clients. They tell me that 
was after hundreds of hours of research and over fifty phones calls to various IRS 
personnel. 

The filing instructions for Form 8886 presume a timely filing.  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 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.  It 
follows that taxpayers who no longer enjoy the benefit of those large deductions are no 
longer "participating ' in the listed transaction.   But that is not the end of the story. 
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.  This language may 
provide the taxpayer with a solid argument in the event of an audit.   

 
Important information you should know if you have been, or are involved in, a "419 welfare benefit plan" or 412i "retirement plan".

California Enrolled Agent

January 2

 

Abusive 412(i) Retirement Plans Can Get Accountants Fined $200,000

By Lance Wallach & Ira Kaplan

 

 

Most insurance agents sell 412(i) retirement plans.  The large insurance commissions generate some of the enthusiasm.  Unlike other retirement plans, the 412(i) plan must have insurance products as the funding mechanism.  This seems to generate enthusiasm among insurance agents.  The IRS has been auditing almost all participants in 412(i) plans for the last few years.  At first, they thought all 412(i) plans were abusive.  Many participants' contributions were disallowed and there were additional fines of $200,000 per year for the participants.  The accountants who signed the tax returns (who the IRS called "material advisors") were also fined $200,000 with a referral to the Office of Professional Responsibility.  For more articles and details, see www.vebaplan.com and www.irs.gov/.

 

On Friday February 13, 2004, the IRS issued proposed regulations concerning the valuation of insurance contracts in the context of qualified retirement plans. 

 

The IRS said that it is no longer reasonable to use the cash surrender value or the interpolated terminal reserve as the accurate value of a life insurance contract for income tax purposes.  The proposed regulations stated that the value of a life insurance contract in the context of qualified retirement plans should be the contract's fair market value.

 

The Service acknowledged in the regulations (and in a revenue procedure issued simultaneously) that the fair market value standard could create some confusion among taxpayers.  They addressed this possibility by describing a safe harbor position.

 

When I addressed the American Society of Pension Actuaries Annual National Convention, the IRS chief actuary also spoke about attacking abusive 412(i) pensions.

 

A "Section 412(i) plan" is a tax-qualified retirement plan that is funded entirely by a life insurance contract or an annuity.  The employer claims tax deductions for contributions that are used by the plan to pay premiums on an insurance contract covering an employee.  The plan may hold the contract until the employee dies, or it may distribute or sell the contract to the employee at a specific point, such as when the employee retires.

 

"The guidance targets specific abuses occurring with Section 412(i) plans", stated Assistant Secretary for Tax Policy Pam Olson.  "There are many legitimate Section 412(i) plans, but some push the envelope, claiming tax results for employees and employers that do not reflect the underlying economics of the arrangements."  Or, to put it another way, tax deductions are being claimed, in some cases, that the Service does not feel are reasonable given the taxpayer's facts and circumstances. 

 

"Again and again, we've uncovered abusive tax avoidance transactions that game the system to the detriment of those who play by the rules," said IRS Commissioner Mark W. Everson. 

 

The IRS has warned against Section 412(i) defined benefit pension plans, named for the former IRC section governing them. It warned against certain trust arrangements it deems abusive, some of which may be regarded as listed transactions. Falling into that category can result in taxpayers having to disclose such participation under pain of penalties, potentially reaching $100,000 for individuals and $200,000 for other taxpayers. Targets also include some retirement plans.

One reason for the harsh treatment of 412(i) plans is their discrimination in favor of owners and key, highly compensated employees. Also, the IRS does not consider the promised tax relief proportionate to the economic realities of these transactions. In general, IRS auditors divide audited plans into those they consider noncompliant and others they consider abusive. While the alternatives available to the sponsor of a noncompliant plan are problematic, it is frequently an option to keep the plan alive in some form while simultaneously hoping to minimize the financial fallout from penalties.

The sponsor of an abusive plan can expect to be treated more harshly. Although in some situations something can be salvaged, the possibility is definitely on the table of having to treat the plan as if it never existed, which of course triggers the full extent of back taxes, penalties and interest on all contributions that were made, not to mention leaving behind no retirement plan whatsoever.  In addition, if the participant did not file Form 8886 and the accountant did not file Form 8918 (to report themselves), they would be fined $200,000.

 

Lance Wallach, the National Society of Accountants Speaker of the Year, speaks and writes extensively about retirement plans, Circular 230 problems and tax reduction strategies.  He speaks at more than 40 conventions annually, writes for over 50 publications and has written numerous best selling AICPA books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Business Hot Spots.  Contact him at 516.938.5007 or visitwww.vebaplan.com.

 

The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or other entity.  You should contact an appropriate professional for any such advice.

 

 

 




Mr. Wallach is a member of the AICPA faculty of teaching professionals & a renowned 
national expert in many court cases. He is the author of many best selling financial & law 
books, including:
    *  "Wealth Preservation Planning" by the National Society of Accountants  * "The CPA's Guide to Federal & Estate Gift Taxation" published by Bisk  * The AICPA's "The team approach to Tax, Financial & Estate planning."  * "The CPA's Guide to Life Insurance" by Bisk CPEasy  * Avoiding Circular 230 Malpractice Traps and Common Abusive Small Businesss Hot  spots by the AICPA, author/moderator Lance Wallach