Showing posts with label 419 Captive Insurance Audits. Show all posts

412i 419e IRS audits, 6707a penalties, form 8886 listed transactions

Section 79 Scams and Captive Insurance History - HG.org

Insurance companies, agents, financial planners, and others have pushed abusive 419 and 412i plans for

years. They claimed business owners could obtain large tax deductions. Insurance companies, agents and others earned very large life insurance commissions in the process. Eventually, the IRS cracked down on the unsuspecting business owners. Not only did they lose the tax deductions, but they were also fined, in addition to being charged penalties and interest. A skilled CPA with extensive IRS experience could usually eliminate the penalties and reduce the fines. Most accountants, tax attorneys and others have been unsuccessful in accomplishing this.

After the business owner was assessed the fines and lost his tax deduction, he had another huge, unforeseen problem. The IRS then came back and fined him a huge amount of money for not telling on himself under IRC 6707A. If you participate in a listed or reportable transaction, you must alert the IRS or face a large fine. In essence, you must alert the IRS if you were in a transaction that has the possibility of tax avoidance or evasion. Not only must you file Form 8886 telling on yourself, but the form needs to be filed properly, and done every year that you are in the plan in any way at all, even if you are no longer making contributions.

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Lance Wallach - www.taxaudit419.com

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)

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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.

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.

Fatca, Fbar, Offshore Amnesty Large Fines Coming - HG.org

Taxpayers allowed to enter the IRS amnesty program for confessors own taxes, interest and penalties usually amounting to up to half of the account balance, but they are protected from criminal prosecution.

More than 39,000 taxpayers have entered the amnesty program for undeclared offshore accounts.

Many U.S. taxpayers and advisers have been criminally charged in connection with offshore accounts.

Amazon.com: IRS Secrets You Should Know eBook: Lance Wallach: Books

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 Trap.

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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".

Lance Wallach on 419, 412i, and more

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 and his associates provide Expert Witness Services |

Big Trouble Ahead For Many 419 Welfare Benefit Plan and 412i Retirement Plan Participants

Big Trouble Ahead For Many 419 Welfare Benefit Plan

and 412i Retirement Plan Participants

Aug 25, 2010

By Lance Wallach

Business owners and professionals who have adopted 419 welfare benefit plan arrangements are

in serious trouble. The IRS has attacked these arrangements as "listed transactions." Business

owners who engage in a "listed transaction" must report such transactions on IRS Form 8886

every year that they are participating in the transaction, and you are participating even in years

when you do not make any contribution. Internal Revenue Code 6707A imposes severe penalties

($200,000 annually for a business and $100,000 per year for an individual) for failure to file

Form 8886 with respect to a listed transaction. Tax Court, according to both the IRS Appeals

Office and its own decisions, does not have jurisdiction to abate or lower any penalties imposed

by the IRS. Complaints caused Congress to impose a moratorium on collection of Section

6707A penalties. On June 1, 2010, the moratorium ended, and the IRS immediately began

sending out notices warning of possible imposition of 6707A penalties. When you get this notice

it should be taken very seriously.

Accountants were required to properly prepare and file Form 8918 (if they signed and/or

prepare tax returns and got paid). The penalty for accountants for not properly filing the forms

is $100,000, or $200,000 if they are incorporated.

Businesses that were in some 419 welfare benefit plans or some 412i retirement as well as some

Captive Insurance and Section 79 Plans, were supposed to properly file under IRC Section

6707A each year with the IRS. Either the taxpayer or the accountant was responsible, though

the ultimate, primary obligation falls on the taxpayer. The IRS has just begun sending the notices

referred to above to participants in many of these plans. This is in addition to any IRS audit you

might have had or currently may be having. The large 6707A fine has nothing to do with any

other IRS audit. The 6707A fine is for not having properly filed under 6707A with your returns.

You are required to file each year with your tax return.

Not only were you required to file with your Federal return, but many states also require

protective filings. Some participants in these types of plans have already received notices from

the IRS. You must act immediately if you wish to avoid possible huge IRS penalties and interest

that could put you out of business for good.

THE STATUTE OF LIMITATIONS IS NOT RUNNING. This means that the IRS can fine you

at any time in the future for anything regarding past or present participation in an abusive 419

welfare benefit plan or an abusive 412i retirement plan. There is still time to avoid the IRS

penalties and interest. You need to take action immediately and find out right away if the plan

you are participating in is abusive by consulting with a professional and experienced 419/412i

plan expert.

Most accountants do not know how to properly prepare the appropriate forms. Accountants or

other advisors will probably be fined as material advisors. This means that you may be subject to

a large fine. Once you get the large fine, the IRS claims it is not subject to an appeal.

You should have filed protectively for every year your entity participated in the plan. Once again,

for every year after 2003, the penalty for not properly filing is $200,000 a year for corporations

and $100,000 a year for individuals. For example, it is possible an employer in the plan since

2004 could be subject to over one million dollars in penalties solely as a result of the failure to

file. For all years in the plan, the Statute of Limitations will not begin to run until after the form

is properly filed. In addition, certain individual plan participants should also file for every year of

plan participation. Once again, none of this has anything to do with any other audit that you may

currently be involved in or may previously have experienced.

It is abundantly clear that taxpayers who receive notices from the IRS regarding Section 6707A

penalties should take these letters extremely seriously. These notices do not lend themselves to

"do-it-yourself eye surgery".

ArticlesBase

Under Creative Commons License: Attribution

About the Author:

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.taxadvisorexperts.org

Lance Wallach on 419, 412i, and more

Captive Insurance Plans, Want to Get Audited? - HG.org

When one scheme fails it isn’t long before a resourceful promoter comes up with a different product. Inevitably promoters find some lawyer or accountant to draft a favorable opinion letter and a new industry is born. In a few years, however, the IRS catches up and declares the arrangement to be a listed transaction and abusive tax shelter. As an expert witness I have never lost a case in this field. It is easy to beat the deep pockets of the insurance companies who provide product to these plans. Even though they have business owners sign fraudulent disclaimers saying that the owners will get their own tax advice. These disclaimers are then used when the inevitable happens, the IRS audits and the business owner sues the insurance company.

The latest entries seeking to find a way to make life insurance premiums deductible is a small business captive insurance company or CIC.

No Shelter Here: Beware of These Insurance Plans | Remodeling

During the past few years, the Internal Revenue Service (IRS) has fined many business owners hundreds of thousands of dollars for participating in several particular types of insurance plans.

The 412(i), 419, captive insurance, and section 79 plans were marketed as a way for small-business owners to set up retirement, welfare benefit plans, or other tax-deductible programs while leveraging huge tax savings, but the IRS put most of them on a list of abusive tax shelters, listed transactions, or similar transactions, etc., and has more recently focused audits on them. Many accountants are unaware of the issues surrounding these plans, and many big-name insurance companies are still encouraging participation in them.

Can You Recover Money from 419 and 412i Plans? - HG.org

Remedies for abusive tax shelter schemes

Lance Wallach says that there are remedies for those who have been injured by an insurance company’s abusive tax shelter schemes. He predicts that we’ll see a huge spike in the number of people getting audited by the IRS.