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The dangers of being "listed"


The dangers of being "listed"

A warning for 419, 412i, Sec.79 and captive insurance

Accounting Today: October 25, 2010
By: Lance Wallach


Taxpayers who previously adopted 419, 412i, captive insurance or Section 79 plans are in big trouble.


In recent years, the IRS has identified many of these arrangements as abusive devices to
funnel tax deductible dollars to shareholders and classified these arrangements as "listed
transactions."

These plans were sold by insurance agents, financial planners, accountants and attorneys
seeking large life insurance commissions. In general, taxpayers who engage in a "listed
transaction" must report such transaction to the IRS on Form 8886 every year that they
"participate" in the transaction, and you do not necessarily have to make a contribution or
claim a tax deduction to participate.  Section 6707A of the Code imposes severe penalties
($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.  

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 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.


Life Agents and Accountants Fined $100,000 for Selling 419 and Other Insurance Plans

Life Agents and Accountants Fined $100,000 for Selling 419 and Other Insurance Plans



     By Lance Wallach, CLU, CHFC Abusive Tax Shelter, Listed Transaction, Reportable Transaction Expert Witness

Accountants and others fined $100,000 for signing tax returns and selling 419, 412i and other abusive life insurance plans. - Accounting Today - ‘Don’t Become A Material Advisor’ - Accountants, insurance professionals and others need to be careful that they don’t become what the IRS calls material advisers.
If they sell or give advice, or sign tax returns for abusive, listed or similar plans; they risk a minimum $100,000 fine. Their client will then probably sue them after having dealt with the IRS.

In 2010, the IRS raided the offices of Benistar in Simsbury, Conn., and seized the retirement benefit plan administration firm’s files and records. In McGehee Family Clinic, the Tax Court ruled that a clinic and shareholder’s investment in an employee benefit plan marketed under the name “Benistar” was a listed transaction because it was substantially similar to the transaction described in Notice 95-34 (1995-1 C.B. 309). This is at least the second case in which the court has ruled against the Benistar welfare benefit plan, by denominating it a listed transaction.

The McGehee Family Clinic enrolled in the Benistar 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 assessed tax deficiencies and the enhanced 30 percent penalty under Section 6662A, 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.

In rendering its decision, the court cited Curcio v. Commissioner, in which the court also ruled in favor of the IRS. As noted in Curcio, the insurance policies, which were 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 Benistar Plan owned the insurance contracts. The excessive cost of providing death benefits was a reason for the court’s finding in Curcio that tax deductions had been properly disallowed.

As in Curcio, the McGehee court held that the contributions to Benistar were not deductible under Section 162(a) because the participants could receive the value reflected in the underlying insurance policies purchased by Benistar—despite the payment of benefits by Benistar seeming to be contingent upon an unanticipated event (the death of the insured while employed). As long as plan participants were willing to abide by Benistar’s distribution policies, there was no reason ever to forfeit a policy to the plan. In fact, in estimating life insurance rates, the taxpayers’ expert in Curcio assumed that there would be no forfeitures, even though he admitted that an insurance company would generally assume a reasonable rate of policy lapse.

Companies should carefully evaluate their proposed investments in plans such as the Benistar Plan. The claimed deductions will be disallowed, and penalties will be assessed for lack of disclosure if the investment is similar to the investments described in Notice 95-34, that is, if the transaction is a listed transaction and Form 8886 is either not filed at all or is not properly filed. The penalties, though perhaps not as severe, are also imposed for reportable transactions, which are defined as transactions having the potential for tax avoidance or evasion.

Insurance agents have been selling such abusive plans since the 1990's. They started as 419A(F)(6) plans and abusive 412i plans. The IRS went after them. They then evolved to single-employer 419(e) plans, which the IRS also went after. The latest scams may be the so-called captive insurance plan and the so-called Section 79 plan.

While captive insurance plans are legitimate for large corporations, they are usually not legitimate for small business owners as a way to obtain a tax deduction. I have not yet seen a legitimate Section 79 plan. Recently, I have sent some of the plan promoters’ materials over to my IRS contacts who were very interested in receiving them. Some of my associates are already trying to help defend some unsuspecting business owners who are being audited by the IRS with respect to these plans.

Similar, though perhaps not as abusive, plans fail after the IRS goes after them. Niche was one example. The company first marketed a 419A(F)(6) plan that the IRS audited. They then marketed a 419(e) plan that the IRS audited. Niche, insurance companies, agents, and many accountants were then sued after their clients lost their deductions, paid fines, interest, and penalties, and then paid huge fines for failure to file properly under 6707A. Niche then went out of business.

Millennium sold 419 plans through insurance companies. They stupidly filed for a private letter ruling to the effect that they were not a listed transaction. They got exactly the opposite: a private letter ruling saying that they were a listed transaction. Then many participants were audited. The IRS disallowed the deductions, imposed penalties and interest, and then assessed large fines for not filing properly under Section 6707A. The result was lawsuits against agents, insurance companies and accountants. Millennium sought bankruptcy protection after a lot of lawsuits.

I have been an expert witness in a lot of the lawsuits in these 419 plans, 412i plans, and the like, and my side has never lost a case. I have received thousands of phone calls over the years from business owners, accountants, angry plan promoters, insurance agents, and other various professionals. In the 1990's, when I started writing for the AICPA and other publications warning about these abusive plans, most people laughed at me, especially the plan promoters.

In 2002, when I spoke at the annual national convention of the American Society of Pension Actuaries in Washington, people took notice. The IRS chief actuary Jim Holland also held a meeting similar to mine on abusive 412i plans. Many IRS agents attended my meeting. I was also invited to IRS headquarters, at the request of the acting IRS commissioner, to meet with high-level IRS officials and Treasury officials to discuss 419 issues in depth, which I did after the meeting.

The IRS then set up task forces and started going after 419 and 412i plans. I have been profusely warning accountants to properly file under 6707A to avoid the large fines, but most do not. Even if they file, if they make a mistake on the forms, the IRS will fine them. Very few accountants have had experience filing the forms, and the IRS instructions are complicated and therefore difficult to follow. I only know of two people who have been successful in properly filing the forms, especially after the fact. If the forms are filled out incorrectly, they should be amended and corrected Most accountants call me a few years later when they and their clients get the large fines, either after improperly filling out the forms or failing to fill them out at all. Unfortunately, by then it is too late. If they don’t call me then, then they call me when their clients sue them.

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


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


By Lance Wallach


Producers Web 2011


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 has classified these arrangements as "listed transactions."

Insurance agents, financial planners, accountants and attorneys seeking large life insurance commissions sold these plans. 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 also it has to be prepared correctly. I only know of two people in the United States who have filed these forms properly for clients, and they tell me that was only after hundreds of hours of research and over 50 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. They 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. But, 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.

Treasury 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.

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.

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

Large IRS Fines for participants in 419, 412i, Captive Insurance, Section 79 plans and other Life Insurance Based plans.


Large IRS Fines for participants in 419, 412i, Captive Insurance, Section 79 plans and other Life Insurance Based plans.


June 2011 Lance Wallach




In a recent U.S. Tax Court case, some taxpayers suffered a double loss. The taxpayers, consisting of four couples, had purchased welfare benefit plans marketed by Benistar 419 Plan Services. Under the plan, Benistar provided pre-retirement life insurance to select employees of companies enrolled in the plan. Small employers like the plans because they allow pretax contributions to be shielded from taxation. The plan was marketed through seminars geared towards insurance agents. Benistar did not sell directly to the participants. Ultimately, the court decided that contributions to the plan were not tax deductible.





The loss of the deduction is not the only loss suffered by the taxpayers in this case. In addition to losing the tax deduction on the plan contributions, and the resulting hefty tax bill, the taxpayers were also assessed with penalties. The taxpayers argued that they acted in good faith and with reasonable cause stating they had relied on professional advice. While the taxpayers claimed they relied on their accountants, the court found that there was no evidence the accountants had any particular expertise in welfare benefit plans or that the taxpayers thought their accountants possessed such expertise.

The court did acknowledge that a prominent tax lawyer and author of a book on 419 plans developed the Benistar plan. The court also acknowledged the several legal opinions finding the Benistar plans were not abusive tax shelters. Again, that was not good enough for the court. What does all this mean? The IRS and U.S. Tax Court look unfavorably on welfare benefit and other 419 plans.




Businesses that invested in these plans can expect the IRS to disallow the tax benefits that made these plans so attractive. Not only will the deductions be disallowed, penalties will likely be imposed. Notwithstanding all the legal opinions that surround many of these plans, the tax court will likely find that there was no reasonable reliance on professional advice. The court found specifically that taxpayers couldn’t rely on the advice of insurance agents. Even reliance on accountants and legal opinions may not be enough.

Not at issue in the tax court decision were the huge penalties the IRS now imposes for engaging in a listed transaction under IRS code 6707A. The IRS considers many of these plans to be abusive tax shelters requiring additional disclosures to be filed with the IRS. Because that was not addressed in this court opinion, it is difficult to know with certainty how the IRS will treat these penalties. Everything else with welfare benefit plans, however, suggests the IRS will also be strict with these penalties.



Taxpayers and their representatives should be aware that the Service has disallowed deductions for contributions to these arrangements and other schemes that are substantially similar to them. The IRS is cracking down on small business owners who participate in tax reduction insurance plans and the brokers and others who sell them. Some of these plans include defined benefit retirement plans, 419 welfare benefit plans, 412(i) plans, captive insurance, Section 79 plans, IRA s, or even 401(k) plans with life insurance.



Some Section 412(i) plans have been funded with life insurance using face amounts in excess of the qualified 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 renders that particular plan 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 is not in and of itself a listed transaction. However, the IRS does have a task force auditing 412(i) plans. An employer has not necessarily engaged in a listed transaction simply by virtue of participation in a Section 412(i) plan.

Simply because a 412(i) plan was audited and sanctioned for certain items does not necessarily mean that the plan is a listed transaction. Some Section 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 Benistar Plan. The claimed deductions will be disallowed, and penalties will be assessed for lack of disclosure if the investment is similar to the investments described in Notice 95-34, to wit: if the transaction is a listed transaction and Form 8886 is either not filed at all or is not properly filed. In addition, under IRC Section 6707A, the IRS fines participants a large amount of money for not properly disclosing their participation in listed or reportable transactions, an issue that was not before the court in either Curcio or McGehee. A listed transaction is one which has been specifically designated as such by the Service in a written pronouncement that is available to the general public , or which is substantially similar to such a transaction; a reportable transaction, quite simply, is any transaction having the potential for tax avoidance or evasion.

The disclosure needs to be made for every year that a participant is in the plan. The forms need to be properly filed even for years when no contribution was made. I have received numerous telephone calls from participants who did disclose and were still fined because the forms were not properly prepared. A plan administrator told me that he helped hundreds of his participants to file, and they still all received very large IRs fines for not properly preparing the forms. Do not follow the plan promoter’s directions as to how to file Form 8886. If you did, immediately re-file the forms and use someone who has extensive experience preparing the forms. I would not use someone to redo or to do the forms unless he or she has prepared many others and has had no, or at most very little trouble with the IRS on this issue.



The IRS has been attacking all Section 419 welfare benefit plans, many 412(i) retirement plans, captive insurance plans with life insurance inside of them, and Section 79 plans. I have received hundreds of telephone calls from accountants, business owners, and others who are being attacked by the IRS because of their participation in these plans. Accountants who sign tax returns and/or meet a certain income threshold are called material advisors by the IRS. They also have a disclosure obligation, and failure to meet it results in fines of $100,000 for individuals and $200,000 for corporations.








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 more than 20 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 his side has never lost a case. Visit www.Attorneys-USA.org for more on this subject.





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.


IRS Attacks Business Owners in 419, 412, Section 79 and Captive Insurance Plans Under Section 6707A

Winter 2010


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, captiveinsurance or Section 79 plans are in big trouble.



In recent years, the IRS has identified many of these arrangements as abusive devices to funnel tax deductible dollars to shareholders and classified these arrangements as listed transactions." These plans were sold by insurance agents, financial planners, accountants and attorneys seeking large life insurance commissions. In general, taxpayers who engage in a “listed transaction” must report such transaction to the IRS on Form 8886 every year that they “participate” in the transaction, and you do not necessarily have to make a contribution or claim a tax deduction to participate. Section 6707A of the Code imposes severe penalties for failure to file Form 8886 with respect to a listed transaction. But you are also in trouble if you file incorrectly. I have received numerous phone calls from business owners who filed and still got fined. Not only do you have to file Form 8886, but it also has to be prepared correctly. I only know of two people in the U.S. who have filed these forms properly for clients. They tell me that was after hundreds of hours of research and over 50 phones calls to various IRS personnel. The filing instructions for Form 8886 presume a timely filling. Most people file late and follow the directions for currently preparing the forms. Then the IRS fines the business owner. The tax court does not have jurisdiction to abate or lower such penalties imposed by the IRS.


"Many taxpayers who are no longer taking current tax deductions for these plans continue to enjoy the benefit of previous tax deductions by continuing the deferral of income from contributions and deductions taken in prior years."


Many business owners adopted 412i, 419, captive insurance and Section 79 plans based upon representations provided by insurance professionals that the plans were legitimate plans and were not informed that they were engaging in a listed transaction. Upon audit, these taxpayers were shocked when the IRS asserted penalties under Section 6707A of the Code in the hundreds of thousands of dollars. Numerous complaints from these taxpayers caused Congress to impose a moratorium on assessment of Section 6707A penalties.


The moratorium on IRS fines expired on June 1, 2010. The IRS immediately started sending out notices proposing the imposition of Section 6707A penalties along with requests for lengthy extensions of the Statute of Limitations for the purpose of assessing tax. Many of these taxpayers stopped taking deductions for contributions to these plans years ago, and are confused and upset by the IRS’s inquiry, especially when the taxpayer had previously reached a monetary settlement with the IRS regarding its deductions. Logic and common sense dictate that a penalty should not apply if the taxpayer no longer benefits from the arrangement. Treas. Reg. Sec. 1.6011-4(c)(3)(i) provides that a taxpayer has participated in a listed transaction if the taxpayer’s tax return reflects tax consequences or a tax strategy described in the published guidance identifying the transaction as a listed transaction or a transaction that is the same or substantially similar to a listed transaction.


Clearly, the primary benefit in the participation of these plans is the large tax deduction generated by such participation. Many taxpayers who are no longer taking current tax deductions for these plans continue to enjoy the benefit of previous tax deductions by continuing the deferral of income from contributions and deductions taken in prior years. While the regulations do not expand on what constitutes “reflecting the tax consequences of the strategy,” it could be argued that continued benefit from a tax deferral for a previous tax deduction is within the contemplation of a “tax consequence” of the plan strategy. Also, many taxpayers who no longer make contributions or claim tax deductions continue to pay administrative fees. Sometimes, money is taken from the plan to pay premiums to keep life insurance policies in force. In these ways, it could be argued that these taxpayers are still “contributing,” and thus still must file Form 8886.


It is clear that the extent to which a taxpayer benefits from the transaction depends on the purpose of a particular transaction as described in the published guidance that caused such transaction to be a listed transaction. Revenue Ruling 2004-20, which classifies 419(e) transactions, appears to be concerned with the employer’s contribution/deduction amount rather than the continued deferral of the income in previous years. Another important issue is that the IRS has called CPAs material advisors if they signed tax returns containing the plan, and got paid a certain amount of money for tax advice on the plan. The fine is $100,000 for the CPA, or $200,000 if the CPA is incorporated. To avoid the fine, the CPA has to properly file Form 8918.

Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, Wallach is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters. He is also a featured writer and has been interviewed on television and financial talk shows including NBC, National Pubic Radio’s All Things Considered and others. Lance authored Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education’s CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling books including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots.

How to Avoid IRS Fines for You and Your Clients







How to Avoid IRS Fines for You and Your Clients



Published: 9/29/10
By Lance Wallach
Beware: The IRS is cracking down on small-business owners who participate in tax-reduction insurance plans sold by insurance agents, including defined benefit retirement plans, IRAs, and even 401(k) plans with life insurance. In these cases, the business owner is motivated by a large tax deduction; the insurance agent is motivated by a substantial commission.
A few years ago, I testified as an expert witness in a case in which a physician was in an abusive 401(k) plan with life insurance. It had a so-called “springing cash value policy” in it. The IRS calls plans with these types of policies “listed transactions.” The judge called the insurance agent “a crook.”
If your client was currently is in a 412(i), 419, captive insurance, or Section 79 plan, they may be in big trouble. Accountants who signed a tax return for a client in one of these plans may be what the IRS calls a “material advisor” and subject to a maximum $200,000 fine.
If you are an insurance professional who sold or advised on one of these plans, the same holds true for you.
Section 79 scams
The attack on 412(i) and 419 plans has been going on for some time now, but the IRS will likely begin cracking down on Section 79 plans more heavily in the near future. So what is a Section 79 plan? It is a tax plan where small-business owners are told that they’re allowed to take a tax deduction through their businesses in order to purchase life insurance. That sounds pretty good, doesn’t it? When you break down the math and the sales pitch, however, it just doesn’t make sense.
Agents try to sell Section 79 plans for two simple reasons:
  1. Many small business clients will buy any plan that is "deductible" because they hate paying income taxes.
  2. Insurance advisors want to sell life insurance.

This brings up an interesting issue: If the plan is marginal from a wealth-building standpoint, then why are agents selling it? Again, there are two reasons:
  1. Most advisors have not broken down the math so they can come to a correct conclusion, which is that the plans are not worth implementing from a pure financial standpoint.
  2. Some advisors know the plan is marginal from a financial standpoint and don't care because they know they can still sell it to business owners who are looking for deductions. The IRS considers them abusive, and will audit them.
How to avoid the fines
In order to avoid substantial IRS fines, business owners and material advisors involved in the sale of any of the above type plans must properly file under Section 6707A. Yet filing often isn’t enough; many times, the IRS assesses fines on clients whose accountants did file the form yet made a mistake – an error that usually results in the client being fined more quickly than if the form were not filed at all.
Everyone in a Section 79 should file protectively under Section 6707A – and anyone who has not filed protectively in a 419 or 412(i) had better get some good advice from someone who knows what is going on, and has extensive experience filing protectively. The IRS still has task forces auditing these plans, and will soon move on to Section 79 scams, including many of the illegal captives pushed by the insurance companies and agents (though not all captives are illegal).
As an expert witness in many of cases involving the 412(i) and 419, I can attest that they often do not go well for the agents, accountants, plan promoters, insurance companies, and other involved parties.
Here is one example: Pursuant to a settlement with the IRS, a 412(i) plan was converted into a traditional defined benefit plan. All of the contributions to the 412(i) plan would have been allowable if they had initially adopted a traditional defined benefit plan. Based on negotiations with the IRS agent, the audit of the plan resulted in no income and minimal excise taxes due.
Toward the end of the audit, the business owner received a notice from the IRS. The IRS had assessed a $400,000 penalty for the client under Section 6707A, because the client allegedly participated in a listed transaction and failed to file Form 8886 in a timely manner.
 The IRS may call you a material advisor for selling one of these plans and fine you $200,000.00. The IRS may fine your clients over a million dollars for being in a retirement plan, 419 plan, etc. Anything that the Service deems, at its sole discretion, a “listed transaction” is fair game. As you read this article, hundreds of unfortunate people are having their lives ruined by these fines. You may need to take action immediately.


Lance Wallach speaks at more than 20 conventions annually and writes for more than fifty publications about tax reduction ideas, abusive welfare benefit and retirement plans, captive insurance companies, cash balance plans, life settlements, premium finance, etc.


He is a course developer and instructor for the American Institute of Certified Public Accountants and a prolific author. He has written or collaborated on numerous books, including, The Team Approach to Tax and Financial Planning; Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hotspots; Alternatives to Commonly Misused Tax Strategies: Ensuring Your Client’s Future, all published by the American Institute of CPAs; The CPA’s Guide to Life Insurance, and The CPA’s Guide to Trusts and Estates, both published by Bisk Education, and his latest book,  Protecting Clients from Fraud, Incompetence, and Scams, published by Wiley. In addition, Mr. Wallach writes for various national business associations that sell his books to their members and others. He has been an expert witness on some of the above issues, and to date his side has never lost a case.


Lance Wallach has also appeared on radio and TV financial programs, most recently on National Public Radio and NBC 25. He also consults on VEBAs for both public and private companies, as well as governmental entities. He is the National Society of Accountants Speaker of the Year, and a nationally recognized expert in his field. Contact him at wallachinc@gmail.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.

CSEA

CSEA