Don’t Get Caught in Section 79 Trap
One doctor almost lost everything ………..
The Internal Revenue Service is looking very closely at all types of retirement plans these days, desperately trying to increase the federal treasury by uncovering and fining what it can call “abusive tax shelters.” Insurance agents, accountants and other financial advisors have been downplaying the Section 79 plans, convincing potential buyers that they need not worry about Section 79 plans because they are not on the IRS radar. We now have proof that’s not true, and anyone considering investing in a Section 79 plan should remember this story before they turn over their hard earned cash.
In 2006 Doctor X found himself in what he thought was the pleasant position of having a substantial amount of cash on hand that was not essential to the operation of his practice. That comfortable feeling did not last long. He quickly fell prey to a predatory insurance agent who sold him on the idea of Section 79 scam as a vehicle to obtain tax deductions. Of course what really interested the insurance agent was the funding vehicle, a large life insurance contract with American General as the insurance carrier, which just happened to net the agent a large commission.
Unfortunately, the large, questionable tax deductions claimed by Doctor X indeed attracted the attention of the IRS. As a result of their audit, the IRS not only disallowed all of the tax deductions, but also imposed back taxes, an array of penalties, and interest, turning the doctor’s anticipated investment vehicle into something that could cost him everything he was saving and more. As if that weren’t bad enough, even that draconian action was not the end of the story.
None of his so-called financial advisors had told Doctor X about IRC Section 6707A. Under this section of the code, huge fines can be imposed on those who fail to inform the Service about participation in listed or reportable transactions. Loosely defined, this means any transaction, which has the potential for tax avoidance or evasion. Since he had no knowledge of this requirement, the doctor did not make the proper filings under Section 6707A, and is now also being threatened with monstrous fines for that failure to submit the proper forms in the proper format.
Although these issues had the potential for great disaster and great financial loss for this doctor, all the anxiety and stress he has been suffering over this matter may soon have a happier ending than he expected at its onset because he had the sense to contact us for help, perhaps just in the nick of time. As a result of putting experts with a great deal of experience on his case, he now stands an excellent chance of having at least some of the penalties from the original audit abated. He will probably be able to recover the money that he sank into that large, useless American General life insurance contract as well. Last, but certainly not least, Doctor C also has an excellent chance of avoiding the large Section 6707A penalties, as our experts in the art of filing late without paying fines are currently at work on that as well.
January 15, 2010: Brand New Update:
The new proposed regulations specify a requirement that reporting forms filed under 6707A filed late must have additional attachments. Where in is described many additional details not covered in the original regulations. In addition, various parties must sign a statement on the attachments under penalty of perjury. The proposed regulations also specify that the late filing must be done in a specific manner. If this filing is not done according to these rules, the one-year period for statute of limitations will not commence, etc. In addition, the form should include a statement at the top in the manner the IRS suggests. If a tax payer fails to include, on any return or statement, for any taxable year, any information with respect to a listed transaction as defined in CODE SECTION 6707A, which is required to be included with such return or statement the time for assessment of any tax imposed by this title with respect to such transaction shall not expire before the date, which is one year after the earlier of; the date on which the secretary is furnished the information so required, or the date that a material advisor meets the requirements relating to such transaction with respect to such tax payer. As you know, Congress has armed the IRS with many weapons for enforcement. Usually there is three-year statute of limitations granted to all taxpayers. In the situation above there will be no statute of limitations, unless the forms are filed in correctly with no errors at all. In addition, the forms must be sent to the proper IRS authorities at their various locations. Lance Wallach’s commentary: It seems to me and to the only two people that I know who have been filing these forms correctly that that the IRS has purposely made it almost impossible for accountants and tax attorneys to properly fill out these forms and to comply with regulations under SECTION 6707A. The result is that a business owner in one of these plans asks his accountant or attorney to file the disclosures. The Business Owner then gets fined, on average, ABOUT A MILLION DOLLARS. Or the Business Owner does not file the forms and gets the same fine. The same goes for the Material Advisor. The two people that have been filing these forms properly to my knowledge have repeatedly had discussions with the authors of these regulations and various other IRS personnel, including the Office of Tax Shelter Analysis. Based on those many conversations with IRS personnel, repeatedly re-reading the various regulations and experience in filing many of the form under these code sections, these two people have developed their expertise. I only have their word that no one has been fined that they have helped. One of these individuals has been preparing the forms after the fact, late, for the last few years. I am not endorsing using anyone in particular for these forms. I am just writing about my experience in this area.