Lance Wallach Newsletter June 2011
The IRS has increased its attacks on listed transactions , abusive tax shelters and similar plans. These plans go by various names and are primarily sold by insurance agents to small business owners and professionals. Accountants who sign tax returns and get paid a certain amount of money are called “material advisors”. Their fines are a minimum of a $100,000. If an accountant has a client in a plan and his client signs the tax return even if the after a client has stopped making contributions both of them must file under IRS code section 6707A to avoid the large fines. In short, both the accountant and the business owner must report on themselves to avoid large IRS fines. Not only must they report on themselves, but they must also fill out the forms exactly right.
I have received hundreds of phone calls whereby the accountant and or business owner filed under 6707A and were still fined. The directions for the filing are vague and if the forms are filed after the fact the directions are almost impossible to follow. Many times the plan promoter will assist in filing the forms. I have never seen the forms done properly under that circumstance. I know of only two people who are excellent at refilling forms or filing them properly the first time. I have not yet seen forms filed by business owners and or accountants that were done properly the first time, except for the two people that I know of; who have years of experience in these matters.
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 marketed under the 419 Plan was a listed transaction. 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.
In order to fully grasp the severity of the situation, one must have an understanding of Notice 95-34, which was issued because of trust arrangements sold to companies that were designed to provide deductible benefits such as life insurance, disability and severance pay benefits, the questionable tax deductions claimed and often disallowed under these arrangements, and all of the notices, revenue rulings, and other guidance that the Service has issued in this area in the intervening years.
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 pre-funding permitted for contributions to a welfare benefit fund.
In rendering its decision in McGehee Family Clinic, the Tax Court heavily cited Curcio v. Commissioner, 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 excessive cost of providing death benefits was a reason for the court’s finding in Curcio that tax deductions had been properly disallowed.
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 thirty percent penalties, 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 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 419 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. The IRS calls accountants who sign tax returns and/or meet a certain income threshold material advisors. 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.
Lance Wallach
68 Keswick Lane
Plainview, NY 11803
Ph.: (516)938-5007
Fax: (516)938-6330 www.vebaplan.com
National Society of Accountants Speaker of The Year
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.
68 Keswick Lane
Plainview, NY 11803
Ph.: (516)938-5007
Fax: (516)938-6330 www.vebaplan.com
National Society of Accountants Speaker of The Year
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.
