Reportable Transactions: 412i

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.

IRS attacks 412i scams.

Lance Wallach

I spoke at the American Society of Pension Actuaries national convention in Washington in Oct, 2002 about plans, as did the IRS chief actuary. People were warned of IRS attention to these abusive plans. After I spoke I was invited to the IRS headquarters where I addressed IRS senior officials. Treasury dept officials were also listening on speakerphones. We discussed problems, and the IRS future action against abusive plans. Within a few years IRS developed task forces that started to audit abusive plans.

Below is an article published in 2003 that I did not author about the 2003 ASPA convention.

Pending Guidance on 412(i) Plans Discussed at ASPA Convention - November 3, 2003

The IRS discussed pending guidance on fully insured defined benefit pension plans under §412(i) at its "Aggressive Practices" session last week at the annual American Society of Pension Actuaries (ASPA) conference in Washington, D.C.

The Treasury/IRS reiterated its concerns relative to the aggressive marketing of policies to fund 412(i) plans with "springing" cash value schemes (as previously addressed in IRS Notice 89-25) and atypically high death benefits that exceed the incidental life insurance limits. These issues were discussed in detail in our March 28, 2003 article: 412(i) Plan: A "Dream" or "Nightmare" for the Small Business Owner? Which was referenced in the Tax Exempt and Government Entities Division (TE/GE) Advisory Committee Report on Abusive Tax Shelters released on May 20, 2003 (also view IRS Recognizes Milberg Consulting as Pension Compliance Advocate).

The pending guidance is expected to identify abusive, or potentially abusive 412(i) plan designs. These abusive arrangements will likely be designated as "listed transactions" under tax shelter rules. The IRS representatives at the conference made it clear that the pending guidance is not intended to affect those properly designed 412(i) plans that are funded with conventional life insurance contracts (absent "springing" cash values and atypically high death benefits).

The really bad news for those who have adopted a plan funded with policies that fall under this scrutiny is that the pending guidance is expected to be retroactive.

Commentary

Let's face the facts... all of the schemes involving the sale of life insurance products that attempt to take advantage of the "loopholes" in the laws governing qualified retirement or welfare benefit plans were created to make the cost of life insurance more palatable to the consumer, typically the owners of small businesses. Each and every one of these imprudent schemes in the past 20 years involving VEBAs (§501(c)9), the so-called "pension rescue or pension crush plans," §419 plans, life insurance sub trusts and most recently, §412(i) plans are eventually shut down by the IRS.

We are mindful that our view is biased in that we earn our living by providing plan design and compliance services associated with traditional defined benefit and defined contribution plans on a fee for service basis. We also believe that most business owners have legitimate needs for life insurance, and that a life insurance contract created by reputable company and sold by a reputable agent can serve as an invaluable planning tool for the small business owner.

As to those §412(i) plans which in theory fit within the pending IRS guidance, we simply do not believe that most life insurance agents and their home offices have the expertise to determine if a defined benefit pension plan in any form or fashion is the appropriate plan type for their small business clients. We routinely receive calls from referring professionals inquiring relative to the applicability of a defined benefit plan for their small business clients. In the vast majority of instances, a defined benefit pension plan is simply not the proper solution.

The one thing for certain about the future is that it brings change. Therefore, the potential for change in the owner's desire for tax-sheltered benefits is a reality that must be considered during the planning process. In the context of a traditional defined benefit plan, a change of this nature could lead to a cutback in benefits to mitigate plan costs. It might even necessitate the termination of the plan resulting in a distribution of the owner's accrued benefit into an IRA. In the context of a fully insured defined benefit pension plan under §412(i), changes in the plan's benefit structure or plan termination could leave the small business owner with the continued expense to maintain a superfluous life insurance policy or an unanticipated taxable event.

Using a §412(i) plan in the context of an owner only business with a legitimate need for the death benefit protection provided by life insurance may be an appropriate place for this plan type. However, we believe that until such time that the uniform estate tax credit is unlimited (which is currently subject to change), a traditional defined benefit plan along with a conventional life insurance policy held within an irrevocable life insurance trust (ILIT) is a more prudent choice for the small business owner. While this plan design may cost more than a 412(i), it provides the small business owner with a significantly higher probability for a positive outcome and the flexibility to address change in the future.

Bottom Line: In theory the §412(i) plan provides a small business owner with a retirement plan that provides significant benefits on a tax deductible basis absent the complications typically associated with a traditional defined benefit pension plan. In reality, this plan type is rarely appropriate for owners of small businesses.

Lance Wallach, CLU, ChFC, CIMC, speaks and writes extensively about financial planning, retirement plans, and tax reduction strategies. He is an American Institute of CPA’s course developer and instructor and has authored numerous best selling books about abusive tax shelters, IRS crackdowns and attacks and other tax matters. He speaks at more than 20 national conventions annually and writes for more than 50 national publications. For more information and additional articles on these subjects, visit www.vebaplan.com, www.taxlibrary.us, lawyer4audits.com or call 516-938-5007.

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.

Reportable Transactions- Help from the Experts

The IRS might be ready to levy a $50,000 tax penalty on your business for not properly reporting certain transactions to the IRS.

Learn more from the leading experts on IRS Reportable Transactions, Listed Transactions, code Sec 79 plans and other retirement & benefit plans for which the IRS is assessing large penalties for not filing the required IRS reporting forms by visiting our blog and website

http://www.reportabletransactions.blogspot.com

http://www.reportabletransactions.com

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 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 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.taxlibrary.us

Avoid IRS FINES, 8886 Forms Listed Reportable Transactions Lawline.com C...

How to Beat the IRS -Helpful Article

Why You Should Not Own Mutual Funds

Reportable Transactions .com: How to Beat the IRS -Helpful Article

Reportable Transactions .com: How to Beat the IRS -Helpful Article: How to Beat the IRS -Helpful Article

About Lance Wallach

Lance Wallach, CLU, ChFC,
CEO & Pres. Veba Plan LLC
Website: VebaPlan.com

Lance Wallach, Managing Director, is the nation's leading expert on employee benefit plans, tax problem resolution and IRS audit defense.

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

68 Keswick Lane
Plainview, NY 11803
Ph.: (516)938-5007
Fax: (516)938-6330
www.vebaplan.com

Captive insurance or Section 79 plans are in big trouble.

Finance Toolbox June 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 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 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.

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.

Contact him at:

516.938.5007,

wallachinc@gmail.com, or