Showing posts with label Captive Insurance. Show all posts
Showing posts with label Captive Insurance. Show all posts
Captive Insurance Plans For Your Problems
Captive Insurance Plans
Avoid Paying nondeductible fines or penalties
Find out how we can guide you through these times
Avoid Paying nondeductible fines or penalties
Find out how we can guide you through these times
Reportable Transactions .com: Help with Common IRS Problems
Reportable Transactions .com: Help with Common IRS Problems: Help with Common IRS Problems
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."
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.
Continue reading the article
Captive Insurance Buyer Beware
By Lance Wallach,
Abusive Tax Shelter, Listed Transaction, Reportable Transaction Expert Witness
Is a captive insurance cell the way to go? - Accounting Today - Captive Insurance: Achieve large tax and cost reductions by renting a “CAPTIVE”. Most accountants and small business owners are unfamiliar with a great way to reduce taxes and expenses. By either creating or sharing “a captive insurance company”, substantial tax and cost savings will benefit the small business owner.
Over 80% of Fortune 500 companies take advantage of some kind of captive insurance company arrangement. They set up their own insurance companies to provide coverage when they think outside insurers are charging too much, or coverage is simply unavailable. The parent company creates a captive so that it has a self-financing option for buying insurance. The captive then either retains the risk of providing insurance or pays reinsurers (companies that reinsure insurers) to take the risk.
If you buy insurance from a standard insurance company, your money buys a service, but the money is spent and gone forever. When you utilize or “rent a captive”, your money buys a service but it is invested with a good possibility of a return.
In the event of a claim, the company pays claims from its captive or from its reinsurer. To keep costs down, captives are often based in places where there is favorable tax treatment and less onerous regulation (i.e. Vermont, South Carolina, and Bermuda).
Optimum utilization of a captive by a small business, medical practice, or professional.
The best way for a small business, medical practice, etc., to take advantage of captive benefits is to share or rent a large captive. You can significantly decrease your costs of insurance and obtain tax deductions at the same time. There are, as well, significant tax advantages to renting a large captive as opposed to owning a captive.
The advantages of “renting a captive” become apparent when you consider that the single parent captive may be forced to use less than adequate standards or marginal service so they can meet the financial requirements associated with the initial general licensing and administrative costs of establishment. Additionally, when renting a large captive, the captive bears the burden of initial capital commitment and protects reinsurers from runaway claims and unnecessary losses through their underwriting protocols and claims management practices, all at significant savings to the small business owner.
Other advantages include low policy fees and no capital responsibilities to meet solvency requirements or annual management and maintenance costs. By renting a large captive, you only pay a pro rata fee to cover all administrative expenses for the captive insurance company. Another significant advantage of renting a large captive is the ability to take a loan. It is illegal for an individual captive to make loans to subscribers. When renting a large captive, however, the individual subscriber has no ownership interest, and this difference makes it legal for a rented captive to make loans to individual subscribers. So you can make a tax deductible contribution, and then take back money tax free. Operation of an individual stand alone captive insurance company may not achieve the type of cost savings that a small business could obtain by renting a large captive. To rent a large captive, your company simply fills out some forms. Renting a captive requires no significant financial commitment beyond the payment of premiums.
Buyer Beware
As with many strategies to enjoy tax savings and advantages, you must to do this correctly. IRS and other problems have happened, in the past, to those that have done this improperly or abusively. You probably want to work with a large captive that already has over fifty million in assets and is being rented by at least 200 different companies. Also, you’ll not want to own or control any part of the captive. As an unrelated party, you can more likely significantly decrease your cost of insurance, eliminate capital requirements, and minimize maintenance costs.
You want to deal with a large captive that meets the risk shifting requirements of IRS Revenue Ruling 2005-40. Be cautious about setting up your own small captive. In addition to all the costs, a small captive may find that the expense of defending itself from regulatory oversight is much greater than any benefits received.
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.” As an expert witness Lance's Side has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxadvisorexpert.com.
If you buy insurance from a standard insurance company, your money buys a service, but the money is spent and gone forever. When you utilize or “rent a captive”, your money buys a service but it is invested with a good possibility of a return.
In the event of a claim, the company pays claims from its captive or from its reinsurer. To keep costs down, captives are often based in places where there is favorable tax treatment and less onerous regulation (i.e. Vermont, South Carolina, and Bermuda).
Optimum utilization of a captive by a small business, medical practice, or professional.
The best way for a small business, medical practice, etc., to take advantage of captive benefits is to share or rent a large captive. You can significantly decrease your costs of insurance and obtain tax deductions at the same time. There are, as well, significant tax advantages to renting a large captive as opposed to owning a captive.
The advantages of “renting a captive” become apparent when you consider that the single parent captive may be forced to use less than adequate standards or marginal service so they can meet the financial requirements associated with the initial general licensing and administrative costs of establishment. Additionally, when renting a large captive, the captive bears the burden of initial capital commitment and protects reinsurers from runaway claims and unnecessary losses through their underwriting protocols and claims management practices, all at significant savings to the small business owner.
Other advantages include low policy fees and no capital responsibilities to meet solvency requirements or annual management and maintenance costs. By renting a large captive, you only pay a pro rata fee to cover all administrative expenses for the captive insurance company. Another significant advantage of renting a large captive is the ability to take a loan. It is illegal for an individual captive to make loans to subscribers. When renting a large captive, however, the individual subscriber has no ownership interest, and this difference makes it legal for a rented captive to make loans to individual subscribers. So you can make a tax deductible contribution, and then take back money tax free. Operation of an individual stand alone captive insurance company may not achieve the type of cost savings that a small business could obtain by renting a large captive. To rent a large captive, your company simply fills out some forms. Renting a captive requires no significant financial commitment beyond the payment of premiums.
Buyer Beware
As with many strategies to enjoy tax savings and advantages, you must to do this correctly. IRS and other problems have happened, in the past, to those that have done this improperly or abusively. You probably want to work with a large captive that already has over fifty million in assets and is being rented by at least 200 different companies. Also, you’ll not want to own or control any part of the captive. As an unrelated party, you can more likely significantly decrease your cost of insurance, eliminate capital requirements, and minimize maintenance costs.
You want to deal with a large captive that meets the risk shifting requirements of IRS Revenue Ruling 2005-40. Be cautious about setting up your own small captive. In addition to all the costs, a small captive may find that the expense of defending itself from regulatory oversight is much greater than any benefits received.
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.” As an expert witness Lance's Side 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.
Captive Insurance
Just a few years ago, captive insurance companies were a hot news item in the arcane world of abusive tax shelters. Sleazy promoters were signing up small businesses in droves. If you created a cell captive as a property and casualty loss management tool, it’s probably legitimate. If you “bought” an off the shelf captive from a promoter who promised tax savings, there is a good chance you own an abusive tax shelter.
After the initial wave of fraud and audits, many of the bad promoters went away. New reports suggest that captives are again making a comeback. And with the next generation of captives will come the inevitable fraudsters looking to catch a free ride on the resurgent popularity of these products.
The new wave of captive insurance companies are sometimes called cell captive insurance companies or “group captives.” We have also seen them called rent-a-captive, segregated account companies, segregated portfolio companies and incorporated protected cell companies. Whatever they are called, if properly set up they can be completely legal and valuable risk management tool.
The IRS issued a bulletin in 2008 to give guidance on these products including whether premiums can be deductible as insurance costs. The IRS says there must be adequate risk shifting and distribution to be considered “insurance.”
The scam promotions typically offer to shelter a large sum of money by calling it an insurance premium. The premium is usually the same dollar amount as the deduction you seek. The promoter offers “insurance” on a highly improbable risk. Hurricane insurance in Nebraska, anyone? Magically, you get a big deduction and in a few years you are promised the ability to get back your money in the form of a “premium refund” or dividend. Sound familiar? You probably purchased an abusive tax shelter.
If you think that you have one of these products, seek legal help immediately. First, the premiums in bogus captive insurance companies or cell captives are not deductible. That has significant tax implications and likely involves big civil penalties too.
Because the IRS views many of these schemes as abusive tax shelters, there are special penalties that apply. If the IRS finds that your captive insurance resembles an illegal welfare benefit scheme (sometimes called 419 or 412 plans), your plan might be considered a listed transaction subject to penalties of $100,000 or more per year.
Abusive tax shelters can also be criminally prosecuted.
Another danger is that in many of the cell captive frauds, the money is simply not there when you go to cancel the policy and seek a refund of premiums.
It’s not always promoters who sell the bad plans. We know of otherwise honest insurance agents and even accountants who were roped into selling these products. Many promoters lure agents into their scheme by offering legitimate looking “legal” opinion letters and slick marketing materials. If an agent or accountant sold or recommended the plan, you may still be able to recover your damages if the promoter – and your money – is long gone. (Insurance agents love these plans because they usually pay above average commissions – another red flag.)
According to a recent story in Captive Review, Bahamian cell captives have “risen from extinction” and are making a dramatic resurgence. Cell captives are currently offered in Guernsey, Jersey, Malta, Gibraltar, Isle of Man, Bahamas, Bermuda, the British Virgin Islands, Anguilla and Dubai. In the United States, they may be offered in Nevada, Washington, Montana, Hawaii, Kentucky, South Carolina and Oklahoma. Because they can be created in certain states doesn’t mean they pass IRS muster, however.
Whatever you do, don’t wait until the IRS finds you or until you discover that your premium refund isn’t coming. If you have questions about your cell captive or captive insurance company, give us a call. We also represent owners of phony welfare benefit plans, 419 and 412 plans. Our tax and fraud lawyers can help you determine if your cell captive or other plan is legitimate and if not, unwind the transaction and get back your hard earned money.
IRS Attacks Captive Insurance, Section79, 412I, 419 Plans
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.
Subscribe to:
Posts (Atom)