Showing posts with label 419. Show all posts
Showing posts with label 419. Show all posts
Reportable Transactions .com: 419 Plan, 412i Plan
Reportable Transactions .com: 419 Plan, 412i Plan, Welfare benefit plan assistan...: 419 Plan, 412i Plan, Welfare benefit plan assistance, audits & Abusive tax shelters
How Hartford Life and Other Insurance Companies Tricked their Agents and Got People in Trouble with the IRS - HG.org
How Hartford Life and Other Insurance Companies Tricked their Agents and Got People in Trouble with the IRS - HG.org
Agents from Hartford and other insurance companies were shown ways to sell large life insurance policies. This “Welfare Benefit Trust 419 plan or 412i plan should be shown to their profitable small business owners as a cure for paying too much taxes.
A Welfare Benefit Trust 419 plan essentially works like this:
• The business provides a fringe benefit for their employees, such as health insurance and life insurance.
• The benefit is established in the name of a trust and funded with a cash value life insurance policy
• Here is the gravy: the entire amount deposited into the trust (insurance policy) is tax deductible to the company,and
• The owners of the company can withdraw the cash value from the policy in later years tax-free.
• The business provides a fringe benefit for their employees, such as health insurance and life insurance.
• The benefit is established in the name of a trust and funded with a cash value life insurance policy
• Here is the gravy: the entire amount deposited into the trust (insurance policy) is tax deductible to the company,and
• The owners of the company can withdraw the cash value from the policy in later years tax-free.
Read more by clicking the link above!
Commentary on the Economy
On the plane ride to speak at my last convention I overheard two farmers talking. One farmer was speaking about how his prized bull was going to service his prized cow; then I realized what service was. Your stock broker has been servicing you for years. So have the phone company, your internet provider, and the government. How about waking up and doing something about it, because now, the government is really giving you big-time service and your children and grandchildren are going to pay for it.
As the economy continues to worsen, people resume losing their savings and their houses, and most people are burying their heads in the sand. The administration will destroy your children’s future. Think we pay high taxes now? Who do you think is going to pay for all of these bailouts; it won’t be the people on welfare, the unemployed, or the illegal aliens. It will be people like you and I that work for a living and pay taxes.
Think things are going to get better? Well think again. Even though my clients all made money in 2008, I have not heard that statement from too many other people. So, what are you going to do? Listen to your incompetent stockbroker, your tax collector accountant, or your life insurance financial planner who helped you get into this situation?
While there are signs that some of the principal indicators have stabilized to some degree, but it’s at a minuscule level, and we’re not seeing corporate investment starting to pick up or consumers starting to spend again. To put it in simple terms, the traditional methods by which economies generally come out of a recession are lacking at this time.
This being said, hopes that the American economy, which led the world into recession, might lead it back out this year, have been diminishing quickly.
In March, Warren E. Buffett, wrote in his company’s annual report that the economy will be in shambles throughout 2009, and most likely, well beyond. As if to highlight the problems, the Institute for Supply Management also reported that companies in the US said business was getting much worse, particularly regarding jobs. The February employment report showed a decline of 785,000 jobs, which made it one of the largest one-month declines in employment in virtually 60 years.
Throughout February, the US revised its estimate of fourth quarter gross domestic product to show a decline at an annual rate of 6.2 percent, the worst in more than a quarter century.
The continued plunge of the stock market and economy has shocked investors and governments. If this is so, then why did the federal government just rescue the A.I.G. for the fourth time in six months, and why was the government willing to spend $30 billion more of taxpayers’ money for very little return. The government, which owns nearly 80 percent of A.I.G., did not take more equity in A.I.G., and also converted its preferred shares, which paid a 10 percent dividend, into shares that don’t pay a dividend at all.
One of the biggest worries relating to this, besides the considerable collateral damage to the banking system, is a risk that most people don’t know about. In the United States, A.I.G. has more than 375 million policies with a face value of $19 trillion and if policyholders lost faith in A.I.G. and rushed withdraw cash from their policies all at once, the entire insurance industry could falter; this could lead to a systemic risk, which is a phrase often used to describe the domino effect of one business’s failure on the rest of the economy. See the Bisk Education CPA’s Guide to Life Insurance by Lance Wallach. A ‘run on the bank’ in the life and retirement business would have sweeping impacts across the economy in the US.
Even though A.I.G.’s insurance business is regulated by states, there probably would not be enough money to pay out to consumers from what’s known as a guarantee fund. Other regulated insurance companies, which have been weakened by credit losses, would be required to pay money into the fund to cover the shortfall, weakening them further and in some cases bankrupting them.
Some people would have to sell more of the bonds in their portfolios to honor their obligations to the scared-off-policyholders, which would freeze up the bond markets again, because life insurance companies to a very great extent are the bond markets. They buy more corporate debt than any other institutions.
Given the number of states in which A.I.G. issued large numbers of policies, the net effect may be regulatory gridlock and high administrative expenses, delaying payment and decreasing the funds available to pay claims.
What’s worse is if A.I.G. failed, many people would be unable to obtain the same insurance from a competitor for the same price. In fact, many people would probably be shut out. Some life-policy holders may no longer be insurable at commensurate rates or as a result of adverse health situations since the purchase of the original policy.
Another issue disappointing investors is the dividend cuts that many companies have been forced to make. On March 2, the large regional bank PNC Financial Services Group cut its dividend 85 percent and the International Paper Company cut its dividend by 90 percent. Last week, General Electric cut its dividend by 87 percent.
For now, at least, few investors expect any such good news. Over the six months that ended last week, the S.&P. 500 lost 43 percent of its value. There were comparable declines during the Great Depression, but since then, the worst six-month performance before the current plunge was a 32 percent fall in 1974 when the world was also in recession. The S.&P. 500 fell 18.6 percent in the first two months of 2009, even before Monday’s fall. That was its worst start, exceeding the 18.2 percent fall recorded in the first two months of 1933, yet another year when a new president took office during an economic and financial crisis. In 1933, the stock market soon turned and nearly doubled over 12 months.
The S.&P. 500 has now fallen below, and the Dow is close to, the levels that existed on Dec. 5, 1996, when Alan Greenspan, then the chairman of the Federal Reserve, inquired in a speech, “How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”
It was a question that has undoubtedly been answered over the past 17 months. During that period of time, the Dow has fallen 52.3 percent, a greater percentage decline than in any bear market since the Great Depression, but nowhere near the 89 percent collapse that took less than three years to complete after the 1929 high.
While there has been speculation about international cooperation to deal with the growing financial and economic crisis, the European Union summit this weekend provided an indication that a small number of countries were prepared to risk their own taxpayers’ money to help others, so why are we?
Investors have greeted the stimulus spending plans with a quantity of uncertainty because of signs that the financial system continues to weaken.
These tribulations are just a few of the hundreds of problems that the government is not telling you about, which is why it is vital for you to seek helpful and knowledgeable advice.
So what are you waiting for? Visit www.FinanceExperts.org, www.TaxLibrary.us, www.IRS.gov, and www.Vebaplan.com for more information like this; take your head out of the sand and do something before it’s too late.
Lance Wallach, the National Society of Accountants Speaker of the Year, speaks and writes extensively about retirement plans, Circular 230 problems and tax reduction strategies. He speaks at more than 40 conventions annually, writes for over 50 publications and has written numerous best-selling AICPA books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Business Hot Spots. Contact him at 516.938.5007 or visit www.vebaplan.com.
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.
As the economy continues to worsen, people resume losing their savings and their houses, and most people are burying their heads in the sand. The administration will destroy your children’s future. Think we pay high taxes now? Who do you think is going to pay for all of these bailouts; it won’t be the people on welfare, the unemployed, or the illegal aliens. It will be people like you and I that work for a living and pay taxes.
Think things are going to get better? Well think again. Even though my clients all made money in 2008, I have not heard that statement from too many other people. So, what are you going to do? Listen to your incompetent stockbroker, your tax collector accountant, or your life insurance financial planner who helped you get into this situation?
While there are signs that some of the principal indicators have stabilized to some degree, but it’s at a minuscule level, and we’re not seeing corporate investment starting to pick up or consumers starting to spend again. To put it in simple terms, the traditional methods by which economies generally come out of a recession are lacking at this time.
This being said, hopes that the American economy, which led the world into recession, might lead it back out this year, have been diminishing quickly.
In March, Warren E. Buffett, wrote in his company’s annual report that the economy will be in shambles throughout 2009, and most likely, well beyond. As if to highlight the problems, the Institute for Supply Management also reported that companies in the US said business was getting much worse, particularly regarding jobs. The February employment report showed a decline of 785,000 jobs, which made it one of the largest one-month declines in employment in virtually 60 years.
Throughout February, the US revised its estimate of fourth quarter gross domestic product to show a decline at an annual rate of 6.2 percent, the worst in more than a quarter century.
The continued plunge of the stock market and economy has shocked investors and governments. If this is so, then why did the federal government just rescue the A.I.G. for the fourth time in six months, and why was the government willing to spend $30 billion more of taxpayers’ money for very little return. The government, which owns nearly 80 percent of A.I.G., did not take more equity in A.I.G., and also converted its preferred shares, which paid a 10 percent dividend, into shares that don’t pay a dividend at all.
One of the biggest worries relating to this, besides the considerable collateral damage to the banking system, is a risk that most people don’t know about. In the United States, A.I.G. has more than 375 million policies with a face value of $19 trillion and if policyholders lost faith in A.I.G. and rushed withdraw cash from their policies all at once, the entire insurance industry could falter; this could lead to a systemic risk, which is a phrase often used to describe the domino effect of one business’s failure on the rest of the economy. See the Bisk Education CPA’s Guide to Life Insurance by Lance Wallach. A ‘run on the bank’ in the life and retirement business would have sweeping impacts across the economy in the US.
Even though A.I.G.’s insurance business is regulated by states, there probably would not be enough money to pay out to consumers from what’s known as a guarantee fund. Other regulated insurance companies, which have been weakened by credit losses, would be required to pay money into the fund to cover the shortfall, weakening them further and in some cases bankrupting them.
Some people would have to sell more of the bonds in their portfolios to honor their obligations to the scared-off-policyholders, which would freeze up the bond markets again, because life insurance companies to a very great extent are the bond markets. They buy more corporate debt than any other institutions.
Given the number of states in which A.I.G. issued large numbers of policies, the net effect may be regulatory gridlock and high administrative expenses, delaying payment and decreasing the funds available to pay claims.
What’s worse is if A.I.G. failed, many people would be unable to obtain the same insurance from a competitor for the same price. In fact, many people would probably be shut out. Some life-policy holders may no longer be insurable at commensurate rates or as a result of adverse health situations since the purchase of the original policy.
Another issue disappointing investors is the dividend cuts that many companies have been forced to make. On March 2, the large regional bank PNC Financial Services Group cut its dividend 85 percent and the International Paper Company cut its dividend by 90 percent. Last week, General Electric cut its dividend by 87 percent.
For now, at least, few investors expect any such good news. Over the six months that ended last week, the S.&P. 500 lost 43 percent of its value. There were comparable declines during the Great Depression, but since then, the worst six-month performance before the current plunge was a 32 percent fall in 1974 when the world was also in recession. The S.&P. 500 fell 18.6 percent in the first two months of 2009, even before Monday’s fall. That was its worst start, exceeding the 18.2 percent fall recorded in the first two months of 1933, yet another year when a new president took office during an economic and financial crisis. In 1933, the stock market soon turned and nearly doubled over 12 months.
The S.&P. 500 has now fallen below, and the Dow is close to, the levels that existed on Dec. 5, 1996, when Alan Greenspan, then the chairman of the Federal Reserve, inquired in a speech, “How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”
It was a question that has undoubtedly been answered over the past 17 months. During that period of time, the Dow has fallen 52.3 percent, a greater percentage decline than in any bear market since the Great Depression, but nowhere near the 89 percent collapse that took less than three years to complete after the 1929 high.
While there has been speculation about international cooperation to deal with the growing financial and economic crisis, the European Union summit this weekend provided an indication that a small number of countries were prepared to risk their own taxpayers’ money to help others, so why are we?
Investors have greeted the stimulus spending plans with a quantity of uncertainty because of signs that the financial system continues to weaken.
These tribulations are just a few of the hundreds of problems that the government is not telling you about, which is why it is vital for you to seek helpful and knowledgeable advice.
So what are you waiting for? Visit www.FinanceExperts.org, www.TaxLibrary.us, www.IRS.gov, and www.Vebaplan.com for more information like this; take your head out of the sand and do something before it’s too late.
Lance Wallach, the National Society of Accountants Speaker of the Year, speaks and writes extensively about retirement plans, Circular 230 problems and tax reduction strategies. He speaks at more than 40 conventions annually, writes for over 50 publications and has written numerous best-selling AICPA books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Business Hot Spots. Contact him at 516.938.5007 or visit www.vebaplan.com.
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.
Surprise! 200k Fine for section 419, section 412(i), and other plans
The IRS has various task forces auditing all section 419, section 412(i), and other plans that tend to be abusive. These plans are sold by most insurance agents. The IRS is looking to raise money and is not looking to correct plans or help taxpayers. The fines for being in a listed, abusive, or similar transaction are up to $200,000 per year (section 6707A), unless you report on yourself. The IRS calls accountants, attorneys, and insurance agents ‘‘material advisers’’ and also fines them the same amount, again unless the client’s participation in the transaction is reported. An accountant is a material adviser if he signs the return or gives advice and gets paid. More details can be found on http://www.irs.gov and http://www.vebaplan.com.
Bruce Hink, who has given me written permission to use his name and circumstances, is a perfect example of what the IRS is doing to unsuspecting business owners.
What follows is a story about how the IRS fined him $200,000 a year for being in what they called a listed transaction. Listed transactions can be found at www.irs-gov. Also involved are what the IRS calls abusive plans or what it refers to as substantially similar. Substantially similar to is very difficult to understand, but the IRS seems to be saying ‘‘if it looks like some other listed transaction, the fines apply.’’ Also, I believe that the accountant who signed the tax return and the insurance agent who sold the retirement plan will each be fined $200,000 as material advisers. We have received many calls for help from accountants, attorneys, business owners, and insurance agents in similar situations. Don’t think this will happen to you? It is happening to a lot of accountants and business owners, because most of these so-called listed, abusive, or insurance agents are selling substantially similar plans.
Recently I came across the case of Hink, a small business owner who is facing $400,000 in IRS penalties for 2004 and 2005 because of his participation in a section 412(i) plan. (The penalties were assessed under section 6707A.)
In 2002 an insurance agent representing a 100-yearold,well-established insurance company suggested the owner start a pension plan. The owner was given a portfolio of information from the insurance company, which was given to the company’s outside CPA to review and give an opinion on. The CPA gave the plan the green light and the plan was started. Contributions were made in 2003. The plan administrator came out with amendments to the plan, based on new IRS guidelines, in October 2004.
The business owner’s insurance agent disappeared in May 2005, before implementing the new guidelines from the administrator with the insurance company. The business owner was left with a refund check from the insurance company, a deduction claim on his 2004 tax return that had not been applied, and no agent. It took six months of making calls to the insurance company to get a new insurance agent assigned. By then, the IRS had started an examination of the pension plan. Asking advice from the CPA and a local attorney (who had no previous experience in these cases) made matters worse, with a ‘‘big name’’ law firm being recommended and over $30,000 in additional legal fees being billed in three months.
To make a long story short, the audit stretched on for over 2½ years to examine a 2-year-old pension with four participants and $178,000 in contributions. During the audit, no funds went to the insurance company, which was awaiting formal IRS approval on restructuring the plan as a traditional defined benefit plan, which the administrator had suggested and the IRS had indicated would be acceptable. The $90,000 in 2005 contributions was put into the company’s retirement bank account along with the 2004 contributions.
In March 2008 the business owner received a private e-mail apology from the IRS agent who headed the examination, saying that her hands were tied and that she used to believe she was correcting problems and helping taxpayers and not hurting people.
The IRS denied any appeal and ruled in October 2008 the $400,000 penalty would stand. The IRS fine for being in a listed, abusive, or similar transaction is $200,000 per year for corporations or $100,000 per year for unincorporated entities. The material adviser fine is $200,000 if you are incorporated or $100,000 if you are not.
Could you or one of your clients be next?
To this point, I have focused, generally, on the horrors of running afoul of the IRS by participating in a listed transaction, which includes various types of transactions and the various fines that can be imposed on business.
Lance Wallach is the author of the American Institute of Certified Public Accountants’ The Team Approach to Tax, Financial and Estate Planning. He can be reached at lawallach@aol.com or on the Web at http://www.vebaplan.com. The information in this article is not intended as accounting, legal, financial, or any other type of advice for any specific individual or other entity. You should consult an appropriate professional for that advice.
Copyright 2009 Lance Wallach.
All rights reserved.tax notes®
TAX PRACTICE
TAX NOTES, February 16, 2009 1 owners and their advisers who participate in, sell, or advise on these transactions. I happened to use, as an example, someone in a section 412 plan, which was deemed to be a listed transaction, pointing out the truly doleful consequences the person has suffered. Others who fall into this trap, even unwittingly, can suffer the same fate. Now let’s go into more detail about section 412(i) plans. This is important because these defined benefit plans are popular and because few people think of retirement plans as tax shelters or listed transactions. People therefore may get into serious trouble in this area unwittingly, out of ignorance of the law, and, for the same reason, may fail to take necessary and appropriate precautions. The IRS has warned against section 412(i) defined benefit pension plans, named for the former code section governing them. It warned against trust arrangements it deems abusive, some of which may be regarded as listed transactions. Falling into that category can result in taxpayers having to disclose the participation under pain of penalties, potentially reaching $100,000 for individuals and $200,000 for other taxpayers. Targets also include some retirement plans. One reason for the harsh treatment of some 412(i) plans is their discrimination in favor of owners and key, highly compensated employees. Also, the IRS does not consider the promised tax relief proportionate to the economic realities of the transactions. In general, IRS auditors divide audited plans into those they consider noncompliant and others they consider abusive. While the alternatives available to the sponsor of a noncompliant plan are problematic, it is frequently an option to keep the plan alive in some form while simultaneously hoping to minimize the financial fallout from penalties.
The sponsor of an abusive plan can expect to be treated more harshly than participants. Although in some situations something can be salvaged, the possibility is definitely on the table of having to treat the plan as if it never existed, which of course triggers the full extent of back taxes, penalties, and interest on all contributions that were made — not to mention leaving behind no retirement plan whatsoever.
Another plan the IRS is auditing is the section 419 plan. A few listed transactions concern relatively common employee benefit plans the IRS has deemed tax avoidance schemes or otherwise abusive. Perhaps some of the most likely to crop up, especially in small-business returns, are arrangements purporting to allow deductibility of premiums paid for life insurance under a welfare benefit plan or section 419 plan. These plans have been sold by most insurance agents and insurance companies.
Some of these abusive employee benefit plans are represented as satisfying section 419, which sets limits on purposes and balances of ‘‘qualified asset accounts’’ for the benefits, although the plans purport to offer deductibility of contributions without any corresponding income.
Others attempt to take advantage of exceptions to qualified asset account limits, such as sham union plans that try to exploit the exception for separate welfare benefit funds under collective bargaining agreements provided by section 419A(f)(5). Others try to take advantage of exceptions for plans serving 10 or more employers, once popular under section 419A(f)(6). More recently, one may encounter plans relying on section 419(e) and, perhaps, defined benefit section 412(i) pension plans.
Sections 419 and 419A were added to the code by the Deficit Reduction Act of 1984 in an attempt to end employers’ acceleration of deductions for plan contributions. But it wasn’t long before plan promoters found an end run around the new code sections. An industry developed in what came to be known as 10-or-moreemployer plans. The IRS steadily added these abusive plans to its designations of listed transactions. With Revenue Ruling 90-105, it warned against deducting some plan contributions attributable to compensation earned by plan participants after the end of the tax year. Purported exceptions to limits of sections 419 and 419A claimed by 10-or-more-employer benefit funds were likewise proscribed in Notice 95-34 (Doc 95-5046, 95 TNT 98-11). Both positions were designated as listed transactions in 2000.
At that point, where did all those promoters go?
Evidence indicates many are now promoting plans purporting to comply with section 419(e). They are calling a life insurance plan a welfare benefit plan (or fund), somewhat as they once did, and promoting the plan as a vehicle to obtain large tax deductions. The only substantial difference is that these are now single-employer plans. And again, the IRS has tried to rein them in, reminding taxpayers that listed transactions include those substantially similar to any that are specifically described and so designated.
On October 17, 2007, the IRS issued Notices 2007-83 (Doc 2007-23225, 2007 TNT 202-6) and 2007-84 (Doc 2007-23220, 2007 TNT 202-5). In the former, the IRS identified some trust arrangements involving cash value life insurance policies, and substantially similar arrangements, as listed transactions. The latter similarly warned against some postretirement medical and life insurance benefit arrangements, saying they might be subject to issued related Rev. Rul. 2007-65 (Doc 2007-23226, 2007 TNT 202-7) to address situations in which an arrangement is considered a welfare benefit fund but the employer’s deduction for its contributions to the fund is denied in whole or in part for premiums paid by the trust on cash value life insurance policies. It states that a welfare benefit fund’s qualified direct cost under section 419 does not include premium amounts paid by the fund for cash value life insurance policies if the fund is directly or indirectly a beneficiary under the policy, as determined under section 264(a).
Notice 2007-83 targets promoted arrangements under which the fund trustee purchases cash value insurance policies on the lives of a business’s employee/owners, and sometimes key employees, while purchasing term insurance policies on the lives of other employees covered under the plan. These plans anticipate being terminated and anticipate that the cash value policies will be distributed to the owners or key employees, with little distributed to other employees. The promoters claim that the insurance premiums are currently deductible by the business and that the distributed insurance policies are virtually tax-free to the owners. The ruling makes it clear that, going forward, a business under most circumstances cannot deduct the cost of premiums paid through a welfare benefit plan for cash value life insurance on the lives of its employees.
Should a client approach you with one of these plans, be especially cautious, for both of you. Advise your client to check out the promoter very carefully. Make it clear that the government has the names of all former section 419A(f)(6) promoters and, therefore, will be scrutinizing the promoter carefully if the promoter was once active in that area, as many current section 419(e) (welfare benefit fund or plan) promoters were. This makes an audit of your client more likely and far riskier.
It is worth noting that listed transactions are subject to a regulatory scheme applicable only to them, entirely separate from Circular 230 requirements, regulations, and sanctions. Participation in such a transaction must be disclosed on a tax return, and the penalties for failure to disclose are severe — up to $100,000 for individuals and $200,000 for corporations. The penalties apply to both taxpayers and practitioners. And the problem with disclosure, of course, is that it is apt to trigger an audit, in which case even if the listed transaction were to pass muster, something else may not.
Lance Wallach, CLU, ChFC, CIMC, speaks and writes about benefit plans, tax reductions strategies, and financial plans. He has authored numerous books for the AICPA, Bisk Total tape, and others. He can be reached at (516) 938-5007 or lawallach@aol.com. For more articles on this or other subjects, feel free to visit his website at www.vebaplan.com.
Lance Wallach, the National Society of Accountants Speaker of the Year, speaks and writes extensively about retirement plans, Circular 230 problems and tax reduction strategies. He speaks at more than 40 conventions annually, writes for over 50 publications, is quoted regularly in the press, and has written numerous best-selling AICPA books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Business Hot Spots. He does extensive expert witness work and has never lost a case. Contact him at 516.938.5007 or visit www.vebaplan.com.
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.
Bruce Hink, who has given me written permission to use his name and circumstances, is a perfect example of what the IRS is doing to unsuspecting business owners.
What follows is a story about how the IRS fined him $200,000 a year for being in what they called a listed transaction. Listed transactions can be found at www.irs-gov. Also involved are what the IRS calls abusive plans or what it refers to as substantially similar. Substantially similar to is very difficult to understand, but the IRS seems to be saying ‘‘if it looks like some other listed transaction, the fines apply.’’ Also, I believe that the accountant who signed the tax return and the insurance agent who sold the retirement plan will each be fined $200,000 as material advisers. We have received many calls for help from accountants, attorneys, business owners, and insurance agents in similar situations. Don’t think this will happen to you? It is happening to a lot of accountants and business owners, because most of these so-called listed, abusive, or insurance agents are selling substantially similar plans.
Recently I came across the case of Hink, a small business owner who is facing $400,000 in IRS penalties for 2004 and 2005 because of his participation in a section 412(i) plan. (The penalties were assessed under section 6707A.)
In 2002 an insurance agent representing a 100-yearold,well-established insurance company suggested the owner start a pension plan. The owner was given a portfolio of information from the insurance company, which was given to the company’s outside CPA to review and give an opinion on. The CPA gave the plan the green light and the plan was started. Contributions were made in 2003. The plan administrator came out with amendments to the plan, based on new IRS guidelines, in October 2004.
The business owner’s insurance agent disappeared in May 2005, before implementing the new guidelines from the administrator with the insurance company. The business owner was left with a refund check from the insurance company, a deduction claim on his 2004 tax return that had not been applied, and no agent. It took six months of making calls to the insurance company to get a new insurance agent assigned. By then, the IRS had started an examination of the pension plan. Asking advice from the CPA and a local attorney (who had no previous experience in these cases) made matters worse, with a ‘‘big name’’ law firm being recommended and over $30,000 in additional legal fees being billed in three months.
To make a long story short, the audit stretched on for over 2½ years to examine a 2-year-old pension with four participants and $178,000 in contributions. During the audit, no funds went to the insurance company, which was awaiting formal IRS approval on restructuring the plan as a traditional defined benefit plan, which the administrator had suggested and the IRS had indicated would be acceptable. The $90,000 in 2005 contributions was put into the company’s retirement bank account along with the 2004 contributions.
In March 2008 the business owner received a private e-mail apology from the IRS agent who headed the examination, saying that her hands were tied and that she used to believe she was correcting problems and helping taxpayers and not hurting people.
The IRS denied any appeal and ruled in October 2008 the $400,000 penalty would stand. The IRS fine for being in a listed, abusive, or similar transaction is $200,000 per year for corporations or $100,000 per year for unincorporated entities. The material adviser fine is $200,000 if you are incorporated or $100,000 if you are not.
Could you or one of your clients be next?
To this point, I have focused, generally, on the horrors of running afoul of the IRS by participating in a listed transaction, which includes various types of transactions and the various fines that can be imposed on business.
Lance Wallach is the author of the American Institute of Certified Public Accountants’ The Team Approach to Tax, Financial and Estate Planning. He can be reached at lawallach@aol.com or on the Web at http://www.vebaplan.com. The information in this article is not intended as accounting, legal, financial, or any other type of advice for any specific individual or other entity. You should consult an appropriate professional for that advice.
Copyright 2009 Lance Wallach.
All rights reserved.tax notes®
TAX PRACTICE
TAX NOTES, February 16, 2009 1 owners and their advisers who participate in, sell, or advise on these transactions. I happened to use, as an example, someone in a section 412 plan, which was deemed to be a listed transaction, pointing out the truly doleful consequences the person has suffered. Others who fall into this trap, even unwittingly, can suffer the same fate. Now let’s go into more detail about section 412(i) plans. This is important because these defined benefit plans are popular and because few people think of retirement plans as tax shelters or listed transactions. People therefore may get into serious trouble in this area unwittingly, out of ignorance of the law, and, for the same reason, may fail to take necessary and appropriate precautions. The IRS has warned against section 412(i) defined benefit pension plans, named for the former code section governing them. It warned against trust arrangements it deems abusive, some of which may be regarded as listed transactions. Falling into that category can result in taxpayers having to disclose the participation under pain of penalties, potentially reaching $100,000 for individuals and $200,000 for other taxpayers. Targets also include some retirement plans. One reason for the harsh treatment of some 412(i) plans is their discrimination in favor of owners and key, highly compensated employees. Also, the IRS does not consider the promised tax relief proportionate to the economic realities of the transactions. In general, IRS auditors divide audited plans into those they consider noncompliant and others they consider abusive. While the alternatives available to the sponsor of a noncompliant plan are problematic, it is frequently an option to keep the plan alive in some form while simultaneously hoping to minimize the financial fallout from penalties.
The sponsor of an abusive plan can expect to be treated more harshly than participants. Although in some situations something can be salvaged, the possibility is definitely on the table of having to treat the plan as if it never existed, which of course triggers the full extent of back taxes, penalties, and interest on all contributions that were made — not to mention leaving behind no retirement plan whatsoever.
Another plan the IRS is auditing is the section 419 plan. A few listed transactions concern relatively common employee benefit plans the IRS has deemed tax avoidance schemes or otherwise abusive. Perhaps some of the most likely to crop up, especially in small-business returns, are arrangements purporting to allow deductibility of premiums paid for life insurance under a welfare benefit plan or section 419 plan. These plans have been sold by most insurance agents and insurance companies.
Some of these abusive employee benefit plans are represented as satisfying section 419, which sets limits on purposes and balances of ‘‘qualified asset accounts’’ for the benefits, although the plans purport to offer deductibility of contributions without any corresponding income.
Others attempt to take advantage of exceptions to qualified asset account limits, such as sham union plans that try to exploit the exception for separate welfare benefit funds under collective bargaining agreements provided by section 419A(f)(5). Others try to take advantage of exceptions for plans serving 10 or more employers, once popular under section 419A(f)(6). More recently, one may encounter plans relying on section 419(e) and, perhaps, defined benefit section 412(i) pension plans.
Sections 419 and 419A were added to the code by the Deficit Reduction Act of 1984 in an attempt to end employers’ acceleration of deductions for plan contributions. But it wasn’t long before plan promoters found an end run around the new code sections. An industry developed in what came to be known as 10-or-moreemployer plans. The IRS steadily added these abusive plans to its designations of listed transactions. With Revenue Ruling 90-105, it warned against deducting some plan contributions attributable to compensation earned by plan participants after the end of the tax year. Purported exceptions to limits of sections 419 and 419A claimed by 10-or-more-employer benefit funds were likewise proscribed in Notice 95-34 (Doc 95-5046, 95 TNT 98-11). Both positions were designated as listed transactions in 2000.
At that point, where did all those promoters go?
Evidence indicates many are now promoting plans purporting to comply with section 419(e). They are calling a life insurance plan a welfare benefit plan (or fund), somewhat as they once did, and promoting the plan as a vehicle to obtain large tax deductions. The only substantial difference is that these are now single-employer plans. And again, the IRS has tried to rein them in, reminding taxpayers that listed transactions include those substantially similar to any that are specifically described and so designated.
On October 17, 2007, the IRS issued Notices 2007-83 (Doc 2007-23225, 2007 TNT 202-6) and 2007-84 (Doc 2007-23220, 2007 TNT 202-5). In the former, the IRS identified some trust arrangements involving cash value life insurance policies, and substantially similar arrangements, as listed transactions. The latter similarly warned against some postretirement medical and life insurance benefit arrangements, saying they might be subject to issued related Rev. Rul. 2007-65 (Doc 2007-23226, 2007 TNT 202-7) to address situations in which an arrangement is considered a welfare benefit fund but the employer’s deduction for its contributions to the fund is denied in whole or in part for premiums paid by the trust on cash value life insurance policies. It states that a welfare benefit fund’s qualified direct cost under section 419 does not include premium amounts paid by the fund for cash value life insurance policies if the fund is directly or indirectly a beneficiary under the policy, as determined under section 264(a).
Notice 2007-83 targets promoted arrangements under which the fund trustee purchases cash value insurance policies on the lives of a business’s employee/owners, and sometimes key employees, while purchasing term insurance policies on the lives of other employees covered under the plan. These plans anticipate being terminated and anticipate that the cash value policies will be distributed to the owners or key employees, with little distributed to other employees. The promoters claim that the insurance premiums are currently deductible by the business and that the distributed insurance policies are virtually tax-free to the owners. The ruling makes it clear that, going forward, a business under most circumstances cannot deduct the cost of premiums paid through a welfare benefit plan for cash value life insurance on the lives of its employees.
Should a client approach you with one of these plans, be especially cautious, for both of you. Advise your client to check out the promoter very carefully. Make it clear that the government has the names of all former section 419A(f)(6) promoters and, therefore, will be scrutinizing the promoter carefully if the promoter was once active in that area, as many current section 419(e) (welfare benefit fund or plan) promoters were. This makes an audit of your client more likely and far riskier.
It is worth noting that listed transactions are subject to a regulatory scheme applicable only to them, entirely separate from Circular 230 requirements, regulations, and sanctions. Participation in such a transaction must be disclosed on a tax return, and the penalties for failure to disclose are severe — up to $100,000 for individuals and $200,000 for corporations. The penalties apply to both taxpayers and practitioners. And the problem with disclosure, of course, is that it is apt to trigger an audit, in which case even if the listed transaction were to pass muster, something else may not.
Lance Wallach, CLU, ChFC, CIMC, speaks and writes about benefit plans, tax reductions strategies, and financial plans. He has authored numerous books for the AICPA, Bisk Total tape, and others. He can be reached at (516) 938-5007 or lawallach@aol.com. For more articles on this or other subjects, feel free to visit his website at www.vebaplan.com.
Lance Wallach, the National Society of Accountants Speaker of the Year, speaks and writes extensively about retirement plans, Circular 230 problems and tax reduction strategies. He speaks at more than 40 conventions annually, writes for over 50 publications, is quoted regularly in the press, and has written numerous best-selling AICPA books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Business Hot Spots. He does extensive expert witness work and has never lost a case. Contact him at 516.938.5007 or visit www.vebaplan.com.
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.
TAX MATTERS: ABUSIVE INSURANCE PLANS GET RED FLAG
ABUSIVE INSURANCE PLANS GET RED FLAG
The IRS in Notice 2007-83 identified as listed transactions certain trust arrangements involving cash-value life insurance policies. Revenue Ruling 2007-65, issued simultaneously, addressed situations where the tax deduction has been disallowed, in part or in whole, for premiums paid on such cash-value life insurance policies. Also simultaneously issued was Notice 2007-84, which disallows tax deductions and imposes severe penalties for welfare benefit plans that primarily and impermissibly benefit shareholders and highly compensated employees.
Taxpayers participating in these listed transactions must disclose such participation to the Service by January 15. Failure to disclose can result in severe penalties--- up to $100,000 for individuals and $200,000 for corporations.
Ruling 2007-65 aims at situations where cash-value life insurance is purchased on owner/employees and other key employees, while only term insurance is offered to the rank and file. These are sold as 419(e), 419(f) (6), and 419 plans. Other arrangements described by the ruling may also be listed transactions. A business in such an arrangement cannot deduct premiums paid for cash-value life insurance.
A CPA who is approached by a client about one of these arrangements must exercise the utmost degree of caution, and not only on behalf of the client. The severe penalties noted above can also be applied to the preparers of returns that fail to properly disclose listed transactions.
Prepared by Lance Wallach, CLU, ChFC, CIMC, of Plainview, N.Y.,
516-938-5007, a writer and speaker on voluntary employee’s beneficiary associations and other employee benefits.
The IRS in Notice 2007-83 identified as listed transactions certain trust arrangements involving cash-value life insurance policies. Revenue Ruling 2007-65, issued simultaneously, addressed situations where the tax deduction has been disallowed, in part or in whole, for premiums paid on such cash-value life insurance policies. Also simultaneously issued was Notice 2007-84, which disallows tax deductions and imposes severe penalties for welfare benefit plans that primarily and impermissibly benefit shareholders and highly compensated employees.
Taxpayers participating in these listed transactions must disclose such participation to the Service by January 15. Failure to disclose can result in severe penalties--- up to $100,000 for individuals and $200,000 for corporations.
Ruling 2007-65 aims at situations where cash-value life insurance is purchased on owner/employees and other key employees, while only term insurance is offered to the rank and file. These are sold as 419(e), 419(f) (6), and 419 plans. Other arrangements described by the ruling may also be listed transactions. A business in such an arrangement cannot deduct premiums paid for cash-value life insurance.
A CPA who is approached by a client about one of these arrangements must exercise the utmost degree of caution, and not only on behalf of the client. The severe penalties noted above can also be applied to the preparers of returns that fail to properly disclose listed transactions.
Prepared by Lance Wallach, CLU, ChFC, CIMC, of Plainview, N.Y.,
516-938-5007, a writer and speaker on voluntary employee’s beneficiary associations and other employee benefits.
EP Abusive Tax Transactions - Certain Trust Arrangements Seeking to Qualify for Exemption from Section 419
Notice 95-34 discusses tax problems raised by certain trust arrangements seeking to qualify for exemption from IRC section 419. This transaction involves the claiming of deductions under IRC sections 419 and 419A for contributions to multiple employer welfare benefit funds. In general, an employer may deduct contributions to a welfare benefit fund when paid, but only if the contributions qualify as ordinary and necessary business expenses of the employer and only to the extent allowable under IRC sections 419 and 419A. There are strict limits on the amount of tax-deductible pre-funding permitted for contributions to a welfare benefit fund.
IRC section 419A(f)(6) provides an exemption from IRC sections 419 and 419A for a welfare benefit fund that is part of a 10 or more employer plan. In general, for this exemption to apply, an employer normally cannot contribute more than 10 percent of the total contributions contributed under the plan by all employers, and the plan must not be experience rated with respect to individual employers.
Promoters have offered trust arrangements that are used to provide life insurance, disability, and severance pay benefits. The promoters enroll at least 10 employers in their multiple employer trusts and claim that all employer contributions are tax deductible when paid, relying on the 10-or-more-employer exemption from the limitations under IRC sections 419 and 419A. Often the trusts maintain separate accounting of the assets attributable to each subscribing employer’s contributions.
Notice 95-34 puts taxpayers on notice that deductions for contributions to these arrangements are disallowable for any one of several reasons (e.g., the arrangements may provide deferred compensation, the arrangements may be separate plans for each employer, the arrangements may be experience rated in form or operation, or the contributions may be nondeductible prepaid expenses).
On July 17, 2003, final regulations (T.D. 9079) relating to whether a welfare benefit fund is part of a 10 or more employer plan (as defined in section 419A(f)(6) of the Internal Revenue Code) were published in the Federal Register (68 FR 42254).
In addition, in a case decided by the Third Circuit Court of Appeals, the contributions to the plan were taxable to the owners of the corporate employers as constructive dividends (Neonatology Associates, P.A., Et Al. v. Commissioner, 299 F.3rd 221 - 3rd Cir. 2002).
IRC section 419A(f)(6) provides an exemption from IRC sections 419 and 419A for a welfare benefit fund that is part of a 10 or more employer plan. In general, for this exemption to apply, an employer normally cannot contribute more than 10 percent of the total contributions contributed under the plan by all employers, and the plan must not be experience rated with respect to individual employers.
Promoters have offered trust arrangements that are used to provide life insurance, disability, and severance pay benefits. The promoters enroll at least 10 employers in their multiple employer trusts and claim that all employer contributions are tax deductible when paid, relying on the 10-or-more-employer exemption from the limitations under IRC sections 419 and 419A. Often the trusts maintain separate accounting of the assets attributable to each subscribing employer’s contributions.
Notice 95-34 puts taxpayers on notice that deductions for contributions to these arrangements are disallowable for any one of several reasons (e.g., the arrangements may provide deferred compensation, the arrangements may be separate plans for each employer, the arrangements may be experience rated in form or operation, or the contributions may be nondeductible prepaid expenses).
On July 17, 2003, final regulations (T.D. 9079) relating to whether a welfare benefit fund is part of a 10 or more employer plan (as defined in section 419A(f)(6) of the Internal Revenue Code) were published in the Federal Register (68 FR 42254).
In addition, in a case decided by the Third Circuit Court of Appeals, the contributions to the plan were taxable to the owners of the corporate employers as constructive dividends (Neonatology Associates, P.A., Et Al. v. Commissioner, 299 F.3rd 221 - 3rd Cir. 2002).
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