Showing posts with label Lance Wallach Expert Witness. Show all posts
Showing posts with label Lance Wallach Expert Witness. 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
Abusive Insurance, Welfare Benefit, and Retirement Plans
Abusive Insurance, Welfare Benefit, and Retirement 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 advisors" and also fines them the same amount, again
unless the client's participation in the transaction is reported. An accountant is a material
advisor 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 fines him $200,000 a year for being in what they
called a listed transaction. Listed transactions can be found at http://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 advisors. 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 theses so-called listed, abusive, or substantially
similar plans are being sold by insurance agents.
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-year-old, 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 2 ½ years to examine a 2-
year-old pension with four participants and the $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 advisor 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 owners and their advisors who participate
in, sell, or advice on these transactions. I happened to use, as an example, someone
in a section 412(i) 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, many fail to take
necessary and appropriate precautions.
The IRS has warned against the 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 plan into those they consider noncompliant and other
they consider abusive. While the alternatives available to the sponsor of 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 situation 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 the arrangements purporting to allow the 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 theses abusive employee benefit plans are represented as satisfying section
419, which sets limits on purposed and balances of "qualified asset accounts" for the
benefits, although the plans purport to offer the deductibility of contributions without
any corresponding income. Others attempt to take advantage of the exceptions to
qualified asset account limits, such as sham union plans that try to exploit the exception
for the 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, defines benefit sections 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-more-employer 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 prescribed in Notice 95-24 (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 theses 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 issues 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 "alternative tax treatment." The IRS at the same time 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 id 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 sections264(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 was to pass muster, something else may not.
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 advisors" and also fines them the same amount, again
unless the client's participation in the transaction is reported. An accountant is a material
advisor 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 fines him $200,000 a year for being in what they
called a listed transaction. Listed transactions can be found at http://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 advisors. 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 theses so-called listed, abusive, or substantially
similar plans are being sold by insurance agents.
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-year-old, 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 2 ½ years to examine a 2-
year-old pension with four participants and the $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 advisor 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 owners and their advisors who participate
in, sell, or advice on these transactions. I happened to use, as an example, someone
in a section 412(i) 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, many fail to take
necessary and appropriate precautions.
The IRS has warned against the 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 plan into those they consider noncompliant and other
they consider abusive. While the alternatives available to the sponsor of 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 situation 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 the arrangements purporting to allow the 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 theses abusive employee benefit plans are represented as satisfying section
419, which sets limits on purposed and balances of "qualified asset accounts" for the
benefits, although the plans purport to offer the deductibility of contributions without
any corresponding income. Others attempt to take advantage of the exceptions to
qualified asset account limits, such as sham union plans that try to exploit the exception
for the 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, defines benefit sections 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-more-employer 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 prescribed in Notice 95-24 (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 theses 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 issues 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 "alternative tax treatment." The IRS at the same time 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 id 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 sections264(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 was to pass muster, something else may not.
Avoiding, or at least winning, an IRS challenge
Lance Wallach
Of course, a Captive insurance company can be extremely beneficial in many aspects, as
insurance profits are kept within the group and tax benefits may be obtained. As is true with any
business planning, however, the Captive must be a legitimate business entity and be in
compliance with the law. There are opportunities for the Service to challenge Captive insurance
companies; therefore, proper formation and ongoing administration is essential. The Service may
have given up on the economic family doctrine, but the Service specifically stated in Rev. Rul.
2001-31 that it may continue to challenge Captives based on the facts and circumstances of each
case.
Legitimate business reason. As is true with any business planning, a Captive must possess a
legitimate business reason to avoid being characterized as a sham by the Service. Some
legitimate business reasons are as follows:
(1) To obtain coverage where insurers are unwilling to do so.
(2) To reduce premium payments.
(3) To control risk.
(4) To increase cash-flow.
(5) To gain access to the reinsurance market
(6) To create diversification.
(7) To balance coverage.
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 bestselling 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.
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!
How to Find the Right Experts to Guide You Through These Times
These days, business owners have a lot on their plates. Not only do they have businesses to run, but they need to have the resources to operate, manage, and flourish those businesses in order to stay afloat. Without serious knowledge of things like finances, taxes, tax audits, and retirement plans, it's hard to keep a shop open for business and to ensure that your future is in good hands. Especially now, as the economy begins to change, it is smart to look into different ways to secure your future and money. Recent well documented events have made it increasingly important to educate yourself on how to handle such endeavors correctly.
Thousands of businesses have closed as a result of bankruptcy, corrupt policies, lowered sales, and other factors, often because issues that seemingly, in hindsight, should have been obvious were overlooked. In this environment, more than ever, you simply cannot afford mistakes or omissions with respect to your finances. Such mistakes can result in audits and other problems that could eventually lead to the closing of your establishment. Being aware of the amount of debt that you are carrying, when your sales tend to plummet, and your number of employees are three trivial yet important aspects of watching your money. Websites such as IRS.gov, financeExperts.org, and taxlibrary.us are resources that can help make sure that there are ZERO unpleasant surprises in your numbers.
Additionally, keeping accurate records and constantly double checking your numbers are two obvious, yet often neglected, things that you should do. So the question stands: how knowledgeable are you about your own finances?
Many of you have received information about the current state of your investments in the past few months. Sticker shock would be an understatement. Thousands have been lost as a direct result of the fiascoes constantly occurring as of this writing. Savings that would not only brighten your futures, but in many cases investments that you planned to use for your children's educations, are gone. The downward spiral will continue, as the shrapnel from these events moves throughout our failing economy. It won't stop in the foreseeable future, and it will entail more than just monetary losses. The watchdog agencies that will now have to redeem themselves for failing to perform their regulatory functions, leading at least in part to all of these failures, will respond with increased scrutiny of American citizens and businesses in every manner imaginable. Trust me, no stone will be left unturned, including that of increased IRS audits for the express purpose of raising money, which in fact has already started.
All of which is why treading water in the tide of an ebbing economy is not a solution.
It would appear that the seemingly indestructible giants of Wall Street have begun to crumble. Lehman Brothers is no more, Merrill Lynch has been taken down a peg or two, and now, disaster is apparently looming over Morgan Stanley. To say nothing of the looming threat to the consumer banking industry. As industry insiders, we've seen the writing on the wall for quite some time. Now, everybody else can see it, too.
In this day, the veil has been pulled back on the stock market's heavy hitters. Consumers now know there is indeed no "wizard" behind the curtain, just a few individuals in designer suits pulling down astronomical sums of money for the advice they send down from on high. Who can forget the images of the Lehman Brothers employees in New York City, emptying their offices into boxes and carrying them down Seventh Avenue? As sad as it was to see, it was a day we all had the feeling was coming, right? But now that it's here, why don't we feel any better?
The hopes of many investors in the stock market have been shaken to the core, but we cannot forget about the morose consumers and business owners. A number of individuals are suffering the potentially substantial loss (or potential loss) of their hard-earned money in a volatile market. Consumers need advisors who can guide them toward a safe harbor. As previously mentioned, financeexperts.org can give you the help you need in this failing economy. The leading authorities are members, and will most likely give helpful feedback. Consumers are fearful, and if they say they aren't, it's probable that they aren't being honest. For most Americans today, a stress free retirement is looking more and more impossible, and the difficulties looming between ourselves and that goal seem insurmountable. But things do not have to look and seem so bleak.
In a sense of the word, we feel compassion. Too many scoundrels plague Wall Street but, to some degree, we all feel the brunt. Be it for the out of work traders and brokers, or the investors who are wondering what is going to happen to their futures, we all feel some concern. But when it comes to who will receive most of our compassion, my money is on the investors. We hate to have an "I told you so" attitude, but at times it is hard to avoid. However, rather than dwell on this compassion, why not capitalize on it? Often unforeseen opportunities arise from the ashes of situations such as these. In fact, many such opportunities are available as I write this. They will be taken advantage of by those with the imagination and talent to position themselves to do so.
By reading this, you may be off to a good start. There are many ideas you will get from our leading finance experts to better run your business, reduce taxes and insurance costs, and much more. You will learn how to avoid audits, which are already up fifty (50) percent and are expected to increase further still, and turn your accountant into your protector instead of a tax collector. You will learn from Lance Wallach, who, as an American Institute of CPAs instructor and course developer, teaches CPAs. Lance also draws upon the knowledge and expertise of his associates, who are the leading finance experts in the United States. None of them work for any of the firms that were affected by the recent and ongoing financial fiascoes. Many of them perceived the arrival of these problems, and only their clients benefited because most other business people were too busy buying products from stockbrokers, insurance agents, and so-called financial planners who did not know what was going on. In Lance's spare time, between speaking at conventions, writing and helping a select few business owners, Lance appears as an expert witness. In fact, for two days in Sept 2008, Lance Wallach testified as an expert witness in Federal Court for a business owner that was sold a faulty financial product by a combination of his accountant and a so-called retirement plan expert. After Lance completed his testimony, the judge call the retirement plan salesman a "crook" and said that he should settle with the plaintiff. He did not, and the jury awarded the business owner TWICE what he had sued for. As a side note, Lance had advised the lawyer that this was a so called "ERISA case" and instead of the $400,000 that the business owner was suing for, $800,000 (double damages, as is possible in "ERISA" cases), could be awarded if the jury felt that was appropriate.
The point is that, under no circumstances, should you be forced to lay down and take the abuse and malpractice that most salespeople pin on you. Get your financial and business affairs in order, and, if necessary, take some action! Take some serious action!
Lance Wallach is a frequent speaker at national conventions and writes for more than 50 publications. He was the National Society of Accountants Speaker of the Year. He welcomes your contact. E-mail lawallach @aol.com or call (516) 938-5007 for more info.
The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or entity. You should contact an appropriate professional for any such advice.
Thousands of businesses have closed as a result of bankruptcy, corrupt policies, lowered sales, and other factors, often because issues that seemingly, in hindsight, should have been obvious were overlooked. In this environment, more than ever, you simply cannot afford mistakes or omissions with respect to your finances. Such mistakes can result in audits and other problems that could eventually lead to the closing of your establishment. Being aware of the amount of debt that you are carrying, when your sales tend to plummet, and your number of employees are three trivial yet important aspects of watching your money. Websites such as IRS.gov, financeExperts.org, and taxlibrary.us are resources that can help make sure that there are ZERO unpleasant surprises in your numbers.
Additionally, keeping accurate records and constantly double checking your numbers are two obvious, yet often neglected, things that you should do. So the question stands: how knowledgeable are you about your own finances?
Many of you have received information about the current state of your investments in the past few months. Sticker shock would be an understatement. Thousands have been lost as a direct result of the fiascoes constantly occurring as of this writing. Savings that would not only brighten your futures, but in many cases investments that you planned to use for your children's educations, are gone. The downward spiral will continue, as the shrapnel from these events moves throughout our failing economy. It won't stop in the foreseeable future, and it will entail more than just monetary losses. The watchdog agencies that will now have to redeem themselves for failing to perform their regulatory functions, leading at least in part to all of these failures, will respond with increased scrutiny of American citizens and businesses in every manner imaginable. Trust me, no stone will be left unturned, including that of increased IRS audits for the express purpose of raising money, which in fact has already started.
All of which is why treading water in the tide of an ebbing economy is not a solution.
It would appear that the seemingly indestructible giants of Wall Street have begun to crumble. Lehman Brothers is no more, Merrill Lynch has been taken down a peg or two, and now, disaster is apparently looming over Morgan Stanley. To say nothing of the looming threat to the consumer banking industry. As industry insiders, we've seen the writing on the wall for quite some time. Now, everybody else can see it, too.
In this day, the veil has been pulled back on the stock market's heavy hitters. Consumers now know there is indeed no "wizard" behind the curtain, just a few individuals in designer suits pulling down astronomical sums of money for the advice they send down from on high. Who can forget the images of the Lehman Brothers employees in New York City, emptying their offices into boxes and carrying them down Seventh Avenue? As sad as it was to see, it was a day we all had the feeling was coming, right? But now that it's here, why don't we feel any better?
The hopes of many investors in the stock market have been shaken to the core, but we cannot forget about the morose consumers and business owners. A number of individuals are suffering the potentially substantial loss (or potential loss) of their hard-earned money in a volatile market. Consumers need advisors who can guide them toward a safe harbor. As previously mentioned, financeexperts.org can give you the help you need in this failing economy. The leading authorities are members, and will most likely give helpful feedback. Consumers are fearful, and if they say they aren't, it's probable that they aren't being honest. For most Americans today, a stress free retirement is looking more and more impossible, and the difficulties looming between ourselves and that goal seem insurmountable. But things do not have to look and seem so bleak.
In a sense of the word, we feel compassion. Too many scoundrels plague Wall Street but, to some degree, we all feel the brunt. Be it for the out of work traders and brokers, or the investors who are wondering what is going to happen to their futures, we all feel some concern. But when it comes to who will receive most of our compassion, my money is on the investors. We hate to have an "I told you so" attitude, but at times it is hard to avoid. However, rather than dwell on this compassion, why not capitalize on it? Often unforeseen opportunities arise from the ashes of situations such as these. In fact, many such opportunities are available as I write this. They will be taken advantage of by those with the imagination and talent to position themselves to do so.
By reading this, you may be off to a good start. There are many ideas you will get from our leading finance experts to better run your business, reduce taxes and insurance costs, and much more. You will learn how to avoid audits, which are already up fifty (50) percent and are expected to increase further still, and turn your accountant into your protector instead of a tax collector. You will learn from Lance Wallach, who, as an American Institute of CPAs instructor and course developer, teaches CPAs. Lance also draws upon the knowledge and expertise of his associates, who are the leading finance experts in the United States. None of them work for any of the firms that were affected by the recent and ongoing financial fiascoes. Many of them perceived the arrival of these problems, and only their clients benefited because most other business people were too busy buying products from stockbrokers, insurance agents, and so-called financial planners who did not know what was going on. In Lance's spare time, between speaking at conventions, writing and helping a select few business owners, Lance appears as an expert witness. In fact, for two days in Sept 2008, Lance Wallach testified as an expert witness in Federal Court for a business owner that was sold a faulty financial product by a combination of his accountant and a so-called retirement plan expert. After Lance completed his testimony, the judge call the retirement plan salesman a "crook" and said that he should settle with the plaintiff. He did not, and the jury awarded the business owner TWICE what he had sued for. As a side note, Lance had advised the lawyer that this was a so called "ERISA case" and instead of the $400,000 that the business owner was suing for, $800,000 (double damages, as is possible in "ERISA" cases), could be awarded if the jury felt that was appropriate.
The point is that, under no circumstances, should you be forced to lay down and take the abuse and malpractice that most salespeople pin on you. Get your financial and business affairs in order, and, if necessary, take some action! Take some serious action!
Lance Wallach is a frequent speaker at national conventions and writes for more than 50 publications. He was the National Society of Accountants Speaker of the Year. He welcomes your contact. E-mail lawallach @aol.com or call (516) 938-5007 for more info.
The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or entity. You should contact an appropriate professional for any such advice.
Draconian Fines by the IRS
The IRS may call you a material advisor and fine you $200,000.00. The IRS may fine your clients over a million dollars for being in a retirement plan, 419 plan, etc. As you read this article, hundreds of unfortunate people are having their lives ruined by these fines. You may need to take action immediately.
Senator Ben Nelson (D-Nebraska) has sponsored legislation (S.765) to curtail the IRS and its nearly unlimited authority and power under Code Section 6707A. The bill seeks to scale back the scope of the Section 6707A reportable/listed transaction nondisclosure penalty to a more reasonable level. The current law provides for penalties that are Draconian by nature and offer no flexibility to the IRS to reduce or abate the imposition of the 6707A penalty. This has served as a weapon of mass destruction for the IRS and has hit many small businesses and their owners with unconscionable results.
Internal Revenue Code 6707A was enacted as part of the American Jobs Creation Act on October 22, 2004. It imposes a strict liability penalty for any person that failed to disclose either a listed transaction or reportable transaction per each occurrence. Reportable transactions usually fall within certain general types of transactions (e.g. confidential transactions, transactions with tax protection, certain loss generating transaction and transactions of interest arbitrarily so designated as by the IRS) that have the potential for tax avoidance. Listed transactions are specified transactions which have been publicly designated by the IRS, including anything that is substantially similar to such a transaction (a phrase which is given very liberal construction by the IRS). There are currently 34 listed transactions, including certain retirement plans under Code section 412(i) and certain employee welfare benefit plans funded in part with life insurance under Code sections 419A(f)(5), 419(f)(6) and 419(e). Many of these plans were implemented by small business seeking to provide retirement income or health benefits to their employees.
Strict liability requires the IRS to impose the 6707A penalty regardless of innocence of a person (i.e. whether the person knew that the transaction needed to be reported or not or whether the person made a good faith effort to report) or the level of the person’s reliance on professional advisors. A Section 6707A penalty is imposed when the transaction becomes a reportable/listed transaction. Therefore, a person has the burden to keep up to date on all transactions requiring disclosure by the IRS into perpetuity for transactions entered into the past.
Additionally, the 6707A penalty strictly penalizes nondisclosure irrespective of taxes owed. Accordingly, the penalty will be assessed even in legitimate tax planning situations when no additional tax is due but an IRS required filing was not properly and timely filed. It is worth noting that a failure to disclose in the view of the IRS encompasses both a failure to file the proper form as well as a failure to include sufficient information as to the nature and facts concerning the transaction. Hence, people may find themselves subject to the 6707A penalty if the IRS determines that a filing did not contain enough information on the transaction. A penalty is also imposed when a person does not file the required duplicate copy with a separate IRS office in addition to filing the required copy with the tax return. Lance Wallach Commentary. In our numerous talks with IRS, we were also told that improperly filling out the forms could almost be as bad as not filing the forms. We have reviewed hundreds of forms for accountants, business owners and others. We have not yet seen a form that was properly filled in. We have been retained to correct many of these forms.
The imposition of a 6707A penalty is not subject to judicial review regardless of whether the penalty is imposed for a listed or reportable transaction. Accordingly, the IRS’s determination is conclusive, binding and final. The next step from the IRS is sending your file to collection, where your assets may be forcibly taken, publicly recorded liens may be placed against your property, and/or garnishment of your wages or business profits may occur, amongst other measures.
The 6707A penalty amount for each listed transaction is generally $200,000 per year per each person that is not an individual and $100,000 per year per individual who failed to properly disclose each listed transaction. The 6707A penalty amount for each reportable transaction is generally $50,000 per year for each person that is not an individual and $10,000 per year per each individual who failed to properly disclose each reportable transaction. The IRS is obligated to impose the listed transaction penalty by law and cannot remove the penalty by law. The IRS is obligated to impose the reportable transaction penalty by law, as well, but may remove the penalty when the IRS determines that removal of the penalty would promote compliance and support effective tax administration.
The 6707A penalty is particularly harmful in the small business context, where many business owners operate through an S corporation or limited liability company in order to provide liability protection to the owner/operators. Numerous cases are coming to light where the IRS is imposing a $200,000 penalty at the entity level and them imposing a $100,000 penalty per individual shareholder or member per year.
The individuals are generally left with one of two options:
1. Declare Bankruptcy
2. Face a $300,000 penalty per year.
Keep in mind, taxes do not need to be due nor does the transaction have to be proven illegal or illegitimate for this penalty to apply. The only proof required by the IRS is that the person did not properly and timely disclose a transaction that the IRS believes the person should have disclosed. It is important to note in this context that for non-disclosed listed transactions, the Statue of Limitations does not begin until a proper disclosure is filed with the IRS.
Many practitioners believe the scope and authority given to the IRS under 6707A, which allows the IRS to act as judge, jury and executioner, is unconstitutional. Numerous real life stories abound illustrating the punitive nature of the 6707A penalty and its application to small businesses and their owners. In one case, the IRS demanded that the business and its owner pay a 6707A total of $600,000 for his and his business’ participation in a Code section 412(i) plan. The actual taxes and interest on the transaction, assuming the IRS was correct in its determination that the tax benefits were not allowable, was $60,000. Regardless of the IRS’s ultimate determination as to the legality of the underlying 412(i) transaction, the $600,000 was due as the IRS’s determination was final and absolute with respect to the 6707A penalty. Another case involved a taxpayer who was a dentist and his wife whom the IRS determined had engaged in a listed transaction with respect to a limited liability company. The IRS determined that the couple owed taxes on the transaction of $6,812, since the tax benefits of the transactions were not allowable. In addition, the IRS determined that the taxpayers owed a 1,200,000 section 6707A penalty for both their individual nondisclosure of the transaction along with the nondisclosure by the limited liability company.
Even the IRS personnel continue to question both the legality and the fairness of the IRS’s imposition of 6707A penalties. An IRS appeals officer in an email to a senior attorney within the IRS wrote that “…I am both an attorney and CPA and in my 29 years with the IRS I have never {before} worked a case or issue that left me questioning whether in good conscience I could uphold the Government’s position even though it is supported by the language of the law.” The Taxpayers Advocate, an office within the IRS, even went so far as to publicly assert that the 6707A should be modified as it “raises significant Constitutional concerns, including possible violations of the Eighth Amendment’s prohibition against excessive government fines, and due process protection.”
Senate bill 765, the bill sponsored by Senator Nelson, seeks to alleviate some of above cited concerns. Specifically, the bill makes three major changes to the current version of Code section 6707A. The bill would allow an IRS imposed 6707A penalty for nondisclosure of a listed transaction to be rescinded if a taxpayer’s failure to file was due to reasonable cause and not willful neglect. The bill would make a 6707A penalty proportional to an understatement of any tax due.
Would only allow the IRS to impose a 6707A penalty on actual taxpayers.
Accordingly, non-tax paying entities such as S corporations and limited liability companies would not be subject to a 6707A penalty (individuals, C corporations and certain trusts and estates would remain subject to the 6707A penalty).
Important update as of July 2009.
In a letter dated July 6, 2009, from Douglas Shulman, Commissioner of the Internal Revenue Service, to Representative John Lewis, Chairman of the Subcommittee on Oversight of the House Committee on Ways and Means, the IRS announced that it is suspending “collection enforcement action” on penalties under section 6707A of the Internal Revenue Code. Section 6707A of the Code imposes a penalty on a taxpayer who fails to disclose participation in a reportable transaction. The term “reportable transaction” includes a “listed transaction”. In the letter, the IRS says that it will suspend collection efforts where the tax benefits resulting from a listed transaction are less than $100,000 for a person and $200,000 for all other taxpayers. The IRS will suspend such collection efforts until September 30, 2009.
There are a number of interesting points to note about this action:
1. In the letter, the IRS acknowledges that, in certain cases, the penalty imposed by section 6707A for failure to report participation in a “listed transaction” is disproportionate to the tax benefits obtained by the transaction.
2. In the letter, the IRS says that it is taking this action because Congress has indicated its intention to amend the Code to modify the penalty provision, so that the penalty for failure to disclose will be more in line with the tax benefits resulting from a listed transaction.
3. The IRS will not suspend audits or collection efforts in appropriate cases. It cannot suspend imposition of the penalty, because, at least with respect to listed transactions, it does not have the discretion to not impose the penalty. It is simply suspending collection efforts in cases where the tax benefits are below the penalty threshold in order to give Congress time to amend the penalty provision, as Congress has indicated to the IRS it intends to do. Presumably, if Congress does not act by September 30, 2009, then the IRS will resume collection efforts.
4. In a press release dated July 7, 2009, Senator Charles Grassley said that the suspension probably needs to be longer, because he does not believe that legislation can get through Congress by September 30, 2009.
It should also be noted that identical bills have been introduced in the Senate and the House to amend Section 6707A. Each bill has been referred to the appropriate committee, where no action has taken place. There are a couple of points about the proposed legislation:
1. The legislation would reduce the penalty for failure to disclose participation in a reportable transaction, other than a listed transaction, to the amount imposed by section 6662A for an understatement of tax. For a listed transaction, the penalty would equal 200% of the penalty imposed for an understatement of tax. The amount of the penalty imposed by section 6662A is 20%.
2. The proposed legislation is different than the position expressed by the IRS. The IRS would like the penalty to equal the tax benefits obtained from the transaction.
3.The legislation does not change the penalty provisions for material advisors.
Important articles for Attorneys, Accountants and Insurance Professionals.
NATP TAXPRO Journal, Winter 2009
My biggest challenge (Lance Wallach) will be finding time to educate the hundreds of accountants who are being targeted by the IRS as “material advisors”. Any accountant who allows a 419,412(i), or other type of listed transaction (or substantially similar to such a transaction) to be deducted can be labeled a material advisor by the IRS and be subject to a $200,000.00 fine. In addition, the information will be forwarded to the Office of Professional Responsibility and they could lose their licenses. This past year, I often received as many as fifty calls a week from people needing help with this problem.
For example, I recently received a phone call from an accountant whose client went into an insurance company-sponsored 412(i) retirement plan in 2003. The business owner made no contribution to the plan in 2004 or 2005, and actually tried to get out of the plan. The IRS audited the returns for 2004 and 2005 and fined the business owner $400,000.00 for failing to disclose being in a listed transaction. I believe they are now fining the accountant $200,000.00 for being a material advisor. The accountant had nothing to do with the plan, did not think anything was wrong, and still can’t understand what is going on. If you think this can’t happen to you, think again. It's happening to a lot of honest people.
- Lance Wallach
Lance Wallach, Planview NY, is a member of the AICPA faculty of teaching professionals and an AICPA course developer. He speaks at more than 70 national conventions a year on topics including retirement plans, financial and estate planning, reducing health insurance costs, and tax-oriented strategies. He writes for numerous publications, and has authored many books for the AICPA and Bisk. In addition, Lance has been named NSA “Speaker of the Year”. Congratulations Lance on being chosen NATP’s March Member of the Month!
Q. What are the biggest challenges facing tax professionals today?
A. I think the biggest challenge facing tax professionals is the IRS trying to make them policemen. Most tax professionals do not realize that they can now be subject to large fines for nondisclosure of certain activities of their clients. I have authored a few books for the AICPA on these issues. In fact, allowing an item on a client’s tax return turns out to be a listed transaction can be disastrous. This can happen even if the item became listed after the fact, and even if the tax professional never knew that it was listed or abusive. I have spoken at hundreds of conventions about abusive products that clients are buying. Most professionals think that the products are legitimate, or think that they are retirement plans, etc. Without further education, the tax pro can lose his or her career, not to mention being sued.
Lance Wallach speaks and writes about benefit plans, and 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.
Today's IRS audits are both targeted and coordinated
Today's IRS audits are both targeted and coordinated
Question: Are the IRS audits coordinated?
Question: Are the IRS audits coordinated?
Answer: Yes. The IRS audits are both targeted and coordinated. They are targeted meaning that the IRS obtains a list of the participating employers in a plan promotion and audits the participating employers (and owners) for the purpose of challenging the deductions taken with respect to the plan. The audits are coordinated meaning that there is an IRS Issue Management Team for each promotion that has responsibility for both managing the promoter audit(s) and also developing the coordinated position to be followed by the Examination Agents. Their intention is that all taxpayers under audit will receive the similar treatment in Exam. There are also IRS Offices that specialize in 419 audits. For example, IRS offices in upstate New York and in El Monte California will manage many audits of specific promotions. Williams Coulson has significant experience in working with both of these offices.
Question: What is the general IRS position on these plans?
Answer: Though there can be some differences among plans, the basic IRS position is that the plans are not welfare benefit plans, but really plans of deferred compensation. As such, the contributions remain deductible at the business level but are included in the owner’s 1040 income for every open year and the value of the insurance policy with respect to contributions in closed years is included in the owner’s income either in the first open year or the year of termination or transfer. The IRS will normally apply 20% penalties on the tax applied and 30% with respect to non-reporting cases (see discussion below).
Question: Can the penalties ever be waived?
Answer: Yes. The penalties can often be waived upon a showing of the taxpayer’s due diligence and good faith reasonable cause. For example, if the taxpayer can show reliance on an outside tax advisor who reviewed the plan and the law, the Examining Agent normally has the authority to waive the 20% negligence penalty. Note that there are different standards for waiving penalties among the IRS Offices. It is important to know the standards of each office before requesting a waiver.
Question: What if there is an opinion letter issued on the plan – will that eliminate penalties?
Answer: Generally, the answer is a resounding – No. If the opinion letter was issued to the promoter or the promotion itself and a copy was merely provided to the taxpayer (even if the taxpayer paid for it), the IRS perceives the advice to be bias and not reasonable for reliance.
Question: What if the taxpayer relied upon the advisor who sold the promotion?
Answer: The IRS also discounts any advice provided by parties who are part of the sales team for the promotion. It is possible to negate the bias against professionals involved in the sale if you can demonstrate that the professional was first a tax advisor and gave advice in that role and not as a salesman.
Question: What are the “listed transaction” penalties?
Answer: The IRS has identified certain multiple and single employer welfare benefit plans as listed transactions. Taxpayers who participate in listed transactions have an obligation to notify the IRS of their participation on IRS Form 8886. The Form 8886 must be filed with every tax return where a tax effect of the transaction appears on the return and for the first year of filing must also be filed with the IRS Office of Tax Shelter Analysis (OTSA). There are penalties that apply for the failure to file the Form 8886. The IRS position appears to be that although only the C corporation must file the 8886, if the business is a pass-through entity like an S Corporation, LLC or partnership, then the Form 8886 must be filed at both the entity level and also the individual level. The penalty for non-filing is 75% of the tax reduction for the tax year. Note that it is very clear that a plan does not have to be proven to be defective or abusive for the penalty to apply. Further, the IRS has made it very clear that they will construe the duty to disclose broadly. Thus, if there is even a possibility that a plan is a listed transaction, the taxpayer should consider strongly filing the Form 8886.
Question: Are there other negatives to not filing the Form 8886?
Answer: Yes. In addition to the non-reporting penalty, the negligence penalty discussed above of 20% becomes 30% and is much more difficult to have waived. Further, the non-reporting penalty cannot be appealed to tax court. Therefore, the only recourse is to pay the penalty, file for a refund and fight the case in District Court.
Question: Whose responsibility is it to notify taxpayers of the need to file Form 8886?
Answer: It depends. Many promoters take the initiative to inform their customers that the promotion may be considered to be a listed transaction and that they should consider filing Forms 8886, though some promoters have actually taken the opposite view and have directed customers to not file the Form 8886 to keep them off the IRS radar. These promoters face potential liability if the penalties are assessed. Because the Form 8886 is filed with the tax returns, it may be partly the responsibility of the CPA who prepares the returns to file the Form, though many CPAs may not know that the transaction is a listed transaction or how to prepare the Form. From the IRS perspective, the responsibility is clear – it is the taxpayer who bears the ultimate responsibility and will be penalized if the Form is not filed.
Question: Are some plans better than others?
Answer: Yes. Even though the IRS appears to have thrown a giant net over the entire industry, I have observed that many promoters have worked hard to develop a plan that complies with the tax law. The plans are supported by substantial legal and actuarial authority and make it clear that they are welfare plans and not deferred compensation plans. These plans are often very strong in their marketing materials as to the nature of the plan and also provide for less deductible amounts. On the other hand, some promotions have ignored new IRS Regulations (issued in 2003) and continue to sell and market plans that have been out of compliance for years. They make no attempt to bring their plans into compliance and seek to stay under the radar by directing their customers to not file Forms 8886.
Question: Do taxpayers have causes of action?
Answer: Maybe. We see two potential causes of action. First, in cases where the promoter has either created a defective product, or has turned a blind eye towards law changes, the promoter and potentially the insurance companies may have liability for the creating, marketing, endorsing and selling a defective product. Second, where planners have sold the product to customers improperly, by describing the plan as a safe, IRS approved retirement plan with unlimited deductions, they may have liability for fraudulent sales.
I do not agree with everything in this well written sales pitch. As an expert witness Lance Wallach’s side has never lost a case. I only know of two people that have successfully filed under IRS 8886, after the fact. Many of the hundreds of phone calls that I receive each year involve misfiling of 8886 forms.
If you are, or were in an abusive tax shelter like a 419 or 412i plan to time to act is now. If you are in a captive insurance or section 79 plan you should speak with someone that does not sell them. Many former promoters of abusive 419 plans now sell captive insurance or section 79 plans. IRS audits those plans. Who should you believe as many people still promote these scams?
Google Lance Wallach and the man pushing the plan.
IRS tax relief firm, Lance Wallach, speaking: How to Avoid IRS Fines for You and Your Clients
IRS tax relief firm, Lance Wallach, speaking: How to Avoid IRS Fines for You and Your Clients | ...: How to Avoid IRS Fines for You and Your Clients | LifeHealthPro
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).
Similarities and Differences Between IRC Section 419A(f)(6) and IRC Section 419(e) Plans CPA’s Guide to Life Insurance
Author/Moderator: Lance Wallach, CLU, CHFC, CIMC
Below is an excerpt from one of Lance Wallach’s new books.
Similarities and Differences Between IRC Section 419A(f)(6) and IRC Section 419(e) Plans
One popular type of listed transaction is the so-called “welfare benefit plan,” which once relied on IRC §419A(f)(6) for its authority to claim tax deductions, but now more commonly relies on IRC §419(e). The IRC §419A(f)(6) plans used to claim that the section completely exempted business owners from all limitations on how much tax could be deducted. In other words, it was claimed, tax deductions were unlimited. These plans featured large amounts of life insurance and accompanying large commissions, and were thus aggressively pushed by insurance agents, financial planners, and sometimes even accountants and attorneys. Not to mention the insurance companies themselves, who put millions of dollars in premiums on the books and, when confronted with questions about the outlandish tax claims made in marketing these plans, claimed to be only selling product, not giving opinions on tax questions.
Re-entering The Tax System
Taxlanta.org July 2011
by Lance Wallach
by Lance Wallach
Taxpayers who have failed to file federal tax returns for three years or more and owe more than $75,000 in tax should find this section particularly interesting. (i.e., pure tax ― no interest, no penalties).
Rule No. 1:
Under no circumstances should you attempt to re-enter the tax system on your own. Tax evasion, failing to file a timely tax return, and perjury are very serious tax crimes, and one mistake can send you to federal prison for a very long time. Your voluntary admission of a tax crime is similar to Pandora’s box; once the lid has been opened there is nothing you can do to get it closed again. The biggest mistake that most people make is hiring advisors that do not specialize in failure-to-file cases and have little or no knowledge of the IRS/Criminal Investigation Division (IRS/CID) procedures and criminal-tax violations.
Rule No. 2
Under no circumstance should you assume that the IRS/CID and the U.S. Attorney’s Office (USAO) will grant you immunity from prosecution simply because you volunteered to come forward, bare your soul, and beg for forgiveness. The IRS terminated its guaranteed non-prosecution policy for voluntary disclosure of tax crimes in 1961. If you have not filed federal tax returns for three years or more and owe more than $75,000 in back taxes, then you will likely receive a visit from the IRS/CID six to eighteen months after you file your delinquent tax returns. The “reward” you get for filing true and correct delinquent tax returns is that you may be able to avoid additional perjury charges. But you will still have to pay a very large tax liability, which will include interest and a whopping 75% civil tax fraud penalty. Your full disclosure will be appreciated, and under current IRS guidelines you “may” avoid criminal prosecution only if you pay the entire amount due.
Call our office today for a free 3-5 minute consultation with Lance Wallach, the nation’s foremost tax expert, or visit www.experttaxadvisors.org.
Rule No. 3
You must hire the best tax advisors that money can buy. Preferably you will want someone with at least 23 years experience handling failure-to-file cases before the IRS, and preferably this same person will have experience as a former IRS Special Agent. That’s where we come in.
Last year I received over a thousand phone calls from business owners, accountants and other professionals who were in trouble with the IRS over a recent large fine. If you were in what the IRS considers an abusive, listed or similar to transaction, you face a hundred thousand dollar IRS fine under IRS code 6707A. The IRS is attacking thousands of people for either being in, selling, or advising about, various types of plans, which are primarily marketed by insurance professionals.
If you are or were in a 412i, 419, captive insurance, or section 79 plan, you should immediately file under 6707A protectively. If you have already filed you should find someone who knows what he is doing to review the forms. I only know of two people who know how to properly file. The IRS instructions are vague. If a taxpayer files wrong, or fills out the forms wrong he still gets the fine. I have had hundreds of phone calls from people in that situation.
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 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 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.
IRS: Disclose Offshore Accounts or Go to Jail
IRS: Disclose Offshore Accounts or Go to Jail
Brian
That's pretty much the headline from a CNBC article on Friday. And it's true.In 2009, 15,000 Americans came forward and admitted having foreign bank accounts. Unfortunately, Uncle Sam estimates there are some 500,000 more people hiding money offshore. Opening a bank account in another country isn't illegal. There are a whole host of reasons why people may wish to send money offshore. It only becomes illegal when you send money to a foreign country in the hopes of cheating Uncle Sam.
U.S. law makes it a felony if you fail to declare the income from foreign investments on your U.S. tax return and makes it illegal to not disclose the existence of the foreign account.
So what is a person to do? Taxpayers can do nothing and hope they don't lose the "audit lottery" (there are no winners with the IRS). Or taxpayers can come into compliance, report the account and pay the government ¼ of the highest dollar amount that was in the account. That's right, if you had an account with $200,000 in it, get out the checkbook and write a check to the IRS for $50,000.
Taxpayers wanting to take advantage of the current amnesty program (called the Offshore Voluntary Disclosure Initiative) must move quickly, however. Unlike the 2009 program, which simply said you had to apply be the deadline, the current amnesty requires that all missing forms ("FBAR's"), amended returns and payment must be made by the deadline. There is a great deal of paperwork involved with the new program, waiting until the last minute is a recipe for disaster.
Those that don't comply face prison and loss of 50% of their highest account value.
So what is the risk of getting caught? We think it is quite high.
Transparency within the international banking community is at an all time high. And the developed countries are exchanging information. That means if Germany obtains information about accounts in a Bermuda bank it will likely share that information with other countries.
The U.S. has been issuing "John Doe" subpoenas to foreign banks fishing for the names of American account holders. Countries like Germany have been bribing foreign bank officials to simply steal the information and turn it over.
Still not convinced? The IRS paid its first award under the new whistleblower program - $4.5 million to an accountant who reported his employer! If anyone, anywhere knows you have a foreign account; they may report you and keep a large percentage of what you pay.
The world suddenly got much smaller.
This is interesting article but I do not believe everything in it is correct. I have received numerous phone calls from participants in these plans and the IRS is auditing. For the most accurate information contact: Lance Wallach at lancewallach.com or call 516-935-7346
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