Commentary on the Economy:
As the economy continues to worsen, people resume losing their savings and their houses, and most are burying their heads in the sand...
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 2009, 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. 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.
Showing posts with label tax. Show all posts
Showing posts with label tax. Show all posts
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.
Insurance swap-outs trade old policies for new ones
ACCOUNTING TODAY: Oct. 16. - Nov. 5, 2006
Do you have any clients who complain that their life insurance was supposed to be paid up by now, but it isn’t? Notices from their insurance companies may even indicate that their suggested premium payment has increased, or that their policies are about to lapse.
Do you have clients whose “investment type” life insurance policy is not performing as projected? Ever have clients cancel their life insurance and get a taxable statement of gain? This can even happen if their policy lapses and they get nothing back (they had a paper gain). This is becoming more common.
There are many reasons why it may be advantageous for the owner of a cash value life insurance policy to swap out the policy for a new one. These reasons include reducing premium payments substantially, the insured’s improved health, a change in the rating of the insurance company, competitive terms of a new policy, increasing the death benefit while making the same payment, increase of the
endowment age for the insured, change in the insured’s financial situation, and many more.
Instead of cashing in a value life insurance policy and purchasing a new one, a policy-owner should use the process of the insurance swapoutsm on the policies. By doing so, a policyowner can roll the exiting cash value insurance policy into a new one without paying taxes on the growth in the old policy’s cash value. In contrast, if the policyowner were to cancel the policy, she would be subject to paying income tax on the cash value in excess of premiums paid into the policy.
An insurance swapoutsm also allows the policyowner to carry over the original basis, which is used to calculate income taxes due upon receiving distributions from the policy’s cash value. Maintaining the original basis can be especially beneficial in the initial contract years of the policy, when the premiums paid may exceed the policy’s cash value.
As an example, a life insurance policy on which the owner has paid $30,000 in premiums has a cash value of $20,000. If the owner were to surrender the policy and buy a new one with the proceeds, the basis in the new policy would be $20,000. With an insurance swapoutsm, however, the basis would remain at $30,000.
Because people are living longer, and due to the insurance marketplace having become more efficient and competitive, the cost of death protection on new policies is usually lower than on older policies. Clients with old policies that don’t reflect updated mortality experience may benefit by swapping them for policies with lower premiums or higher death benefits. One problem with older policies is that they were illustrated at high interest rates that probably would not last indefinitely. These policies might have illustrated being paid up in, say, 11 years, and when interest rates dropped, premiums had to be paid for, in some cases, twice as long.
An insurance swapoutsm is the most efficient way to accomplish various fundamental insurance planning goals. Don’t attempt this on your own, and be wary of your local insurance agent who may say he can help. The result may be a large tax bill. Under Internal Revenue Code Section 1035, insurance can be exchanged for insurance or annuities.
However, because such exchanges are complicated, there are many mistakes that can be made. Any mistake may make the exchange useless or, worse, taxable (in a gain situation). There is also a liability issue. Section 1035 does not require state insurance department replacement forms to be filed. But the filing and analysis of state insurance department replacement forms are part of the insurance swapoutsm procedure. So is the analysis of new acquisition costs, cancellation penalties, new contestability periods, etc. … The swapout should only be recommended if the advantages outweigh the disadvantages.
Lance Wallach, CLU, ChFC, CIMC, speaks and writes about financial planning, retirement plans, and tax reduction strategies. National Society of Accountants Speaker of the Year. For more information and additional articles on these subjects, call 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.
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The Insurance Swapoutsm was created by Gary B. Garland, Esq. and the trademark is owned by Gary B. Garland, Esq. All rights reserved.
Do you have any clients who complain that their life insurance was supposed to be paid up by now, but it isn’t? Notices from their insurance companies may even indicate that their suggested premium payment has increased, or that their policies are about to lapse.
Do you have clients whose “investment type” life insurance policy is not performing as projected? Ever have clients cancel their life insurance and get a taxable statement of gain? This can even happen if their policy lapses and they get nothing back (they had a paper gain). This is becoming more common.
There are many reasons why it may be advantageous for the owner of a cash value life insurance policy to swap out the policy for a new one. These reasons include reducing premium payments substantially, the insured’s improved health, a change in the rating of the insurance company, competitive terms of a new policy, increasing the death benefit while making the same payment, increase of the
endowment age for the insured, change in the insured’s financial situation, and many more.
Instead of cashing in a value life insurance policy and purchasing a new one, a policy-owner should use the process of the insurance swapoutsm on the policies. By doing so, a policyowner can roll the exiting cash value insurance policy into a new one without paying taxes on the growth in the old policy’s cash value. In contrast, if the policyowner were to cancel the policy, she would be subject to paying income tax on the cash value in excess of premiums paid into the policy.
An insurance swapoutsm also allows the policyowner to carry over the original basis, which is used to calculate income taxes due upon receiving distributions from the policy’s cash value. Maintaining the original basis can be especially beneficial in the initial contract years of the policy, when the premiums paid may exceed the policy’s cash value.
As an example, a life insurance policy on which the owner has paid $30,000 in premiums has a cash value of $20,000. If the owner were to surrender the policy and buy a new one with the proceeds, the basis in the new policy would be $20,000. With an insurance swapoutsm, however, the basis would remain at $30,000.
Because people are living longer, and due to the insurance marketplace having become more efficient and competitive, the cost of death protection on new policies is usually lower than on older policies. Clients with old policies that don’t reflect updated mortality experience may benefit by swapping them for policies with lower premiums or higher death benefits. One problem with older policies is that they were illustrated at high interest rates that probably would not last indefinitely. These policies might have illustrated being paid up in, say, 11 years, and when interest rates dropped, premiums had to be paid for, in some cases, twice as long.
An insurance swapoutsm is the most efficient way to accomplish various fundamental insurance planning goals. Don’t attempt this on your own, and be wary of your local insurance agent who may say he can help. The result may be a large tax bill. Under Internal Revenue Code Section 1035, insurance can be exchanged for insurance or annuities.
However, because such exchanges are complicated, there are many mistakes that can be made. Any mistake may make the exchange useless or, worse, taxable (in a gain situation). There is also a liability issue. Section 1035 does not require state insurance department replacement forms to be filed. But the filing and analysis of state insurance department replacement forms are part of the insurance swapoutsm procedure. So is the analysis of new acquisition costs, cancellation penalties, new contestability periods, etc. … The swapout should only be recommended if the advantages outweigh the disadvantages.
Lance Wallach, CLU, ChFC, CIMC, speaks and writes about financial planning, retirement plans, and tax reduction strategies. National Society of Accountants Speaker of the Year. For more information and additional articles on these subjects, call 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.
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The Insurance Swapoutsm was created by Gary B. Garland, Esq. and the trademark is owned by Gary B. Garland, Esq. All rights reserved.
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.
Captive Insurance and Other Tax Reduction Strategies – The Good, Bad, and Ugly
From: NSA - National Society of Accountants- May 14, 2008
Every accountant knows that increased cash flow and cost savings are critical for businesses in 2008. What is uncertain is the best path to recommend to garner these benefits.
Over the past decade business owners have been overwhelmed by a plethora of choices designed to reduce the cost of providing employee benefits while increasing their own retirement savings. The solutions ranged from traditional pension and profit sharing plans to more advanced strategies.
Some strategies, such as IRS section 419 and 412(i) plans, used life insurance as vehicles to bring about benefits. Unfortunately, the high life insurance commissions (often 90% of the contribution, or more) fostered an environment that led to aggressive and noncompliant plans.
The result has been thousands of audits and an IRS task force seeking out tax shelter promotion. For unknowing clients, the tax consequences are enormous. For their accountant advisors, the liability may be equally extreme.
Recently, there has been an explosion in the marketing of a financial product called Captive Insurance. These so called “Captives” are typically small insurance companies designed to insure the risks of an individual business under IRS code section 831(b). When properly designed, a business can make tax-deductible premium payments to a related-party insurance company. Depending on circumstances, underwriting profits, if any, can be paid out to the owners as dividends, and profits from liquidation of the company may be taxed as capital gains.
While captives can be a great cost saving tool, they also are expensive to build and manage. Also, captives are allowed to garner tax benefits because they operate as real insurance companies. Advisors and business owners who misuse captives or market them as estate planning tools, asset protection vehicles, tax deferral or other benefits not related to the true business purpose of an insurance company face grave regulatory and tax consequences.
A recent concern is the integration of small captives with life insurance policies. Small captives under section 831(b) have no statutory authority to deduct life premiums. Also, if a small captive uses life insurance as an investment, the cash value of the life policy can be taxable at corporate rates, and then will be taxable again when distributed. The consequence of this double taxation is to devastate the efficacy of the life insurance, and it extends serious liability to any accountant who recommends the plan or even signs the tax return of the business that pays premiums to the captive.
The IRS is aware that several large insurance companies are promoting their life insurance policies as investments with small captives. The outcome looks eerily like that of the 419 and 412(i) plans mentioned above.
Remember, if something looks too good to be true, it usually is. There are safe and conservative ways to use captive insurance structures to lower costs and obtain benefits for businesses. And, some types of captive insurance products do have statutory protection for deducting life insurance premiums (although not 831(b) captives). Learning what works and is safe is the first step an accountant should take in helping his or her clients use these powerful, but highly technical insurance tools.
Lance Wallach speaks and writes extensively about VEBAs, retirement plans, and tax reduction strategies. He speaks at more than 70 conventions annually, writes for 50 publications, and was the National Society of Accountants Speaker of the Year. 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.
NSA - National Society of Accountants- May 14, 2008
Every accountant knows that increased cash flow and cost savings are critical for businesses in 2008. What is uncertain is the best path to recommend to garner these benefits.
Over the past decade business owners have been overwhelmed by a plethora of choices designed to reduce the cost of providing employee benefits while increasing their own retirement savings. The solutions ranged from traditional pension and profit sharing plans to more advanced strategies.
Some strategies, such as IRS section 419 and 412(i) plans, used life insurance as vehicles to bring about benefits. Unfortunately, the high life insurance commissions (often 90% of the contribution, or more) fostered an environment that led to aggressive and noncompliant plans.
The result has been thousands of audits and an IRS task force seeking out tax shelter promotion. For unknowing clients, the tax consequences are enormous. For their accountant advisors, the liability may be equally extreme.
Recently, there has been an explosion in the marketing of a financial product called Captive Insurance. These so called “Captives” are typically small insurance companies designed to insure the risks of an individual business under IRS code section 831(b). When properly designed, a business can make tax-deductible premium payments to a related-party insurance company. Depending on circumstances, underwriting profits, if any, can be paid out to the owners as dividends, and profits from liquidation of the company may be taxed as capital gains.
While captives can be a great cost saving tool, they also are expensive to build and manage. Also, captives are allowed to garner tax benefits because they operate as real insurance companies. Advisors and business owners who misuse captives or market them as estate planning tools, asset protection vehicles, tax deferral or other benefits not related to the true business purpose of an insurance company face grave regulatory and tax consequences.
A recent concern is the integration of small captives with life insurance policies. Small captives under section 831(b) have no statutory authority to deduct life premiums. Also, if a small captive uses life insurance as an investment, the cash value of the life policy can be taxable at corporate rates, and then will be taxable again when distributed. The consequence of this double taxation is to devastate the efficacy of the life insurance, and it extends serious liability to any accountant who recommends the plan or even signs the tax return of the business that pays premiums to the captive.
The IRS is aware that several large insurance companies are promoting their life insurance policies as investments with small captives. The outcome looks eerily like that of the 419 and 412(i) plans mentioned above.
Remember, if something looks too good to be true, it usually is. There are safe and conservative ways to use captive insurance structures to lower costs and obtain benefits for businesses. And, some types of captive insurance products do have statutory protection for deducting life insurance premiums (although not 831(b) captives). Learning what works and is safe is the first step an accountant should take in helping his or her clients use these powerful, but highly technical insurance tools.
Lance Wallach speaks and writes extensively about VEBAs, retirement plans, and tax reduction strategies. He speaks at more than 70 conventions annually, writes for 50 publications, and was the National Society of Accountants Speaker of the Year. 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.
NSA - National Society of Accountants- May 14, 2008
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.
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