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NCCPAP November 2010 Newsletter 2010
Business Owners in 419, 412i, Section 79 and Captive Insurance Plans Will Probably Be Fined
by the IRS Under Section 6707A
Lance Wallach
Taxpayers who previously adopted 419, 412i, captive insurance or Section 79 plans are in big trouble. In recent years, the IRS has
identified many of these arrangements as abusive devices to funnel tax deductible dollars to shareholders and classified these
arrangements as “listed transactions.” These plans were sold by insurance agents, financial planners, accountants and attorneys
seeking large life insurance commissions. In general, taxpayers who engage in a “listed transaction” must report such transaction
to the IRS on Form 8886 every year that they “participate” in the transaction, and the taxpayer does not necessarily have to make a
contribution or claim a tax deduction to be deemed to participate. Section 6707A of the Code imposes severe penalties ($200,000
for a business and $100,000 for an individual) for failure to file Form 8886 with respect to a listed transaction. But a taxpayer can
also be in trouble if they file incorrectly. I have received numerous phone calls from business owners who filed and still got fined.
Not only does
the taxpayer have to file Form 8886, but it has to be prepared correctly. I only know of two people in the United States who have filed
these forms properly for clients. They told me that the form was prepared after hundreds of hours of research and over fifty phones
calls to various IRS personnel. The filing instructions for Form 8886 presume a timely filing. Most people file late and follow the
directions for currently preparing the forms. Then the IRS fines the business owner. The tax court does not have
jurisdiction to abate or lower such penalties imposed by the IRS.
Many business owners adopted 412i, 419, captive insurance and Section 79 plans based upon representations provided by
insurance professionals that the plans were legitimate plans and
they were not informed that they were engaging in a listed transaction. Upon audit, these taxpayers were shocked when the IRS
asserted penalties under Section 6707A of the Code in the hundreds
of thousands of dollars. Numerous complaints from these taxpayers caused Congress to impose a moratorium on assessment of
Section 6707A penalties.
The moratorium on IRS fines expired on June 1, 2010. The IRS immediately started sending out notices proposing the imposition of
Section 6707A penalties along with requests for lengthy extensions of the Statute of Limitations for the purpose of assessing tax.
Many of these taxpayers stopped taking deductions for contributions to these plans years ago, and are confused and upset by the
IRS’s inquiry, especially when the taxpayer had previously reached a monetary settlement with the IRS regarding the deductions
taken in prior years. Logic and common sense dictate that a penalty should not apply if the taxpayer no longer benefits from the
arrangement.
Treas. Reg. Sec. 1.6011-4(c)(3)(i) provides that a taxpayer has participated in a listed transaction if the taxpayer’s tax return reflects
tax consequences or a tax strategy described in the published guidance identifying the transaction as a listed transaction or a
transaction that is the same or substantially
similar to a listed transaction. Clearly, the primary benefit in the participation of these plans is the large tax deduction generated by
such participation. It follows that taxpayers who no longer enjoy the benefit of those large deductions are no longer “participating” in
the listed transaction.
But that is not the end of the story. Many taxpayers who are no longer taking current tax deductions for these plans continue to enjoy
the benefit of previous tax deductions by continuing the deferral of income from contributions and deductions taken in prior years.
While the regulations do not expand on what constitutes “reflecting the tax consequences of the strategy,” it could be argued that
continued benefit from a tax deferral for a previous tax deduction is within the contemplation of a “tax consequence” of the plan
strategy. Also, many taxpayers who no longer make contributions or claim tax deductions continue to pay administrative fees.
Sometimes, money is taken from the plan to pay premiums to keep life insurance policies in force. In these ways, it could be argued
that these taxpayers are still “contributing,” and thus still must file Form 8886.
It is clear that the extent to which a taxpayer benefits from the transaction depends on the purpose of a particular transaction as
described in the published guidance that caused such transaction to be a listed transaction. Revenue Ruling 2004-20, which
classifies 419(e) transactions, appears to be concerned with the employer’s contribution/deduction amount rather than the
continued deferral of the income in previous years. This language may provide the taxpayer with a solid argument in the event of an
audit.
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; speaks at more than ten conventions annually; writes for over fifty publications; is quoted regularly in the
press; and has been featured on TV and radio financial talk shows. Lance has written numerous books including Protecting Clients
from Fraud, Incompetence and Scams (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 www.lancewallack.com,
www.taxadvisorexperts.org or www.taxaudit419.com,
Lance Wallach
68 Keswick Lane
Plainview, NY 11803
Ph.: (516)938-5007
Fax: (516)938-6330 www.vebaplan.com,
National Society of Accountants Speaker of The Year
The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other
entity. You should contact an appropriate professional for any such advice.
Business Owners in 419, 412i, Section 79 and Captive Insurance Plans Will Probably Be Fined
by the IRS Under Section 6707A
Lance Wallach
Taxpayers who previously adopted 419, 412i, captive insurance or Section 79 plans are in big trouble. In recent years, the IRS has
identified many of these arrangements as abusive devices to funnel tax deductible dollars to shareholders and classified these
arrangements as “listed transactions.” These plans were sold by insurance agents, financial planners, accountants and attorneys
seeking large life insurance commissions. In general, taxpayers who engage in a “listed transaction” must report such transaction
to the IRS on Form 8886 every year that they “participate” in the transaction, and the taxpayer does not necessarily have to make a
contribution or claim a tax deduction to be deemed to participate. Section 6707A of the Code imposes severe penalties ($200,000
for a business and $100,000 for an individual) for failure to file Form 8886 with respect to a listed transaction. But a taxpayer can
also be in trouble if they file incorrectly. I have received numerous phone calls from business owners who filed and still got fined.
Not only does
the taxpayer have to file Form 8886, but it has to be prepared correctly. I only know of two people in the United States who have filed
these forms properly for clients. They told me that the form was prepared after hundreds of hours of research and over fifty phones
calls to various IRS personnel. The filing instructions for Form 8886 presume a timely filing. Most people file late and follow the
directions for currently preparing the forms. Then the IRS fines the business owner. The tax court does not have
jurisdiction to abate or lower such penalties imposed by the IRS.
Many business owners adopted 412i, 419, captive insurance and Section 79 plans based upon representations provided by
insurance professionals that the plans were legitimate plans and
they were not informed that they were engaging in a listed transaction. Upon audit, these taxpayers were shocked when the IRS
asserted penalties under Section 6707A of the Code in the hundreds
of thousands of dollars. Numerous complaints from these taxpayers caused Congress to impose a moratorium on assessment of
Section 6707A penalties.
The moratorium on IRS fines expired on June 1, 2010. The IRS immediately started sending out notices proposing the imposition of
Section 6707A penalties along with requests for lengthy extensions of the Statute of Limitations for the purpose of assessing tax.
Many of these taxpayers stopped taking deductions for contributions to these plans years ago, and are confused and upset by the
IRS’s inquiry, especially when the taxpayer had previously reached a monetary settlement with the IRS regarding the deductions
taken in prior years. Logic and common sense dictate that a penalty should not apply if the taxpayer no longer benefits from the
arrangement.
Treas. Reg. Sec. 1.6011-4(c)(3)(i) provides that a taxpayer has participated in a listed transaction if the taxpayer’s tax return reflects
tax consequences or a tax strategy described in the published guidance identifying the transaction as a listed transaction or a
transaction that is the same or substantially
similar to a listed transaction. Clearly, the primary benefit in the participation of these plans is the large tax deduction generated by
such participation. It follows that taxpayers who no longer enjoy the benefit of those large deductions are no longer “participating” in
the listed transaction.
But that is not the end of the story. Many taxpayers who are no longer taking current tax deductions for these plans continue to enjoy
the benefit of previous tax deductions by continuing the deferral of income from contributions and deductions taken in prior years.
While the regulations do not expand on what constitutes “reflecting the tax consequences of the strategy,” it could be argued that
continued benefit from a tax deferral for a previous tax deduction is within the contemplation of a “tax consequence” of the plan
strategy. Also, many taxpayers who no longer make contributions or claim tax deductions continue to pay administrative fees.
Sometimes, money is taken from the plan to pay premiums to keep life insurance policies in force. In these ways, it could be argued
that these taxpayers are still “contributing,” and thus still must file Form 8886.
It is clear that the extent to which a taxpayer benefits from the transaction depends on the purpose of a particular transaction as
described in the published guidance that caused such transaction to be a listed transaction. Revenue Ruling 2004-20, which
classifies 419(e) transactions, appears to be concerned with the employer’s contribution/deduction amount rather than the
continued deferral of the income in previous years. This language may provide the taxpayer with a solid argument in the event of an
audit.
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; speaks at more than ten conventions annually; writes for over fifty publications; is quoted regularly in the
press; and has been featured on TV and radio financial talk shows. Lance has written numerous books including Protecting Clients
from Fraud, Incompetence and Scams (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 www.lancewallack.com,
www.taxadvisorexperts.org or www.taxaudit419.com,
Lance Wallach
68 Keswick Lane
Plainview, NY 11803
Ph.: (516)938-5007
Fax: (516)938-6330 www.vebaplan.com,
National Society of Accountants Speaker of The Year
The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other
entity. You should contact an appropriate professional for any such advice.