Internal Revenue Code 6707A and Section 79: Breaking Down the Problem

  Lance Wallach Council Member President, VEBA Plan

Lance Wallach Council Member President, VEBA Plan

 

22%Risk Management22%Taxation22%Insurance34%Other

April 06, 

Premise
by Lance WallachThe IRS is fussy about its forms, and people involved in 419 and 412i plans discovered that the hard way. Now the IRS is starting to target Section 79 plans, and business owners are running into the same 6707A issues that the 412i and 419 plan participants had.  Knowing this history could help someone considering a Section 79 plan avoid those very major headaches.

Discussion

Insurance companies, agents, financial planners, and others have pushed abusive 419 and 412i plans for years. They claimed business owners could obtain large tax deductions. Insurance companies, agents and others earned very large life insurance commissions in the process. Eventually, the IRS cracked down on the unsuspecting business owners. Not only did they lose the tax deductions, but they were also fined and charged penalties and interest.

After the business owner was assessed the fines and lost his tax deduction, the IRS then came back and fined him a huge amount of money for not telling on himself under Internal Revenue Code 6707A. You see, if you participate in a listed or reportable transaction, you must alert the IRS or face a large fine. In essence, you must alert the IRS if you were in a transaction that has the possibility of tax avoidance or evasion. Not only must you file Form 8886 telling on yourself, but the form needs to be filed properly, and done every year that you are in the plan, even if you are no longer making contributions.

I have received hundreds of phone calls from business owners who improperly filed Form 8886, usually with the help of their accountants or the plan promoter. They got the fine for either improperly filing, or for making mistakes on the form. I only know of two people in the entire country who have consistently prepared these forms properly.

In addition, many states also require forms to be filed. For example, if you work in New York State and manage to properly fill out the Federal form, but don’t file the State form, you may still get fined.

Lately, insurance companies, agents, accountants, and others have been selling captive insurance and Section 79 scams. The motivations are exactly the same. They push large tax deductions for business owners. There are also huge commissions for salespeople.

If you do not properly file Form 8886, there is no Statute of Limitations. That means the IRS can come back and fine you many years later.

Anyone that wants to risk an IRS audit by utilizing a captive insurance or Section 79 scam should, at the very least, engage a competent professional to file 8886 forms.

Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, abusive tax shelters, financial, international tax, and estate planning.  He writes about 412(i), 419, Section79, FBAR, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public Radio’s All Things Considered, and others. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education’s CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation, as well as the AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. 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.

Internal Revenue Code 6707A and Section 79: Breaking Down the Problem

  Lance Wallach Council Member President, VEBA Plan

April 06, 

Premise
by Lance WallachThe IRS is fussy about its forms, and people involved in 419 and 412i plans discovered that the hard way. Now the IRS is starting to target Section 79 plans, and business owners are running into the same 6707A issues that the 412i and 419 plan participants had.  Knowing this history could help someone considering a Section 79 plan avoid those very major headaches.

Discussion

Insurance companies, agents, financial planners, and others have pushed abusive 419 and 412i plans for years. They claimed business owners could obtain large tax deductions. Insurance companies, agents and others earned very large life insurance commissions in the process. Eventually, the IRS cracked down on the unsuspecting business owners. Not only did they lose the tax deductions, but they were also fined and charged penalties and interest.

After the business owner was assessed the fines and lost his tax deduction, the IRS then came back and fined him a huge amount of money for not telling on himself under Internal Revenue Code 6707A. You see, if you participate in a listed or reportable transaction, you must alert the IRS or face a large fine. In essence, you must alert the IRS if you were in a transaction that has the possibility of tax avoidance or evasion. Not only must you file Form 8886 telling on yourself, but the form needs to be filed properly, and done every year that you are in the plan, even if you are no longer making contributions.

I have received hundreds of phone calls from business owners who improperly filed Form 8886, usually with the help of their accountants or the plan promoter. They got the fine for either improperly filing, or for making mistakes on the form. I only know of two people in the entire country who have consistently prepared these forms properly.

In addition, many states also require forms to be filed. For example, if you work in New York State and manage to properly fill out the Federal form, but don’t file the State form, you may still get fined.

Lately, insurance companies, agents, accountants, and others have been selling captive insurance and Section 79 scams. The motivations are exactly the same. They push large tax deductions for business owners. There are also huge commissions for salespeople.

If you do not properly file Form 8886, there is no Statute of Limitations. That means the IRS can come back and fine you many years later.

Anyone that wants to risk an IRS audit by utilizing a captive insurance or Section 79 scam should, at the very least, engage a competent professional to file 8886 forms.

Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, abusive tax shelters, financial, international tax, and estate planning.  He writes about 412(i), 419, Section79, FBAR, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public Radio’s All Things Considered, and others. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education’s CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation, as well as the AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. 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.

What is a Section 79 Plan?

INTRODUCTION

What is a Section 79 Plan?

A Section 79 Plan is offered under Section 79 of the Internal Revenue Code. A group-term life insurance plan which otherwise qualifies under Section 79 of the Internal Revenue Code may provide term life insurance and Permanent Benefits. Premiums paid by an employer for life insurance on behalf of an employee are deductible by the employer (provided the employer is not directly or indirectly a beneficiary of the policy), and such amounts generally constitute additional compensation to the employee which must be reported.

Under Code Section 79, a corporation can provide up to $50,000 of group-term life insurance for an employee on a tax deductible basis with no increase in the employee’s gross income. Any amount of group-term life insurance in excess of $50,000 is taxable to the employee and must be reported by the employer on the employee’s W-2 as “other compensation” as described under Code Section 6052. Any life insurance, which has a cash value, will also result in additional taxable income and must be reportedby the employer on the employee’s W-2.

Coverage must be provided under a formula based on factors such as age, years of service, compensation, or position. The amount of insurance provided an employee under such a schedule must, however, be computed under a formula which precludes individual selection.

Important: *Owner Participation

In accordance with the Internal Revenue Code, Section 79 Plan states that only “employees” may participate. The term “employees” does not include self-employed individuals or 2% shareholders of an S Corporation, LLC taxed as a Partnership or a Partnership. The Internal Revenue Service rules governing owner participation in your Section 79 Plan are as follows:

Type of Business Participation Rules

C Corporation/LLC taxed as a C Corporation: Owners, who are employees, who meet the eligibility requirements of the Plan may participate

S Corporation/Partnerships/LLP: Any employee who owns more than 2% of the stock or possesses more than 2% of the total combined voting power of all the stock cannot participate.**

Sole Proprietor: A sole proprietor cannot participate.

** Remember that, for purposes of determining ownership, the stock ownership/attribution rules provide that an individual is considered as owning the stock owned, directly or indirectly, by his or her spouse (other than a spouse who is legally separated from the individual under decree of divorce or separate maintenance), children, grandchildren, and parents.

DISCRIMINATION

Corporations with 10 or more employees

? Must cover at least 10 employees

? Group must be comprised of 85% non-key employees or cover 70% of all full time

employees

? Death benefit must be based on a formula that precludes individual selection and on

something related to employment (years of service, income, job description, location,

etc.)

? The penalty for being a discriminatory plan is the loss of the exclusion from income of

the cost for the first $50,000 of term insurance for key employees

Corporations with fewer than 10 employees

? Coverage must be offered to all full time employees with 6 months or more of service

? Coverage must be provided as a multiple of income or a flat death benefit amount, or

coverage brackets in which there is no more than 2 ½ times between coverage brackets

and 10x between top to bottom

? Underwriting must be based on a non-medical questionnaire only

A note about Controlled Groups and Affiliated Service Groups

Two or more employers must be included under one Section 79 Plan if they are members of a

“controlled group” or an “affiliated service group,” as defined in the Internal Revenue Code and

related regulations. A simplified description of a controlled group of corporations is as follows:

A “parent-subsidiary” controlled group exists where there are one or more chains of subsidiary

corporations connected through ownership with a common parent and (a) 80% or more (by value

or voting power) of each corporation is owned (both directly and through option rights) by one or

more of the other corporations; and (b) the common parent owns (both directly and through

option rights) at least 80% (by value or voting power) of at least one of the other corporations. A

“brother-sister” controlled group exists where five or fewer persons own stock possessing; (a)

80% or more (by value or voting power) of each corporation; and (b) more than 50% (by value

or voting power) of each corporation when taking into account each stockholder’s interest only

to the extent that he has identical interests in each corporation. (A stockholder’s interest is only

considered for purposes of the 80% test if he owns at least some interest in each corporation in

the group.) Controlled groups and affiliated service groups can also exist among other types of

businesses, such as partnerships and sole proprietorships, in which case the determination is

made on the basis of other types of ownership interests