Showing posts with label IRS. Show all posts

Friday, April 26, 2024

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.

Tuesday, May 30, 2017

IRS Dog Attacks Evil Agent

Lance Wallach, the nation's leading tax resolution expert and his team of CPAs,
former IRS Agents, Tax Attorneys, and Tax Audit Professionals will fight the
IRS and insurance companies who sold you abusive tax shelters!

Call (516) 938-5007 or email wallachinc@gmail.com
also visit www.taxaudit419.com & www.LanceWallach.com

Section 79 Plans

Most people have never heard of what we call in the industry a Section 79 Plan.

Why? Because it’s a marginally affective wealth building tool pitched by insurance agents who really do not understand the math behind the plan.

If you already have the opinion that we do not like Section 79 Plans, you are correct.

If that’s the case, then why are we discussing it on our web-site?

The answer is simple, the benefits of Section 79 plans are massively oversold by advisors who pitch them and we wanted you to know that we believe the plans are not worth implementing from a pure financial point of view. In other words, this section of our web-site was put together to warn you to stay away from advisors pitching this plan.

Why is it such a bad plan? It’s all about the math. We can show you how to build more wealth without implementing a Section 79 Plan.

For More Information Google Lance Wallach.

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.

We Can Help You Avoid the IRS 6707A Penalty

Many business owners, accountants and insurance advisors are getting the 6707A letter from the IRS notifying them that they will be assessed huge penalties for participating in an abusive tax shelter. Many of these people had no idea that they were doing anything wrong. Could you be next? There is help available if you have been caught in the crossfire of these recent IRS crackdowns. Call the IRS Dog today! 516.938.5007

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.taxaudit419.com and www.taxlibrary.us

IRS tax relief firm, Lance Wallach, speaking at attorney CPA's convention on abusive tax shelters, benefit retirement plans

IRS Penalties, Audits, Benefit Plans 419e 412i

IRS tax relief firm, Lance Wallach, speaking at attorney CPA's convention on abusive tax shelters, benefit retirement plans, 419e 412i plans, material advisor penalties, IRS audits, and expert witness tax court cases.

Call for Tax Resolution, IRS Audit Defense, Expert Witness Lance Wallach

Accountants Get Fined By IRS And Sued By Their Clients - Finance - Taxes

You CAN Avoid Section 79 IRS Fines....

Section 79 Plan-What Is It & How Do You Avoid Being Fined by IRS?

Raymond Ankner -Expected to be the biggest life insurance failure in Illinois : Captive Insurance & 419 Plans Litigation: September 2013

419 Plans Attacked by IRS

By Lance Wallach, CLU, CHFC Abusive Tax Shelter, Listed Transaction, Reportable Transaction Expert Witness

Insurance agents and costs attacked. - Enrolled Agents Journal MarchApril - For years promoters of life insurance companies and agents have tried to find ways of claiming that the premiums paid by business owners were tax deductible. This allowed them to sell policies at a “discount”.

The problem became especially bad a few years ago with all of the outlandish claims about how §§419A(f)(5) and 419A(f)(6) exempted employers from any tax deduction limits. Many other inaccurate statements were made as well, until the IRS finally put a stop to such assertions by issuing regulations and naming such plans as “potentially abusive tax shelters” (or “listed transactions”) that needed to be disclosed and registered. This appeared to put an end to the scourge of such scurrilous promoters, as such plans began to disappear from the landscape.

And what happened to all the providers that were peddling §§419A(f)(5) and (6) life insurance plans a couple of years ago? We recently found the answer: most of them found a new life as promoters of so-called “419(e)” welfare benefit plans.

We recently reviewed several §419(e) plans, and it appears that many of them are nothing more than recycled §419A(f)(5) and §419A(f)(6) plans.

The “Tax Guide” written by one vendor’s attorney is illustrative: he confuses the difference between a “multi-employer trust” (a Taft-Hartley, collectively-bargained plan), a “multiple-employer trust” (a plan with more than one unrelated employer) and a “10-or-more employer trust” (a plan seeking to comply with IRC §419A(f)(6)).

Background: Section 419 of the Internal Revenue Code

Section 419 was added to the Internal Revenue Code (“IRC”) in 1984 to curb abuses in welfare benefit plan tax deductions. §419(a) does not authorize tax deductions, but provides as follows: “Contributions paid or accrued by an employer to a welfare benefit fund * * shall not be deductible under this chapter * * .”. It simply limits the amount that would be deductible under another IRC section to the “qualified cost for the taxable year”. (§419(b))

Section 419(e) of the IRC defines a “welfare benefit fund” as “any fund-- (A) which is part of a plan of an employer, and (B) through which the employer provides welfare benefits to employees or their beneficiaries.” It also defines the term "fund", but excludes from that definition “amounts held by an insurance company pursuant to an insurance contract” under conditions described.

None of the vendors provides an analysis under §419(e) as to whether or not the life insurance policies they promote are to be included or excluded from the definition of a “fund”. In fact, such policies will be included and therefore subject to the limitations of §§419 and 419A.

Errors Commonly Made

Materials from the various plans commonly make several mistakes in their analyses:

1. They claim not to be required to comply with IRC §505 non-discrimination requirements. While it is true that §505 specifically lists “organizations described in paragraph (9) or (20) of section 501(c)”, IRC §4976 imposes a 100% excise tax on any “post-retirement medical benefit or life insurance benefit provided with respect to a key employee” * * “unless the plan meets the requirements of section 505(b) with respect to such benefit (whether or not such requirements apply to such plan).” (Italics added) Failure to comply with §505(b) means that the plan will never be able to distribute an insurance policy to a key employee without the 100% penalty!

2. Vendors commonly assert that contributions to their plan are tax deductible because they fall within the limitations imposed under IRC §419; however, §419 is simply a limitation on tax deductions. Providers must cite the section of the IRC under which contributions to their plan would be tax-deductible. Many fail to do so. Others claim that the deductions are ordinary and necessary business expense under §162, citing Regs. §1.162-10 in error: there is no mention in that section of life insurance or a death benefit as a welfare benefit.

3. The reason that promoters fail to cite a section of the IRC to support a tax deduction is because, once such section is cited, it becomes apparent that their method of covering only selected key and highly-compensated employees for participation in the plan fails to comply with IRC §414(t) requirements relative to coverage of controlled groups and affiliated service groups.

4. Life insurance premiums could be treated as W-2 wages and deducted under §162 to the extent they were reasonable. Other than that, however, no section of the Internal Revenue Code authorizes tax deductions for a discriminatory life insurance arrangement. IRC §264(a) provides that “[n]o deduction shall be allowed for * * * [p]remiums on any life insurance policy * * * if the taxpayer is directly or indirectly a beneficiary under the policy.” As was made clear in the Neonatology case (Neonatology Associates v. Commissioner, 115 TC 5, 2000), the appropriate treatment of employer-paid life insurance premiums under a putative welfare benefit plan is under §79, which comes with its own nondiscrimination requirements.

5. Some plans claim to impute income for current protection under the PS 58 rules. However, PS58 treatment is available only to qualified retirement plans and split-dollar plans. (Note: none of the 419(e) plans claim to comply with the split-dollar regulations.) Income is imputed under Table I to participants under Group-Term Life Insurance plans that comply with §79. This issue is addressed in footnotes 17 and 18 of the Neonatology case.

6. Several of the plans claim to be exempt from ERISA. They appear to rely upon the ERISA Top-Hat exemption (applicable to deferred compensation plans). However, that only exempts a plan from certain ERISA requirements, not ERISA itself. It is instructive that none of the plans claiming exemption from ERISA has filed the Top-Hat notification with the Dept. of Labor.

7. Some of the plans offer severance benefits as a “welfare benefit”, which approach has never been approved by the IRS. Other plans offer strategies for obtaining a cash benefit by terminating a single-employer trust. The distribution of a cash benefit is a form of deferred compensation, yet none of the plans offering such benefit complies with the IRC §409A requirements applicable to such benefits.

8. Some vendors permit participation by employees who are self-employed, such as sole proprietors, partners or members of an LLC or LLP taxed as a partnership. This issue was also addressed in the Neonatology case where contributions on behalf of such persons were deemed to be dividends or personal payments rather than welfare benefit plan expenses.

[Note: bona fide employees of an LLC or LLP that has elected to be taxed as a corporation may participate in a plan.]

9. Most of the plans fail under §419 itself. §419(c) limits the current tax deduction to the “qualified cost”, which includes the “qualified direct cost” and additions to a “qualified asset account” (subject to the limits of §419A(b)). Under Regs. §1.419-1T, A-6, “the "qualified direct cost" of a welfare benefit fund for any taxable year * * * is the aggregate amount which would have been allowable as a deduction to the employer for benefits provided by such fund during such year (including insurance coverage for such year) * * .” “Thus, for example, if a calendar year welfare benefit fund pays an insurance company * * the full premium for coverage of its current employees under a term * * * insurance policy, * * * only the portion of the premium for coverage during [the year] will be treated as a "qualified direct cost" * * *.” (Italics added)

Most vendors pretend that the whole or universal life insurance premium is an appropriate measurement of cost for Key Employees, and those plans that cover rank and file employees use current term insurance premiums as the appropriate measure of cost for such employees. This approach doesn’t meet any set of nondiscrimination requirements applicable to such plans.

10. Some vendors claim that they are justified in providing a larger deduction than the amount required to pay term insurance costs for the current tax year, but, as cited above, the only justification under §419(e) itself is as additions to a qualified asset account and is subject to the limitations imposed by §419A. In addition, §419A adds several additional limitations to plans and contributions, including requirements that:

A. contributions be limited to a safe harbor amount or be certified by an actuary as to the amount of such contributions (§419A(c)(5));
B. actuarial assumptions be “reasonable in the aggregate” and that the actuary use a level annual cost method (§419A(c)(2));
C. benefits with respect to a Key Employee be segregated and their benefits can only be paid from such account (§419A(d));
D. the rules of subsections (b), (c), (m), and (n) of IRC section 414 shall apply to such plans (§419A(h)).
E. the plan comply with §505(b) nondiscrimination requirements (§419A(e)).

Circular 230 Issues

Circular 230 imposes many requirements on tax professionals with respect to tax shelter transactions. A tax practitioner can get into trouble in the promotion of such plans, in advising clients with respect to such transactions and in preparing tax returns. IRC §§6707 and 6707A add a new concept of “reportable transactions” and impose substantial penalties for failure to disclose participation in certain reportable transactions (including all listed transactions).

This is a veritable minefield for tax practitioners to negotiate carefully or avoid altogether. The advisor must exercise great caution and due diligence when presented with any potential contemplated tax reduction or avoidance transaction. Failure to disclose could subject taxpayers and their tax advisors to potentially Draconian penalties.

Summary

Key points of this article include:

• Practitioners need to be able to differentiate between a legitimate §419(e) plan and one that is legally inadequate when their client approaches them with respect to such plan or has the practitioner to prepare his return;
• Many plans incorrectly purport to be exempt from compliance with ERISA, IRC §§414, 505, 79, etc.
• Tax deductions must be claimed under an authorizing section of the IRC and are limited to the qualified direct cost and additions to a qualified asset account as certified by the plan’s actuary.

Conclusion

Irresponsible vendors such as most of the promoters who previously promoted IRC §419A(f)(6) plans were responsible for the IRS’s issuing restrictive regulations under that Section. Now many of the same individuals have elected simply to claim that a life insurance plan is a welfare benefit plan and therefore tax-deductible because it uses a single-employer trust rather than a "10-or-more-employer plan".

This is an open invitation to the IRS to issue new onerous Regulations and more indictments and legal actions against the unscrupulous promoters who feed off of the naivety of clients and the greed of life insurance companies who encourage and endorse (and even own) such plans.

The last line of defense of the innocent client is the accountant or attorney who is asked by a client to review such arrangement or prepare a tax return claiming a deduction for contributions to such a plan. Under these circumstances accountants and attorneys should be careful not to rely upon the materials made available by the plan vendors, but should review any proposed plan thoroughly, or refer the review to a specialist.

A Rose By Any Other Name, or Whatever Happened to All Those 419A(f)(6) Providers? By Ronald H. Snyder, JD, MAAA, EA & Lance Wallach, CLU, ChFC, CIMC.

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 more than 50 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.

While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

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Lance Wallach,IRS aUDITS

Help with Common IRS Problems: As an expert witness Lance Wallach side has never lost a case: Sometimes the IRS might disagree with planning you...

Help with Common IRS Problems: As an expert witness Lance Wallach side has never ...

Help with Common IRS Problems: As an expert witness Lance Wallach side has never ...: As an expert witness Lance Wallach side has never lost a case: Sometimes the IRS might disagree with planning you... : Sometimes the IRS mig...

LanceWallach

Lance Wallach, National Society of Accountants Speaker of the Year, is the nation's leading expert on employee benefit plans, retirement plans, financial and estate planning, and abusive tax shelters. Mr. Wallach's team of highly experienced tax attorneys, CPAs and ex-IRS agents have helped his clients save hundreds of thousands of dollars by successfully defending them in lawsuits and IRS audits. Lance Wallach is a member of the AICPA faculty of teaching professionals and an AICPA course developer, is a frequent and popular speaker on retirement plans, financial and estate planning, reduction of health insurance costs, and tax oriented strategies at accounting and financial planning conventions. Lance 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 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.taxadvisorexperts.org or www.taxaudit419.com. * Associates throughout the United States *

IRS tax relief firm, Lance Wallach, speaking: FBAR/OVDI LANCE WALLACH: The IRS has kicked out an...

IRS tax relief firm, Lance Wallach, speaking: FBAR/OVDI LANCE WALLACH: The IRS has kicked out an...: FBAR/OVDI LANCE WALLACH: The IRS has kicked out an undisclosed number of ta... : Lance Wallach We have written at least 75 posts about ...

International Tax Division: FBAR, OVDI, Foreign Offshore Assets
Veba Plan LLC

About Us

Our specialties in the international arena include accounting and tax planning, assisting companies with maximizing tax benefits related to export transactions, designing global tax structures to minimize U.S. and foreign taxes and developing repatriation strategies centered on the use of foreign tax credits.

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Fbar Ovdi Want To Go To Jail? Offshore tax
Lance Wallach

The Federal government is aggressively pursuing taxpayers with undisclosed foreign accounts and unreported foreign income using information furnished by the foreign banks and other sources. If you have not yet applied for the Offshore Voluntary Disclosure Program, Recent convictions involving UBS Clients:

Jan. 30, 2012 - Stephen M. Kerr, Michael Quiel and Christopher M. Rusch were charged in Phoenix, Ariz., with conspiracy to defraud the IRS for concealing millions of dollars in assets in numerous secret Swiss bank accounts held at UBS and elsewhere.
Jan. 20, 2012 - Kenneth Heller, of New York, N.Y., was sentenced to 45 days in prison and two years of supervised release. Heller pleaded guilty to income tax evasion in June 2011 and admitted to hiding more than $26.4 million in a bank account at UBS AG. He has agreed to pay a civil penalty of over $9.8 million.

To Read More Click Link Below:
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Internal Revenue Code 6707A and Section 79: Breaking Down the Problem

Lance Wallach Council Member President, VEBA Plan

April 06,

Discussion

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.

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

Section 79, Captive Insurance, IRS Audits and Lawsuits on 419 and 412i Plans

Hg Experts

Legal Experts Directory

By Lance Wallach, CLU, CHFC Abusive Tax Shelter, Listed Transaction, Reportable Transaction Expert Witness

IRS Attacks Business Owners in 419, 412, Section 79 and Captive Insurance Plans Under Section 6707A - By 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 you do not necessarily have to make a contribution or claim a tax deduction to participate. Section 6707A of the Code imposes severe penalties for failure to file Form 8886 with respect to a listed transaction. But you are also in trouble if you file incorrectly. I have received numerous phone calls from business owners who filed and still got fined. Not only do you have to file Form 8886, but it also has to be prepared correctly. I only know of two people in the U.S. who have filed these forms properly for clients. They tell me that was after hundreds of hours of research and over 50 phones calls to various IRS personnel. The filing instructions for Form 8886 presume a timely filling. 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 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."

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 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 its deductions. 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. 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. Another important issue is that the IRS has called CPAs material advisors if they signed tax returns containing the plan, and got paid a certain amount of money for tax advice on the plan. The fine is $100,000 for the CPA, or $200,000 if the CPA is incorporated. To avoid the fine, the CPA has to properly file Form 8918.

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 more than 50 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.

While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

Taxpayers who previously adopted 419, 412i, captive insurance or Section 79 plans are in big trouble

Massachusetts Society of Certified Public Accounts, Inc.

Winter 2010

IRS Attacks Business Owners in 419, 412, Section 79 and Captive Insurance Plans Under Section 6707A

By 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 you do not necessarily have to make a contribution or claim a tax deduction to participate. Section 6707A of the Code imposes severe penalties for failure to file Form 8886 with respect to a listed transaction. But you are also in trouble if you file incorrectly. I have received numerous phone calls from business owners who filed and still got fined. Not only do you have to file Form 8886, but it also has to be prepared correctly. I only know of two people in the U.S. who have filed these forms properly for clients. They tell me that was after hundreds of hours of research and over 50 phones calls to various IRS personnel. The filing instructions for Form 8886 presume a timely filling. 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 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."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 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 its deductions. 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. 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. Another important issue is that the IRS has called CPAs material advisors if they signed tax returns containing the plan, and got paid a certain amount of money for tax advice on the plan. The fine is $100,000 for the CPA, or $200,000 if the CPA is incorporated.

To avoid the fine, the CPA has to properly file Form 8918.Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, Wallach is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters. He is also a featured writer and has been interviewed on television and financial talk shows including NBC, National Pubic Radio’s All Things Considered and others. Lance authored 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.

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.Contact him at:516.938.5007,wallachinc@gmail.com, orwww.taxadvisorexperts.org, orwww.taxlibrary.us.

Friday, April 26, 2024

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

Tuesday, May 30, 2017

419 Plans Attacked by IRS

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