November 5, |
Notice
2007-83
Abusive Trust
Arrangements Utilizing Cash Value Life Insurance Policies Purportedly to
Provide Welfare Benefits
The Internal Revenue Service
(IRS) and Treasury Department are aware of certain trust arrangements claiming
to be welfare benefit funds and involving cash value life insurance policies
that are being promoted to and used by taxpayers to improperly claim federal
income and employment tax benefits. This notice informs taxpayers and their
representatives that the tax benefits claimed for these arrangements are not
allowable for federal tax purposes. This notice also alerts taxpayers and their
representatives that these transactions are tax avoidance transactions and
identifies certain transactions using trust arrangements involving cash value
life insurance policies, and substantially similar transactions, as listed
transactions for purposes of § 1.6011-4(b)(2) of the Income Tax
Regulations and §§ 6111 and 6112 of the Internal Revenue Code. This notice
further alerts persons involved with these transactions of certain
responsibilities that may arise from their involvement with these transactions.
Concurrently with this notice, the IRS is
publishing Rev. Rul. 2007-65 (concluding that for purposes of deductions
allowable to an employer under § 419, a welfare benefit fund’s qualified
direct cost does not include premium amounts for cash value life insurance
policies paid by the fund, whenever the fund is directly or indirectly a beneficiary
under the policy within the meaning of § 264(a)), and Notice 2007-84
(describing trust arrangements involving purported welfare benefit funds that,
in form, provide post-retirement medical and life insurance benefits to
employees on a nondiscriminatory basis but, in operation, result in the owner
or owners receiving all or a substantial portion of the post-retirement and
other benefits, and all or a substantial portion of any assets distributed from
the trust).
Probs IRS
ReplyDelete412i, 419e plans litigation and IRS Audit Experts for abusive insurance based plans deemed reportable or listed transactions by the IRS - Lance Wallach
Small business retirement plans fuel litigation
Dolan Media Newswires
Small business retirement plans fuel litigation
Small businesses facing audits and potentially huge tax penalties over certain types of retirement plans are filing lawsuits against those who marketed, designed and sold the plans. The 412(i) and 419(e) plans were marketed in the past several years as a way for small business owners to set up retirement or welfare benefits plans while leveraging huge tax savings, but the IRS put them on a list of abusive tax shelters and has more recently focused audits on them.
The penalties for such transactions are extremely high and can pile up quickly - $100,000 per individual and $200,000 per entity per tax year for each failure to disclose the transaction - often exceeding the disallowed taxes.
There are business owners who owe $6,000 in taxes but have been assessed $1.2 million in penalties. The existing cases involve many types of businesses, including doctors' offices, dental practices, grocery store owners, mortgage companies and restaurant owners. Some are trying to negotiate with the IRS. Others are not waiting. A class action has been filed and cases in several states are ongoing. The business owners claim that they were targeted by insurance companies; and their agents to purchase the plans without any disclosure that the IRS viewed the plans as abusive tax shelters. Other defendants include financial advisors who recommended the plans, accountants who failed to fill out required tax forms and law firms that drafted opinion letters legitimizing the plans, which were used as marketing tools.
A 412(i) plan is a form of defined benefit pension plan. A 419(e) plan is a similar type of health and benefits plan. Typically, these were sold to small, privately held businesses with fewer than 20 employees and several million dollars in gross revenues. What distinguished a legitimate plan from the plans at issue were the life insurance policies used to fund them. The employer would make large cash contributions in the form of insurance premiums, deducting the entire amounts. The insurance policy was designed to have a "springing cash value," meaning that for the first 5-7 years it would have a near-zero cash value, and then spring up in value.
Just before it sprung, the owner would purchase the policy from the trust at the low cash value, thus making a tax-free transaction. After the cash value shot up, the owner could take tax-free loans against it. Meanwhile, the insurance agents collected exorbitant commissions on the premiums - 80 to 110 percent of the first year's premium, which could exceed $1 million.
Technically, the IRS's problemsLaWallach@aol.com- 516-938-5007- or www.vebaplan.com
M Funds 2
ReplyDeleteBusiness Owners and Accountants Face Huge IRS Fines
The IRS is attacking people in retirement plans and so-called 419 plans that contain life insurance, and the consequences are