WebCPA
The
dangers of being "listed"
A warning for 419, 412i, Sec.79 and captive insurance
Accounting Today: October 25, 2010
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
($200,000 for a business and $100,000 for an individual) 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 has to be prepared
correctly. I only know of two
people in the United States who have filed these forms
properly for clients. They tell me that
was 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 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. 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. 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 or www.taxlibrary.
us.
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.
dangers of being "listed"
A warning for 419, 412i, Sec.79 and captive insurance
Accounting Today: October 25, 2010
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
($200,000 for a business and $100,000 for an individual) 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 has to be prepared
correctly. I only know of two
people in the United States who have filed these forms
properly for clients. They tell me that
was 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 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. 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. 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 or www.taxlibrary.
us.
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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