EBSA News Release: U.S. Department of Labor sues Bridgeport, Pa., benefit firms and lawyers to protect welfare benefit plan participants nationwide [03/11/2009]

EBSA News Release: U.S. Department of Labor sues Bridgeport, Pa., benefit firms and lawyers to protect welfare benefit plan participants nationwide [03/11/2009]



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.








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