Should you File, and then Opt Out?

Announced February 8, 2011, the IRS 2011 Offshore Voluntary Disclosure Initiative (OVDI) program is a welcome but conditional amnesty allowing taxpayers with foreign accounts to come clean and get into compliance with the IRS.  The program runs through Sept.  9, 2011.

There’s been discussion of “opting out” of the program to take your chances in audit, but it’s a topic fraught with danger.  Now, however, there is guidance about opting out of the program that makes much of it transparent. Because of this late date it is recommended that you properly file FBARs and the 90-day request for amnesty extension. This is the first important step. If the forms are not done properly, you will have extensive problems and will not have to think about opting out. If your forms are properly done and filed, then your situation should be discussed with someone who is experienced in these matters.

Under the OVDI, taxpayers are subject to a penalty of 25 percent of the highest aggregate account balance on their undisclosed account(s) between 2003 and 2010.  If the value was less than $75,000 at all times during those years, the penalty is only 12.5 percent.

These account balance penalties are in lieu of all other penalties that may apply, including FBAR and offshore-related information return penalties.  Plus, participants are required to pay taxes and interest on any monies (such as interest income on foreign accounts) they previously failed to report.  Finally, they must pay an accuracy-related penalty equal to 20 percent of the underpayment of tax, plus interest.

Opting out of the program can make sense for some, though it involves taking your chances with an IRS examination. Someone should represent you with extensive experience in this. We always suggest they should at least be a CPA with years of experience in international tax. It’s even better if you use one that was with the international tax division of the IRS for a number of years. The IRS has published a separate guide detailing the rules and procedures for opting out. 

Here are some of the rules: 

1.      IRS Summary.  The IRS employee who has been handling your case summarizes it, agreeing or disagreeing with your view of penalties, and listing how extensive an audit he or she recommends.

2.      Program Status Report.  Before you can opt out, the IRS sends a letter reporting on the status of your disclosure and what you still must submit.  If you’ve given enough data, the IRS will calculate what you would owe under the OVDI.  You should provide any missing items within 30 days.

3.      Taxpayer Submission.  Within 20 days, the taxpayer opts out in writing and makes a written case what penalties should apply and why. 

4.      Central Committee.  A Committee of IRS Managers reviews the summary and decides how extensive an audit to conduct.  The IRS says “the taxpayer is not to be punished (or rewarded) for opting out.”   The Committee also decides whether to assign your case for a normal civil audit or to assign it for a criminal exam. 

5.      Written Warning.  The IRS sends another letter explaining that opting out must be in writing and is irrevocable.  You have 20 days thereafter to opt out in writing.

6.      Interview?  Some audits will include taxpayer interviews.

Bottom Line?  The “opt out” procedure is helpful but still a bit daunting.  If you are considering it, make sure you get some solid advice from an experienced person who, in my opinion, should have worked for the IRS and is a CPA about the nature of your case. This is just one of the many options that should be discussed with your advisor. There are many other strategies that you may want to utilize. Your advisor should be aware of all your options, and should explain them. If not, consider engaging someone else. Remember, the penalties can be very large, especially if your advisor is not skilled at this. There is even the potential for criminal prosecution.  See taxadvisorexpert.com for the latest information in this area or to contact one of our professionals today.

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, international tax, and other subjects. He writes about FBAR, OVDI, international taxation, captive insurance plans and other topics. 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, lawallach@aol.com,lanwalla@aol.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.

6707A Penalties & 419 Plans Litigation: Audit Lottery, Captive insurance, 419, 412i, Secti...

6707A Penalties & 419 Plans Litigation: Audit Lottery, Captive insurance, 419, 412i, Secti...: The audit lottery is a gambit in which taxpayers claim tax benefits to which they are not entitled in the hope that the IRS will never audit...

412i, 419, Lawsuits, IRS Audits. Lance Wallach, expert witness.

419, 412i, plans are being audited by the IRS. Lawsuits are the result. 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 advisers 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 problems with the plans were that the "springing cash" structure disqualified them from being 412(i) plans and that the premiums, which dwarfed any payout to a beneficiary, violated incidental death benefit rules.

Under §6707A of the Internal Revenue Code, once the IRS flags something as an abusive tax shelter, or "listed transaction," penalties are imposed per year for each failure to disclose it. Another allegation is that businesses weren't told that they had to file Form 8886, which discloses a listed transaction.

According to Lance Wallach of Plainview, N.Y. (516-938-5007), who testifies as an expert in cases involving the plans, the vast majority of accountants either did not file the forms for their clients or did not fill them out correctly.
Because the IRS did not begin to focus audits on these types of plans until some years after they became listed transactions, the penalties have already stacked up by the time of the audits.

Another reason plaintiffs are going to court is that there are few alternatives - the penalties are not appealable and must be paid before filing an administrative claim for a refund.

The suits allege misrepresentation, fraud and other consumer claims. "In street language, they lied," said Peter Losavio, a plaintiffs' attorney in Baton Rouge, La., who is investigating several cases. So far they have had mixed results. Losavio said that the strength of an individual case would depend on the disclosures made and what the sellers knew or should have known about the risks.

In 2004, the IRS issued notices and revenue rulings indicating that the plans were listed transactions. But plaintiffs' lawyers allege that there were earlier signs that the plans ran afoul of the tax laws, evidenced by the fact that the IRS is auditing plans that existed before 2004.

"Insurance companies were aware this was dancing a tightrope," said William Noll, a tax attorney in Malvern, Pa. "These plans were being scrutinized by the IRS at the same time they were being promoted, but there wasn't any disclosure of the scrutiny to unwitting customers."

A defense attorney, who represents benefits professionals in pending lawsuits, said the main defense is that the plans complied with the regulations at the time and that "nobody can predict the future."

An employee benefits attorney who has settled several cases against insurance companies, said that although the lost tax benefit is not recoverable, other damages include the hefty commissions - which in one of his cases amounted to $860,000 the first year - as well as the costs of handling the audit and filing amended tax returns.
Defying the individualized approach an attorney filed a class action in federal court against four insurance companies claiming that they were aware that since the 1980s the IRS had been calling the policies potentially abusive and that in 2002 the IRS gave lectures calling the plans not just abusive but "criminal." A judge dismissed the case against one of the insurers that sold 412(i) plans.

The court said that the plaintiffs failed to show the statements made by the insurance companies were fraudulent at the time they were made, because IRS statements prior to the revenue rulings indicated that the agency may or may not take the position that the plans were abusive. The attorney, whose suit also names law firm for its opinion letters approving the plans, will appeal the dismissal to the 5th Circuit.

In a case that survived a similar motion to dismiss, a small business owner is suing Hartford Insurance to recover a "seven-figure" sum in penalties and fees paid to the IRS. A trial is expected in August.

Last July, in response to a letter from members of Congress, the IRS put a moratorium on collection of §6707A penalties, but only in cases where the tax benefits were less than $100,000 per year for individuals and $200,000 for entities. That moratorium was recently extended until March 1, 2010.

But tax experts say the audits and penalties continue. "There's a bit of a disconnect between what members of Congress thought they meant by suspending collection and what is happening in practice. Clients are still getting bills and threats of liens," Wallach said.

"Thousands of business owners are being hit with million-dollar-plus fines. ... The audits are continuing and escalating. I just got four calls today," he said. A bill has been introduced in Congress to make the penalties less draconian, but nobody is expecting a magic bullet.

"From what we know, Congress is looking to make the penalties more proportionate to the tax benefit received instead of a fixed amount."

Dolan Media Newswires 01/22
Small Business Retirement Plans Fuel Litigation

As an expert witness Lance Wallach's side has never lost a case. People need to be careful of 419 Welfare Benefit Plans, 412i plans, Section 79 plans and Captive Insurance Plans. Most of these plans are sold by insurance agents. If you are in an abusive, listed or similar transaction plan you need to file under IRS 6707a. The participant files form 8886, and the salesmen or accountant who signs the tax returns files form 8918 if they got paid over $10,000. They are called Material Advisors and face a minimum $100,000 fine. Some plans are offshore which could involve FBAR or OVDI filings. If you have money overseas you probably need to file for IRS tax amnesty. If you want to reduce the tax we suggest that you first file and then opt out. For more information Google Lance Wallach.

Disclaimer: 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.

New Transaction of Interest - Charitable Remainder Trust Interests

Lance Wallach Council Member President, VEBA Plan

 

December 08, 2010

Premise
Potential for Avoidance of Tax Through Sale of Charitable Remainder Trust Interests Notice 2008-99 identifies a transaction of interest in which a sale or other disposition of all interests in a charitable remainder trust (subsequent to the contribution of appreciated assets to and their reinvestment by the trust), results in the grantor or other noncharitable recipient receiving the value of that person's trust interest while claiming to recognize little or no taxable gain.

Discussion
Persons entering into these transactions on or after November 2, 2006, must disclose the transaction as described in section 1.6011-4. Material advisors who make a tax statement on or after November 2, 2006, with respect to transactions entered into on or after November 2, 2006, have disclosure and list maintenance obligations under sections 6111 and 6112. Persons required to disclose these transactions and/or maintain lists of advisees who fail to do so may be subject to the penalties under sections 6707A, 6707, 6708, 6662, and/or 6662A.

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.

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.

CJA & Associates and 412i, 419, and Other Abusive Plans

For help with CJA & Associates and 412i, 419, and other abusive plans contact Lance Wallach at lawallach@aol.com or call 516-938-5007. Lance Wallach is the leading expert on 412i, 419, Section 79 and Captive Insurance Plans. Lance has helped hundreds of people resolve their problems and get all their money back, usually without a lawsuit. Google Lance Wallach and see why CJA & Associates, insurance companies, and the IRS do not want to fight with Lance Wallach.

If you purchased a 412(i) defined-benefit plan in the past as a tax deduction, you could be in a world of trouble.

Why 412(i) Plans Are being audited by the IRS and insurance agents are being sued
by Lance Wallach

The older 412i plans were abusive tax shelter. Below is one of the abusive. There were many others but this is one example. If a physician- investor puts $250,000 into a 412(i) plan every year for 5 years as a tax-deductible expense, they'll eventually fund $1.25 million over that period. The cash surrender value (CSV) of the policy at the end of the 5th year will be $250,000. The physician-investor will then purchase the life policy from the 412(i) plan for that $250,000 CSV and think they got a great deal since the cash account value (CAV) of the policy is really $1.1 million. After waiting for surrender charges in the life policy to evaporate, they will take income tax–free loans from the policy.
Buying a policy with a low CSV and a high CAV seems like a steal of a deal since the investor only pays 20% of the value of the asset when they purchase it out of the 412(i)plan. This was supposed to save the investor 80% of the tax on that money. If this sounds too good to be true, it didn't to many physician-investors who allowed insurance agents to sell them 412(i) plans. After looking at the plan, the IRS eventually shut it down. Ironically, the beginning of the end of 412(i) plans started on Friday, Feb. 13, 2004.
IRS Revenue Procedure 2004-16 basically states that the fair market value of a life insurance policy that comes out of a 412(i) defined-benefit plan should be based on the premiums paid and not on the CSV or internal reserve value of the insurance company. How will this affect a recently implemented 412(i) plan? The investor will not be able to purchase the life policy from the 412(i) plan for the CSV, which is 80% lower than the premiums paid. Instead, they will have to use the premiums paid as the value (minus minor term costs), which basically destroys the tax-favorable nature of a 412(i) plan.
In addition, Revenue Procedure 2004-20 states that the IRS doesn't want excess life insurance purchased inside a 412(i) plan. In this case, the IRS is referring to insurance contracts where the death benefits exceed the death benefits provided to the employee's beneficiaries under the terms of the plan, whereby the balance of the proceeds revert to the plan as a return on investment. IRS Revenue Procedure 2004-20 also states that if excess death benefits are purchased, those deductions will be disallowed in the current tax year and will be spread out, if allowable, over future years. Furthermore, any nondeductible premiums will be subject to a 10% excise tax.
Finally, Revenue Ruling 2004-21 says that a qualified plan cannot discriminate in favor of highly compensated employees by buying life policies for non-highly compensated employees that aren't inherently equal. Note: The word inherently seems to indicate that the IRS has no idea how to define certain standards or rules in their attempt to give final guidance to taxpayers. As is the case with a lot of revenue rulings and regulations on advanced tax topics, the IRS doesn't always know how to give guidance on what should be done. Instead, it tries to muddy the waters and scare investors so that certain tax plans aren't used due to uncertainty about the law.
In Oct. 2002 I spoke at the annual National Society of Pension Actuaries convention about plans. The IRS chief actuary also warned about 412i plans. This was not the first warning about these plans. Most in the industry knew that IRS would be coming after the participants in these plans long before that convention. In spite of that insurance company's promoters and agents continued to sell the scams to unsuspecting business owners. The insurance company's had the purchasers sign fraudulent disclaimers saying that they would get their own tax advice. The insurance companies had a duty to disclose the fact that there were potential IRS problems with these 412i scams, but they did not, thereby making the disclaimers fraudulent. The reason for the disclaims was to try to protect the insurance company's from potential lawsuits when the buyers were audited by the IRS.
We have helped may fight the IRS audits. As an expert witness my side has never lost a case. Most lawsuits however against insurance company's and agents are lost. The inexperienced attorneys lose based on the disclaimers that the clients signed. The attorneys fail to prove that those disclaimers were fraudulent.

Another issue was the failure of the participants in the 412i scams failure to properly file under 6707a to avoid horrendous fines for being in listed transactions and not telling the IRS. You can still avoid  the fine by  filing properly.

Taxpayers Who Previously Adopted 419, 412i, Captive Insurance or Section 79 Plans are in Big Trouble

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June 15, 2011     By Lance Wallach, CLU, CHFC

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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." Insurance agents, financial planners, accountants and attorneys seeking large life insurance commissions sold these plans.

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.

To Read More Click Link below:
http://www.hg.org/article.asp?preview=1&id=22195

Important 412i Retirement Plan Information

The Observer

Must Read:

http://www.cwattorneys.com/wp-content/uploads/2012/06/observer_2.pdf

412i Plans attacked by IRS, lawsuits

Published by HG Experts.com

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April 24, 2012     By Lance Wallach, CLU, CHFC

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IRS has been attacking abusive 412i plans for years. Business men have been suing the insurance agents who sold the plans.

The IRS has attacked 412i, 419 plans for years. As a result promoters are now promoting section 79 and captive insurance plans. They are just starting to be attacked by the IRS.

A 412(i) plan differs from other defined benefit pension plans in that it must be funded exclusively by the purchase of individual life insurance products.

In the late 1990's brokers and promoters such as Kenneth Hartstein, Dennis Cunning, and others began selling 412(i) plans designed with policies created and sold through agents of Pacific Life, Hartford, Indianapolis life, and American General. These plans were sold or administered through companies such as Economic Concepts, Inc., Pension Professionals of America, Pension Strategies, L.L.C. and others.

These plans were very lucrative for the brokers, promoters, agents, and insurance companies. In addition to the costs associated with adminstering the plans, the policies of insurance had high commissions. If they were cancelled within a few years of purchace the had very little cash value.

These plans were often described as Pendulum Plans, or other similar names. In theory, the plans would work as follows. After the plan was set up, the plan would purchase a life insurance policy insuring the life of an individual. The plan would have very little (and high surrender charges) for 5 or more years. The Corporation would pay the premium on the policy and take a deduction for the entire amount. In year 5, when the policy had little or no cash value, the plan would transfer the policy to the individual, who would take it at a greatly reduced basis. Subsequently, the policy would spring up with cash value, thus the name springing cash value policy. The insured would have cash value which he could withdraw almost tax free .

Attorney Richard Smith at the law firm of Bryan Cave issued tax opinion letters opinion which stated that the design of many of the plans met the requirements of section 412(i) of the tax code.

In the early 2000s, IRS officials began questioning the insurance representatives, brokers, promoters, and their attorneys and giving speeches at benefits conferences wherein they took the position that these plans were in violation of both the letter and spirit of the Internal Revenue Code. When I spoke at the annual national convention of the American Society of Pension Actuarys in 2002 I heard such a speech given by Jim Holland, IRS chief actuary.

In February 2004, the IRS issued guidance on 412(i) and began the process of making plans "listed transactions." Taxpayers involved in listed transaction are required to report them to the IRS. These transactions are to be reported using a form 8886. The failure to file a form 8886 subjects individual to penalties of very large amounts, and failure of insurance agents, accountants and others to file 8918 results in a $100,000 fine.
In late 2005, the IRS began obtaining information from advisors and actively auditing plans and more recently, levying section 6707 penalties. First the IRS would audit the business owner and deny the deduction. The business owner would also owe interest and penalities. Then another unit of the IRS would assess large additional fines for failure to properly file, or failure to file 8886 forms. The directions for these forms is very complicated, expecially if the forms are filed after the fact. Many business owners still got fined even if they filed the forms. If the forms were not filled in exactly right a fine was still assessed.

The IRS's response to these 412(i) plans was predictable. They made it clear that the IRS would not be gentle and even indicated that potential criminal liability existed. The IRS made speeches and people like me wrote articles about the problems.

Insurance company representatives attended these conferences and heard the IRS warnings. Many of them ignored them.

Neither the brokers, promoters, or Insurance companies relayed this information to their clients and insureds at this time. When I would speak about the problems of 412i and 419 plans I would be attacked by promoters and salesmen. When I testified againt a springing cash value policy in my first court case I was challenged by the defendants attorney as not being an expert. The judge allowed the jury to hear whether I was indeed an expert. The result was a huge loss for the defense.

On February 13, 2004, the IRS issued a press release, two revenue rulings, and proposed regulations to shut down abusive transactions involving specifically designed life insurance policies in retirement plans, section 412(i) plans and 419 plans etc.

In October of 2005, the IRS invited those who sponsored 412(i) plans that were treated as listed transactions to enter a settlement program in which the taxpayer would recind the plan and pay the income taxes it would have paid had it not engaged in the plan, plus interest and reduced penalties.

MDL stands for Multidistrict Litigation. It was created by Congress in 1968 – 28 U.S.C. §1407.

The act created an MDL Panel of judges to determine whether civil actions pending in different federal districts involve one or more common questions of fact such that the actions should be transferred to one federal district for coordinated or consolidated pretrial proceedings. In theory, the purposes of this transfer or “centralization” process are to avoid duplication of discovery, to prevent inconsistent pretrial rulings, and to conserve the resources of the parties, their counsel and the judiciary. Transferred actions which are not resolved in the MDL are remanded to their originating court or district by the Panel for trial. Lots of people who were audited sued the insurance companys, agents, accountants and others.

Then, Pacific Life, Hartford Life & Annuity moved for summary judgment in the MDL. The court granted the motions in part, and denied the motions in part. Specifically, the court dealt with the issue of the disclaimers contained within the policies and signed by various policyholders.

Applying California law in evauating the disclosures and disclaimers, the Court ruled that the California Plaintiffs failed to raise issues of material fact that they reasonably relied on representations by Hartford and Pacific Life regarding the tax and legal issues related to their 412(i) plans.

Conversely, the court ruled that pursuant to Wisconsin law, the disclaimers were unenforceable. The court came to similar conclusion when applying Texas law to the Plaintiffs claims.

Plaintiffs have been more successful in suing 419 plan promoters, insurance companys, accountants ,etc. I have been an expert witness and my side has never lost a case.

I have been speaking with my IRS contacts about the newest abusive tax shelter trends, captives and section 79 plans. They have started auditing participants in these plans. The IRS has not yet decided if the plans are listed, abusive or similar to. I think that captive insurance companies and section 79 plans may become the next 412 and 419 problem for unsuspecting companies. Designed under IRS Code 831(b), these captive insurance companies are designed to insure the risks of an individual business. In theory and if properly designed, the premiums are deducted when paid to a related company, and depending on claims, profits can be paid out as dividends and when liquidated, the proceeds are taxed at capital gains rates.

The problem with Captives is that they are expensive to set up and operate. Captives must be opetate as a true risk assuming entity, not simply a tax avoidance vehicle. Some variations are to rent a cell captives that can work for a lot less money.
The IRS is looking into the sale of life insurance to fund Captives. They are also looking at most section 79 plans. This sounds very familiar.

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.

The IRS Penalizes Millions of Taxpayers

Published in Coatings Pro Magazine
Lance Wallach

It is tax time. There are many problems you can run into with the IRS. This article is a generalized overview of some of these confusing issues:

•IRS Penalties
•Unfiled Tax Returns
•IRS Liens
•IRS Audits
•Payroll Tax Problems
•IRS Levies
•Wage Garnishments
•IRS Seizures

When dealing with the IRS, it can seem like they have all the power. That is not always true. As a small business owner--and a taxpayer--it is vital that you know your options and your rights.

IRS Penalties

The IRS penalizes millions of taxpayers each year. In fact, they have so many penalties that it can be hard to understand which penalty they are hitting you with.

The most common penalties are Failure to File and Failure to Pay. Both of these penalties can substantially increase the amount you owe the IRS in a very short period of time.

To make matters worse, the IRS charges interest on penalties. Many taxpayers often find out about IRS problems many years after they have occurred. As a result, the amount owed the IRS is substantially greater due to penalties and the accumulated interest on those penalties. Some IRS penalties can be as high as 75% to 100% of the original taxes owed. Often taxpayers can afford to pay the taxes owed, but the extra penalties make it impossible to pay off the entire balance.

The original goal of the IRS imposing penalties was to punish taxpayers in order to keep them in line. Unfortunately, the penalties have turned into additional sources of income for the IRS. So they are happy to add whatever penalties they can and to pile interest on top of those penalties. Your loss is their gain. It is important to know that under certain circumstances the IRS does abate or forgive penalties. Therefore before you pay the IRS any penalty amounts, you may want to
consider requesting that the IRS abate your penalties.

Unfiled Tax Returns

Many taxpayers fail to file required tax returns for a variety of reasons. What you must understand is that failure to file tax returns may be construed as a criminal act by the IRS--a criminal act punishable by up to one year in jail for each year not filed. Needless to say, its one thing to owe the IRS money but another thing to potentially lose your freedom for failure to file a tax return.

The IRS may file “SFR” (Substitute For Return) Tax Returns on your behalf. This is the IRS’s version of an unfiled tax return. Because SFR Tax Returns are filed in the best interest of the government, the only deductions you’ll see are standard deductions and one personal exemption. You will not get credit for deductions to which you may be entitled, such as exemptions for a spouse or children, interest on your home mortgage and property taxes, cost of any stock or real estate sales, business expenses, etc.

Remember that regardless of what you have heard, you have the right to file your original tax return, no matter how late it is filed.

IRS Liens

The IRS can make your life miserable by filing Federal Tax Liens on your business or
property. Federal Tax Liens are public records indicating that you owe the IRS various taxes. They are filed with the County Clerk in the county from which you or your business operates.

Because they are public records, they will show up on your credit report. This often
makes it difficult to obtain financing on an automobile or a home. Federal Tax Liens can also tie up your personal property, meaning that you cannot sell or transfer that property without a clear title.

Often taxpayers find themselves in a Catch-22 in which they have property that they
would like to borrow against, but because of the Federal Tax Lien, they cannot get a loan. Should a Federal Tax Lien be filed against you, a CPA can help get it lifted.

IRS Audits

The IRS conducts multiple types of audits. They can audit you by mail, in their offices, in your office or home. The location of the audit is a good indication of the severity.

Typically, Correspondence Audits are conducted to locate missing documents in your tax return that have been flagged by IRS computers. These documents usually include W-2s and 1099 income items or interest expense items. This type of audit can typically be handled through the mail with the correct documentation.

The IRS Office Audit--held in IRS offices--is usually conducted by a Tax Examiner who
will request numerous documents and explanations of various deductions. During this
type of audit you may be required to produce all bank records for a period of time so that the IRS can check for unreported income.

The IRS Home or Office Audit--held in your home or office--should be taken very
seriously as these are conducted by IRS Revenue Agents. Revenue Agents receive more
training and learn more auditing techniques than typical Tax Examiners.  Of course, all IRS audits should be taken seriously as they often lead to examinations of
other tax years and other tax problems not stated in the original audit letter.

Payroll Tax Problems

The IRS is very aggressive in their collection attempts for past-due payroll taxes. The penalties assessed on delinquent payroll tax deposits or filings can dramatically increase the total amount you owe in just a matter of months.

I believe that it is critical for business owners to have an attorney present in these situations. Your answers to the first five IRS questions may determine whether you stay in business or are liquidated by the IRS. We always advise clients to avoid meeting with any IRS representatives regarding payroll taxes until you have met with a professional to discuss your options.

IRS Levies--Bank and Wage

An IRS Levy is an action taken by the IRS to collect taxes. For example, the IRS can
issue a Bank Levy to obtain the cash in your savings and checking accounts. Or, the IRS can levy your wages or accounts receivable. The person, company, or institution that is served with the levy must comply or face its own IRS problems.

When the IRS levies a bank account, the levy can only be honored on the particular day on which the bank receives the levy. The bank is required to remove whatever amount of money is in your account on that day (up to the amount of the IRS Levy) and send it to the IRS within 21 days unless otherwise notified by the IRS. This type of levy does not affect any future deposits made into your bank account unless the IRS issues another Bank Levy.

An IRS Wage Levy is different. Wage Levies are filed with your employer and remain in
effect until the IRS notifies the employer that the Wage Levy has been released. Most
Wage Levies take so much money from the taxpayer’s paycheck that the taxpayer doesn’t even have enough money remaining to meet basic needs. Both Bank and Wage Levies create difficult situations and should be avoided if possible.

Wage Garnishments

The IRS Wage Garnishment is a very powerful tool used to collect taxes that you owe through your employer. Once a Wage Garnishment is filed with an employer, the employer is required to collect a large percentage of each paycheck. The funds that would have otherwise been paid to the employee will then be paid to the IRS.
The Wage Garnishment stays in effect until the IRS is fully paid or until the IRS agrees to release the garnishment. Having wages garnished can create other debt problems because the amount left over after the IRS takes its cut is often small, so you may have difficulty with bills and other financial obligations.

IRS Seizures

The IRS has extensive powers when it comes to seizures of assets. These powers allow them to seize personal and business assets to pay off outstanding tax liabilities. Seizures typically occur when taxpayers have been avoiding the IRS.

Similar to levies and garnishments, seizures are one of the IRS’s ultimate invasive collection tools. They can seize cars, television sets, jewelry, computers, collectibles, business equipment, or anything of value, which can be sold in order to acquire the money the IRS wants to pay off your tax debts. If you are facing a seizure, you have a serious problem.

Hopefully this tax season will begin and end without any of these IRS issues coming into play. But if they do, help is out there. CPAs and attorneys can help you negotiate your rights should it become necessary.

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.

419 Welfare Benefit Plans

HG EXPERTS

Legal Experts Directory

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May 9, 2012     By  Sam Susser

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   A view from a former IRS Agent, CPA, College Professor

Welfare Benefit Plans (WBP), also known as Welfare Benefit Trusts and Welfare Benefit Funds are vehicles by which employers may offer their employees and retirees with certain types of insurance coverage (e.g., life insurance, health insurance, disability insurance, and long-term care), as well as other benefits such as severance payments and educational funding. If properly designed and in compliance with IRC sections 419 and 419A, WBPs offer employers with a valid tax deduction. However, as is the case with many plans that offer opportunities for deductibility, some WBPs fail to comply with Code standards, invite abuse, and otherwise are used inappropriately as a basis to reduce taxable income.
It is, therefore, not surprising that the Internal Revenue Service (IRS) has targeted WBP, designating many such plans as “listed transactions.” The IRS’ attack arsenal includes, but is not limited to: Notice 2007-83 (where the IRS intends to challenge claimed tax benefits meeting the definition of a “listed transaction”); Notice 2007-84 (where the IRS may challenge trust arrangements purporting to provide non-discriminatory medical and life insurance benefits, if such plans are, in substance, discriminatory); Revenue Ruling 2007-65 (where the IRS will not disallow deductions for such arrangements for prior year tax years, except to the extent that deductions have exceeded the amount of insurance included on the participant’s Form W-2 for a particular year), and IR-2007-170 (the IRS’ guidance position on WBPs). Accordingly, taxpayers who have claimed deductions pursuant to Internal Revenue Code (Code) Section 419 are receiving letters from the IRS inviting them to an audit.
THE GOOD:
Let’s start off with a proposition that may surprise many of you – the IRS is generally good. No, that’s not an oxymoron. The rest of this article is in the words of Sam Susser:

For over 35 years, I have had the privilege of representing the IRS and the US taxpayers on tax audits. Our goal was to always determine the correct tax –whether the outcome was a deficiency or a refund. The bottom line, which the IRS supported, was to “do the right thing.” Over these years, I have met and befriended many competent and exemplary agents. As with all industries, there are a few who simply go through the motions, and there are a few who are simply incompetent. Fortunately, the latter two groups are in the minority. Now that I represent clients who are being audited by IRS, my objectives have not changed. The right thing must still be done. I only hope to get a well-versed agent who knows the law and can make a determination based on facts and circumstances, and not by preconceived notions.
I have been resolving the WBP issue mostly at the Revenue Agent (RA) level. Most RAs are knowledgeable in the area of WBP, and it it a pleasure dealing with them. My clients became involved with both abusive plans as well as what I determined to be non-abusive plan. Because most clients have sought the opinions of an independent professional tax attorney, CPA, Enrolled Agent , or other independent professionals who the IRS deems to be knowledgeable and capable of rendering an opinion on a Plan, Prior to 2007 I had a good case for abating the penalty and any interest thereon due to the reasonable cause exception. The RAs accepted my briefs for penalty relief and I usually resolved the case agreed at the agent’s level. The right thing was being done by both sides. Since 2007 the bar has been raised in meeting the reasonable cause exception. Simply put, if taxpayers failed to file Forms 8886 with their tax returns, the penalty could no longer be abated due to reasonable cause. If we do not come to an agreement, the case would, at taxpayer’s additional expense, proceed to the Appeals Division. This would normally be a good strategy in nebulous circumstances. With rare exceptions this is not a good strategy under these circumstances as explained later.
Just as there are good and bad IRS agents, there are good and bad WBPs. The abusive plans that have been sold should not affect those plans that adhere to the spirit of the tax laws. Thus, of the many plans sold to taxpayers, some can be considered “good.” The “bad” WBPs should not taint the “good” ones.
IR-2007-170, Oct. 17, 2007, recognizes that “[t]here are many legitimate welfare benefit funds that provide benefits, such as health insurance and life insurance, to employees and retirees. However, the arrangements the IRS is cautioning employers about is primarily benefits the owner or other key employees of businesses, sometimes in the form of distributions of cash, loans, or life insurance policies.”
THE BAD:
A persistent pattern that I see with WBPs is that the IRS appears to presumptively hold such plans as improper contrary to the statement in IR-2007-170. From what I have indirectly encountered, it appears that the IRS may interview the plan administrator, with the primary objective of securing the plan’s participants (and audit targets) rather than determining whether the limitations of a Code Section 419 deduction were satisfied. No determination is made as to whether the plan meets or fails to meet Code requirements. The plan participants then receive audit letters: one to the entity claiming the deduction, and the other to the owner(s) of such entity. These audit letters are generally accompanied by a lengthy “canned” Information Document Request (IDR) ostensibly written by IRS attorneys.
During my decades with the IRS, IDRs are usually focused documents seeking very specific documents and information to determine whether further action is required. However, my review of IDRs on the subject of WBPs shows them to be akin to document production demands in a civil litigation. The IRS basically wants everything associated with the WBP – there is no specific focus. Moreover, they have a very expansive definition of documents, and seek them whether they are in the taxpayer’s possession, or in the possession of the taxpayer’s “attorneys, accountants, affiliates, advisers, representatives, or other persons directly or indirectly employed by you, hired by you, or connected with you, or your representatives, and anyone else subject to your control.”
What was most disturbing about these IDRs that I have seen is the fact that the RAs also have, on a number of occasions, requested copies of the tax returns for the tax year(s) under audit. This indicated to me, especially since the name of the WBP is repeatedly mentioned in the IDR, that my client was selected from the list provided by the plan administrator to the IRS. This in itself is not necessarily bad since this is a useful tool for the IRS in obtaining names of participants of plans that might not meet the muster of the Code and IRS pronouncements. However, I would think that the “give me everything from everybody” approach should not be the first step in an IRS inquiry into the validity of a WBP.
Other clients received audit letters with a similar IDR requesting information including copies of the returns under examination. These clients, however, had stopped participating in the plan many years prior to the audit years. Nonetheless, since the client's name was still on the Plan’s list of participants, the client was going to be audited. The IRS takes the position that the cash surrender value of any life insurance policy in the plan is available to the client and is therefore income to that client for the year the IRS has decided to audit Accordingly, the RAs are proposing adjustments in years in which no deduction to the WBP have been taken.
THE … ?
To rub salt into the wound, the RA has enclosed an explanation as to why the deduction is disallowed, and has proposed a statutory underpayment penalty. The tax law provides for a penalty to be imposed where a taxpayer makes a substantial understatement of their tax liability. For individual taxpayers, a substantial underpayment exists when the understatement for the year exceeds the greater of ten percent of the tax required to be shown on the return, or $5,000. This is a relatively low threshold and is easily met by most taxpayers. The penalty is twenty percent of the tax underpayment.
Following the RA’s review, the taxpayer can expect to receive a 20 – 40 page “boiler-plated” or “canned” write-up, which will wind up as the Revenue Agent Report (RAR). The RARs that I’ve seen appear obviously drafted by IRS attorneys. Sometimes the RAR is shortened as a result of “cut and paste” procedures assembled by the RA. The RARs also contain alternative positions for these proposed disallowances. Taxpayers and representatives can take little comfort when all indications lead to the conclusion that the IRS has made a determination prior to assessing all the facts and circumstances of any given case standing on its own merits. My concern is that the WBP that meet IRS requirements are swept together with those that do not, and are unjustly branded as “bad.” The participants of these “good” plans must now overcome the preconceived notions of the RA. This becomes a difficult task as RAs won't deviate from the “boiler-plated” positions, forcing the taxpayer to expend funds in seeking further relief . The Appeals Division has similarly received a directive to sustain the RA RAR thus effectively eliminating the appeals right the taxpayers normally have. The only "appeals" route a taxpayer can take is to petition the Courts for a hearing. The time, expense, and outcome in defending a WBP under this scenario are enigmatic (hence the “…?”), and well, simply put, can really become downright UGLY!
CONCLUSION:
The IRS needs to examine WBPs on a plan by plan basis, and make a determination based on the facts and circumstances of each plan. Specifically, they should be charged with independently evaluating whether a particular WBP generally adheres to the Code and the IRS’s issued pronouncements. The RA and those in charge of this project should be cognizant of the statement issued by Donald L. Korb (Chief Counsel for the IRS): “The guidance targets specific abuses involving a limited group of arrangements that claim to be welfare benefit funds.” (emphasis provided). He continues to state that: “[T]oday’s action sends a strong signal that these abusive schemes must stop.” (emphasis provided). For those plans that the IRS deems to be abusive, the IRS can concentrate its resources in auditing the plan participants. The IRS hierarchy needs to eliminate the UGLY, recognize the GOOD, and pursue the BAD.

ABOUT THE AUTHOR: Sam Susser
Sam Susser began his IRS career on 2/1/71, and spent most the succeeding years as an international examiner with brief stints in the Review Section and the Appeals Division. He closed out his IRS tenure spending four years as International Team Manager for South Florida. Currently Sam is in private practice and can be reached at 561-742-1005

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.


Copyright Lance Wallach, CLU, CHFC

412i Tax Shelter Fraud Litigation - How It Works

Lance Wallach

 PARTIES:

Typically, these transactions will include an Insurance company, accountant, tax attorney, and a promoter (someone with an insurance background, perhaps an actuary, who knows how to structure the policy itself). These groups will use insurance brokerages and sub-agents (licensed in the various states) to sell the policies themselves. 

INSURANCE COMPANIES

AMERICAN GENERAL LIFE INSURANCE COMPANY® INDIANAPOLIS LIFE INSURANCE COMPANY®

HARTFORD LIFE AND ANNUITY INSURANCE COMPANY® PACIFIC LIFE INSURANCE COMPANY®

 BANKERS LIFE and OTHERS®?

4121iHOW THESE PLANS WORK:

In the late 1990’s, the individuals and groups above devised a scheme to sell abusive tax shelters under the auspices of Section 412(i) of the tax code. A 412(i) is a defined benefit pension plan. It provides specific retirement benefits to participants once they reach retirement and must contain assets sufficient to pay those benefits. A 412(i) plan differs from other defined benefit pension plans in that it must be funded exclusively by the purchase of individual life insurance products. To create a 412(i) plan, there must be a trust to hold the assets. The employer funds the plan by making cash contributions to the trust, and the Code allows the employer to take a tax deduction in the amount of the contributions, i.e. the entire amount.

The trust uses the contributed funds to purchase some combination of life insurance products (insurance or annuities) for the plan. As the plan participants retire, the trust will usually sell the policies for their present cash value and purchase annuities with the proceeds. The revenue stream from the annuities pays the specified retirement benefit to plan participants.

These defendants (with the aid and knowledge of the insurance companies) used the traditional structure and sold life insurance policies with excessively high premiums. The trust then uses the large cash contributions to pay high insurance premiums and the employer takes a deduction for the sum of those large contributions. As you might expect, these policies were designed with excessively high fees or “loads” which provided exorbitant commissions to the insurance companies and the agents who sold the products.

The policies that were sold were termed Springing Cash Value Policies. They had no cash value for the first 5-7 years, after which they had significant cash value. Under this scheme, after 5-7 years, and just before the cash value sprung, the participant purchases the policy from the trust for the policy’s surrender value. In theory, you have a tax free transaction.

The IRS does not recognize the tax benefit of such a plan and has repeatedly issued announcements indicating that such plans are contrary to federal tax laws and regulations.

               

I am not an attorney but I learned some of the above information from attorney’s Mr. Ford’s website.

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 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.taxaudit419.com and www.taxlibrary.us

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.

412i, 419, Lawsuits, IRS Audits. Lance Wallach, expert witness.

419, 412i, plans are being audited by the IRS. Lawsuits are the result. 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 advisers 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 problems with the plans were that the "springing cash" structure disqualified them from being 412(i) plans and that the premiums, which dwarfed any payout to a beneficiary, violated incidental death benefit rules.

Under §6707A of the Internal Revenue Code, once the IRS flags something as an abusive tax shelter, or "listed transaction," penalties are imposed per year for each failure to disclose it. Another allegation is that businesses weren't told that they had to file Form 8886, which discloses a listed transaction.

According to Lance Wallach of Plainview, N.Y. (516-938-5007), who testifies as an expert in cases involving the plans, the vast majority of accountants either did not file the forms for their clients or did not fill them out correctly.
Because the IRS did not begin to focus audits on these types of plans until some years after they became listed transactions, the penalties have already stacked up by the time of the audits.

Another reason plaintiffs are going to court is that there are few alternatives - the penalties are not appealable and must be paid before filing an administrative claim for a refund.

The suits allege misrepresentation, fraud and other consumer claims. "In street language, they lied," said Peter Losavio, a plaintiffs' attorney in Baton Rouge, La., who is investigating several cases. So far they have had mixed results. Losavio said that the strength of an individual case would depend on the disclosures made and what the sellers knew or should have known about the risks.

In 2004, the IRS issued notices and revenue rulings indicating that the plans were listed transactions. But plaintiffs' lawyers allege that there were earlier signs that the plans ran afoul of the tax laws, evidenced by the fact that the IRS is auditing plans that existed before 2004.

"Insurance companies were aware this was dancing a tightrope," said William Noll, a tax attorney in Malvern, Pa. "These plans were being scrutinized by the IRS at the same time they were being promoted, but there wasn't any disclosure of the scrutiny to unwitting customers."

A defense attorney, who represents benefits professionals in pending lawsuits, said the main defense is that the plans complied with the regulations at the time and that "nobody can predict the future."

An employee benefits attorney who has settled several cases against insurance companies, said that although the lost tax benefit is not recoverable, other damages include the hefty commissions - which in one of his cases amounted to $860,000 the first year - as well as the costs of handling the audit and filing amended tax returns.
Defying the individualized approach an attorney filed a class action in federal court against four insurance companies claiming that they were aware that since the 1980s the IRS had been calling the policies potentially abusive and that in 2002 the IRS gave lectures calling the plans not just abusive but "criminal." A judge dismissed the case against one of the insurers that sold 412(i) plans.

The court said that the plaintiffs failed to show the statements made by the insurance companies were fraudulent at the time they were made, because IRS statements prior to the revenue rulings indicated that the agency may or may not take the position that the plans were abusive. The attorney, whose suit also names law firm for its opinion letters approving the plans, will appeal the dismissal to the 5th Circuit.

In a case that survived a similar motion to dismiss, a small business owner is suing Hartford Insurance to recover a "seven-figure" sum in penalties and fees paid to the IRS. A trial is expected in August.

Last July, in response to a letter from members of Congress, the IRS put a moratorium on collection of §6707A penalties, but only in cases where the tax benefits were less than $100,000 per year for individuals and $200,000 for entities. That moratorium was recently extended until March 1, 2010.

But tax experts say the audits and penalties continue. "There's a bit of a disconnect between what members of Congress thought they meant by suspending collection and what is happening in practice. Clients are still getting bills and threats of liens," Wallach said.

"Thousands of business owners are being hit with million-dollar-plus fines. ... The audits are continuing and escalating. I just got four calls today," he said. A bill has been introduced in Congress to make the penalties less draconian, but nobody is expecting a magic bullet.

"From what we know, Congress is looking to make the penalties more proportionate to the tax benefit received instead of a fixed amount."

Dolan Media Newswires 01/22
Small Business Retirement Plans Fuel Litigation

As an expert witness Lance Wallach's side has never lost a case. People need to be careful of 419 Welfare Benefit Plans, 412i plans, Section 79 plans and Captive Insurance Plans. Most of these plans are sold by insurance agents. If you are in an abusive, listed or similar transaction plan you need to file under IRS 6707a. The participant files form 8886, and the salesmen or accountant who signs the tax returns files form 8918 if they got paid over $10,000. They are called Material Advisors and face a minimum $100,000 fine. Some plans are offshore which could involve FBAR or OVDI filings. If you have money overseas you probably need to file for IRS tax amnesty. If you want to reduce the tax we suggest that you first file and then opt out. For more information Google Lance Wallach.

Disclaimer: 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.

412i 419e IRS audits, 6707a penalties, form 8886 listed transactions

412i form 8886 listed transactions .419e IRS audits, 6707a penalties