TAX MATTERS: ABUSIVE INSURANCE PLANS GET RED FLAG

By Lance Wallach

 

 Finance / Taxes   

The IRS in Notice 2007-83 identified as listed transactions certain trust arrangements involving cash-value life insurance policies. Revenue Ruling 2007-65, issued simultaneously, addressed situations where the tax deduction has been disallowed, in part or in whole, for premiums paid on such cash-value life insurance policies. Also simultaneously issued was Notice 2007-84, which disallows tax deductions and imposes severe penalties for welfare benefit plans that primarily and impermissibly benefit shareholders and highly compensated employees. Taxpayers participating in these listed transactions must disclose such participation to the Service by January 15. Failure to disclose can result in severe penalties--- up to $100,000 for individuals and $200,000 for corporations. Ruling 2007-65 aims at situations where cash-value life insurance is purchased on owner/employees and other key employees, while only term insurance is offered to the rank and file. These are sold as 419(e), 419(f) (6), and 419 plans. Other arrangements described by the ruling may also be listed transactions. A business in such an arrangement cannot deduct premiums paid for cash-value life insurance. A CPA who is approached by a client about one of these arrangements must exercise the utmost degree of caution, and not only on behalf of the client. The severe penalties noted above could also be applied to the preparers of returns that fail to properly disclose listed transactions. The IRS may challenge the claimed tax benefits of these arrangements for various reasons:
· Some or all of the benefits or distributions provided to or for the benefit of owner-employees or key employees may be disqualified benefits for purposes of the 100-percent excise tax under IRC §4976.
· Whenever the property distributed from a trust has not been properly valued by the taxpayer, the IRS intends to challenge the value of the distributed property, including life insurance policies.
· Under the tax benefit rule, some or all of an employer's deductions in an earlier year may have to be included in income in a later year if an event occurs that is fundamentally inconsistent with the premise on which the deduction was based.
· An employer's deductions for contributions to an arrangement that is properly characterized as a welfare benefit fund are subject to the limitations and requirements of the rules in IRC §§419 and419A, including the use of reasonable actuarial assumptions and the satisfaction of nondiscrimination requirements. Further, a taxpayer cannot obtain a deduction for reserves for post-retirement medical or life benefits unless the employer actually intends to use the contributions for that purpose.
· The arrangement may be subject to the rules for split-dollar arrangements, depending on the facts and circumstances.
· Contributions on behalf of an owner-employee may be characterized as dividends or as nonqualified deferred compensation subject to IRC §404(a)(5) or IRC §409A or both, depending on the facts and circumstances.

Lance Wallach speaks and writes about benefit plans, and has authored numerous books for the AICPA, Bisk Total tape, and others. He can be reached at (516) 938-5007. Lance Wallach, the National Society of Accountants Speaker of the Year, speaks and writes extensively about retirement plans, Circular 230 problems and tax reduction strategies. He speaks at more than 40 conventions annually, writes for over 50 publications, is quoted regularly in the press, and has written numerous best-selling AICPA books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker. Contact him at 516.938.5007, wallachinc@gmail.com or visithttp://www.taxaudit419.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.

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.

IRS Auditing 412(i) Plans

The Internal Revenue Service has 
recently been auditing 412(i) 
defined-benefit pension plans. They are seeking substantial taxes and 
penalties from what they characterize as 
“abusive plans,” but they do not regard all 412
(i) plans as necessarily abusive.  A properly 
structured and administered 412(i) plan can 
be an invaluable tax reduction tool for a 
business, but care must be taken.
To Read More:

http://taxaudit419.com/Article-16-IRS_Auditing_412i_Plans.html

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

---

June 15, 2011     By Lance Wallach, CLU, CHFC

---

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

Interested in being published in our new book?

We need three people in various groups for a new book to each give us a story about how they helped a client. Some of the groups are financial planners, life agents, brokers, attys., business owners, etc., etc. The book goes to print in two weeks and has been pre sold to 67431 people so far. We have a second version of this book which goes to print next month which will be sold by a professional organization to their 100,000 plus members and others. Attached are a few promotions for a few of last years books that we did. This is you opportunity to get your story in front of a lot of people and get your name included with some of the nations leading experts.

If you are interested please email me at LAWALLACH@aol.com (ASAP)

The IRS audits are both targeted and coordinated

Question: Are the IRS audits coordinated?

Answer: Yes. The IRS audits are both targeted and coordinated. They are targeted meaning that the IRS obtains a list of the participating employers in a plan promotion and audits the participating employers (and owners) for the purpose of challenging the deductions taken with respect to the plan. The audits are coordinated meaning that there is an IRS Issue Management Team for each promotion that has responsibility for both managing the promoter audit(s) and also developing the coordinated position to be followed by the Examination Agents. Their intention is that all taxpayers under audit will receive the similar treatment in Exam. There are also IRS Offices that specialize in 419 audits. For example, IRS offices in upstate New York and in El Monte California will manage many audits of specific promotions. Williams Coulson has significant experience in working with both of these offices.

Question: What is the general IRS position on these plans?

Answer: Though there can be some differences among plans, the basic IRS position is that the plans are not welfare benefit plans, but really plans of deferred compensation. As such, the contributions remain deductible at the business level but are included in the owner’s 1040 income for every open year and the value of the insurance policy with respect to contributions in closed years is included in the owner’s income either in the first open year or the year of termination or transfer. The IRS will normally apply 20% penalties on the tax applied and 30% with respect to non-reporting cases (see discussion below).

Question: Can the penalties ever be waived?

Answer:  Yes. The penalties can often be waived upon a showing of the taxpayer’s due diligence and good faith reasonable cause. For example, if the taxpayer can show reliance on an outside tax advisor who reviewed the plan and the law, the Examining Agent normally has the authority to waive the 20% negligence penalty. Note that there are different standards for waiving penalties among the IRS Offices. It is important to know the standards of each office before requesting a waiver.

Question: What if there is an opinion letter issued on the plan – will that eliminate penalties?

Answer:  Generally, the answer is a resounding – No. If the opinion letter was issued to the promoter or the promotion itself and a copy was merely provided to the taxpayer (even if the taxpayer paid for it), the IRS perceives the advice to be bias and not reasonable for reliance.

Question: What if the taxpayer relied upon the advisor who sold the promotion?

Answer:  The IRS also discounts any advice provided by parties who are part of the sales team for the promotion. It is possible to negate the bias against professionals involved in the sale if you can demonstrate that the professional was first a tax advisor and gave advice in that role and not as a salesman.

Question: What are the “listed transaction” penalties?

Answer: The IRS has identified certain multiple and single employer welfare benefit plans as listed transactions. Taxpayers who participate in listed transactions have an obligation to notify the IRS of their participation on IRS Form 8886. The Form 8886 must be filed with every tax return where a tax effect of the transaction appears on the return and for the first year of filing must also be filed with the IRS Office of Tax Shelter Analysis (OTSA). There are penalties that apply for the failure to file the Form 8886. The IRS position appears to be that although only the C corporation must file the 8886, if the business is a pass-through entity like an S Corporation, LLC or partnership, then the Form 8886 must be filed at both the entity level and also the individual level. The penalty for non-filing is 75% of the tax reduction for the tax year. Note that it is very clear that a plan does not have to be proven to be defective or abusive for the penalty to apply. Further, the IRS has made it very clear that they will construe the duty to disclose broadly. Thus, if there is even a possibility that a plan is a listed transaction, the taxpayer should consider strongly filing the Form 8886.

Question: Are there other negatives to not filing the Form 8886?

Answer:  Yes. In addition to the non-reporting penalty, the negligence penalty discussed above of 20% becomes 30% and is much more difficult to have waived. Further, the non-reporting penalty cannot be appealed to tax court. Therefore, the only recourse is to pay the penalty, file for a refund and fight the case in District Court.

Question: Whose responsibility is it to notify taxpayers of the need to file Form 8886?

Answer:  It depends. Many promoters take the initiative to inform their customers that the promotion may be considered to be a listed transaction and that they should consider filing Forms 8886, though some promoters have actually taken the opposite view and have directed customers to not file the Form 8886 to keep them off the IRS radar. These promoters face potential liability if the penalties are assessed. Because the Form 8886 is filed with the tax returns, it may be partly the responsibility of the CPA who prepares the returns to file the Form, though many CPAs may not know that the transaction is a listed transaction or how to prepare the Form. From the IRS perspective, the responsibility is clear – it is the taxpayer who bears the ultimate responsibility and will be penalized if the Form is not filed.

Question:  Are some plans better than others?

Answer:  Yes. Even though the IRS appears to have thrown a giant net over the entire industry, I have observed that many promoters have worked hard to develop a plan that complies with the tax law. The plans are supported by substantial legal and actuarial authority and make it clear that they are welfare plans and not deferred compensation plans. These plans are often very strong in their marketing materials as to the nature of the plan and also provide for less deductible amounts. On the other hand, some promotions have ignored new IRS Regulations (issued in 2003) and continue to sell and market plans that have been out of compliance for years. They make no attempt to bring their plans into compliance and seek to stay under the radar by directing their customers to not file Forms 8886.

Question:  Do taxpayers have causes of action?

Answer:  Maybe. We see two potential causes of action. First, in cases where the promoter has either created a defective product, or has turned a blind eye towards law changes, the promoter and potentially the insurance companies may have liability for the creating, marketing, endorsing and selling a defective product. Second, where planners have sold the product to customers improperly, by describing the plan as a safe, IRS approved retirement plan with unlimited deductions, they may have liability for fraudulent sales.

I do not agree with everything in this well written sales pitch. As an expert witness Lance Wallach’s side has never lost a case. I only know of two people that have successfully filed under IRS 8886, after the fact. Many of the hundreds of phone calls that I receive each year involve misfiling of 8886 forms.

If you are, or were in an abusive tax shelter like a 419 or 412i plan to time to act is now. If you are in a captive insurance or section 79 plan you should speak with someone that does not sell them. Many former promoters of abusive 419 plans now sell captive insurance or section 79 plans. IRS audits those plans. Who should you believe as many people still promote these scams?

Google Lance Wallach and the man pushing the plan.

Expert Witness

Expert Witness and Forensic Expert Directory

412(I) Plans and and the IRS audits and lawsuits.

Lance Wallach

 

412(i) is a provision of the tax code. A 412(i) plan is a defined pension plan. A 412(i) plan differs from other defined benefit pension plans in that it must be funded exclusively by the purchase of individual insurance products (insurance and annuities). It provides specific retirement benefits to participants once they reach retirement and must contain assets sufficient to pay those benefits. To create a 412(i) plan, there must be a plan to hold the assets. The employer funds the plan by making cash contributions to the plan, and the Code allows the employer to take a tax deduction in the amount of the contributions, i.e. the entire amount.

The plan uses the contributed funds to purchase some combination of insurance products (insurance or annuities) for the plan. As the plan participants retire, the plan 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.

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 administering the plans, the policies of insurance had high commissions and high surrender charges.

These plans were often described as Pendulum Plans, or other similar names. In theory, the plans would work as follows. After the defined pension plan was set up, the plan would purchase a life insurance policy insuring the life of an individual. The plan would have no cash value (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 bloom like a rose, and the individual would have a policy with significant cash value, which he or she could withdraw tax-free.

Who signed off on the plan?

Attorney Richard Smith at the law firm of Bryan Cave issued tax opinion letters opinion, which stated that many of the plans complied with the tax code.

So what is the problem?

In the early 2000s, IRS officials began questioning Richard Smith and others 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 nation convention of the American Society of Pension Actuaries on problems the IRS chief actuary also spoke. The convention was in Oct. of 2002. The IRS chief actuary discussed how the IRS was looking at these plans. This was not the first notice of IRS looking at these plans as being abusive. Most in the industry knew that the IRS would be coming after the participants in these plans well before the convention. Insurance companies continued to push these plans in spite of the potential IRS problems. They had participants sign disclosures saying that they would get their own tax advice. The insurance company disclosures were fraudulent. The disclosures were fraudulent because they did not disclose the fact that the IRS was in the process of taking action against people that were buying the plans. The insurance companies had a duty to disclose this fact to the buyers of the plans and to the buyers of the insurance that went inside the plans. They knew that by getting buyers to sign the disclaimers, without disclosing the true facts, they would have a defense if the buyers tried to sue.

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 large addition fines for every year in the plan, even if no contributions are made. These penalties are often referred to as section 6707a penalties. Advisors of these plans are required to maintain records regarding these plans and turn them over to the IRS, upon demand. If the 8886 forms were not done properly it is as if the forms were not filed. You can do the forms after the fact, but most people then make mistakes on the forms, and the forms do not count.

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 rescind the plan and pay the income taxes it would have paid had it not engaged in the plan, plus interest and reduced penalties. In late 2005, the IRS began obtaining information from advisors and actively auditing plans and more recently, levying section 6707 penalties.

If you were, or are still in a 412i plan time is of the essence. You have no statue of limitations if you did not, or do not properly file the 8886 forms. In addition to losing your tax deduction, you then get fined a minimum of $10,000 per year on the corporate level, and $5000 a year on the personal level.

I only know of two people who are skilled at doing the 8886 forms after the fact. I have received hundreds of phone calls from people who did the forms and still got the fines because the forms were not properly done.

 Lance Wallach, the National Society of Accountants Speaker of the Year, speaks and writes extensively about retirement plans, Circular 230 problems and tax reduction strategies. He speaks at more than 40 conventions annually, writes for over 50 publications, is quoted regularly in the press, and has written numerous best-selling AICPA books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Business Hot Spots.  Contact him at 516.938.5007 or visit www.vebaplan.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.

412i Plans attacked by IRS, lawsuits

Published by HG Experts.com

---

April 24, 2012     By Lance Wallach, CLU, CHFC

---

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.