419 Insurance Welfare Benefit Plans Continue to Get Accountants in Trouble
February 6, 2012 By Lance Wallach, CLU, CHFC
Popular so-called "419 Insurance Welfare Benefit
Plans," sold by most insurance professionals, are getting accountants and
their clients into more and more trouble. A CPA who is approached by a client
about one of the abusive arrangements and/or situations to be described and
discussed in this article must exercise the utmost degree of caution, not only
on behalf of the client, but for his/her own good as well.
Plans," sold by most insurance professionals, are getting accountants and
their clients into more and more trouble. A CPA who is approached by a client
about one of the abusive arrangements and/or situations to be described and
discussed in this article must exercise the utmost degree of caution, not only
on behalf of the client, but for his/her own good as well.
The National Conference of CPA Practitioners - By
Lance Wallach
The penalties noted in this article can also be applied to practitioners who
prepare and/or sign returns that fail to properly disclose listed transactions,
including those discussed herein.
On Oct. 17, 2007, the IRS issued Notice 2007-83, Notice 2007-84, and Revenue
Ruling 2007-65. Notice 2007-83 essentially lists the characteristics of welfare
benefit plans that the Service regards as listed transactions. Put simply, to
be a listed transaction, a plan cannot rely on the union exception set forth in
IRC Section 419A(f)(5),there must be cash value life insurance within the plan
and excessive tax deductions for life insurance, in excess of what may be
permitted by Sections 419 and 419A, must have been claimed.
In Notice 2007-84, the Service expressed concern with plans that provide all or
a substantial portion of benefits to owners and/or key and highly compensated
employees. The notice identified numerous specific concerns, among them:
1. The granting of loans to participants;
2. Providing deferred compensation;
3. Plan terminations that result in the distribution of assets rather than
being used post-retirement, as originally established; and
4. Permitting the transfer of life insurance policies to participants.
Alternative tax treatment may well be in the offing for such arrangements, as
the IRS intends to re-characterize such arrangements as dividends,
non-qualified deferred compensation (under IRC Section 404(a)(5) or Section
409A), split-dollar life insurance arrangements, or disqualified benefits
pursuant to Section 4976. Taxpayers participating in these listed transactions
should have, in most cases, already disclosed such participation to the
Service. Those who have not should do so at the earliest possible moment.
Failure to disclose can result in severe penalties – up to $100,000 for individuals
and $200,000 for corporations.
Finally, Revenue Ruling 2007-65 focused on 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), 419A
(f)(6), and 419 plans. Life insurance premiums are not inherently tax
deductible and authority must be found in Section 79 to justify such a
deduction. Section 264(a), in fact, specifically disallows tax deductions for
life insurance, at least in some cases. And moreover, the Service declared,
interposition of a trust does not change the nature of the transaction.
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.
Lance Wallach
The penalties noted in this article can also be applied to practitioners who
prepare and/or sign returns that fail to properly disclose listed transactions,
including those discussed herein.
On Oct. 17, 2007, the IRS issued Notice 2007-83, Notice 2007-84, and Revenue
Ruling 2007-65. Notice 2007-83 essentially lists the characteristics of welfare
benefit plans that the Service regards as listed transactions. Put simply, to
be a listed transaction, a plan cannot rely on the union exception set forth in
IRC Section 419A(f)(5),there must be cash value life insurance within the plan
and excessive tax deductions for life insurance, in excess of what may be
permitted by Sections 419 and 419A, must have been claimed.
In Notice 2007-84, the Service expressed concern with plans that provide all or
a substantial portion of benefits to owners and/or key and highly compensated
employees. The notice identified numerous specific concerns, among them:
1. The granting of loans to participants;
2. Providing deferred compensation;
3. Plan terminations that result in the distribution of assets rather than
being used post-retirement, as originally established; and
4. Permitting the transfer of life insurance policies to participants.
Alternative tax treatment may well be in the offing for such arrangements, as
the IRS intends to re-characterize such arrangements as dividends,
non-qualified deferred compensation (under IRC Section 404(a)(5) or Section
409A), split-dollar life insurance arrangements, or disqualified benefits
pursuant to Section 4976. Taxpayers participating in these listed transactions
should have, in most cases, already disclosed such participation to the
Service. Those who have not should do so at the earliest possible moment.
Failure to disclose can result in severe penalties – up to $100,000 for individuals
and $200,000 for corporations.
Finally, Revenue Ruling 2007-65 focused on 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), 419A
(f)(6), and 419 plans. Life insurance premiums are not inherently tax
deductible and authority must be found in Section 79 to justify such a
deduction. Section 264(a), in fact, specifically disallows tax deductions for
life insurance, at least in some cases. And moreover, the Service declared,
interposition of a trust does not change the nature of the transaction.
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.
accounting, financial or any type of advice for any specific individual or
other entity. You should contact an appropriate professional for any such
advice.
No comments:
Post a Comment