Business Meals and Entertainment Expenses
Running a business isn't easy.On this blog we have helpful financial information that you will find very useful.
SUBSTANTIALLY REDUCE OR ELIMINATE YOUR TAXES
The national society of Accountants, 'Speaker of The Year' will show you how to take advantage of Trump's IRS attacks. If a CPA or tax attorney is aggressive with your returns, he must anonymously report on you, or face a hundred thousand dollar fine and loss of his license.
Lance Wallach has spoken at hundreds of legal and CPA conventions about this and other unique tax issues.
Here's a hint: Google Lance Wallach, Forbes magazine, and read at least 4 different forbes magazine articles where Lance is mentioned.
Google Lance Wallach's financial articles and CPE books he writes for the American Institute of CPAs for more pointers.
Better yet; call Lance Wallach and speak with him or his team of former IRS tax attorneys and CPAs.
516-236-8440
Wallachinc@gmail.com
If you sold, advised on or had anything to do with a listed transaction you will be fined by the IRS. For those that bought listed transactions like, 419 welfare benefit plans or 412i plans, you have been or will also be fined.
On July 30, 2014, the Internal Revenue Service issued final regulations regarding the imposition of penalties under Internal Revenue Code section 6707 against material advisors who fail to file true, complete or timely disclosure returns with respect to reportable or listed transactions. The effective date of the final regulations is July 31, 2014.
Taxlibrary A blog for when you haveproblems with the IRS, you need a proven winner to stand up to the IRS to help you avoid large"IRS penalties and interest" that could put you out of business.
Strategic
Advice on the Tax Implications of Business Planning
March 2004
UPDATE ON IRS CRACKDOWN ON ABUSIVE 412(i) PLANS
By Lance Wallach & Ira Kaplan
On Friday, February 3, 2004, the IRS issued
proposed regulations concerning the valuation of insurance contracts in the
context of qualified retirement plans.
The IRS says that it is no longer reasonable to use the cash surrender
value or the interpolated terminal reserve as the accurate value of a life
insurance contract for income tax purposes.
The IRS issued proposed regulations stating that the value of a life
insurance contract in the context of qualified retirement plans should be the
contract’s fair market value.
The Service acknowledged in the regulations (and in a revenue procedure
issued simultaneously) that the fair market value standard could create some
confusion among taxpayers. They
addressed this possibility by describing a safe harbor position.
When I addressed the American Society of Pension Actuaries Annual National
Convention, the IRS chief actuary also spoke about attacking abusive 412(i)
pensions.
A “Section 412(i) plan” is a tax-qualified retirement plan that is
funded entirely by a life insurance contract or an annuity. The employer claims tax deductions for
contributions that are used by the plan to pay premiums on an insurance
contract covering an employee. The plan
may hold the contract until the employee dies, or it may distribute or sell the
contract to the employee at a specific point, such as when the employee
retires.
“The guidance targets specific abuses occurring with Section 412(i)
plans”, stated Assistant Secretary for Tax Policy Pam Olson. “There are many legitimate Section 412(i)
plans, but some push the envelope, claiming tax results for employees and
employers that do not reflect the underlying economics of the
arrangements.” Or, to put it another
way, tax deductions are being claimed, in some cases, that the Service does not
feel are reasonable given the taxpayer’s facts and circumstances.
“Again and again, we’ve uncovered abusive tax avoidance transactions
that game the system to the detriment of those who play by the rules,” said IRS
Commissioner Mark W. Everson.
I
have been published by the AICPA and others for years about these and similar
abuses. Finally, the IRS is doing
something. If someone is in an abusive
412(i) plan, they had better seek counsel quickly.
Editor's
note: The author and publisher are not rendering professional advice and assume
no liability in connection with its use.
Consult your tax adviser and accountant before making any investment or
tax-related decisions.·
Lance Wallach is a member of Small
Business Tax News’ Advisory Board. He is
a frequent speaker on tax-related subjects including VEBAs, pensions, and
tax-oriented strategies.·
Ira Kaplan, Esq., CPA, MBA, is a
national speaker and author. For
more information call Lance Wallach at (516)938-5007.
During the past few years, the Internal Revenue Service (IRS) has fined many business owners hundreds of thousands of dollars for participating in several particular types of insurance plans.
The 412(i), 419, captive insurance, and section 79 plans were marketed as a way for small-business owners to set up retirement, welfare benefit plans, or other tax-deductible programs while leveraging huge tax savings, but the IRS put most of them on a list of abusive tax shelters, listed transactions, or similar transactions, etc., and has more recently focused audits on them. Many accountants are unaware of the issues surrounding these plans, and many big-name insurance companies are still encouraging participation in them.
Seems Attractive
The plans are costly up-front, but your money builds over time, and there’s a large payout if the money is removed before death. While many business owners have retirement plans, they also must care for their employees. With one of these plans, business owners are not required to give their workers anything.
Gotcha
Although small business has taken a recessionary hit and owners may not be spending big sums on insurance now, an IRS task force is auditing people who bought these as early as 2004. There is no statute of limitations.
The IRS also requires participants to file Form 8886 informing the IRS of participation in this “abusive transaction.” Failure to file or to file incorrectly will cost the business owner interest and penalties. Plus, you’ll pay back whatever you claimed for a deduction, and there are additional fines — possibly 70% of the tax benefit you claim in a year. And, if your accountant does not confidentially inform on you, he or she will get fined $100,000 by the IRS. Further, the IRS can freeze assets if you don’t pay and can fine you on a corporate and a personal level despite the type of business entity you have.
Legal Wrangling
Currently, small businesses facing audits and potentially huge tax penalties over these plans are filing lawsuits against those who marketed, designed, and sold the plans. Find out promptly if you have one of these plans and seek advice from a knowledgeable accountant to help you properly file Form 8886.
Introduction Section 419A(f)(6) was added in 1984; creating the 10-or-more employer plan. The promoters of these plans...
Abusive Insurance and Retirement Plans
Single-employer section 419 welfare benefit plans are the latest incarnation in insurance deductions the IRS deems abusive.
by Lance Wallach
Parts of this article are from the AICPA CPE self-study course Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots, by Sid Kess, authored by Lance Wallach.
Many of the listed transactions that can get your clients into trouble with the IRS are exotic shelters that relatively few practitioners ever encounter. When was the last time you saw someone file a return as a Guamanian trust (Notice 2000-61)? On the other hand, a few listed transactions concern relatively common employee benefit plans the IRS has deemed tax-avoidance schemes or
otherwise abusive. Perhaps some of the most likely to crop up, especially in small business returns, are arrangements purporting to allow deductibility of premiums paid for life insurance under a welfare benefit plan. Some of these abusive employee benefit plans are represented as satisfying section 419 of the Code, which sets limits on purposes and balances of “qualified asset accounts” for such benefits, but purport to offer deductibility of contributions without any corresponding income. Others attempt to take advantage of exceptions to qualified asset account limits, such as sham union plans that try to exploit the exception for separate welfare benefit funds under collective-bargaining
agreements provided by IRC § 419A(f)(5). Others try to take advantage of exceptions for plans serving 10 or more employers, once popular under section 419A(f)(6). More recently, one may encounter plans relying on section 419(e) and, perhaps, defined-benefit pension plans established pursuant to the former section 412(i) (still so-called, even though the subsection has since been redesignated section 412(e)(3). See sidebar “Defined-Benefit 412(i) Plans Under Fire”).
Promoters and Their Best-Laid Plans
Sections 419 and 419A were added to the Code in 1984 by the Deficit Reduction Act of 1984
in an attempt to end employers’ acceleration of deductions for plan contributions. But it wasn’t long before plan promoters found an end run around the new Code sections. An industry developed in what came to be known as “10 or more employer plans.” The promoters of these plans, in conjunction with life insurance companies who just wanted premiums on the books, would sell people on the idea of tax-deductible life insurance and other benefits, and especially large tax deductions. It was almost, “How much can I deduct?” with the reply, “How much do you want to?” Adverse court decisions (there were a few) and other law to the contrary were either glossed over or explained away. The IRS steadily added these abusive plans to its designations of listed transactions. With Revenue Ruling 90-105, it warned against deducting certain plan contributions attributable to compensation earned by plan participants after the end of the taxable year. Purported exceptions to limits of sections 419 and 419A claimed by 10 or more multiple-employer benefit funds were likewise proscribed in Notice 95-34. Both positions were designated listed transactions in 2000.
At that point, where did all those promoters go? Evidence indicates many are now promoting plans purporting to comply with section 419(e). They are calling a life insurance plan a welfare benefit plan (or fund), somewhat as they once did, and promoting the plan as a vehicle to obtain large tax deductions. The only substantial difference is that these are now single-employer plans. And again, the IRS has tried to rein them in, reminding that listed transactions include those substantially similar to any that are specifically described and so designated. On Oct. 17, 2007, the IRS issued notices 2007-83 and 2007-84. In the former, the IRS identified certain trust arrangements involving cash-value life insurance policies, and substantially similar arrangements, as listed transactions. The latter similarly warned against certain post-retirement medical and life insurance benefit arrangements, saying they might be subject to “alternative tax treatment.” The IRS at the same time issued related Revenue Ruling 2007-65 to address situations where an arrangement is considered a welfare benefit fund but the employer’s deduction for its contributions to the fund is denied in whole or part for premiums paid by the trust on cash-value life insurance policies. It states that a welfare benefit fund’s qualified direct cost under section 419 does not include premium amounts paid by the fund
for cash-value life insurance policies if the fund is directly or indirectly a beneficiary under the policy, as determined under section 264(a). Notice 2007-83 is aimed at promoted arrangements under
which the fund trustee purchases cash-value insurance policies on the lives of a business’s employee/owners, and sometimes key employees, while purchasing term insurance policies on the lives of other employees covered under the plan. These plans anticipate being terminated and that the cash-value policies will be distributed to the owners or key employees, with very little distributed to
other employees. The promoters claim that the insurance premiums are currently deductible by the business, and that the distributed insurance policies are virtually tax-free to the owners. The ruling makes it clear that, going forward, a business under most circumstances cannot deduct the cost of premiums paid through a welfare benefit plan for cash-value life insurance on the lives of its employees. 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% excise tax under section 4976.
■ Whenever the property distributed from a trust has not been properly valued by the taxpayer, the IRS said in Notice 2007-84 that it 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 sections 419
and 419A, including reasonable actuarial assumptions and nondiscrimination. Further, a taxpayer cannot obtain a deduction for reserves for post-retirement medical or life benefits unless the employer 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 section 404(a)(5), section 409A or both, depending on the facts and circumstances.
Higher Risks for Practitioners
Under New Penalties The updated Circular 230 regulations and the new law (IRC § 6694, preparer penalties) make it more important for CPAs to understand what their clients are deducting on tax
returns. A CPA may not prepare a tax return unless he or she has a reasonable belief that the tax treatment of every position on the return would more likely than not be sustained on its merits. Proposed regulations issued in June 2008 spell out many new implications of these changes introduced by the Small Business and Work Opportunity Act of 2007. The CPA should study all the facts and, based on that study, conclude that there is more than a 50% likelihood (“more
likely than not”) that, if the IRS challenges the tax treatment, it will be upheld. As an alternative, there must be a reasonable basis for each position on the tax return, and each position needs to be adequately disclosed to the IRS. The reasonable-basis standard is not satisfied by an arguable claim. A CPA may not take into account the possibility that a return will not be audited by the IRS, or that an issue will not be raised if there is an audit.
It is worth noting that listed transactions are subject to a regulatory scheme applicable only to
them, entirely separate from Circular 230 requirements, regulations and sanctions. Participation in such a transaction must be disclosed on a tax return, and the penalties for failure to disclose are severe—up to $100,000 for individuals and $200,000 for corporations. The penalties apply to both
taxpayers and practitioners. And the problem with disclosure, of course, is that it is apt to trigger an audit, in which case even if the listed transaction were to pass muster, something else may not.
Need for Caution
Should a client approach you with one of these plans, be especially cautious, for both of you. Advise your client to check out the promoter very carefully. Make it clear that the government has the names of all former 419A(f)(6) promoters and therefore will be scrutinizing the promoter carefully if the promoter was once active in that area, as many current 419(e) (welfare benefit fund or plan) promoters were. This makes an audit of your client far riskier and more likely.
SIDEBAR
Defined-Benefit 412(i) Plans Under Fire The IRS has warned against so-called section 412(i) defined-benefit pension plans, named for the former IRC section governing them. It warned against certain trust arrangements it deems abusive, some of which may be regarded as listed transactions. Falling into that category can result in taxpayers having to disclose such participation under
pain of penalties potentially reaching $100,000 for individuals and $200,000 for other taxpayers. Targets also include some retirement plans.
One reason for the harsh treatment of 412(i) plans is their discrimination in favor of owners and key, highly compensated employees. Also, the IRS does not consider the promised tax relief proportionate to the economic realities of these transactions. In general, IRS auditors divide audited plans into those they consider noncompliant and others they consider abusive. While the alternatives available to the sponsor of a noncompliant plan are problematic, it is frequently an option to keep the plan alive in some form while simultaneously hoping to minimize the financial fallout from penalties.
The sponsor of an abusive plan can expect to be treated more harshly. Although in some situations something can be salvaged, the possibility is definitely on the table of having to treat the plan as if it never existed, which of course triggers, the full extent of back taxes, penalties and interest on all
contributions that were made, not to mention leaving behind no retirement plan whatsoever.
EXECUTIVE SUMMARY
■ Some of the listed transactions CPA tax practitioners are most likely to encounter are employee benefit insurance plans that the IRS has deemed abusive. Many of these plans have been sold by promoters in conjunction with life insurance companies.
■ As long ago as 1984, with the addition of IRC §§ 419 and 419A, Congress and the IRS took aim at unduly accelerated deductions and other perceived abuses. More recently, with guidance and a ruling issued in fall 2007, the Service declared as abusive certain trust arrangements involving cash-value
life insurance and providing post-retirement medical and life insurance benefits.
■ The new “more likely than not” penalty standard for tax preparers under IRC § 6694 raises the stakes for CPAs whose clients may have maintained or participated in such a plan. Failure to disclose a listed transaction carries particularly severe potential penalties.
Would you go to a dentist for heart surgery? They are both doctors?
Like any other professional service, such as legal services, medical care, or accounting services, the price of appraisal services should always be one consideration in selecting the professional or professional firm. However, it's usually not appropriate to shop for the lowest priced vendor, or to use competitive bidding to obtain the lowest price. The heart patient, whose life may depend on the skill and judgment of his surgeon, wouldn't be smart to put his surgery out to bid. Similarly, the client whose financial fortunes may rely on the quality of work or the effectiveness of testimony by his valuation expert should probably not make a decision on hiring an appraiser based primarily on lowest fees.
Is a captive insurance cell the way to go? - Accounting Today - Captive Insurance: Achieve large tax and cost reductions by renting a “CAPTIVE”. Most accountants and small business owners are unfamiliar with a great way to reduce taxes and expenses. By either creating or sharing “a captive insurance company”, substantial tax and cost savings will benefit the small business owner.
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 tax 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.
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.
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.
