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Reportable Transactions .com: 419 Plan, 412i Plan

Reportable Transactions .com: 419 Plan, 412i Plan, Welfare benefit plan assistan...: 419 Plan, 412i Plan, Welfare benefit plan assistance, audits & Abusive tax shelters

412i Plans , 412(i) Defined Benefit Plan, Advisors, 412i-plans

419 412i audits lawsuits www.taxaudit419.com for help | LinkedIn

Tax Resolution Sevices - Attorneys-USA.org Lance Wallach

IRS Secrets You Should Know by Lance Wallach

Investment News - Lance Wallach - 412i and 419 plan litigatation

by Lance Wallach - Currently, the Internal Revenues Service ("IRS") has the discretion to assess hundreds of thousands of dollars in penalties under Section 6707A of the Internal Revenue Code ("Code") in an attempt to curb tax avoidance shelters. This discretion can be applied regardless of the innocence of the taxpayer and was granted by Congress. It works so if the you have engaged in a listed transaction and failed to properly disclose it, you will be subject to a potentially draconian penalty regardless of any other facts and circumstances concerning the transaction. For some, this penalty has been assessed a million dollars and for many it is the beginning of a long nightmare.

The IRS may call you a material advisor and fine you $200,000.00. The IRS may fine your clients over a million dollars for being in a retirement plan, 419 plan, etc. As you read this article, hundreds of unfortunate people are having their lives ruined by these fines. You may need to take action immediately. The Internal Revenue Service said it would extend until the end of 2009 a grace period granted to small business owners for collection of certain tax-shelter penalties.

With that deadline approaching, Congress has not yet acted on the tax shelter penalty legislation. IRS Commissioner Doug Shulman said in a Thursday letter to the chairmen and ranking members of tax-writing committees that the IRS would continue to suspend its collection efforts with regard to the penalties until Dec. 31, 2009.

"Clearly, a number of taxpayers have been caught in a penalty regime that the legislation did not intend," wrote Shulman. "I understand that Congress is still considering this issue, and that a bipartisan, bicameral, bill may be in the works."

The issue relates to penalties for so-called listed transactions, the kinds of tax shelters the IRS has designated most egregious. A number of small business owners that bought employee retirement plans so called 419 and 412(i) plans and others, that were listed by the IRS, and who are now facing hundreds and thousands in penalties, contend that the penalty amounts are unfair.

Leaders of tax-writing committees in the House and Senate have said they intend to pass legislation revising the penalty structure.

The IRS has suspended collection efforts in cases where the tax benefit derived from the listed transaction was less than $100,000 for individuals, or less than $200,000 for firms.

Senator Ben Nelson (D-Nebraska) has sponsored legislation (S.765) to curtail the IRS and its nearly unlimited authority and power under Code Section 6707A. The bill seeks to scale back the scope of the Section 6707A reportable/listed transaction nondisclosure penalty to a more reasonable level. The current law provides for penalties that are Draconian by nature and offer no flexibility to the IRS to reduce or abate the imposition of the 6707A penalty. This has served as a weapon of mass destruction for the IRS and has hit many small businesses and their owners with unconscionable results. If the new bill passes, large penalties will still be assessed. The penalties, however, will more realistically relate to the deductions taken.

Internal Revenue Code 6707A was enacted as part of the American Jobs Creation Act on October 22, 2004. It imposes a strict liability penalty for any person that failed to disclose either a listed transaction or reportable transaction per each occurrence. Reportable transactions usually fall within certain general types of transactions (e.g. confidential transactions, transactions with tax protection, certain loss generating transaction and transactions of interest arbitrarily so designated as by the IRS) that have the potential for tax avoidance. Listed transactions are specified transactions, which have been publicly designated by the IRS, including anything that is substantially similar to such a transaction (a phrase which is given very liberal construction by the IRS). There are currently 34 listed transactions, including certain retirement plans under Code section 412(i) and certain employee welfare benefit plans funded in part with life insurance under Code sections 419A(f)(5), 419(f)(6) and 419(e). Many of these plans were implemented by small business seeking to provide retirement income or health benefits to their employees.

Strict liability requires the IRS to impose the 6707A penalty regardless of innocence of a person (i.e. whether the person knew that the transaction needed to be reported or not or whether the person made a good faith effort to report) or the level of the person's reliance on professional advisors. A Section 6707A penalty is imposed when the transaction becomes a reportable/listed transaction. Therefore, a person has the burden to keep up to date on all transactions requiring disclosure by the IRS into perpetuity for transactions entered into the past.

Additionally, the 6707A penalty strictly penalizes nondisclosure irrespective of taxes owed. Accordingly, the penalty will be assessed even in legitimate tax planning situations when no additional tax is due but an IRS required filing was not properly and timely filed. It is worth noting that a failure to disclose in the view of the IRS encompasses both a failure to file the proper form as well as a failure to include sufficient information as to the nature and facts concerning the transaction. Hence, people may find themselves subject to the 6707A penalty if the IRS determines that a filing did not contain enough information on the transaction. A penalty is also imposed when a person does not file the required duplicate copy with a separate IRS office in addition to filing the required copy with the tax return.

Lance Wallach Commentary. In our numerous talks with IRS, we were also told that improperly filling out the forms could almost be as bad as not filing the forms. We have reviewed hundreds of forms for accountants, business owners and others. We have not yet seen a form that was properly filled in. We have been retained to correct many of these forms.
For more information see www.vebaplan.com, www.lawyer4audits.com, www.irs.gov or e-mail us at LaWallach@aol.com

The imposition of a 6707A penalty is not subject to judicial review regardless of whether the penalty is imposed for a listed or reportable transaction. Accordingly, the IRS's determination is conclusive, binding and final. The next step from the IRS is sending your file to collection, where your assets may be forcibly taken, publicly recorded liens may be placed against your property, and/or garnishment of your wages or business profits may occur, amongst other measures.

The 6707A penalty amount for each listed transaction is generally $200,000 per year per each person that is not an individual and $100,000 per year per individual who failed to properly disclose each listed transaction. The 6707A penalty amount for each reportable transaction is generally $50,000 per year for each person that is not an individual and $10,000 per year per each individual who failed to properly disclose each reportable transaction. The IRS is obligated to impose the listed transaction penalty by law and cannot remove the penalty by law. The IRS is obligated to impose the reportable transaction penalty by law, as well, but may remove the penalty when the IRS determines that removal of the penalty would promote compliance and support effective tax administration.

The 6707A penalty is particularly harmful in the small business context, where many business owners operate through an S corporation or limited liability company in order to provide liability protection to the owner/operators. Numerous cases are coming to light where the IRS is imposing a $200,000 penalty at the entity level and them imposing a $100,000 penalty per individual shareholder or member per year.

The individuals are generally left with one of two options:

1. Declare Bankruptcy

2. Face a $300,000 penalty per year.

Keep in mind, taxes do not need to be due nor does the transaction have to be proven illegal or illegitimate for this penalty to apply. The only proof required by the IRS is that the person did not properly and timely disclose a transaction that the IRS believes the person should have disclosed. It is important to note in this context that for non-disclosed listed transactions, the Statue of Limitations does not begin until a proper disclosure is filed with the IRS.

Many practitioners believe the scope and authority given to the IRS under 6707A, which allows the IRS to act as judge, jury and executioner, is unconstitutional. Numerous real life stories abound illustrating the punitive nature of the 6707A penalty and its application to small businesses and their owners. In one case, the IRS demanded that the business and its owner pay a 6707A total of $600,000 for his and his business' participation in a Code section 412(i) plan. The actual taxes and interest on the transaction, assuming the IRS was correct in its determination that the tax benefits were not allowable, was $60,000. Regardless of the IRS's ultimate determination as to the legality of the underlying 412(i) transaction, the $600,000 was due as the IRS's determination was final and absolute with respect to the 6707A penalty. Another case involved a taxpayer who was a dentist and his wife whom the IRS determined had engaged in a listed transaction with respect to a limited liability company. The IRS determined that the couple owed taxes on the transaction of $6,812, since the tax benefits of the transactions were not allowable. In addition, the IRS determined that the taxpayers owed a $1,200,000 section 6707A penalty for both their individual nondisclosure of the transaction along with the nondisclosure by the limited liability company.

Even the IRS personnel continue to question both the legality and the fairness of the IRS's imposition of 6707A penalties. An IRS appeals officer in an email to a senior attorney within the IRS wrote that "…I am both an attorney and CPA and in my 29 years with the IRS I have never {before} worked a case or issue that left me questioning whether in good conscience I could uphold the Government's position even though it is supported by the language of the law." The Taxpayers Advocate, an office within the IRS, even went so far as to publicly assert that the 6707A should be modified as it "raises significant Constitutional concerns, including possible violations of the Eighth Amendment's prohibition against excessive government fines, and due process protection."

Senate bill 765, the bill sponsored by Senator Nelson, seeks to alleviate some of above cited concerns. Specifically, the bill makes three major changes to the current version of Code section 6707A. The bill would allow an IRS imposed 6707A penalty for nondisclosure of a listed transaction to be rescinded if a taxpayer's failure to file was due to reasonable cause and not willful neglect. The bill would make a 6707A penalty proportional to an understatement of any tax due. It is this author's opinion that some legislation will pass. The legislation will have fines for non-disclosure. The fines will be more reasonable but will still be large, in the range of $10,000 or more.

Accordingly, non-tax paying entities such as S corporations and limited liability companies would not be subject to a 6707A penalty (individuals, C corporations and certain trusts and estates would remain subject to the 6707A penalty).

There are a number of interesting points to note about this action:

1. In the letter, the IRS acknowledges that, in certain cases, the penalty imposed by section 6707A for failure to report participation in a "listed transaction" is disproportionate to the tax benefits obtained by the transaction.

2. In the letter, the IRS says that it is taking this action because Congress has indicated its intention to amend the Code to modify the penalty provision, so that the penalty for failure to disclose will be more in line with the tax benefits resulting from a listed transaction.

3. The IRS will not suspend audits or collection efforts in appropriate cases. It cannot suspend imposition of the penalty, because, at least with respect to listed transactions, it does not have the discretion to not impose the penalty. It is simply suspending collection efforts in cases where the tax benefits are below the penalty threshold in order to give Congress time to amend the penalty provision, as Congress has indicated to the IRS it intends to do.

It should also be noted that identical bills have been introduced in the Senate and the House to amend Section 6707A. Each bill has been referred to the appropriate committee, where no action has taken place. There are a couple of points about the proposed legislation:

1. The legislation would reduce the penalty for failure to disclose participation in a reportable transaction, other than a listed transaction, to the amount imposed by section 6662A for an understatement of tax. For a listed transaction, the penalty would equal 200% of the penalty imposed for an understatement of tax. The amount of the penalty imposed by section 6662A is 20%.

2. The proposed legislation is different than the position expressed by the IRS. The IRS would like the penalty to equal the tax benefits obtained from the transaction.

3. The legislation does not change the penalty provisions for material advisors. For example. An accountant who signed a tax return and got paid would still face a large fine. An insurance agent who sold one of these plans would still face a large fine.

About the Author:
Lance Wallach, CLU, ChFC, speaks and writes extensively about financial planning, retirement plans, and tax reduction strategies. He is an American Institute of CPA's course developer and instructor and has authored numerous best selling books about abusive tax shelters, IRS crackdowns and attacks and other tax matters. He speaks at more than 20 national conventions annually and writes for more than 50 national publications. For more information and additional articles on these subjects, visit www.vebaplan.com, www.taxlibrary.us, www.lawyer4audits.comor call 516-938-5007.

The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or entity. You should contact an appropriate professional for any such advice.

Investment News - Lance Wallach - 412i and 419 plan litigatation

Small Business Tax News

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.

Investment News - Lance Wallach - 412i and 419 plan litigatation

Investment News

Small Business Tax News

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.

412i Plans Attacked by IRS, Lawsuits

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.

Click here to find out more

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.