Massachusetts Society of Certified Public Accountants, Inc.
IRS Attacks Business Owners in 419, 412, Section 79 and Captive Insurance Plans Under Section 6707A
By Lance Wallach
Taxpayers who previously adopted 419, 412i, captive
insurance or Section 79 plans are in big trouble.
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." These plans were sold by insurance agents, financial planners, accountants and attorneys seeking large life insurance commissions. In general, taxpayers who engage in a â��listed transactionâ�� must report such transaction to the IRS on Form 8886 every year that they â��participateâ�� 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.
The moratorium on IRS fines expired on June 1, 2010. The IRS immediately started sending out notices proposing the imposition of Section 6707A penalties along with requests for lengthy extensions of the Statute of Limitations for the purpose of assessing tax. Many of these taxpayers stopped taking deductions for contributions to these plans years ago, and are confused and upset by the IRSâ��s inquiry, especially when the taxpayer had previously reached a monetary settlement with the IRS regarding its deductions. Logic and common sense dictate that a penalty should not apply if the taxpayer no longer benefits from the arrangement. Treas. Reg. Sec. 1.6011-4(c)(3)(i) provides that a taxpayer has participated in a listed transaction if the taxpayerâ��s tax return reflects tax consequences or a tax strategy described in the published guidance identifying the transaction as a listed transaction or a transaction that is the same or substantially similar to a listed transaction.
Clearly, the primary benefit in the participation of these plans is the large tax deduction generated by such participation. 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. While the regulations do not expand on what constitutes â��reflecting the tax consequences of the strategy,â�� it could be argued that continued benefit from a tax deferral for a previous tax deduction is within the contemplation of a â��tax consequenceâ�� of the plan strategy. Also, many taxpayers who no longer make contributions or claim tax deductions continue to pay administrative fees. Sometimes, money is taken from the plan to pay premiums to keep life insurance policies in force. In these ways, it could be argued that these taxpayers are still â��contributing,â�� and thus still must file Form 8886.
It is clear that the extent to which a taxpayer benefits from the transaction depends on the purpose of a particular transaction as described in the published guidance that caused such transaction to be a listed transaction. Revenue Ruling 2004-20, which classifies 419(e) transactions, appears to be concerned with the employerâ��s contribution/deduction amount rather than the continued deferral of the income in previous years. Another important issue is that the IRS has called CPAs material advisors if they signed tax returns containing the plan, and got paid a certain amount of money for tax advice on the plan. The fine is $100,000 for the CPA, or $200,000 if the CPA is incorporated. To avoid the fine, the CPA has to properly file Form 8918.
Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, Wallach is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters. He is also a featured writer and has been interviewed on television and financial talk shows including NBC, National Pubic Radioâ��s All Things Considered and others. Lance authored Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Educationâ��s CPAâ��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.
Contact him at:
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.
by taburkett 5 years ago
Is it time to replace the IRS with a true fair tax system?Is it time to replace the IRS and current disproportionate tax system with a 1% charge on every commercial monetary transaction that creates equal contribution for all?
by Susie Lehto 2 years ago
It would put more money in the hands of the working class, and provide growth and opportunities. It would eliminate taxes that are ridiculous (example: Obamacare). It would end the IRS and Washing cartel. It would be post-card size filing, a real simple form. To me, it looks like what...
by route66tim 7 years ago
What are rules for IRA deductions with retirement plans at work?My wife made $1000 last year and we contributed $5000 to a traditional IRA for her... Her job also has her enrolled in a retirement plan. Can we still deduct IRA? Our combined income is over $109K.
by IncomePowerBoost 8 years ago
This is one of the mail reasons to open a home base business. You could save 30-50% on what you are currently paying. Search small business tax deductions in goggle to find out more. If you plan on opening some sort of home base business I would recommend that you seek the counsel of a...
by T 2 years ago
Should we "End the IRS Before It Ends Us"? Can you find one reason not to end the IRS?The book, End the IRS Before It Ends Us, is not about taxation. It is about liberty. Grover Norquist, the head of Americans for Tax Reform, shows how the IRS taxes not only our incomes but...
by Beth Perry 5 years ago
Should the IRS be forced to reimburse taxpayers for the money spent on making videos?It has been revealed that the U.S. Internal Revenue Service spent thousands of dollars of taxpayer money in making videos for employees. One video was a dance video, two others were parodies, one of Star Trek, the...
Copyright © 2018 HubPages Inc. and respective owners. Other product and company names shown may be trademarks of their respective owners. HubPages® is a registered Service Mark of HubPages, Inc. HubPages and Hubbers (authors) may earn revenue on this page based on affiliate relationships and advertisements with partners including Amazon, Google, and others.
|HubPages Device ID||This is used to identify particular browsers or devices when the access the service, and is used for security reasons.|
|Login||This is necessary to sign in to the HubPages Service.|
|HubPages Traffic Pixel||This is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.|
|Remarketing Pixels||We may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.|
|Conversion Tracking Pixels||We may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.|