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shops, "international business" clients and private individuals. Our experience
and professionalism guide every case, no matter how big or small.
FinanceExperts.org is the association for the" leading authorities" in the fields of
Accounting, Law, Taxation, Finance, Insurance and related fields.
Some of our prominent members include Lance Wallach, the National Society of
Accountants Speaker of the Year and best selling financial author; Ira Kaplan, ESQ.,
CPA who is the leading legal expert on welfare benefit plans; and Ronald Noll, MS,
CPA, CEA, the past president of an accounting society who helped Congress write the
Taxpayer Bill of Rights.
_________________________________________________________________________
FEATURED EXPERTS SPOTLIGHT
We have selected a handful of our numerous prestigious members to be featured
experts.
Lance Wallach
Lance Wallach, CLU, CHFC,
· National Society of Accountants Speaker of the Year
· Best selling financial author
· Leading expert on employee benefit plans & IRS audit defense
· CEO of Veba Plan LLC (The nation’s leading consulting & expert witness firm)
· The Lance Wallach Radio Show
"Ronald L. Noll"
Ronald L. Noll, MS, CPA, CEA
Jonathan E. "Gopman", Esq., J.D., LL.M
"Ira Kaplan", Esq., CPA, MBA
Janice H. "Eiseman", Esq.
and professionalism guide every case, no matter how big or small.
FinanceExperts.org is the association for the" leading authorities" in the fields of
Accounting, Law, Taxation, Finance, Insurance and related fields.
Some of our prominent members include Lance Wallach, the National Society of
Accountants Speaker of the Year and best selling financial author; Ira Kaplan, ESQ.,
CPA who is the leading legal expert on welfare benefit plans; and Ronald Noll, MS,
CPA, CEA, the past president of an accounting society who helped Congress write the
Taxpayer Bill of Rights.
_________________________________________________________________________
FEATURED EXPERTS SPOTLIGHT
We have selected a handful of our numerous prestigious members to be featured
experts.
Lance Wallach
Lance Wallach, CLU, CHFC,
· National Society of Accountants Speaker of the Year
· Best selling financial author
· Leading expert on employee benefit plans & IRS audit defense
· CEO of Veba Plan LLC (The nation’s leading consulting & expert witness firm)
· The Lance Wallach Radio Show
"Ronald L. Noll"
Ronald L. Noll, MS, CPA, CEA
- Helped Congress Write the Taxpayers Bill of Rights
- CPA and Investment Advisor for 40 Years
- Past National President of Accounting Society
- Author of AICPA Course on Taxation and Use of Private Annuity Trusts
- Real Estate Tax Expert and Investor Expert in Wealth Accumulation,
Perservation and Transfer
Jonathan E. "Gopman", Esq., J.D., LL.M
- Jonathan’s practice focuses on sophisticated wealth accumulation and
preservation planning strategies for entrepreneurs. - Jonathan has substantial experience in assisting high net worth families with
international and domestic estate planning, implementing foreign trust structures,
business planning and general tax planning. - He is AV rated by Martindale Hubbell.
- Jonathan is the co-author of the revised version of the BNA Tax Management
Portfolio on Estate Tax Payments and Liabilities. - Has been interviewed for, and quoted in, a number of articles published in well
known publications.
"Ira Kaplan", Esq., CPA, MBA
- One of America’s leading authorities on 419 and 412 plans
- Expert on fighting IRS fines and penalties, and Circular 230 fines for
accountants. Contributor to Lance’s Circular 230 book, recently published by
the American Institute of Certified Public Accountants, and to many of Lance’s
numerous other books - Expert on arbitration hearings and on lawsuits related to bad financial products
described and regulated by Sections 419 and 412 of the Internal Revenue Code
Janice H. "Eiseman", Esq.
- Janice focuses on the taxation of closely held businesses and tax planning for
owners and investors. - She has broad-based experience counseling clients on the formation, ownership
and structuring of various business entities, as well as drafting and negotiating tax-
based and transactional documentation for both individuals and business clients. - She has also done work before the IRS and the NYS department of Taxation
and Finance.
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| Late breaking news: Large 419 plan Millennium files for Bankruptcy. Recent court cases and other developments have highlighted serious problems in plans, popularly know as Benistar, issued by Nova Benefit Plans of Simsbury, Connecticut. Recently unsealed IRS criminal case information now raises concerns with other plans as well. If you have any type plan issued by NOVA Benefit Plans, U.S. Benefits Group, Benefit Plan Advisors, Grist Mill trusts, Rex Insurance Service or Benistar, get help at once. You may be subject to an audit or in some cases, criminal prosecution. On November 17th, 59 pages of search warrant materials were unsealed in the Nova Benefit Plans litigation currently pending in the U.S. District Court for the District of Connecticut. According to these documents, the IRS believes that Nova is involved in a significant criminal conspiracy involving the crimes of Conspiracy to Impede the IRS and Assisting in the Preparation of False Income Tax Returns. Read more here. |
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.
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 “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. Read more
here
Under Section
6707A
By Lance Wallach
Taxpayers who previously adopted 419, 412i, captive
insurance or Section 79 plans are in big trouble.
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 “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. Read more
here
Breaking News: Don't Become A Material
Advisor
Accountants, insurance professionals and others need to be careful that they don’t
become what the IRS calls material advisors. If they sell or give advice, or sign tax
returns for abusive, listed or similar plans; they risk a minimum $100,000 fine. Their
client will then probably sue them after having dealt with the IRS.
In 2010, the IRS raided the offices of Benistar in Simsbury, Conn., and seized the
retirement benefit plan administration firm’s files and records. In McGehee Family
Clinic, the Tax Court ruled that a clinic and shareholder’s investment in an employee
benefit plan marketed under the name “Benistar” was a listed transaction because it
was substantially similar to the transaction described in Notice 95-34 (1995-1 C.B.
309). This is at least the second case in which the court has ruled against the Benistar
welfare benefit plan, by denominating it a listed transaction.
The McGehee Family Clinic enrolled in the Benistar Plan in May 2001 and claimed
deductions for contributions to it in 2002 and 2005. The returns did not include a
Form 8886, Reportable Transaction Disclosure Statement, or similar disclosure. The
IRS disallowed the latter deduction and adjusted the 2004 return of shareholder
Robert Prosser and his wife to include the $50,000 payment to the plan. Click
here to read more.
Advisor
Accountants, insurance professionals and others need to be careful that they don’t
become what the IRS calls material advisors. If they sell or give advice, or sign tax
returns for abusive, listed or similar plans; they risk a minimum $100,000 fine. Their
client will then probably sue them after having dealt with the IRS.
In 2010, the IRS raided the offices of Benistar in Simsbury, Conn., and seized the
retirement benefit plan administration firm’s files and records. In McGehee Family
Clinic, the Tax Court ruled that a clinic and shareholder’s investment in an employee
benefit plan marketed under the name “Benistar” was a listed transaction because it
was substantially similar to the transaction described in Notice 95-34 (1995-1 C.B.
309). This is at least the second case in which the court has ruled against the Benistar
welfare benefit plan, by denominating it a listed transaction.
The McGehee Family Clinic enrolled in the Benistar Plan in May 2001 and claimed
deductions for contributions to it in 2002 and 2005. The returns did not include a
Form 8886, Reportable Transaction Disclosure Statement, or similar disclosure. The
IRS disallowed the latter deduction and adjusted the 2004 return of shareholder
Robert Prosser and his wife to include the $50,000 payment to the plan. Click
here to read more.
How to Avoid IRS Fines for You and Your Clients
Published: 2010/2011
By Lance Wallach
Beware: The IRS is cracking down on small-business owners who participate in tax-reduction insurance plans sold by insurance
agents, including defined benefit retirement plans, IRAs, and even 401(k) plans with life insurance. In these cases, the business
owner is motivated by a large tax deduction; the insurance agent is motivated by a substantial commission.
A few years ago, I testified as an expert witness in a case in which a physician was in an abusive 401(k) plan with life insurance.
It had a so-called “springing cash value policy” in it. The IRS calls plans with these types of policies “listed transactions.” The
judge called the insurance agent “a crook.”
If your client was currently is in a 412(i), 419, captive insurance, or Section 79 plan, they may be in big trouble. Accountants
who signed a tax return for a client in one of these plans may be what the IRS calls a “material advisor” and subject to a
maximum $200,000 fine.
If you are an insurance professional who sold or advised on one of these plans, the same holds true for you. Read more here!
Published: 2010/2011
By Lance Wallach
Beware: The IRS is cracking down on small-business owners who participate in tax-reduction insurance plans sold by insurance
agents, including defined benefit retirement plans, IRAs, and even 401(k) plans with life insurance. In these cases, the business
owner is motivated by a large tax deduction; the insurance agent is motivated by a substantial commission.
A few years ago, I testified as an expert witness in a case in which a physician was in an abusive 401(k) plan with life insurance.
It had a so-called “springing cash value policy” in it. The IRS calls plans with these types of policies “listed transactions.” The
judge called the insurance agent “a crook.”
If your client was currently is in a 412(i), 419, captive insurance, or Section 79 plan, they may be in big trouble. Accountants
who signed a tax return for a client in one of these plans may be what the IRS calls a “material advisor” and subject to a
maximum $200,000 fine.
If you are an insurance professional who sold or advised on one of these plans, the same holds true for you. Read more here!
FBAR Offshore Bank Accounts and Foreign Income Attacked by IRS
Offshore International Today Aug 2011
You may want to think about participation in the IRS’ offshore tax amnesty program (called the Offshore Voluntary
Disclosure Initiative). Do you want to play audit roulette with the IRS? Some clients think they are too small to be
prosecuted. They are wrong.
To the average businessperson, only the guys with tens of millions secretly stashed in Swiss bank accounts get
prosecuted. Don't tell that to Michael Schiavo. He was just prosecuted for hiding money in a Swiss account back in 2003.
How much money does the IRS say he hid? A whopping $90,000. That’s it.
But wait, there is more to the story. Schiavo attempted to do a quiet disclosure during the 2009 amnesty but instead of
filling out the amnesty paperwork, he simply trusted that by coming forward voluntarily he could avoid criminal
prosecution. He was wrong on all counts. Nothing is too small for the IRS, and nothing is too old.
“So, to save a whopping $40,624 in taxes, this guy risked a felony conviction and prison time, not to mention steep
penalties that could very easily eat up the entire $90,000, and also his criminal and civil defense costs.
The smart taxpayers are the ones coming forward and not having to look over their shoulders for the next 10 years.
Time is running out. The tax amnesty runs through August but it takes at least days to jump through all the hoops. We
will also fight hard to reduce the penalties down even more. Remember, the IRS can go as low as 5%. Don’t want this to
happen to you? Visit taxadvisorexpert.com today!
Offshore International Today Aug 2011
You may want to think about participation in the IRS’ offshore tax amnesty program (called the Offshore Voluntary
Disclosure Initiative). Do you want to play audit roulette with the IRS? Some clients think they are too small to be
prosecuted. They are wrong.
To the average businessperson, only the guys with tens of millions secretly stashed in Swiss bank accounts get
prosecuted. Don't tell that to Michael Schiavo. He was just prosecuted for hiding money in a Swiss account back in 2003.
How much money does the IRS say he hid? A whopping $90,000. That’s it.
But wait, there is more to the story. Schiavo attempted to do a quiet disclosure during the 2009 amnesty but instead of
filling out the amnesty paperwork, he simply trusted that by coming forward voluntarily he could avoid criminal
prosecution. He was wrong on all counts. Nothing is too small for the IRS, and nothing is too old.
“So, to save a whopping $40,624 in taxes, this guy risked a felony conviction and prison time, not to mention steep
penalties that could very easily eat up the entire $90,000, and also his criminal and civil defense costs.
The smart taxpayers are the ones coming forward and not having to look over their shoulders for the next 10 years.
Time is running out. The tax amnesty runs through August but it takes at least days to jump through all the hoops. We
will also fight hard to reduce the penalties down even more. Remember, the IRS can go as low as 5%. Don’t want this to
happen to you? Visit taxadvisorexpert.com today!
Our tax resolution offices have received calls regarding the following companies or
plans: CJA, CJA and Associates
plans: CJA, CJA and Associates
IRS Audits 419, 412i, Captive Insurance Plans With Life Insurance, and Section 79 Scams
By Lance Wallach June 2011
The IRS started auditing 419 plans in the ‘90s, and then continued going after 412i and other plans that they considered abusive, listed, or reportable transactions, or
substantially similar to such transactions.
In a recent Tax Court Case, Curcio v. Commissioner (TC Memo 2010-115), the Tax Court ruled that an investment in an employee welfare benefit plan marketed under
the name “Benistar” was a listed transaction in that the transaction in question was substantially similar to the transaction described in IRS Notice 95-34. A subsequent
case, McGehee Family Clinic, largely followed Curcio, though it was technically decided on other grounds. The parties stipulated to be bound by Curcio on the issue of
whether the amounts paid by McGehee in connection with the Benistar 419 Plan and Trust were deductible. Curcio did not appear to have been decided yet at the time
McGehee was argued. The McGehee opinion (Case No. 10-102) (United States Tax Court, September 15, 2010) does contain an exhaustive analysis and discussion of
virtually all of the relevant issues.
Taxpayers and their representatives should be aware that the Service has disallowed deductions for contributions to these arrangements. The IRS is cracking down on
small business owners who participate in tax reduction insurance plans and the brokers who sold them. Some of these plans include defined benefit retirement plans,
IRAs, or even 401(k) plans with life insurance.
In order to fully grasp the severity of the situation, one must have an understanding of Notice 95-34, which was issued in response to trust arrangements sold to
companies that were designed to provide deductible benefits such as life insurance, disability and severance pay benefits. The promoters of these arrangements claimed
that all employer contributions were tax-deductible when paid, by relying on the 10-or-more-employer exemption from the IRC § 419 limits. It was claimed that
permissible tax deductions were unlimited in amount.
In general, contributions to a welfare benefit fund are not fully deductible when paid. Sections 419 and 419A impose strict limits on the amount of tax-deductible
prefunding permitted for contributions to a welfare benefit fund. Section 419A(F)(6) provides an exemption from Section 419 and Section 419A for certain “10-or-
more employers” welfare benefit funds. In general, for this exemption to apply, the fund must have more than one contributing employer, of which no single employer
can contribute more than 10% of the total contributions, and the plan must not be experience-rated with respect to individual employers.
According to the Notice, these arrangements typically involve an investment in variable life or universal life insurance contracts on the lives of the covered employees.
The problem is that the employer contributions are large relative to the cost of the amount of term insurance that would be required to provide the death benefits under
the arrangement, and the trust administrator may obtain cash to pay benefits other than death benefits, by such means as cashing in or withdrawing the cash value of
the insurance policies. The plans are also often designed so that a particular employer’s contributions or its employees’ benefits may be determined in a way that
insulates the employer to a significant extent from the experience of other subscribing employers. In general, the contributions and claimed tax deductions tend to be
disproportionate to the economic realities of the arrangements.
Benistar advertised that enrollees should expect to obtain the same type of tax benefits as listed in the transaction described in Notice 95-34. The benefits of enrollment
listed in its advertising packet included:
* Virtually unlimited deductions for the employer;
* Contributions could vary from year to year;
* Benefits could be provided to one or more key executives on a selective basis;
* No need to provide benefits to rank-and-file employees;
* Contributions to the plan were not limited by qualified plan rules and would not interfere with pension, profit sharing or 401(k) plans;
* Funds inside the plan would accumulate tax-free;
* Beneficiaries could receive death proceeds free of both income tax and estate tax;
* The program could be arranged for tax-free distribution at a later date;
* Funds in the plan were secure from the hands of creditors.
The Court said that the Benistar Plan was factually similar to the plans described in Notice 95-34 at all relevant times. In rendering its decision the court heavily cited
Curcio, in which the court also ruled in favor of the IRS. As noted in Curcio, the insurance policies, overwhelmingly variable or universal life policies, required large
contributions relative to the cost of the amount of term insurance that would be required to provide the death benefits under the arrangement. The Benistar Plan owned
the insurance contracts.
Following Curcio, as the Court has stipulated, the Court held that the contributions to Benistar were not deductible under section 162(a) because participants could
receive the value reflected in the underlying insurance policies purchased by Benistar—despite the payment of benefits by Benistar seeming to be contingent upon an
unanticipated event (the death of the insured while employed). As long as plan participants were willing to abide by Benistar’s distribution policies, there was no
reason ever to forfeit a policy to the plan. In fact, in estimating life insurance rates, the taxpayers’ expert in Curcio assumed that there would be no forfeitures, even
though he admitted that an insurance company would generally assume a reasonable rate of policy lapses.
The McGehee Family Clinic had enrolled in the Benistar Plan in May 2001 and claimed deductions for contributions to it in 2002 and 2005. The returns did not include
a Form 8886,Reportable Transaction Disclosure Statement, or similar disclosure.
The IRS disallowed the latter deduction and adjusted the 2004 return of shareholder Robert Prosser and his wife to include the $50,000 payment to the plan. The IRS
also assessed tax deficiencies and the enhanced 30% penalty totaling almost $21,000 against the clinic and $21,000 against the Prossers. The court ruled that the
Prossers failed to prove a reasonable cause or good faith exception.
More you should know:
* In recent years, some section 412(i) plans have been funded with life insurance using face amounts in excess of the maximum death benefit a qualified plan is
permitted to pay. Ideally, the plan should limit the proceeds that can be paid as a death benefit in the event of a participant’s death. Excess amounts would revert to
the plan. Effective February 13, 2004, the purchase of excessive life insurance in any plan is considered a listed transaction if the face amount of the insurance exceeds
the amount that can be issued by $100,000 or more and the employer has deducted the premiums for the insurance.
* A 412(i) plan in and of itself is not a listed transaction; however, the IRS has a task force auditing 412i plans.
* An employer has not engaged in a listed transaction simply because it is a 412(i) plan.
* Just because a 412(i) plan was audited and sanctioned for certain items, does not necessarily mean the plan engaged in a listed transaction. Some 412(i) plans have
been audited and sanctioned for issues not related to listed transactions.
Companies should carefully evaluate proposed investments in plans such as the Benistar Plan. The claimed deductions will not be available, and penalties will be
assessed for lack of disclosure if the investment is similar to the investments described in Notice 95-34. In addition, under IRC 6707A, IRS fines participants a large
amount of money for not properly disclosing their participation in listed, reportable or similar transactions; an issue that was not before the Tax Court in either Curcio
or McGehee. The disclosure needs to be made for every year the participant is in a plan. The forms need to be properly filed even for years that no contributions are
made. I have received numerous calls from participants who did disclose and still got fined because the forms were not filled in properly. A plan administrator told me
that he assisted hundreds of his participants file forms, and they still all received very large IRS fines for not properly filling in the forms.
IRS has been attacking all 419 welfare benefit plans, many 412i retirement plans, captive insurance plans with life insurance in them and Section 79 plans.
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 Pubic 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, lawallach@aol.com or visit www.vebaplan.com.
Lance Wallach
68 Keswick Lane
Plainview, NY 11803
Ph.: (516)938-5007
Fax: (516)938-6330 www.vebaplan.com
National Society of Accountants Speaker of The Year
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 Lance Wallach June 2011
The IRS started auditing 419 plans in the ‘90s, and then continued going after 412i and other plans that they considered abusive, listed, or reportable transactions, or
substantially similar to such transactions.
In a recent Tax Court Case, Curcio v. Commissioner (TC Memo 2010-115), the Tax Court ruled that an investment in an employee welfare benefit plan marketed under
the name “Benistar” was a listed transaction in that the transaction in question was substantially similar to the transaction described in IRS Notice 95-34. A subsequent
case, McGehee Family Clinic, largely followed Curcio, though it was technically decided on other grounds. The parties stipulated to be bound by Curcio on the issue of
whether the amounts paid by McGehee in connection with the Benistar 419 Plan and Trust were deductible. Curcio did not appear to have been decided yet at the time
McGehee was argued. The McGehee opinion (Case No. 10-102) (United States Tax Court, September 15, 2010) does contain an exhaustive analysis and discussion of
virtually all of the relevant issues.
Taxpayers and their representatives should be aware that the Service has disallowed deductions for contributions to these arrangements. The IRS is cracking down on
small business owners who participate in tax reduction insurance plans and the brokers who sold them. Some of these plans include defined benefit retirement plans,
IRAs, or even 401(k) plans with life insurance.
In order to fully grasp the severity of the situation, one must have an understanding of Notice 95-34, which was issued in response to trust arrangements sold to
companies that were designed to provide deductible benefits such as life insurance, disability and severance pay benefits. The promoters of these arrangements claimed
that all employer contributions were tax-deductible when paid, by relying on the 10-or-more-employer exemption from the IRC § 419 limits. It was claimed that
permissible tax deductions were unlimited in amount.
In general, contributions to a welfare benefit fund are not fully deductible when paid. Sections 419 and 419A impose strict limits on the amount of tax-deductible
prefunding permitted for contributions to a welfare benefit fund. Section 419A(F)(6) provides an exemption from Section 419 and Section 419A for certain “10-or-
more employers” welfare benefit funds. In general, for this exemption to apply, the fund must have more than one contributing employer, of which no single employer
can contribute more than 10% of the total contributions, and the plan must not be experience-rated with respect to individual employers.
According to the Notice, these arrangements typically involve an investment in variable life or universal life insurance contracts on the lives of the covered employees.
The problem is that the employer contributions are large relative to the cost of the amount of term insurance that would be required to provide the death benefits under
the arrangement, and the trust administrator may obtain cash to pay benefits other than death benefits, by such means as cashing in or withdrawing the cash value of
the insurance policies. The plans are also often designed so that a particular employer’s contributions or its employees’ benefits may be determined in a way that
insulates the employer to a significant extent from the experience of other subscribing employers. In general, the contributions and claimed tax deductions tend to be
disproportionate to the economic realities of the arrangements.
Benistar advertised that enrollees should expect to obtain the same type of tax benefits as listed in the transaction described in Notice 95-34. The benefits of enrollment
listed in its advertising packet included:
* Virtually unlimited deductions for the employer;
* Contributions could vary from year to year;
* Benefits could be provided to one or more key executives on a selective basis;
* No need to provide benefits to rank-and-file employees;
* Contributions to the plan were not limited by qualified plan rules and would not interfere with pension, profit sharing or 401(k) plans;
* Funds inside the plan would accumulate tax-free;
* Beneficiaries could receive death proceeds free of both income tax and estate tax;
* The program could be arranged for tax-free distribution at a later date;
* Funds in the plan were secure from the hands of creditors.
The Court said that the Benistar Plan was factually similar to the plans described in Notice 95-34 at all relevant times. In rendering its decision the court heavily cited
Curcio, in which the court also ruled in favor of the IRS. As noted in Curcio, the insurance policies, overwhelmingly variable or universal life policies, required large
contributions relative to the cost of the amount of term insurance that would be required to provide the death benefits under the arrangement. The Benistar Plan owned
the insurance contracts.
Following Curcio, as the Court has stipulated, the Court held that the contributions to Benistar were not deductible under section 162(a) because participants could
receive the value reflected in the underlying insurance policies purchased by Benistar—despite the payment of benefits by Benistar seeming to be contingent upon an
unanticipated event (the death of the insured while employed). As long as plan participants were willing to abide by Benistar’s distribution policies, there was no
reason ever to forfeit a policy to the plan. In fact, in estimating life insurance rates, the taxpayers’ expert in Curcio assumed that there would be no forfeitures, even
though he admitted that an insurance company would generally assume a reasonable rate of policy lapses.
The McGehee Family Clinic had enrolled in the Benistar Plan in May 2001 and claimed deductions for contributions to it in 2002 and 2005. The returns did not include
a Form 8886,Reportable Transaction Disclosure Statement, or similar disclosure.
The IRS disallowed the latter deduction and adjusted the 2004 return of shareholder Robert Prosser and his wife to include the $50,000 payment to the plan. The IRS
also assessed tax deficiencies and the enhanced 30% penalty totaling almost $21,000 against the clinic and $21,000 against the Prossers. The court ruled that the
Prossers failed to prove a reasonable cause or good faith exception.
More you should know:
* In recent years, some section 412(i) plans have been funded with life insurance using face amounts in excess of the maximum death benefit a qualified plan is
permitted to pay. Ideally, the plan should limit the proceeds that can be paid as a death benefit in the event of a participant’s death. Excess amounts would revert to
the plan. Effective February 13, 2004, the purchase of excessive life insurance in any plan is considered a listed transaction if the face amount of the insurance exceeds
the amount that can be issued by $100,000 or more and the employer has deducted the premiums for the insurance.
* A 412(i) plan in and of itself is not a listed transaction; however, the IRS has a task force auditing 412i plans.
* An employer has not engaged in a listed transaction simply because it is a 412(i) plan.
* Just because a 412(i) plan was audited and sanctioned for certain items, does not necessarily mean the plan engaged in a listed transaction. Some 412(i) plans have
been audited and sanctioned for issues not related to listed transactions.
Companies should carefully evaluate proposed investments in plans such as the Benistar Plan. The claimed deductions will not be available, and penalties will be
assessed for lack of disclosure if the investment is similar to the investments described in Notice 95-34. In addition, under IRC 6707A, IRS fines participants a large
amount of money for not properly disclosing their participation in listed, reportable or similar transactions; an issue that was not before the Tax Court in either Curcio
or McGehee. The disclosure needs to be made for every year the participant is in a plan. The forms need to be properly filed even for years that no contributions are
made. I have received numerous calls from participants who did disclose and still got fined because the forms were not filled in properly. A plan administrator told me
that he assisted hundreds of his participants file forms, and they still all received very large IRS fines for not properly filling in the forms.
IRS has been attacking all 419 welfare benefit plans, many 412i retirement plans, captive insurance plans with life insurance in them and Section 79 plans.
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 Pubic 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, lawallach@aol.com or visit www.vebaplan.com.
Lance Wallach
68 Keswick Lane
Plainview, NY 11803
Ph.: (516)938-5007
Fax: (516)938-6330 www.vebaplan.com
National Society of Accountants Speaker of The Year
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.
Massachusetts Society of Certified Public Accounts, Inc.
Winter 2010
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 “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.
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 IRS’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 taxpayer’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 “reflecting the tax consequences of the strategy,” it could be argued that continued benefit
from a tax deferral for a previous tax deduction is within the contemplation of a “tax consequence” 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 “contributing,” 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 employer’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 Radio’s All Things Considered and others. Lance authored 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.
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.
Contact him at:
516.938.5007,
wallachinc@gmail.com, or
www.taxadvisorexperts.org, or
www.taxlibrary.us.