By: Lance Wallach
The IRS is cracking down on what it considers to be abusive tax shelters. Many of them are being
marketed to small business owners by insurance professionals, financial planners and even
accountants and attorneys. I speak at numerous conventions, for both business owners and
accountants. And after I speak, I am always approached by many people who have questions about
tax reduction plans that they have heard about. Below are the most common.
419 tax reduction insurance plans
These come in various versions, and most of them have or will get the participant audited and the
salesman sued. They purportedly allow the business owner to make a large tax-deductible contribution,
and some or all of the contribution pays for a life insurance product. The IRS has been disallowing
most versions of these plans for years, yet they continue to be sold. After everyone gets into trouble
and the insurance agents get sued, the promoters of the abusive versions sometimes change the name
of their company and call the plan something else. The insurance companies whose policies are sold
are legitimate companies. What usually is not legitimate is the way that most of the plans are operated.
There can also be a $200,000 IRS fine facing the insurance agent who sold the plan if Form 8918 has
not been properly filed. I've reviewed hundreds of these forms for agents and have yet to see one that
was filled out correctly.
When the IRS audits a participant in one of these plans, the tax deductions are lost. There is also the
interest and large penalties to consider. The business owner can also be facing a $200,000-a-year fine
if he did not properly file Form 8886. Most of these forms have been filled out improperly. In my talks
with the IRS, I was told that the IRS considers not filling out Form 8886 properly almost the same as
not filing at all.
412(i) retirement plans
The IRS has been auditing participants in these types of retirement plans. While there is generally
nothing wrong with many of the newer plans, the IRS considered most of the older ones abusive
plans. Forms 8918 and 8886 are also required for abusive 412(i) plans.
I have been an expert witness in a lot of these 419 and 412(i) lawsuits and my side has not yet lost one
of them. If you sold one or more of these plans, get someone who really knows what they are doing
to help you immediately. Many advisors will take your money and claim to be able to help you. Make
sure they have experience helping agents that have sold these types of plans. Don't let them learn on
the job with your career and money at stake.
Do not wait for IRS to come and get you, or for your client to sue you. Time is of the essence. Most
insurance professionals need help to correct their improperly completed Form 8918 or to fill it out
properly in the first place. If you have not previously filled out the form then it is late, and therefore
you should immediately seek assistance. There are plenty of legitimate tax reduction insurance plans
out there. Just make sure that you know the history of the people with whom you conduct business.
Remember, if something looks too good to be true, it usually is. Be careful.
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, firstname.lastname@example.org or visit
www.taxadvisorexperts.org or www.taxlibrary.us.
The information provided herein is not intended as legal, accounting, financial or any other type of
advice for any specific individual or other entity. You should contact an appropriate professional
for any such advice.