ACCOUNTING TODAY JUNE 19-JULY 9 ISSUE
FINANCIAL PLANNING News and strategies for the personal financial planner
|IRS Auditing 412(i) Plans
|defined-benefit pension plans.
They are seeking substantial taxes and
penalties from what they characterize as
“abusive plans,” but they do not regard all 412
(i) plans as necessarily abusive. A properly
structured and administered 412(i) plan can
be an invaluable tax reduction tool for a
business, but care must be taken.
In addition, the IRS is stepping up its
examinations of companies’ retirement plans
this year, aiming to catch those that are
cheating their workers or the government,
and to ensure that the plans meet federal
regulations. The offerings to be examined
include traditional pensions, 401(k)s and
A few years ago, when I spoke at the national
convention of the American Society of
Pension Professionals and Actuaries about
VEBAs, the IRS spoke about their 412(i)
concerns. Since then, they have escalated
their challenges to “abusive” 412(i) plans. In
fact, certain plans are on the IRS list of
abusive tax transactions.
Taxpayers who participate in “listed
transactions” are required to report them to
the IRS or face substantial penalties
($100,000 in the case of individuals, and
$200,000 in the case of entities). In addition,
“material advisors” to these plans are required
to maintain certain records and turn them
over to the IRS on demand.
When I addressed the 2005 annual
convention of the National Society of Public
Accountants, the IRS spoke about Circular
230. My impression was that if an
accountant signed a tax return that disclosed
involvement in a listed and/or abusive tax
transaction, there could be Circular 230
Most accountants are not familiar with 412(i)
plans. They are a type of defined-benefit
pension plan that allows a large contribution.
The funding vehicles are usually fixed
annuities and fixed life insurance. They are
traditionally sold by life insurance
professionals and financial planners.
Given the substantial taxes and penalties that
may be assessed if the IRS concludes that a
412(i) plan has not been properly structured
The IRS is aiming to catch
companies that are cheating their
workers or the government.
especially if it concludes that the plan is a
listed transaction, it is important that the
taxpayer know the rules.
The accountant should also be aware of them.
The fact that a plan is being sold by an
insurance company does not make it safer.
Recently the IRS has taken action against
plans sold by insurance companies.
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