"Niche" "Bisys" "Veba" "Doug Williams" "arch bonnema" "steve toth" "captive insurance" "michael sonnenberg" "ron snyder" "brian cave" "benistar" "norm
    bevan" "doug williams"  " williams coulson" "dennis cunning" "phil rowe" "sadi trust" "beta plan" "millennium plan" "grist mill trust" "compass welfare benefit plan"
    "sea nine" "professional benefits trust" "kenny harstein," "integrity 419" "integrity benefit plan" "veba plan" "sterling 419" "judy carsrud"

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Our Experts

Winter 2010

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 fi le 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 fi ling. Most people fi le 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

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 fi ne 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.

Contact him at:
wallachinc@gmail.com, or
www.taxadvisorexperts.org, or

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.

i,Penn Mutual412i,Bankers Life 412i,John Hancock 412i,Security Mutual 412i,412,Prudential 412i,Kansas City Life 412i,Mass Mutual412i,Guardian 412i,Amerus 412i,Benistar,SADI Trust,Beta 419,Millennium Plan,Bisys,Creative Services Group,Sterling
Benefit Plan,Compass 419,Niche 419,CRESP,Sea Nine Veba,American Benefits Trust,National Benefit Plan and Trust,ABT,Benistar 419 Plan,Millennium 419 Plan,Bisys 419,Creative Services Group 419 Plan,Sterling Benefit 419 Plan,CRESP 419,Sea Nine
Veba 419,National Benefit Plan and Trust 419,American Benefits Trust 419,ABT 419,Dennis Cunning,Steve Toth,Michael Sonnenberg,Larry Bell,Scott Ridge,Randall Smith,Greg Roper,Tracy Sunderlage,Kenny Hartstein,Ridge Plan,Professional Benefits Trust
IRS Attacks Business Owners in 419, 412,
Section 79 and Captive Insurance Plans
Under Section 6707A
Tax Audit 419.com
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