For those who participated in a 419 welfare benefit plan or a 412i retirement plan or other abusive tax shelter as
    well as those who prepared and/or signed a tax return for someone who did participate in such a plan, the
    information that follows is critical.

    Participants probably did not properly file with either the IRS or the Office of Tax Shelter Analysis, as required by
    IRC Section 6707A, or with their state. Non-filed or incorrectly filed forms mean the Statute of Limitations is open,
    and participants will probably be fined $200,000 or a lot more.

    In July I started receiving a lot of phone calls from business owners who are being advised that the IRS is
    considering asserting penalties provided under Internal Revenue Code 6707A for not adequately disclosing a listed
    transaction. If plan participants have not yet gotten the letter, they will shortly.

    Even if plan participants stopped contributing to their plan years ago, they will still get the fine. Even if plan
    participants got out of their plan years ago, or think they did, they will still get the fine. Even if they have been
    audited already, they get the fine. The fine is for not filing properly, or not at all.

    The fines for 419 and/or 412i plan participants have averaged about $600,000. The accountants probably cannot
    help the plan participants because the accountants that signed the tax returns in question also get fined.

    It was not the responsibility of the plan administrator or insurance agent to assist the plan participants with Form
    8886, which is required by the IRS. The accountants should have advised plan participants and helped them. It is
    now after the fact, and the accountants probably have no experience with these matters after the fact. They will
    not know how to repair the damage that has been done at this point. In fact, accountants also had to file properly
    for themselves, and they probably did not.

    Small businesses are facing potentially huge tax penalties over certain types of retirement plans. The plans were
    marketed in the past several years as a way for small business owners to set up retirement or welfare benefit
    plans while leveraging huge tax savings, but the IRS put them on a list of abusive tax shelters and has more
    recently focused audits on them.

    The penalties for such transactions are extremely high and can pile up quickly - $100,000 per individual and
    $200,000 per entity per tax year for each failure to disclose the transaction - often exceeding the disallowed taxes.

    There are business owners who owe $6,000 in taxes but have been assessed $1.2 million in penalties. The
    existing cases involve many types of businesses, including doctors' offices, dental practices, grocery store
    owners, mortgage companies and restaurant owners.

    A 419 plan is a type of health and benefits plan and a 412(i) plan is a retirement plan. Typically, these were sold to
    small, privately held businesses with fewer than 20 employees and several million dollars in gross revenues.

    Under §6707A of the Internal Revenue Code, once the IRS flags something as an abusive tax shelter, or "listed
    transaction," penalties are imposed per year for each failure to disclose it. Another allegation is that businesses
    weren't told that they had to file Form 8886, which discloses a listed transaction.

    The vast majority of accountants either did not file the forms for their clients or did not prepare them correctly.

    Because the IRS did not begin to focus audits on these types of plans until some years after they became listed
    transactions, the penalties have already stacked up by the time of the audits.

    The penalties are not appealable and must be paid before filing an administrative claim for a refund.

    In 2004, the IRS issued notices and revenue rulings indicating that the plans were listed transactions, but plaintiffs'
    lawyers allege that there were earlier signs that the plans ran afoul of the tax laws, evidenced by the fact that the
    IRS is auditing plans that existed before 2004.

    An attorney filed a class action in federal court against four insurance companies claiming that they were aware
    that since the 1980s the IRS had been calling the policies potentially abusive and that in 2002 the IRS gave lectures
    calling the plans not just abusive but "criminal."

    Last July, in response to a letter from members of Congress, the IRS put a moratorium on collection of §6707A
    penalties. That moratorium was recently extended until June 1, 2010, at which time the Service allowed it to expire.
    So time is now obviously more of the essence than it ever was.

    Thousands of business owners are being hit with million-dollar-plus fines.... The audits are continuing and
    escalating. A bill has been introduced in Congress to make the penalties less draconian, but nobody is expecting a
    magic bullet.

    Lance Wallach, National Society of Accountants Speaker of the Year and a 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 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", 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, or visit 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.
Business Owners and Their Accountants to Be Fined
For 412i and 419 Plan Participation
August 25, 2010
By: Lance Wallach