"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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Business Owners in 419, 412i, Section 79
and Captive Insurance Plans Will Probably Be Fined by the
IRS 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 the taxpayer does not necessarily
have to make a contribution or claim a tax deduction to be deemed to participate. Section
6707A of the Code imposes severe penalties ($200,000 for a business and $100,000 for an
individual) for failure to file Form 8886 with respect to a listed transaction. But a taxpayer
can also be in trouble if they file incorrectly. I have received numerous phone calls from
business owners who filed and still got fined. Not only does the taxpayer have to file Form
8886, but it has to be prepared correctly. I only know of two people in the United States who
have filed these forms properly for clients. They told me that the form was prepared after
hundreds of hours of research and over fifty phones calls to various IRS personnel. The
filing instructions for Form 8886 presume a timely filing. 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 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 they 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 the deductions taken in prior years.
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. It
follows that taxpayers who no longer enjoy the benefit of those large deductions are no
longer “participating” in the listed transaction.

But that is not the end of the story. 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. This language may
provide the taxpayer with a solid argument in the event of an audit.

Lance Wallach, National Society of Accountants Speaker of the Year and member of the
AICPA faculty of teaching professionals, is afrequent speaker on retirement plans, financial
and estate planning, and abusive tax shelters. He writes about 412(i), 419, and captive
insurance plans; speaks at more than ten conventions annually; writes for over fifty
publications; is quoted regularly in the press; and has been featured on TV and radio
financial talk shows. Lance has written numerous books including Protecting Clients from
Fraud, Incompetence and Scams (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, wallachinc@gmail.com 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.

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
- November 2010
Tax Audit 419.com
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Copyright 2010 - Lance Wallach - All Rights Reserved