412i IRS audits, listed transactions
April 24, 2012 By Lance Wallach, CLU, CHFC
IRS auditing 412i plans
Protecting Clients From Fraud, Incompetence, and Scams
By: Lance Wallach
Published by John Wiley and Sons, Inc.
Copyright Ã“ 2010. All rights reserved.
Excerpts have been taken from this book about:
Bruce Hink, who has given me permission to utilize his name and circumstances, is a perfect example of what the IRS is doing to unsuspecting business owners. What follows is a story about Bruce Hink and how the IRS fined him $200,000 a year for being in what they called a â€œlisted transactionâ€. In addition, I believe that the accountant who signed the tax return and the insurance agent who sold the retirement plan will each be fined $200,000 as material advisors. We have received a large number of calls for help from accountants, business owners, and insurance agents in similar situations. Donâ€™t think this will happen to you. It is happening to a lot of accountants and business owners, because most of these so-called listed, abusive plans, or plans substantially similar to the so-called listed, are currently being sold by most insurance agents.
Bruce was a small business owner facing $400,000 in IRS penalties for 2004 and 2005 for his 412(i) plan (IRC6707A). Here is how the story developed.
In 2002 an insurance agent representing a 100-year-old well-established insurance company suggested he start a pension plan. Bruce was given a portfolio of information from the insurance company, which was given to the companyâ€™s outside CPA to review and to offer an opinion. The CPA gave the plan the green light and the plan was started for tax year 2002.
Contributions were made in 2003. Then the administrator came out with amendments to the plan, based on new IRS guidelines, in October 2004.
The business ownerâ€™s agent disappeared in May 2005 before implementing the new guidelines from the administrator with the insurance company. The business owner was left with a refund check from the insurance company, a deduction claim on his 2004 tax return that had not been applied, and without an agent.
I took six months of making calls to the insurance company to get a new insurance agent assigned. By then, the IRS had started an examination of the pension plan. Bruce asked for advice from the CPA and the local attorney (who had no previous experience in such cases), which made matters worse, with a â€œbig nameâ€ law firm being recommended and more than $30,000 in additional legal fees being billed in three months.
To make a long story short, the audit stretched on for more than two years to examine a two-year old pension with four participants and $178,000 in contributions.
During the audit, no funds went to the insurance company. The company was awaiting IRS approval and restructuring the plan as a traditional defined benefit plan, which the administrator had suggested and which the IRS had indicated would be acceptable. The $90,000 2005 contribution was put into the companyâ€™s retirement bank account along with the 2004 contribution.
In March 2008, the business owner received an apology from the IRS agent who headed the examination. Even this sympathetic IRS agent thinks there is a problem with the IRS enforcement of these Draconian penalties. Below is one of her emails to the business owner who was fined $400,000.
From: XXXXXXXX XXXXX
Date: Tue, Mar 4, 2008 at 7:12 AM
Subject: RE: Urgent
To: Bruce Hink
Thanks Bruce â€“ yes â€“ please just overnight then to the Grand Rapids address. Once again, Iâ€™m sorry about this. Basically, our Counsel told us that we needed language specific to the IRC 6707A penalty in order for that statute to be extended. I will ask the Reviewer to hold off an extra day.
Iâ€™m also very sorry that this is getting you down. Deeply sorry. Itâ€™s very difficult for me as well â€“ before I started working on this project (412(i)) I was doing audits of 401(k) and profit sharing plans. If there was an error on the plan, the employer would just fix it and the audit was over. There wasnâ€™t anything controversial about it â€“ and I felt like I was helping people â€“ employers and plan participants. I really liked my job. In two years time, that has completely changed. I know itâ€™s not very â€œprofessionalâ€ to make such confessions â€“ so forgive me. But I guess I just wanted you to know that I really sympathize with your situation â€“ and have been doing whatever I can to help. I know that having this hanging over your head canâ€™t be fun â€“ but as this project goes forward â€“ I think that the IRS is going to have to soften their position somewhat â€“ so these delays may be to your benefit.
Also, Iâ€™m not really supposed to be sending emails to you â€“ but when I went through the file I couldnâ€™t find a good phone number for you. Could you just send me a note or an email with a current phone number?
Looking to receive the signed 872s on Thursday. If you have any questions at any time â€“ please call me at XXX-XXX-XXXX. Iâ€™m usually in the office in the mornings.
The IRS subsequently denied any appeal and ruled in October 2008 that the $400,000 penalty would stand.
Could You or One of Your Clients Be Next?
Some of the areas SB/SE will be examining include pass-though entities, high-income filers, and abusive transactions. S corporations are likely to receive particular scrutiny. Further review would not be limited to S corporations, but would extend to pass-through entities like partnerships, which can expect to receive a â€œsignificant amount of attentionâ€ because SB/SE has found an area of abuse and would like to curb what is called a growing trend of abusive high-income filers, typically classified as those with an adjusted gross income of more than $200,000.
The IRS has been 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.
I have been an expert witness in many of these 419 and 412(i) lawsuits and I have not 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 accountants who signed the tax returns. IRS calls them material advisors and fines them $200,000 if they are incorporated or $100,000 if they are not. Do not let them learn on the job, with your career and money at stake.
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, abusive tax shelters, financial, international tax, and estate planning. He writes about 412(i), 419, Section79, FBAR and captive insurance plans. He speaks at more than ten conventions annually, writes for more than 50 publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public Radioâ€™s â€œAll Things Consideredâ€ and others. Lance has written numerous books including â€œProtecting Clients from Fraud, Incompetence and Scams,â€ published by John Wiley and Sons, Bisk Educationâ€™s â€œCPAâ€™s Guide to Life Insurance and Federal Estate and Gift Taxation,â€ as well as the AICPA best-selling books, including â€œAvoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots.â€ He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, firstname.lastname@example.org or visit taxadvisorexpert.com.
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.
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Posted: Tue Feb 24, 2015 08:33 pm Post Subject: lawsuits audits
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Donâ€™t Become a â€˜Material Advisorâ€™
JULY 1, 2011
BY LANCE WALLACH
Accountants, insurance professionals and others need to be careful that they donâ€™t become what the IRS calls material advisors.
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If they sell or give advice, or sign tax returns for abusive, listed or similar plans; they risk a minimum $100,000 fine. They will then probably be sued by their client, when the IRS finishes with their client
In 2010, the IRS raided the offices of Benistar in Simsbury, Conn., and seized the retirement benefit plan administration firmâ€™s files and records. In McGehee Family Clinic, the Tax Court ruled that a clinic and shareholderâ€™s investment in an employee benefit plan marketed under the name â€œBenistarâ€ was a listed transaction because it was substantially similar to the transaction described in Notice 95-34 (1995-1 C.B. 309). This is at least the second case in which the court has ruled against the Benistar welfare benefit plan, by denominating it a listed transaction.
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The McGehee Family Clinic enrolled in the Benistar Plan in May 2001 and claimed deductions for contributions to it in 2002 and 2005. The returns did not include a Form 8886, Reportable Transaction Disclosure Statement, or similar disclosure. The IRS disallowed the latter deduction and adjusted the 2004 return of shareholder Robert Prosser and his wife to include the $50,000 payment to the plan.
The IRS assessed tax deficiencies and the enhanced 30 percent penalty under Section 6662A, totaling almost $21,000, against the clinic and $21,000 against the Prossers. The court ruled that the Prossers failed to prove a reasonable cause or good faith exception.
In rendering its decision, the court cited Curcio v. Commissioner, in which the court also ruled in favor of the IRS. As noted in Curcio, the insurance policies, which were overwhelmingly variable or universal life policies, required large contributions relative to the cost of the amount of term insurance that would be required to provide the death benefits under the arrangement. The Benistar
Posted: Thu May 07, 2015 12:02 pm Post Subject: g
Captive Insurance Plans
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Lance Wallach, National Society of Accountants Speaker of the Year and member of the American Institute of CPAs faculty of teaching professionals, is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters. He speaks at more than ten conventions annually and writes for over fifty publications. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Educationâ€™s CPAâ€™s Guide to Life Insurance andFederal Estate and Gift Taxation, as well as AICPA best-selling books, including Avoiding
Posted: Mon Jun 01, 2015 11:49 am Post Subject: i
The National Conference of
Volume 5, Issue 7 AUGUST
419 Insurance Welfare Benefit Plans Continue To Get Accountants Into
Trouble 419 insurance welfare benefit plans, 419 plan help, material advisors, Notice 2007-83, Notice 2007-84, Revenue Ruling 2007-65, Section 419, Ridge
Plan, SADI Trust, Grist Mill Trust, Beta Plan, Beta 419, Millennium Plan, Niche 419, Niche, Sterling Benefit
By Lance Wallach
Popular so-called â€œ419 Insurance Welfare Benefit Plansâ€, sold by most insurance professionals, are
getting accountants and their clients into more and more trouble. A CPA who is approached by a client
about one of the abusive arrangements and/or situations to be described and discussed in this article
must exercise the utmost degree of caution, not only on behalf of the client, but for his/her own good
as well. The penalties noted in this article can also be applied to practitioners who prepare and/or sign
returns that fail to properly disclose listed transactions, including those discussed herein.
On October 17, 2007, the IRS issued Notice 2007-83, Notice 2007-84, and Revenue Ruling 2007-65.
Notice 2007-83 essentially lists the characteristics of welfare benefit plans that the Service regards as
listed transactions. Put simply, to be a listed transaction, a plan cannot rely on the union exception set
forth in IRC Section 419A(f)(5),there must be cash value life insurance within the plan and excessive
tax deductions for life insurance, in excess of what may be permitted by Sections 419 and 419A, must
have been claimed.
In Notice 2007-84, the Service expressed concern with plans that provide all or a substantial portion of
benefits to owners and/or key and highly compensated employees. The notice identified numerous
specific concerns, among them:
1. The granting of loans to participants
2. Providing deferred compensation
3. Plan terminations that result in the distribution of assets rather than being used post-retirement, as
4. Permitting the transfer of life insurance policies to participants.
Alternative tax treatment may well be in the offing for such arrangements, as the IRS intends to re-
characterize such arrangements as dividends, non-qualified deferred compensation (under IRC Section
404(a)(5) or Section 409A), split-dollar life insurance arrangements, or disqualified be