Get Sued! By Lance Wallach

PRODUCERSWEB.com
For Smart Advisors

The IRS is 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. Below are the most common.

419 tax reduction insurance plans
These come in various versions, and most of them have or will get the participant audited and the salesman sued. They purportedly allow the business owner to make a large tax-deductible contribution, and some or all of the contribution pays for a life insurance product. The IRS has been disallowing most versions of these plans for years, yet they continue to be sold. After everyone gets into trouble and the insurance agents get sued, the promoters of the abusive versions sometimes change the name of their company and call the plan something else. The insurance companies whose policies are sold are legitimate companies. What usually is not legitimate is the way that most of the plans are operated. There can also be a $200,000 IRS fine facing the insurance agent who sold the plan if Form 8918 has not been properly filed. I've reviewed hundreds of these forms for agents and have yet to see one that was filled out correctly.
When the IRS audits a participant in one of these plans, the tax deductions are lost. There is also the interest and large penalties to consider. The business owner can also be facing a $200,000-a-year fine if he did not properly file Form 8886. Most of these forms have been filled out improperly. In my talks with the IRS, I was told that the IRS considers not filling out Form 8886 properly almost the same as not filing at all.

412(i) retirement plans
The IRS has been auditing participants in these types of retirement plans. While there is generally nothing wrong with many of the newer plans, the IRS considered most of the older abusive plans. Forms 8918 and 8886 are also required for abusive 412(i) plans.

I have been an expert witness in a lot 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 agents that have sold these types of plans. Don't let them learn on the job, with your career and money at stake.

Do not wait for IRS to come and get you, or for your client to sue you. Time is of the essence. Most insurance professionals need help to correct their improperly completed Form 8918 or to fill it out properly in the first place. If you have not previously filled out the form it is late, and therefore you should immediately seek assistance. There are plenty of legitimate tax reduction insurance plans out there. Just make sure that you know the history of the people with whom you conduct business.

...Remember, if something looks too good to be true, it usually is. Be careful.

IRS Criminal Investigation Department Audits Section 79, Captive Insurance, 412i and 419 Scams

IRS Criminal Investigation (CI) has developed a nationally coordinated program to combat these abusive tax schemes. CI's primary focus is on the identification and investigation of the tax scheme promoters as well as those who play a substantial or integral role in facilitating, aiding, assisting, or furthering the abusive tax scheme, such as accountants or lawyers. Just as important is the investigation of investors who knowingly participate in abusive tax schemes.

First the IRS started auditing § 419 plans in the 1990s, and then continued going after § 412(i) and other plans that they considered abusive, listed, or reportable transactions, or substantially similar to such transactions. If an IRS audit disallows the § 419 plan or the § 412(i) plan, not only does the taxpayer lose the deduction and pay interest and penalties, but then the IRS comes back under IRC 6707A and imposes large fines for not properly filing.

http://www.hg.org/article.asp?id=35505

Big Trouble Ahead For Many 419 Welfare Benefit Plan and 412i Retirement Plan Participants

Aug 25, 2010 - By Lance Wallach

Business owners and professionals who have adopted 419 welfare benefit plan arrangements are in serious trouble. The IRS has attacked these arrangements as "listed transactions." Business owners who engage in a "listed transaction" must report such transactions on IRS Form 8886 every year that they are participating in the transaction, and you are participating even in years when you do not make any contribution. Internal Revenue Code 6707A imposes severe penalties ($200,000 annually for a business and $100,000 per year for an individual) for failure to file Form 8886 with respect to a listed transaction. Tax Court, according to both the IRS Appeals Office and its own decisions, does not have jurisdiction to abate or lower any penalties imposed by the IRS. Complaints caused Congress to impose a moratorium on collection of Section 6707A penalties.  On June 1, 2010, the moratorium ended, and the IRS immediately began sending out notices warning of possible imposition of 6707A penalties.  When you get this notice it should be taken very seriously.

Accountants were required to properly prepare and file Form 8918 (if they signed and/or prepare  tax returns and got paid). The penalty for accountants for not properly filing the forms is $100,000, or $200,000 if they are incorporated.

Businesses that were in some 419 welfare benefit plans or some 412i retirement as well as some Captive Insurance and Section 79 Plans, were supposed to properly file under IRC Section 6707A each year with the IRS. Either the taxpayer or the accountant was responsible, though the ultimate, primary obligation falls on the taxpayer. The IRS has just begun sending the notices referred to above to participants in many of these plans. This is in addition to any IRS audit you might have had or currently may be having. The large 6707A fine has nothing to do with any other IRS audit. The 6707A fine is for not having properly filed under 6707A with your returns. You are required to file each year with your tax return.

Not only were you required to file with your Federal return, but many states also require protective filings. Some participants in these types of plans have already received notices from the IRS. You must act immediately if you wish to avoid possible huge IRS penalties and interest that could put you out of business for good.

THE STATUTE OF LIMITATIONS IS NOT RUNNING. This means that the IRS can fine you at any time in the future for anything regarding past or present participation in an abusive 419 welfare benefit plan or an abusive 412i retirement plan. There is still time to avoid the IRS penalties and interest. You need to take action immediately and find out right away if the plan you are participating in is abusive by consulting with a professional and experienced 419/412i plan expert.

Most accountants do not know how to properly prepare the appropriate forms. Accountants or other advisors will probably be fined as material advisors. This means that you may be subject to a large fine. Once you get the large fine, the IRS claims it is not subject to an appeal.

You should have filed protectively for every year your entity participated in the plan. Once again, for every year after 2003, the penalty for not properly filing is $200,000 a year for corporations and $100,000 a year for individuals. For example, it is possible an employer in the plan since 2004 could be subject to over one million dollars in penalties solely as a result of the failure to file. For all years in the plan, the Statute of Limitations will not begin to run until after the form is properly filed. In addition, certain individual plan participants should also file for every year of plan participation. Once again, none of this has anything to do with any other audit that you may currently be involved in or may previously have experienced.

It is abundantly clear that taxpayers who receive notices from the IRS regarding Section 6707A penalties should take these letters extremely seriously. These notices do not lend themselves to "do-it-yourself eye surgery".