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

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".

Business Owners in 419, 412i, Section 79 and Captive Insurance Plans Will Probably Be Fined by the IRS Under Section 6707A

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 penalties.

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 a frequent 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.

Insurance Agents: Help for those who sold 419 and 412i plans.

Insurance Agents: Help for those who sold 419 and 412i plans.

Doctors and Captive Insurance

Doctors were an easy target. Why was this? What is the difference between God and a Doctor? God does not think that he is a Doctor. I hope that did not offend anyone, but it is a good reason why Doctors are an easy target for life insurance agents.

Many of these deals are tax shelters. Doctors are drawn to tax shelters like ants to a picnic, and there is no shortage of tax shelter promoters who love selling to physicians.

Every year, October announces the start of tax shelter season. Every year there is a hot tax shelter that it seems everyone is selling to doctors.

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Liquidation Comes For Lavish Insurer

In 1990 Chicago insurance executive Raymond Ankner flew about 100 of his top agents to

Germany to celebrate Oktoberfest in Cologne. The cost of the trip was $800,000, billed to Ankner`s businesses.

Most of those acquainted with him didn`t view the expensive junket or other lavish activities as out of line. To them, the red-haired, Brooklyn-born Ankner epitomized thesuccessful insurance man, with a fast-growing operation, a company plane, homes in Florida and Vermont and an apartment in Water Tower Place.

But insurance regulators were already beginning to question expenses at his main insurance unit, InterAmerican Insurance Co. of Illinois. When the Illinois Insurance Department obtained a court order last month to liquidate the company, court papers showed a balance sheet crowded with overvalued real estate and questionable intercompany transactions and reinsurance arrangements.

The collapse of InterAmerican is expected to be the biggest life insurance failure in Illinois history, with a gap of more than $30 million between assets and liabilities. It has placed in the hands of state regulators the largest real estate and mortgage portfolio ever managed by the department. InterAmerican`s $33 million portfolio of mortgages and real estate covers several investments on Chicago`s Near West Side, including a loan on its headquarters at 901 W. Jackson Blvd. There also are more far-flung holdings, such as loans to donut shops in Michigan and a bed-and-breakfast in Vermont. Nearly half the $20.5 million in mortgage loans are behind on payments, according to department officials.

Regulators are still investigating the possibility that company funds were improperly used. No charges have been filed, and Ankner denies any suggestion of wrongdoing.

A report by an independent accountant hired by the Insurance Department highlights several questionable charges, such as a $53,681 check to Neiman-Marcus Co. for catering a 1989 Christmas party at Ankner`s apartment here, the company`s payment of most of his $5,200 monthly rent and even a portion of the salaries of Ankner`s gardener and housekeeper in Vermont.

The failure of InterAmerican is a major headache for the many independent agents who represented the company. Many of them apparently believed that the insurer had virtually all its investments in government bonds and was financially sound-or ``hunky-dory,`` according to Eric Wiltshire.

``The agent`s got egg on his face,`` said Wiltshire, chairman of a Birmingham, Mich.-based pension-consulting and insurance firm that dealt with InterAmerican.

InterAmerican`s approximately 25,000 customers can`t currently cash in their insurance policies and annuity contracts or collect benefits. Most of their claims are expected to be covered in the next few months by life insurance guaranty associations in Illinois and the other 44 states in which InterAmerican did business.

Though big by Illinois standards, InterAmerican`s demise is small potatoes compared with several widely publicized out-of-state failures that rocked the life insurance industry last year. Failed Executive Life Insurance Co. of Los Angeles, for example, had assets of about $10 billion;

InterAmerican`s assets totaled about $140 million as of year-end 1990.

Yet the company`s problems are typical of many ailing life insurers, regulators say. Besides a heavy dose of non-performing real estate, the troubles include rapid growth supported by a controversial financial technique known as surplus relief reinsurance, used by insurers to boost their regulatory capital.

InterAmerican`s collapse raises questions about the effectiveness of state insurance regulation, especially in cases involving complex financial transactions. Illinois is usually ranked among the top three states in policing insurers, along with New York and California.

But some insurance experts who have examined InterAmerican`s books say it was clear several years ago that the company was headed for a fall.

Illinois insurance director Stephen Selcke defends the department`s actions, calling them ``appropriate and timely.`` But he and other insurance department officials say the agency`s staff is overworked, particularly in the area of monitoring financially troubled life insurance companies.

Five people are assigned to spot potential problems among the nearly 900 life and health insurers operating in the state, including 160 based here for whom Illinois is the main regulator. Selcke said he hopes to get legislative approval to beef up the staff for fiscal 1993, beginning July 1, when a law takes effect that requires insurance companies to pay more of the department`s budget.

Arnold Dutcher, the department`s deputy director in charge of life and health insurance, is pushing for tighter limits on the kind of surplus relief reinsurance used by InterAmerican. The National Association of Insurance Commissioners, which coordinates the activities of state regulators, is considering stricter standards.