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Captive Insurance Alert

As I have been warning for the last few years some captive insurance plans are being looked at and audited. If you are in a captive, which may be legal, you still may have to file under IRS 6707A. Most people who file do it wrong and then you have compounded the problem by lying to the IRS. Make one mistake on the forms and you have another problem.

On November 1, 2016, the Internal Revenue Service (“IRS”) issued Notice 2016-66 identifying certain transactions relating to small captive insurance companies as a “transaction of interest.” Prior to this notice, the IRS had identified certain small captives as amongst its list of “Dirty Dozen Tax Scams.” Also, the IRS has been actively examining captives and their owners and litigating cases in the U.S. Tax Court. The new “transaction of interest” designation throws small captive insurance company transactions into a tax reporting regime that can potentially lead to significant penalties and IRS income tax and promoter examinations.


Lawline Abusive Retirement Plans 412i

On Lawline regarding Abusive Retirement Plans 412i

Lance Wallach featured on Lawline speaking about Abusive Retirement Plan 412i, IRS 6706AFines and Abusive Insurance product. Here is the story of Bruce Hink purchasing a definet Benefit Retirement Plan & Abusive Tax Shelter from an Insurance Agent and well establish Insurance Company. Whats the problem?





Form 8886 is required to be filed by any taxpayer who is participating


Robert Sherman



Form 8886 is required to be filed by any taxpayer who is participating, or in some cases has participated, in a listed or reportable transaction. What attracted the most attention with respect to it, until very recently, were the penalties for failure to file, which were $100,000 annually for individuals and $200,000 annually for corporations. Recent legislation has reduced those penalties in most cases. However, there is still a minimum penalty of $5,000 annually for an individual and $10,000 annually for a corporation for failure to file. And those are the MINIMUM penalties. If the minimum penalties do not apply, the annual penalty becomes 75 percent of whatever tax benefit was derived from participation in the listed transaction, and the penalty is applied both to the business and to the individual business owners. Since the form must be filed for every year of participation in the transaction, the penalties can be cumulative; i.e., applied in more than one year. For example, a corporation that participated in five consecutive years could find itself, depending on the amount of claimed tax deductions, looking at several hundred thousand dollars in fines, even under the recently enacted legislation, before even thinking about back taxes, penalties, interest, etc., that could result from an audit. Even the minimum fine would be $15,000 per year, again in addition to all other applicable taxes and penalties, etc. So even the minimum fines could mount up fast.

The penalties can also be imposed for incomplete, inaccurate, and/or misleading filings. And the Service itself has not provided totally clear, unequivocal guidance to those hoping to avoid errors and penalties. To illustrate this point, Lance Wallach, a leading authority in this area who has received hundreds of calls and whose associates have literally aided dozens of taxpayers in completing these forms, reports that his associates, on numerous occasions, have sought the opinions and assistance of Service personnel, usually from the Office of Chief Counsel, with respect to questions arising while assisting taxpayers in completing and filing the form. The answers are often somewhat vague, and tend to be accompanied by a disclaimer advising not to rely on them.   

One popular type of listed transaction is the so-called welfare benefit plan, which once relied in IRC Section 419A(F)(6) for its authority to claim tax deductions, but now more commonly relies on Section 419(e). The 419A(F)(6) plans used to claim that that section completely exempted business owners from all limitations on how much tax could be deducted. In other words, it was claimed, tax deductions were unlimited. These plans featured large amounts of life insurance and accompanying large commissions, and were thus aggressively pushed by insurance agents, financial planners, and sometimes even accountants and attorneys. Not to mention the insurance companies themselves, who put millions of dollars in premiums on the books and, when confronted with questions about the outlandish tax claims made in marketing these plans, claimed to be only selling product, not giving opinions on tax questions.

In the summer of 2003, the Service issued guidance that had the effect of severely curtailing those plans, and they began to largely, though not completely, disappear from the landscape. Most welfare benefit plans now claim Section 419(e) as the authority to claim a corporate tax deduction, though the promoters of these plans no longer claim that tax deductions are unlimited. Instead, they acknowledge that the amount of possible tax deductions is limited by the limitations of Section 419A, which Code section is a limitation on tax deductions that are authorized by other sections.

With respect to Section 419(e) welfare benefit plans, and of particular importance in this listed transaction/penalties arena, were the events of October 17, 2007, which over time have had roughly the same effect on Section 419(e) welfare benefit plans as the aforementioned 2003 developments had on Section 419A(F)(6) plans. On that date, the Service issued Notice 2007-83, which identified certain trust arrangements involving cash value life insurance policies, and substantially similar arrangements, as listed transactions. Translation: Section 419(e) welfare benefit plans that are funded by cash value life insurance contracts are listed transactions, at least if a tax deduction is taken for the amount of  premiums paid for such policies. On that same day, the Service also issued Notice 2007-84 and Revenue Ruling 2007-65. The combined effect of these three IRS pronouncements was that not only was the use of cash value life insurance in welfare benefit plans, if combined with claiming tax deductions for the premiums paid, sufficient to cause IRS treatment of these plans as listed transactions, but that discrimination as between owners and rank and file employees in these plans was also being targeted.
To illustrate, in many of these promoted arrangements, these Section 419(e) welfare benefit plans, cash value life insurance policies are purchased on the lives of the owners of the business, and sometimes on key employees, while term insurance is purchased on the lives of the rank and file employees. The plans in question tend to anticipate that the plan will be terminated within five years or so, at which time the cash value policies will be distributed to the owners, and possibly key employees, with very little distributed to rank and file employees. In general, the Internal Revenue Code will not countenance the claiming of a tax deduction in connection with a welfare benefit plan where such blatant unequal treatment (discrimination) is exhibited. Nevertheless, plan promoters claim that insurance premiums are currently deductible by the business, and that the insurance policies, when distributed to the owners, can be done so virtually tax free. And this also despite the fact that an employer’s deductions for contributions to an arrangement that is properly characterized as a welfare benefit fund are subject to the limitations and requirements of the rules in IRC sections 419 and 419A, including the use of reasonable actuarial assumptions and the satisfaction of nondiscrimination requirements.

With respect to the preparation and filing of Form 8886, incidentally, it should not surprise that welfare benefit promoters have been active in this area. This would include both the promoters of plans that have been listed transactions for years as well as those that became listed transactions, at least arguably, by virtue of the previously discussed October 2007 IRS activities. Some promoters take the position that their plans are completely compliant and that, therefore, there is no need to file Form 8886. Others take a more precautionary approach. While never admitting to being a listed transaction, they do urge clients to file on a protective basis. At least one went so far as to offer plan participants complete guidance and instructions about precisely how to file protectively. Many, if not most, plan promoters have, at the very least, forwarded completed sample forms to plan participants for guidance and use in completing Form 8886. It is certainly possible to file protectively. Any remotely good faith belief that the transaction is not a listed one justifies the protective filing. In fact and practice, the Service is actually treating protective filings in the same manner as other filings.

But while many plan promoters have recognized the filing obligation and recommended filing, this has led to another problem. As previously noted, they have been instructing taxpayers on how to complete and file the form, and the problem is that their guidance, in many cases, has not been particularly helpful and sometimes dangerous. In some cases, though this is difficult if not impossible to ascertain, the suggestions of the plan promoters seem designed more to protect the promoters than to assist the taxpayer. While this is a difficult call to make, it is absolutely clear, Wallach says, that more than one promoter, whether carelessly or otherwise, has sent taxpayers outdated forms to complete and file. Wallach, who you may recall has, between himself and his associates, aided dozens of taxpayers in completing and filing Form 8886, notes that his associates have frequently reported this problem. They also report never having seen a Form 8886 prepared completely correctly, especially where a promoter’s instructions were relied on. So, because the fines may be imposed for incomplete, misleading, or incorrect filings, the danger to plan participants can be clearly seen. And the taxpayer who discovers errors subsequent to filing must decide whether to amend the filing or not, which some plan participants are reluctant to do.



Burdens On Professionals With Clients In Welfare Benefit Plans And Other Listed Transactions



Form 8918 must be filed with the Internal Revenue Service by all “material advisors” to clients who are participating in listed transactions. Exactly who, then, is a material advisor? You are a material advisor if three requirements are satisfied. First, the client must actually be participating in the listed transaction. Second, you must have given the client tax advice with respect to the transaction. This does not necessarily mean that you recommended participation. For example, signing off on a tax return claiming a tax deduction for participation in the listed transaction surely qualifies as having given tax advice with respect to the transaction. In fact, even if you recommended against participation, you would satisfy this threshold so long as you rendered tax advice, be it positive, negative, or neutral.

The third threshold is that you must have received $10,000 or more in compensation (yourself and/or a related entity). This is not quite as simple as it sounds. The money need not all be received as a commission (as might be the case with a CPA who is insurance licensed), or even in a lump sum for accounting services rendered in connection with the client’s participation. The money could be received periodically over time. It is even possible that, so long as $10,000 in fees have been received from the client for whatever reason over whatever period of time, the threshold is met. Lance Wallach, previously referred to in the discussion about Form 8886 and whose associates are also expert in assisting CPAs and others in the preparation and filing of Form 8918, reports that one of his associates put this question directly to an attorney in the Office of the Chief Counsel who actually wrote published IRS guidance with respect to Form 8918. While the gentleman from the IRS was very courteous and professional, trying his best to be of assistance, a clear, unqualified, unequivocal answer that could be “taken to the bank” proved impossible to elicit.

Like Form 8886, however, Form 8918 can be filed protectively. Failure to file or incomplete, misleading, or inaccurate filings can lead to the penalties that used to apply to Form 8886, to wit: $100,000.00 for individuals and $200,000.00 for corporations. For this purpose, it is CRITICAL to note that the recent legislation reducing penalties applied ONLY to Form 8886. The penalties for failure to file Form 8918, or for filing it incorrectly, remain the same as they were, to wit: $100,000 for individuals and $200,000 for corporations.

A good faith belief that either you did not receive $10,000 in income or that the transaction in question is not a listed one enables you to file on a protective basis. And, in fact, as with the 8886 form, the IRS is, in fact, treating all filings identically in any event.

When the CPA files this form ( it need only be filed once, not on an annual basis, as Form 8886 must be), the CPA is assigned a number by the IRS. The CPA or other professional then gives this number to all of his affected clients, who are required to report it on the 8886 forms that they must file. Also, as a perusal of Form 8918 makes clear, there is also a section where the material advisor is to give all pertinent information with respect to other material advisors who participated in and/or advised the client with respect to the transaction in question.

As with Form 8886, this area is replete with horror stories about advisors who, mostly innocently, have fallen into this trap. One that we know of was sold by one promoter on a questionable plan, recommended it to about fifteen clients, and now has been forced to file the 8918 form, help all those involved who have to file Form 8886, and expend a fair amount of his own funds, both to find people who can assist his clients with Form 8886 and in “rescuing” clients who want to get out of this plan. Another called about something else, and was horrified to discover that he had six clients in a plan that is a listed transaction. When he was apprised of his situation, he sank into a depression. These are only two of the dozens of sad, and worse, stories in this area that we have been privy to. The second person, for example, had no idea that anything was wrong. He initially called about something totally unrelated. There have even been instances of professional discipline being imposed in connection with this area, of CPAs being threatened with and perhaps even actually suffering loss of their licenses. Such is the terrain in which the CPA must now operate.

Another problem is possible, especially if you recommended that the client participate. Most practitioners are familiar with situations where, when things go wrong, clients often develop selective memory failure. This happens here, as it does elsewhere. At best, it can lead to you spending an inordinate amount of time, and perhaps money, on what is essentially a thankless exercise. At worst, if the situation worsens to the point where a lawsuit may be in the air, you could find yourself the subject of some sort of client complaint or, worse, a named defendant in a lawsuit, in which case your malpractice carrier would become involved, with all of the negative effects upon yourself and your practice that that could entail.

Section 6707A – Past, Present, and Future


Returning now to the Form 8886 aspect of Section 6707A, the disclosure requirement that applies to actual participants in listed transactions, it has been noted, and discussed, that Congress recently reduced the penalties under Section 6707A for many taxpayers. But it is still imperative to realize that this is only a partial solution to the continuing problem caused by the penalties imposed by that section. While the penalties have been reduced from the prior patently ridiculous, and probably illegal, level that until so recently prevailed, they are still sufficient, in many cases, to put business owners out of business, just as the prior penalties obviously were. And since the new legislation did not address or affect obligations and penalties with respect to Form 8918 at all, accountants, insurance professionals and other material advisors are as likely to be hurt as ever.

Whatever the underlying Congressional intent was in enacting the original Section 6707A in 2004, whatever Congress hoped to accomplish, the statute as it was written imposed clearly unconscionable burdens on taxpayers. Penalties of up to $300,000 annually could be imposed on taxpayers who had not underpaid tax and who had no knowledge that they had entered into transactions that the IRS deems “listed”.

Tax provisions are seldom found to violate the United States Constitution, but it is certainly arguable that the imposition of such a large penalty on a taxpayer who entered into a transaction that produced little or even no tax savings and without regard to the taxpayer’s knowledge or intent violates the Eighth Amendment prohibition on excessive fines, etc. In practice, the requirement that this penalty be imposed without regard to culpability often had the effect of bankrupting middle class families who had no intention of entering into a tax shelter – an outcome that dismayed even hardened IRS enforcement personnel.

The section previously imposed a penalty of $100,000 per individual and $200,000 per entity for each failure to make special disclosures with respect to a transaction that the Treasury Department characterizes as a “listed transaction” or “substantially similar” to a listed transaction. A listed transaction is one that is specifically identified as such by published IRS guidance. The question of what is “substantially similar” to such a transaction is increasingly troublesome, especially given the ever broadening IRS definition of the term, beginning with Treasury Decision 9,000, which declared, on June 18, 2002, that, from that date forward, the term “substantially similar” would be construed more broadly by the Service than it had up until that time. This started a trend that continues to this day.

It is important for the reader to understand that the only thing that was accomplished by the new, amended Section 6707A is a reduction in the penalties. The penalties are still severe, severe enough to seriously damage or even bankrupt most small businesses. And professional readers must understand that there has been no effect on their obligations at all, and that the same (in their case, even more severe) fines still apply.

For example, the following eleven statements are equally applicable to the new Section 6707A as they are to its predecessor:

  1. The penalty applies without regard to whether the small business or the small business owners have knowledge that the transaction has been listed.

  1. The penalty applies even if the small business and/or the small business owners derived no tax benefit    from the transaction. Even under the new legislation, there are substantial minimum penalties that are applied even if there has been no tax benefit.

  1. The penalty is applied at multiple levels, which is devastating to small businesses; the result is that the small business and its owners are hit with multiple penalties. The two most common problems are that fines are imposed on both the business entity and the owners as individuals, and also that fines are imposed each year, and thus are sometimes imposed for five years or more. In the case of a small business, the penalties can easily exceed the total earnings of the business and cause bankruptcy – totally out of proportion to any tax advantage that may or may not have been realized.

  1. The penalty is final, must be imposed by the IRS (this is mandatory), and cannot be rescinded. There is no right of appeal, and there is no “good faith” exception, as business advocates had hoped would be a part of the new legislation.

  1. Judicial review is expressly prohibited, which raises another Constitutional issue, this time a separation of powers argument, as it amounts to one branch of government prohibiting another from functioning.

  1. The taxpayer’s disclosure must initially be made twice – once with the IRS Office of Tax Shelter Analysis and again with the tax return for the year in which the transaction is first required to be disclosed. Thereafter, for each year that the taxpayer “benefits” from the transaction, it must be reflected on the tax return. Aside: As a practical matter, the form should be filed with the tax return. The IRS directions assume a timely filing. There are no directions on how to file late, which most taxpayers must do, since few realized the need to disclose in this manner when they still could have timely filed. A few experts have figured out how to file late and simultaneously avoid penalties, after months of study and numerous conversations with IRS personnel. Those conversations were with IRS people that drafted the regulations, those that receive the forms, and others.

  1. A taxpayer that discloses a transaction is subject to penalty if the Service deems the disclosure to be incomplete, incorrect, and/or misleading. I have had numerous conversations with people who filed the disclosure forms and got fined. They did not properly prepare and/or file the forms.

  1. If a transaction is not  “listed” at the time the taxpayer files a return but it subsequently becomes listed, the taxpayer becomes responsible for filing a disclosure statement and will be penalized for failing to do so. This is true even if the taxpayer has no knowledge that the transaction has been listed. This sort of thing is exactly why business interests , albeit unsuccessfully, pushed for a “good faith” exception in the new legislation.

  1. The penalty is imposed on transactions that the IRS, in its sole discretion, determines are “substantially similar” to a listed transaction. Accordingly , taxpayers may never know or realize that they are in a listed transaction and, accordingly, the penalties compound annually because they never made any disclosure. At least, if a transaction is specifically identified, people can find out that it is a listed transaction. But how can anyone be sure that something is  “substantially similar”, or not?

  1. The taxpayer must disclose each year, which can result in compounding of already large penalties; and

  1. The Statute of Limitations, usually three years, does not apply. IRC 6501(c)(10) tolls the statute until proper disclosure is made.



The Treasury Department usually announces on a somewhat ad hoc basis what is a listed transaction. There is no regulatory process or public comment period involved in determining what should be a listed transaction. Once that a transaction is deemed to be a listed transaction, the Draconian Section 6707A  penalties are triggered. Section 6707A penalties not only apply to specifically listed transactions, but also to transactions that are deemed by Treasury to be “substantially similar” to any of the specifically listed transactions. Some have said that under Section 6707A, IRS and Treasury are the judge, jury and executioner. Be that as it may, once again Constitutional concerns need to be addressed, this time possible due process violations pursuant to the Fourteenth Amendment.

Some Examples



A business owner bought a type of life insurance policy featuring what is known as a “springing cash value” as an alternative to a pension plan. Two years later, this type of transaction was specifically identified as an abusive tax shelter, a listed transaction, meaning that the business owner was now obligated to file Form 8886. But the financial advisor, who years before had actually recommended this course of action, either willfully or out of ignorance failed to advise the business owner to disclose.
The IRS demanded back taxes and interest in the neighborhood of $60,000. It also assessed $600,000 of penalties under Section 6707A for failing to disclose participation in a listed transaction for two separate years.

Another taxpayer filed Form 8886 with his tax returns, but failed to file, in the first year, with the Office of Tax Shelter Analysis. The penalty was assessed for that failure, even though the IRS had the form, though perhaps in a different place. Again, this scenario cries out for the “good faith” exception that was not included in the new legislation.

Then there was the doctor who thought that he had settled his 419 welfare benefit plan issues with the Service. He entered into a closing agreement and paid all taxes due and owing. Later, he was assessed the penalty for failing to file Form 8886. Of course, this issue had been neither raised nor even discussed in the doctor’s prior communications, negotiations, etc. with the Service.

I could go on and on with these horror stories, but the reader probably gets my drift by now. I have been urging business owners to properly file Form 8886 for years. A surprising number of accountants have little or no knowledge in this area, even being unaware of the fines that can be imposed on “material advisors” which, as previously noted, have NOT changed as a result of the new legislation. And if a professional assumes that he has no clients in “listed transactions”, he should realize that there are numerous types of listed transactions. They are not restricted to welfare benefit plans. For example, they include the popular Section 412(i) defined benefit pension plan, and even some of the ubiquitous 401(k) plans. No business owner, and especially no financial, insurance or accounting professional should ever assume that he or she is immune from any or all of the possible repercussions outlined herein.

Summing up, the new legislation does reduce possible Section 6707A penalties for most taxpayers. That, in my view, is its only benefit. And the reduction is not as great as one might expect. Depending on surrounding circumstances, penalties of hundreds of thousands of dollars are still quite possible. Even the minimum penalties, which are applied in the event that there is no tax benefit, amount to $15,000 annually. Who can afford to just brush that aside? Over a period of years, and the fines in the 8886 area are still applied annually, the minimum fines all be themselves can add up to a considerable amount.

Both the 8886 and 8918 forms must still be filed properly. The fines and penalties for failure to do so remain substantial and unfair.   








 
    

IRS audits and Lawsuits


Published by 

HG Experts.com


April 24, 2012     By Lance Wallach, CLU, CHFC


419 and 412i plans being audits, insurance agents sued.




Get Sued
By Lance Wallach Wednesday, April 8,

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.


 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 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 and Federal Estate and Gift Taxation,” as well as the 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.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.


412i Tax Shelter Fraud Litigation - How It Works


Lance Wallach

 

PARTIES:
Typically, these transactions will include an Insurance company, accountant, tax attorney, and a promoter (someone with an insurance background, perhaps an actuary, who knows how to structure the policy itself). These groups will use insurance brokerages and sub-agents (licensed in the various states) to sell the policies themselves. 

INSURANCE COMPANIES
AMERICAN GENERAL LIFE INSURANCE COMPANY® INDIANAPOLIS LIFE INSURANCE COMPANY®
HARTFORD LIFE AND ANNUITY INSURANCE COMPANY® PACIFIC LIFE INSURANCE COMPANY®
 BANKERS LIFE and OTHERS®?

4121iHOW THESE PLANS WORK:
In the late 1990’s, the individuals and groups above devised a scheme to sell abusive tax shelters under the auspices of Section 412(i) of the tax code. A 412(i) is a defined benefit pension plan. It provides specific retirement benefits to participants once they reach retirement and must contain assets sufficient to pay those benefits. A 412(i) plan differs from other defined benefit pension plans in that it must be funded exclusively by the purchase of individual life insurance products. To create a 412(i) plan, there must be a trust to hold the assets. The employer funds the plan by making cash contributions to the trust, and the Code allows the employer to take a tax deduction in the amount of the contributions, i.e. the entire amount.
The trust uses the contributed funds to purchase some combination of life insurance products (insurance or annuities) for the plan. As the plan participants retire, the trust will usually sell the policies for their present cash value and purchase annuities with the proceeds. The revenue stream from the annuities pays the specified retirement benefit to plan participants.
These defendants (with the aid and knowledge of the insurance companies) used the traditional structure and sold life insurance policies with excessively high premiums. The trust then uses the large cash contributions to pay high insurance premiums and the employer takes a deduction for the sum of those large contributions. As you might expect, these policies were designed with excessively high fees or “loads” which provided exorbitant commissions to the insurance companies and the agents who sold the products.
The policies that were sold were termed Springing Cash Value Policies. They had no cash value for the first 5-7 years, after which they had significant cash value. Under this scheme, after 5-7 years, and just before the cash value sprung, the participant purchases the policy from the trust for the policy’s surrender value. In theory, you have a tax free transaction.
The IRS does not recognize the tax benefit of such a plan and has repeatedly issued announcements indicating that such plans are contrary to federal tax laws and regulations.
               

I am not an attorney but I learned some of the above information from attorney’s Mr. Ford’s website.

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. 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 Public 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 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.taxaudit419.com and www.taxlibrary.us

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.


Important FBAR and International Tax Information For 2012

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By Lance Wallach

For individual tax returns (Forms 1040) due to be filed in 2012 (due this year by April 17, 2012, unless extended), the IRS has issued new Form 8938, "Statement of Specified Foreign Financial Assets," requiring the disclosure of certain foreign accounts and assets.

Whether an individual is required to file this form is complicated, but basically this applies to the following assets if owned in 2011:
Financial accounts   in foreign financial institutions.
Any stock or   securities issued by foreign corporations or entities, any interest in a   foreign partnership, trust or estate, as well as any financial instrument or   contract issued by a foreign person, and foreign pension plans and deferred   compensation arrangements (but not foreign social security).  You are   not, however, required to report foreign assets (1) if the assets are held in   a U.S. brokerage account; (2) if you are required to disclose the asset on   certain other tax form such as Form 3520 or Form 5471; or (3) if such assets   (other than stock) are used in your trade or business.
Whether you have to file Form 8938 depends on the total value of such foreign assets at year end as well as the highest value at any point in the year.  For U.S. citizens and residents filing joint tax returns, you must file Form 8938 if the year-end value of the foreign assets is $100,000 or more or, if the value at any time during the year exceeded $150,000.  On joint returns, all foreign-based assets owned by the spouses are considered in determining these thresholds.  For married spouses filing separately and for unmarried persons, the thresholds are $50,000 (year end) and $75,000 (high value during the year).

There are different rules regarding certain persons who live abroad.  There are also rules regarding valuation of certain assets.  These are spelled out in greater detail in the Form 8938 instructions.

If required, Form 8938 is to be filed with your Federal Income Tax Return (Form 1040).  Currently only individuals having filing requirements must fill out the Form 8938, but it is expected that this will be extended to corporations, partnerships and trusts in the future.

The IRS may impose penalties for failure to file Form 8938 if you lack reasonable cause or willfully neglected to file.  In addition, if you underpay your tax as a result of a transaction involving an undisclosed foreign financial asset, the penalty for such failure may be 40 percent of the underpayment (instead of the normal 20 percent).  In addition, the statute of limitations for assessing tax may be extended if you fail to file the form.

It is important to note that Form 8938 is in addition to the annual Foreign Bank Account Form or "FBAR," which has different filing requirements.  The FBAR,  generally is required if you have ownership or signature authority over one or more foreign bank accounts with a value of over $10,000 on any date in the prior year.  The FBAR is not part of your income tax return, but is filed separately and must be received by the Department of Treasury in Detroit by June 30 (timely mailing does not apply to that form).


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. 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 Public 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 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.taxaudit419.com and www.taxlibrary.us

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.

IRS Issues Final Regulations for Material Advisors, Accountants, Attorneys and Insurance Agents - HGExperts.com

IRS Issues Final Regulations for Material Advisors, Accountants, Attorneys and Insurance Agents - HGExperts.com: If you sold, advised on or had anything to do with a listed transaction you will be fined by the IRS. For those that bought listed transactions like, 419 welfare benefit plans or 412i plans, you have

Lance Wallach: Big problems need big experts to resolve

Lance Wallach: Big problems need big experts to resolve: The Lance Wallach team of experts handles issues regariding 419 and 419i plans, listed reportable transactions, 6707A, abusive tax shelters, captive insurance, expert witness testimony, litigation support, section 79, and retirement plan lawsuits,Insurance fraud

Accountants Get Fined By IRS And Sued By Their Clients


Accountants Get Fined By IRS And Sued By Their Clients



    By Lance Wallach, CLU, CHFC Abusive Tax Shelter, Listed Transaction, Reportable Transaction 
Expert Witness




Form 8886 is required to be filed by any taxpayer who is participating, or in some cases has participated, in a listed or reportable transaction.

New BISK CPEasy™ CPE Self-Study Course

CPA’s Guide to Life Insurance

Author/Moderator: Lance Wallach

Below is an exert from one of Lance Wallach’s new books.
Lance Wallach

What attracted the most attention with respect to it, until very recently, were the penalties for failure to file, which were $100,000 annually for individuals and $200,000 annually for corporations. Recent legislation has reduced those penalties in most cases. However, there is still a minimum penalty of $5,000 annually for an individual and $10,000 annually for a corporation for failure to file. And those are the MINIMUM penalties. If the minimum penalties do not apply, the annual penalty becomes 75 percent of whatever tax benefit was derived from participation in the listed transaction, and the penalty is applied both to the business and to the individual business owners. Since the form must be filed for every year of participation in the transaction, the penalties can be cumulative; i.e., applied in more than one year. For example, a corporation that participated in five consecutive years could find itself, depending on the amount of claimed tax deductions, looking at several hundred thousand dollars in fines, even under the recently enacted legislation, before even thinking about back taxes, penalties, interest, etc., that could result from an audit. Even the minimum fine would be $15,000 per year, again in addition to all other applicable taxes and penalties, etc. So even the minimum fines could mount up fast.

The penalties can also be imposed for incomplete, inaccurate, and/or misleading filings. And the Service itself has not provided totally clear, unequivocal guidance to those hoping to avoid errors and penalties. To illustrate this point, Lance Wallach, a leading authority in this area who has received hundreds of calls and whose associates have literally aided dozens of taxpayers in completing these forms, reports that his associates, on numerous occasions, have sought the opinions and assistance of Service personnel, usually from the Office of Chief Counsel, with respect to questions arising while assisting taxpayers in completing and filing the form. The answers are often somewhat vague, and tend to be accompanied by a disclaimer advising not to rely on them.

One popular type of listed transaction is the so-called welfare benefit plan, which once relied in IRC Section 419A(F)(6) for its authority to claim tax deductions, but now more commonly relies on Section 419(e). The 419A(F)(6) plans used to claim that that section completely exempted business owners from all limitations on how much tax could be deducted. In other words, it was claimed, tax deductions were unlimited. These plans featured large amounts of life insurance and accompanying large commissions, and were thus aggressively pushed by insurance agents, financial planners, and sometimes even accountants and attorneys. Not to mention the insurance companies themselves, who put millions of dollars in premiums on the books and, when confronted with questions about the outlandish tax claims made in marketing these plans, claimed to be only selling product, not giving opinions on tax questions.

In the summer of 2003, the Service issued guidance that had the effect of severely curtailing those plans, and they began to largely, though not completely, disappear from the landscape. Most welfare benefit plans now claim Section 419(e) as the authority to claim a corporate tax deduction, though the promoters of these plans no longer claim that tax deductions are unlimited. Instead, they acknowledge that the amount of possible tax deductions is limited by the limitations of Section 419A, which Code section is a limitation on tax deductions that are authorized by other sections.

With respect to Section 419(e) welfare benefit plans, and of particular importance in this listed transaction/penalties arena, were the events of October 17, 2007, which over time have had roughly the same effect on Section 419(e) welfare benefit plans as the aforementioned 2003 developments had on Section 419A(F)(6) plans. On that date, the Service issued Notice 2007-83, which identified certain trust arrangements involving cash value life insurance policies, and substantially similar arrangements, as listed transactions. Translation: Section 419(e) welfare benefit plans that are funded by cash value life insurance contracts are listed transactions, at least if a tax deduction is taken for the amount of premiums paid for such policies. On that same day, the Service also issued Notice 2007-84 and Revenue Ruling 2007-65. The combined effect of these three IRS pronouncements was that not only was the use of cash value life insurance in welfare benefit plans, if combined with claiming tax deductions for the premiums paid, sufficient to cause IRS treatment of these plans as listed transactions, but that discrimination as between owners and rank and file employees in these plans was also being targeted.
To illustrate, in many of these promoted arrangements, these Section 419(e) welfare benefit plans, cash value life insurance policies are purchased on the lives of the owners of the business, and sometimes on key employees, while term insurance is purchased on the lives of the rank and file employees. The plans in question tend to anticipate that the plan will be terminated within five years or so, at which time the cash value policies will be distributed to the owners, and possibly key employees, with very little distributed to rank and file employees. In general, the Internal Revenue Code will not countenance the claiming of a tax deduction in connection with a welfare benefit plan where such blatant unequal treatment (discrimination) is exhibited. Nevertheless, plan promoters claim that insurance premiums are currently deductible by the business, and that the insurance policies, when distributed to the owners, can be done so virtually tax-free. And this also despite the fact that an employer’s deductions for contributions to an arrangement that is properly characterized as a welfare benefit fund are subject to the limitations and requirements of the rules in IRC sections 419 and 419A, including the use of reasonable actuarial assumptions and the satisfaction of nondiscrimination requirements.

With respect to the preparation and filing of Form 8886, incidentally, it should not surprise that welfare benefit promoters have been active in this area. This would include both the promoters of plans that have been listed transactions for years as well as those that became listed transactions, at least arguably, by virtue of the previously discussed October 2007 IRS activities. Some promoters take the position that their plans are completely compliant and that, therefore, there is no need to file Form 8886. Others take a more precautionary approach. While never admitting to being a listed transaction, they do urge clients to file on a protective basis. At least one went so far as to offer plan participants complete guidance and instructions about precisely how to file protectively. Many, if not most, plan promoters have, at the very least, forwarded completed sample forms to plan participants for guidance and use in completing Form 8886. It is certainly possible to file protectively. Any remotely good faith belief that the transaction is not a listed one justifies the protective filing. In fact and practice, the Service is actually treating protective filings in the same manner as other filings.

But while many plan promoters have recognized the filing obligation and recommended filing, this has led to another problem. As previously noted, they have been instructing taxpayers on how to complete and file the form, and the problem is that their guidance, in many cases, has not been particularly helpful and sometimes dangerous. In some cases, though this is difficult if not impossible to ascertain, the suggestions of the plan promoters seem designed more to protect the promoters than to assist the taxpayer. While this is a difficult call to make, it is absolutely clear, Wallach says, that more than one promoter, whether carelessly or otherwise, has sent taxpayers outdated forms to complete and file. Wallach, who you may recall has, between himself and his associates, aided dozens of taxpayers in completing and filing Form 8886, notes that his associates have frequently reported this problem. They also report never having seen a Form 8886 prepared completely correctly, especially where a promoter’s instructions were relied on. So, because the fines may be imposed for incomplete, misleading, or incorrect filings, the danger to plan participants can be clearly seen. And the taxpayer who discovers errors subsequent to filing must decide whether to amend the filing or not, which some plan participants are reluctant to do.



Burdens On Professionals With Clients In Welfare Benefit Plans And Other Listed Transactions



Form 8918 must be filed with the Internal Revenue Service by all “material advisors” to clients who are participating in listed transactions. Exactly who, then, is a material advisor? You are a material advisor if three requirements are satisfied. First, the client must actually be participating in the listed transaction. Second, you must have given the client tax advice with respect to the transaction. This does not necessarily mean that you recommended participation. For example, signing off on a tax return claiming a tax deduction for participation in the listed transaction surely qualifies as having given tax advice with respect to the transaction. In fact, even if you recommended against participation, you would satisfy this threshold so long as you rendered tax advice, be it positive, negative, or neutral.

The third threshold is that you must have received $10,000 or more in compensation (yourself and/or a related entity). This is not quite as simple as it sounds. The money need not all be received as a commission (as might be the case with a CPA who is insurance licensed), or even in a lump sum for accounting services rendered in connection with the client’s participation. The money could be received periodically over time. It is even possible that, so long as $10,000 in fees has been received from the client for whatever reason over whatever period of time, the threshold is met. Lance Wallach, previously referred to in the discussion about Form 8886 and whose associates are also expert in assisting CPAs and others in the preparation and filing of Form 8918, reports that one of his associates put this question directly to an attorney in the Office of the Chief Counsel who actually wrote published IRS guidance with respect to Form 8918. While the gentleman from the IRS was very courteous and professional, trying his best to be of assistance, a clear, unqualified, unequivocal answer that could be “taken to the bank” proved impossible to elicit.

Like Form 8886, however, Form 8918 can be filed protectively. Failure to file or incomplete, misleading, or inaccurate filings can lead to the penalties that used to apply to Form 8886, to wit: $100,000.00 for individuals and $200,000.00 for corporations. For this purpose, it is CRITICAL to note that the recent legislation reducing penalties applied ONLY to Form 8886. The penalties for failure to file Form 8918, or for filing it incorrectly, remain the same as they were, to wit: $100,000 for individuals and $200,000 for corporations.

A good faith belief that either you did not receive $10,000 in income or that the transaction in question is not a listed one enables you to file on a protective basis. And, in fact, as with the 8886 form, the IRS is, in fact, treating all filings identically in any event.

When the CPA files this form (it need only be filed once, not on an annual basis, as Form 8886 must be), the CPA is assigned a number by the IRS. The CPA or other professional then gives this number to all of his affected clients, who are required to report it on the 8886 forms that they must file. Also, as a perusal of Form 8918 makes clear, there is also a section where the material advisor is to give all pertinent information with respect to other material advisors who participated in and/or advised the client with respect to the transaction in question.

As with Form 8886, this area is replete with horror stories about advisors who, mostly innocently, have fallen into this trap. One that we know of was sold by one promoter on a questionable plan, recommended it to about fifteen clients, and now has been forced to file the 8918 form, help all those involved who have to file Form 8886, and expend a fair amount of his own funds, both to find people who can assist his clients with Form 8886 and in “rescuing” clients who want to get out of this plan. Another called about something else, and was horrified to discover that he had six clients in a plan that is a listed transaction. When he was apprised of his situation, he sank into a depression. These are only two of the dozens of sad, and worse, stories in this area that we have been privy to. The second person, for example, had no idea that anything was wrong. He initially called about something totally unrelated. There have even been instances of professional discipline being imposed in connection with this area, of CPAs being threatened with and perhaps even actually suffering loss of their licenses. Such is the terrain in which the CPA must now operate.

Another problem is possible, especially if you recommended that the client participate. Most practitioners are familiar with situations where, when things go wrong, clients often develop selective memory failure. This happens here, as it does elsewhere. At best, it can lead to you spending an inordinate amount of time, and perhaps money, on what is essentially a thankless exercise. At worst, if the situation worsens to the point where a lawsuit may be in the air, you could find yourself the subject of some sort of client complaint or, worse, a named defendant in a lawsuit, in which case your malpractice carrier would become involved, with all of the negative effects upon yourself and your practice that that could entail.

Section 6707A – Past, Present, and Future


Returning now to the Form 8886 aspect of Section 6707A, the disclosure requirement that applies to actual participants in listed transactions, it has been noted, and discussed, that Congress recently reduced the penalties under Section 6707A for many taxpayers. But it is still imperative to realize that this is only a partial solution to the continuing problem caused by the penalties imposed by that section. While the penalties have been reduced from the prior patently ridiculous, and probably illegal, level that until so recently prevailed, they are still sufficient, in many cases, to put business owners out of business, just as the prior penalties obviously were. And since the new legislation did not address or affect obligations and penalties with respect to Form 8918 at all, accountants, insurance professionals and other material advisors are as likely to be hurt as ever.

Whatever the underlying Congressional intent was in enacting the original Section 6707A in 2004, whatever Congress hoped to accomplish, the statute as it was written imposed clearly unconscionable burdens on taxpayers. Penalties of up to $300,000 annually could be imposed on taxpayers who had not underpaid tax and who had no knowledge that they had entered into transactions that the IRS deems “listed”.

Tax provisions are seldom found to violate the United States Constitution, but it is certainly arguable that the imposition of such a large penalty on a taxpayer who entered into a transaction that produced little or even no tax savings and without regard to the taxpayer’s knowledge or intent violates the Eighth Amendment prohibition on excessive fines, etc. In practice, the requirement that this penalty be imposed without regard to culpability often had the effect of bankrupting middle class families who had no intention of entering into a tax shelter – an outcome that dismayed even hardened IRS enforcement personnel.

The section previously imposed a penalty of $100,000 per individual and $200,000 per entity for each failure to make special disclosures with respect to a transaction that the Treasury Department characterizes as a “listed transaction” or “substantially similar” to a listed transaction. A listed transaction is one that is specifically identified as such by published IRS guidance. The question of what is “substantially similar” to such a transaction is increasingly troublesome, especially given the ever broadening IRS definition of the term, beginning with Treasury Decision 9,000, which declared, on June 18, 2002, that, from that date forward, the term “substantially similar” would be construed more broadly by the Service than it had up until that time. This started a trend that continues to this day.

It is important for the reader to understand that the only thing that was accomplished by the new, amended Section 6707A is a reduction in the penalties. The penalties are still severe, severe enough to seriously damage or even bankrupt most small businesses. And professional readers must understand that there has been no effect on their obligations at all, and that the same (in their case, even more severe) fines still apply.

For example, the following eleven statements are equally applicable to the new Section 6707A as they are to its predecessor:

1. The penalty applies without regard to whether the small business or the small business owners have knowledge that the transaction has been listed.

2. The penalty applies even if the small business and/or the small business owners derived no tax benefit from the transaction. Even under the new legislation, there are substantial minimum penalties that are applied even if there has been no tax benefit.

3. The penalty is applied at multiple levels, which is devastating to small businesses; the result is that the small business and its owners are hit with multiple penalties. The two most common problems are that fines are imposed on both the business entity and the owners as individuals, and also that fines are imposed each year, and thus are sometimes imposed for five years or more. In the case of a small business, the penalties can easily exceed the total earnings of the business and cause bankruptcy – totally out of proportion to any tax advantage that may or may not have been realized.

4. The penalty is final, must be imposed by the IRS (this is mandatory), and cannot be rescinded. There is no right of appeal, and there is no “good faith” exception, as business advocates had hoped would be a part of the new legislation.

5. Judicial review is expressly prohibited, which raises another Constitutional issue, this time a separation of powers argument, as it amounts to one branch of government prohibiting another from functioning.

6. The taxpayer’s disclosure must initially be made twice – once with the IRS Office of Tax Shelter Analysis and again with the tax return for the year in which the transaction is first required to be disclosed. Thereafter, for each year that the taxpayer “benefits” from the transaction, it must be reflected on the tax return. Aside: As a practical matter, the form should be filed with the tax return. The IRS directions assume a timely filing. There are no directions on how to file late, which most taxpayers must do, since few realized the need to disclose in this manner when they still could have timely filed. A few experts have figured out how to file late and simultaneously avoid penalties, after months of study and numerous conversations with IRS personnel. Those conversations were with IRS people that drafted the regulations, those that receive the forms, and others.

7. A taxpayer that discloses a transaction is subject to penalty if the Service deems the disclosure to be incomplete, incorrect, and/or misleading. I have had numerous conversations with people who filed the disclosure forms and got fined. They did not properly prepare and/or file the forms.

8. If a transaction is not “listed” at the time the taxpayer files a return but it subsequently becomes listed, the taxpayer becomes responsible for filing a disclosure statement and will be penalized for failing to do so. This is true even if the taxpayer has no knowledge that the transaction has been listed. This sort of thing is exactly why business interests, albeit unsuccessfully, pushed for a “good faith” exception in the new legislation.

9. The penalty is imposed on transactions that the IRS, in its sole discretion, determines are “substantially similar” to a listed transaction. Accordingly, taxpayers may never know or realize that they are in a listed transaction and, accordingly, the penalties compound annually because they never made any disclosure. At least, if a transaction is specifically identified, people can find out that it is a listed transaction. But how can anyone be sure that something is “substantially similar”, or not?

10. The taxpayer must disclose each year, which can result in compounding of already large penalties; and

11. The Statute of Limitations, usually three years, does not apply. IRC 6501(c)(10) tolls the statute until proper disclosure is made.



The Treasury Department usually announces on a somewhat ad hoc basis what is a listed transaction. There is no regulatory process or public comment period involved in determining what should be a listed transaction. Once that a transaction is deemed to be a listed transaction, the Draconian Section 6707A penalties are triggered. Section 6707A penalties not only apply to specifically listed transactions, but also to transactions that are deemed by Treasury to be “substantially similar” to any of the specifically listed transactions. Some have said that under Section 6707A, IRS and Treasury are the judge, jury and executioner. Be that as it may, once again Constitutional concerns need to be addressed, this time possible due process violations pursuant to the Fourteenth Amendment.

Some Examples



A business owner bought a type of life insurance policy featuring what is known as a “springing cash value” as an alternative to a pension plan. Two years later, this type of transaction was specifically identified as an abusive tax shelter, a listed transaction, meaning that the business owner was now obligated to file Form 8886. But the financial advisor, who years before had actually recommended this course of action, either willfully or out of ignorance failed to advise the business owner to disclose.
The IRS demanded back taxes and interest in the neighborhood of $60,000. It also assessed $600,000 of penalties under Section 6707A for failing to disclose participation in a listed transaction for two separate years.

Another taxpayer filed Form 8886 with his tax returns, but failed to file, in the first year, with the Office of Tax Shelter Analysis. The penalty was assessed for that failure, even though the IRS had the form, though perhaps in a different place. Again, this scenario cries out for the “good faith” exception that was not included in the new legislation.

Then there was the doctor who thought that he had settled his 419 welfare benefit plan issues with the Service. He entered into a closing agreement and paid all taxes due and owing. Later, he was assessed the penalty for failing to file Form 8886. Of course, this issue had been neither raised nor even discussed in the doctor’s prior communications, negotiations, etc. with the Service.

I could go on and on with these horror stories, but the reader probably gets my drift by now. I have been urging business owners to properly file Form 8886 for years. A surprising number of accountants have little or no knowledge in this area, even being unaware of the fines that can be imposed on “material advisors” which, as previously noted, have NOT changed as a result of the new legislation. And if a professional assumes that he has no clients in “listed transactions”, he should realize that there are numerous types of listed transactions. They are not restricted to welfare benefit plans. For example, they include the popular Section 412(i) defined benefit pension plan, and even some of the ubiquitous 401(k) plans. No business owner, and especially no financial, insurance or accounting professional should ever assume that he or she is immune from any or all of the possible repercussions outlined herein.

Summing up, the new legislation does reduce possible Section 6707A penalties for most taxpayers. That, in my view, is its only benefit. And the reduction is not as great as one might expect. Depending on surrounding circumstances, penalties of hundreds of thousands of dollars are still quite possible. Even the minimum penalties, which are applied in the event that there is no tax benefit, amount to $15,000 annually. Who can afford to just brush that aside? Over a period of years, and the fines in the 8886 area are still applied annually, the minimum fines all be themselves can add up to a considerable amount.

Both the 8886 and 8918 forms must still be filed properly. The fines and penalties for failure to do so remain substantial and unfair.

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.

ABOUT THE AUTHOR: Lance Wallach
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 and is quoted regularly in the press. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, or visit www.taxadvisorexpert.com.

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