tag:blogger.com,1999:blog-63444682205669070772024-03-05T08:53:21.603-05:00Abusive Tax ShelterForm 8886 and 419 Plans Litigation,
412i and 419e plans litigation, IRS Audit Experts for abusive insurance based plans deemed reportable or listed transactions by the IRS.irsdoghttp://www.blogger.com/profile/09151038267411467771noreply@blogger.comBlogger105125tag:blogger.com,1999:blog-6344468220566907077.post-53231574362675946912018-06-27T13:01:00.000-04:002018-06-27T15:20:29.758-04:00Form 8886 is required to be filed by any taxpayer who is participating<br />
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Robert Sherman</h1>
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<a href="http://irsform8886.com/" target="_blank">Form 8886 </a>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.</div>
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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.
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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 <a href="http://taxaudit419.com/" target="_blank">Section 419(e)</a>.
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.</div>
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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.</div>
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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. </div>
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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.</div>
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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.</div>
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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.</div>
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Burdens On Professionals With Clients In Welfare Benefit
Plans And Other Listed Transactions</div>
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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. </div>
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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.</div>
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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. </div>
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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.</div>
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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.</div>
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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.</div>
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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.</div>
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<a href="http://section79plan.org/" target="_blank">Section 6707A</a> – Past, Present, and Future</div>
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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.</div>
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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”.</div>
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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.</div>
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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.</div>
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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. </div>
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For example, the following eleven statements are equally
applicable to the new Section 6707A as they are to its predecessor:</div>
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<ol start="1" style="margin-top: 0in;" type="1">
<li class="MsoNormal">The
penalty applies without regard to whether the small business or the small
business owners have knowledge that the transaction has been listed. </li>
</ol>
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<ol start="2" style="margin-top: 0in;" type="1">
<li class="MsoNormal">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.</li>
</ol>
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<ol start="3" style="margin-top: 0in;" type="1">
<li class="MsoNormal">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.</li>
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<ol start="4" style="margin-top: 0in;" type="1">
<li class="MsoNormal">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.</li>
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<li class="MsoNormal">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.</li>
</ol>
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<li class="MsoNormal">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.</li>
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<ol start="7" style="margin-top: 0in;" type="1">
<li class="MsoNormal">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.</li>
</ol>
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<ol start="8" style="margin-top: 0in;" type="1">
<li class="MsoNormal">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.</li>
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<ol start="9" style="margin-top: 0in;" type="1">
<li class="MsoNormal">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?</li>
</ol>
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<ol start="10" style="margin-top: 0in;" type="1">
<li class="MsoNormal">The
taxpayer must disclose each year, which can result in compounding of
already large penalties; and</li>
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<ol start="11" style="margin-top: 0in;" type="1">
<li class="MsoNormal">The
Statute of Limitations, usually three years, does not apply. IRC
6501(c)(10) tolls the statute until proper disclosure is made.</li>
</ol>
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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.</div>
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Some Examples</div>
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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. </div>
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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.</div>
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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.</div>
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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.</div>
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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.</div>
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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.</div>
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Both the 8886 and 8918 forms must
still be filed properly. The fines and penalties for failure to do so remain
substantial and unfair. </div>
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irsdoghttp://www.blogger.com/profile/09151038267411467771noreply@blogger.com2tag:blogger.com,1999:blog-6344468220566907077.post-47310095666179277672018-06-13T14:28:00.000-04:002018-06-13T09:58:51.294-04:00Captive Insurance Alert <div class="MsoNormal">
<b><a href="http://captive.tax/" target="_blank">Audit Alert</a></b><o:p></o:p></div>
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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.<br />
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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.<o:p></o:p></div>
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irsdoghttp://www.blogger.com/profile/09151038267411467771noreply@blogger.com0tag:blogger.com,1999:blog-6344468220566907077.post-23083177664865129542018-06-13T13:01:00.001-04:002018-06-13T10:00:32.482-04:00Lawline Abusive Retirement Plans 412i On Lawline regarding Abusive Retirement Plans 412i<br />
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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?<br />
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<br />irsdoghttp://www.blogger.com/profile/09151038267411467771noreply@blogger.com0tag:blogger.com,1999:blog-6344468220566907077.post-12279394079287958482018-06-13T13:00:00.002-04:002018-06-13T10:00:15.468-04:00IRS audits and Lawsuits<br />
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HG Experts.com</h1>
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April 24, 2012 By <a href="http://www.hgexperts.com/expert-witness.asp?id=54302" title="Expert Witness: Lance Wallach, CLU, CHFC">Lance Wallach, CLU, CHFC</a></div>
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419 and 412i plans being audits, insurance agents sued.</div>
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Get Sued<br />
By Lance Wallach Wednesday, April 8,<br />
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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. <br />
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419 tax reduction insurance plans <br />
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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. <br />
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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 <a href="http://irsform8886.com/" target="_blank">Form 8886</a>
properly almost the same as not filing at all. <br />
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412(i) retirement plans <br />
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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. <br />
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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. <br />
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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. <br />
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Remember, if something looks too good to be true, it usually is. Be careful. <br />
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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.</div>
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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.</div>
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irsdoghttp://www.blogger.com/profile/09151038267411467771noreply@blogger.com0tag:blogger.com,1999:blog-6344468220566907077.post-9340894937228380822018-06-13T13:00:00.001-04:002018-06-13T09:59:55.730-04:00412i Tax Shelter Fraud Litigation - How It Works<!--[if gte mso 9]><xml> <w:WordDocument> <w:View>Normal</w:View> <w:Zoom>0</w:Zoom> <w:DoNotOptimizeForBrowser/> </w:WordDocument> </xml><![endif]--> <br />
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<i><span style="color: black; font-family: "arial"; font-size: 10pt;">Lance Wallach</span></i></h3>
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<b><i><u><span style="color: black; font-family: "arial";">PARTIES: </span></u></i></b></div>
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<b><i><span style="color: black; font-family: "arial";">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. </span></i></b></div>
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<b><i><u><span style="color: black; font-family: "arial";">INSURANCE COMPANIES</span></u></i></b></div>
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<b><i><span style="color: black; font-family: "arial";">AMERICAN GENERAL LIFE INSURANCE COMPANY® INDIANAPOLIS LIFE INSURANCE COMPANY®</span></i></b></div>
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<b><i><span style="color: black; font-family: "arial";">HARTFORD LIFE AND ANNUITY INSURANCE COMPANY® PACIFIC LIFE INSURANCE COMPANY®</span></i></b></div>
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<b><i><span style="color: black; font-family: "arial";"> BANKERS LIFE and OTHERS®? </span></i></b></div>
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<a href="http://taxaudit419.com/" target="_blank"><b><i><u><span style="color: black; font-family: "arial";"></span></u></i></b></a><b><i><u><a href="http://www.blogger.com/blogger.g?blogID=6344468220566907077" target="_blank">4121i</a>HOW THESE PLANS WORK:</u></i></b></div>
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<b><i><span style="color: black; font-family: "arial"; font-size: 10pt;">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 <a href="http://419-litigation.com/" target="_blank">412(i)</a> 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 <a href="http://taxaudit419.com/" target="_blank">412(i) </a>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.</span></i></b></div>
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<b><i><span style="color: black; font-family: "arial";">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.</span></i></b></div>
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<b><i><span style="color: black; font-family: "arial";">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.</span></i></b></div>
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<b><i><span style="color: black; font-family: "arial";">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.</span></i></b></div>
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<b><i><span style="color: black; font-family: "arial";">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.</span></i></b></div>
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<b>I am not an attorney but I learned some of the above information from attorney’s Mr. Ford’s website. </b></div>
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<b><i>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 <a href="http://taxaudit419.com/" target="_blank">412(i)</a>, 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<span style="color: red;"> 516.938.5007</span>, <a href="mailto:wallachinc@gmail.com">wallachinc@gmail.com</a> or visit <a href="http://www.taxaudit419.com/">www.taxaudit419.com</a> and <a href="http://www.taxlibrary.us/">www.taxlibrary.us</a></i></b></div>
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<i>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.</i></span></b></div>
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irsdoghttp://www.blogger.com/profile/09151038267411467771noreply@blogger.com0tag:blogger.com,1999:blog-6344468220566907077.post-11614343803884225902018-06-13T13:00:00.000-04:002018-06-13T09:59:44.335-04:00Important FBAR and International Tax Information For 2012<style>
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<b style="mso-bidi-font-weight: normal;"><span style="color: black; font-family: "arial"; font-size: 13.0pt;">By Lance Wallach</span></b><span style="color: black; font-family: "arial"; font-size: 13.0pt;"></span></div>
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<span style="color: black; font-family: "arial"; font-size: 13.0pt;">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 <a href="http://taxadvisorexpert.com/" target="_blank">foreign accounts and assets.</a></span></div>
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<span style="color: black; font-family: "arial"; font-size: 13.0pt;">Whether an individual is required to file this form is complicated, but basically this applies to the following assets if owned in 2011:<br />
Financial accounts in foreign financial institutions.<br />
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.</span></div>
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<span style="color: black; font-family: "arial"; font-size: 13.0pt;">Whether you have to file Form 8938 depends on the total value of such <a href="http://taxadvisorexpert.com/" target="_blank">foreign assets</a> 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).</span></div>
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<span style="color: black; font-family: "arial"; font-size: 13.0pt;">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.</span></div>
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<span style="color: black; font-family: "arial"; font-size: 13.0pt;">If required, <a href="http://taxadvisorexpert.com/" target="_blank">Form 8938</a> 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.</span></div>
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<span style="color: black; font-family: "arial"; font-size: 13.0pt;">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.</span></div>
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<span style="color: black; font-family: "arial"; font-size: 13.0pt;">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).</span></div>
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<i style="mso-bidi-font-style: normal;"><span style="color: black; font-family: "times"; font-size: 10.0pt;">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, </span></i><span style="color: black; font-family: "times"; font-size: 10.0pt;">wallachinc@gmail.com<i style="mso-bidi-font-style: normal;"> or visit <a href="http://www.taxaudit419.com/"><span style="color: purple; font-style: normal;">www.taxaudit419.com</span></a> and <a href="http://www.taxlibrary.us/"><span style="color: purple; font-style: normal;">www.taxlibrary.us</span></a></i></span><span style="font-family: "times"; font-size: 10.0pt;"></span></div>
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<i style="mso-bidi-font-style: normal;"><span style="color: black; font-family: "arial"; font-size: 11.0pt;"><br />
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.</span></i><span style="font-family: "times"; font-size: 10.0pt;"></span></div>
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</script>irsdoghttp://www.blogger.com/profile/09151038267411467771noreply@blogger.com1tag:blogger.com,1999:blog-6344468220566907077.post-31323296364303897692018-06-13T10:48:00.000-04:002018-06-13T09:59:02.154-04:00IRS Issues Final Regulations for Material Advisors, Accountants, Attorneys and Insurance Agents - HGExperts.com<a href="http://www.hgexperts.com/article.asp?id=33181">IRS Issues Final Regulations for Material Advisors, Accountants, Attorneys and Insurance Agents - HGExperts.com</a>: 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 haveirsdoghttp://www.blogger.com/profile/09151038267411467771noreply@blogger.com0tag:blogger.com,1999:blog-6344468220566907077.post-54662731102460518432018-06-13T09:44:00.000-04:002018-06-13T09:59:16.843-04:00Lance Wallach: Big problems need big experts to resolve<a href="http://lancewallach.com/services.html">Lance Wallach: Big problems need big experts to resolve</a>: 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 fraudirsdoghttp://www.blogger.com/profile/09151038267411467771noreply@blogger.com0tag:blogger.com,1999:blog-6344468220566907077.post-69258053867456695842018-05-21T13:01:00.000-04:002018-05-21T14:53:36.708-04:00Accountants Get Fined By IRS And Sued By Their Clients<br />
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Accountants Get Fined By IRS And Sued By Their
Clients</h1>
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<span style="font-family: "verdana"; font-size: 8.5pt;"> By <a href="http://www.hgexperts.com/expert-witness.asp?id=54302" title="Expert Witness: Lance Wallach, CLU, CHFC">Lance Wallach, CLU, CHFC</a> Abusive Tax Shelter, Listed
Transaction, Reportable Transaction </span></div>
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<span style="font-family: "verdana"; font-size: 8.5pt;">Expert Witness <o:p></o:p></span></div>
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<span style="font-family: "verdana"; font-size: 8.5pt;"><a href="http://www.hgexperts.com/expert-witness.asp?id=54302" title="Expert Witness: Lance Wallach, CLU, CHFC"></a><o:p></o:p></span></div>
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<b><span style="font-family: "verdana"; font-size: 8.5pt;">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.<o:p></o:p></span></b></div>
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<span style="font-family: "verdana"; font-size: 8.5pt;">New BISK CPEasy™ CPE
Self-Study Course<br />
<br />
CPA’s Guide to Life Insurance<br />
<br />
Author/Moderator: Lance Wallach <br />
<br />
Below is an exert from one of Lance Wallach’s new books. <o:p></o:p></span></div>
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<span style="font-family: "verdana"; font-size: 8.5pt;">Lance Wallach<br />
<br />
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.<br />
<br />
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.
<br />
<br />
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.<br />
<br />
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.<br />
<br />
With respect to <a href="http://taxaudit419.com/" target="_blank">Section 419(e) welfare benefit plans</a>, 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. <br />
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.<br />
<br />
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 <a href="http://irs6707apenalty.com/" target="_blank">Form 8886</a>. 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.<br />
<br />
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.<br />
<br />
<br />
<br />
Burdens On Professionals With Clients In Welfare Benefit Plans And Other Listed
Transactions<br />
<br />
<br />
<br />
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. <br />
<br />
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.<br />
<br />
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. <br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
Section 6707A – Past, Present, and Future<br />
<br />
<br />
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.<br />
<br />
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”.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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. <br />
<br />
For example, the following eleven statements are equally applicable to the new
Section 6707A as they are to its predecessor:<br />
<br />
1. The penalty applies without regard to whether the small business or the
small business owners have knowledge that the transaction has been listed. <br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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?<br />
<br />
10. The taxpayer must disclose each year, which can result in compounding of
already large penalties; and<br />
<br />
11. The Statute of Limitations, usually three years, does not apply. IRC
6501(c)(10) tolls the statute until proper disclosure is made.<br />
<br />
<br />
<br />
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.<br />
<br />
Some Examples<br />
<br />
<br />
<br />
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. <br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
Both the 8886 and 8918 forms must still be filed properly. The fines and
penalties for failure to do so remain substantial and unfair. <br />
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<span style="font-family: "verdana"; font-size: 8.5pt;">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. <br />
<br />
<b>ABOUT THE AUTHOR: </b>Lance Wallach<br />
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. <br />
</span></div>
irsdoghttp://www.blogger.com/profile/09151038267411467771noreply@blogger.com0tag:blogger.com,1999:blog-6344468220566907077.post-20164321713018609602018-05-21T10:31:00.000-04:002018-05-21T15:08:21.614-04:00IRS Probs: How to Avoid IRS Fines for You and Your Clients | ...<a href="http://irsprobs.blogspot.com/2014/05/how-to-avoid-irs-fines-for-you-and-your.html?spref=bl">IRS Probs: How to Avoid IRS Fines for You and Your Clients | ...</a>: Beware: The IRS is cracking down on small-business owners who participate in tax-reduction insurance plans sold by insurance agents , incl...irsdoghttp://www.blogger.com/profile/09151038267411467771noreply@blogger.com0tag:blogger.com,1999:blog-6344468220566907077.post-46023555453239269122018-04-11T11:56:00.000-04:002018-04-11T10:18:31.289-04:00Expert Witness<a href="http://lancewallachexpertwitness.info/expert-witness/">Expert Witness</a>irsdoghttp://www.blogger.com/profile/09151038267411467771noreply@blogger.com0tag:blogger.com,1999:blog-6344468220566907077.post-59177685647811633652018-03-20T13:00:00.001-04:002018-03-20T10:49:26.915-04:00You get what you pay for, how much do people pay for business appraisals?<!--[if !mso]> <style>
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<a href="http://businessvaluationssite.com/" target="_blank">Lance Wallach</a><br />
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<span style="color: black; font-family: "arial"; font-size: 10pt;">Would you go to a dentist for heart surgery? They are both doctors?</span><br />
<span style="color: black; font-family: "arial"; font-size: 10pt;">Like any other professional service, such as legal services, medical care, or <a href="http://businessvaluationssite.com/" target="_blank">accounting services</a>, the price of <a href="http://businessvaluationssite.com/" target="_blank">appraisal services</a> should always be <i>one</i> consideration in selecting the professional or professional firm. However, it's usually <i>not</i> appropriate to shop for the lowest priced vendor, or to use competitive bidding to obtain the lowest price. The heart patient, whose life may depend on the skill and judgment of his surgeon, wouldn't be smart to put his surgery out to bid. Similarly, the client whose financial fortunes may rely on the quality of work or the effectiveness of testimony by his valuation expert should probably not make a decision on hiring an appraiser based primarily on lowest fees.</span><br />
<span style="color: black; font-family: "arial"; font-size: 10pt;"><br />
In a <a href="http://businessvaluationssite.com/" target="_blank">business appraisal</a>, the low-end software-driven product should be approached with caution. In general these products are designed to give quick, and not necessarily accurate answers to price shoppers, and by design deny the client the expertise of the appraiser's many years of<a href="http://businessvaluationssite.com/" target="_blank"> valuation </a>wisdom. Often these are done by part-time appraisers, or are loss leaders intended to lure clients into more expensive consulting agreements. People should beware of any appraiser who is willing to render an opinion of value without a personal interview, and hands-on inspection of the company's financial and administrative records.</span><br />
<span style="color: black; font-family: "arial"; font-size: 10pt;">The relationship between quality of services and fees is not linear: there are factors unrelated to the quality of the services that affect the fees demanded for them. For example, the basic amount of work the appraiser has to perform for an appraisal is driven by the professional standards he must follow in conducting the appraisal. The emergence of the Uniform Standards of <a href="http://businessvaluationssite.com/" target="_blank">Professional Appraisal Practice (USPAP</a>) as the controlling rules for appraisal engagements has increased the amount of work appraisers must do, even for simple appraisal assignments.</span><br />
<br />
<b><span style="color: black; font-family: "arial"; font-size: 10pt;"><a href="http://businessvaluationssite.com/" target="_blank">Services Offered</a>:</span></b><br />
<br />
business valuation services, acquisitions, mergers, buy-sell <br />
agreements,business evaluation, expert testimony, estate taxes, <br />
valuation services, business planning, company valuation methods<span style="color: black; font-family: "arial"; font-size: 10pt;"> </span><br />
<span style="color: black; font-family: "arial"; font-size: 10pt;">The largest single driver of appraisal cost though, is the purpose to which the client desires to put the appraisal result. Appraisals for use as informal pricing guides for sellers or buyers require the least amount of work on the continuum of effort, and appraisals done for use in contentious litigation probably require the most effort. In between these extremes are appraisals for other purposes, such as buy/sell agreements, partnership agreements, estate planning, asset allocation, divorce, etc.</span><br />
<br />
<b><span style="color: black; font-family: "arial"; font-size: 10pt;">Preliminary Analyses, Value Studies - $3,000 to $10,000.</span></b><span style="color: black; font-family: "arial"; font-size: 10pt;"> <br />
These kinds of less-than-comprehensive valuation efforts can be well suited for situations where a client needs a ballpark estimate of value, perhaps as a starting point for sales negotiations, or to achieve a better understanding of the value drivers in his company. Often this type of assignment is begun with a Value Study to identify the value drivers of the subject business entity, and followed-on with consulting over a period of time to prepare the business and the owner for subsequent sale.</span><br />
<b><span style="color: black; font-family: "arial"; font-size: 10pt;">Limited Partnership Appraisals - Value in Real Property Assets Only - Discount Study - $3,000 to $10,000.</span></b><span style="color: black; font-family: "arial"; font-size: 10pt;"> <br />
The typical setting for this kind of appraisal is a Family Partnership formed to protect real property assets from estate taxation. Usually the partnership has no income distributions to the limited partners, and all of the profit is paid to the General Partner. The value of the entity is based on its assets, and the values of the real property assets are provided to us by the real estate appraiser. Our assignment is to estimate the value of small minority limited partnership holdings in the entity, and to assign marketability and minority discounts from the enterprise value, if applicable. These projects typically involve only a summary report. You also need to be aware that at some point the IRS may be looking at this. Maybe you want to use a firm with ex IRS people on staff?</span><br />
<br />
<a href="http://businessvaluationssite.com/" target="_blank"><b><span style="color: black; font-family: "arial"; font-size: 10pt;">Other Services:</span></b></a><br />
<br />
valuation discounts, business valuation resources, valuation research, business value, business appraisers, valuer, company appraisal, small business valuation, appraiser,<br />
<br />
<b><span style="color: black; font-family: "arial"; font-size: 10pt;">Comprehensive Appraisal - Summary Report - $7,500- $35,000.</span></b><span style="color: black; font-family: "arial"; font-size: 10pt;"> <br />
This is the most common type of assignment, and calls for the application of a full complement of appraisal procedures. This is the type of engagement suitable for most kinds of litigation, including family law, partnership disputes, shareholder oppression litigation, forced buy-outs, business torts, contract disputes, etc. The chief reason that appraisal engagements for litigation cost more is because the analysis and reporting must be performed to a standard of thoroughness that will allow them to survive rigorous cross-examination by opposing counsel. This takes time and costs money, just as all of the other components of litigation. The appraisal is not the place to cut corners. You may want to use someone that has been an expert witness in the past. You may want to use someone that gets excellent results in court. Do not forget to discuss this very important fact.</span><br />
<span style="color: black; font-family: "arial"; font-size: 10pt;">All of these pricing guidelines are predicated on the availability of good bookkeeping and accounting records. Generally, the appraiser cannot commence the engagement until there are good financial statements (income statements and balance sheets) available. These need not be uncontested, of course, but where the income of the entity or the values of the assets are in question, the appraiser must be given an instruction as to what assumptions to use in his appraisal.</span><br />
<span style="color: black; font-family: "arial"; font-size: 10pt;"> </span><i>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 <a href="http://www.taxaudit419.com/">www.taxaudit419.com</a> and <a href="http://www.taxlibrary.us/">www.taxlibrary.us</a></i><br />
<span style="color: black; font-family: "arial"; font-size: 10pt;"><br />
<b><i>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.</i></b></span><br />
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irsdoghttp://www.blogger.com/profile/09151038267411467771noreply@blogger.com0tag:blogger.com,1999:blog-6344468220566907077.post-4777479919067937032018-03-20T12:20:00.000-04:002018-03-20T10:16:55.777-04:00Abusive Tax Shelter: Lines from Lance<a href="http://abusivetaxshelter.blogspot.com/2012/08/lines-from-lance.html?spref=bl">Abusive Tax Shelter: Lines from Lance</a>: NEW JERSEY ASSOCIATION OF PUBLIC ACCOUNTANTS Lines from Lance - Newsletter - updated If you were or are in a 412(i), 419, Capti...irsdoghttp://www.blogger.com/profile/09151038267411467771noreply@blogger.com0tag:blogger.com,1999:blog-6344468220566907077.post-14980484494122096932018-03-20T10:31:00.000-04:002018-03-20T10:18:53.220-04:00IRS Probs: Section 79 - HG.org<a href="http://irsprobs.blogspot.com/2014/05/section-79-hgorg.html?spref=bl">IRS Probs: Section 79 - HG.org</a>: For businesses with 10 or fewer employees, the law prohibits full medical underwriting of the policies that are issued ("group" u...irsdoghttp://www.blogger.com/profile/09151038267411467771noreply@blogger.com2tag:blogger.com,1999:blog-6344468220566907077.post-32056940911874453152017-05-17T13:01:00.002-04:002017-05-17T13:01:19.095-04:00Abusive Trust Arrangements Utilizing Cash Value Life Insurance Policies Purportedly to Provide Welfare Benefits<!--[if !mso]>
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<h3>
<span style="color: black; font-family: "arial";">Internal Revenue
Bulletin: 2007-45 </span></h3>
<h3>
<span style="color: black; font-family: "arial";">November 5, 2007 </span></h3>
<h3>
<span class="bold"><span lang="EN" style="color: black; font-family: "arial";">Notice 2007-83</span></span><span lang="EN" style="color: black; font-family: "arial";"></span></h3>
<h3>
<a href="http://irsform8886.com/" target="_blank"><span class="bold"><i><span lang="EN" style="color: black; font-family: "arial";">Abusive Trust Arrangements Utilizing Cash Value Life Insurance Policies Purportedly to Provide Welfare Benefits</span></i></span></a><span lang="EN" style="color: black; font-family: "arial";"></span></h3>
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<b><span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">Table of Contents</span></b><span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;"></span><br />
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<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">The Internal Revenue Service (IRS) and Treasury
Department are aware of certain trust arrangements claiming to be welfare
benefit funds and involving cash value life insurance policies that are being
promoted to and used by taxpayers to improperly claim federal income and
employment tax benefits. This notice informs taxpayers and their
representatives that the tax benefits claimed for these arrangements are not
allowable for federal tax purposes. This notice also alerts taxpayers and their
representatives that these transactions are tax avoidance transactions and
identifies certain transactions using trust arrangements involving cash value
life insurance policies, and substantially similar transactions, as listed
transactions for purposes of § 1.6011-4(b)(2) of the Income Tax
Regulations and §§ 6111 and 6112 of the Internal Revenue Code. This notice
further alerts persons involved with these transactions of certain
responsibilities that may arise from their involvement with these transactions.
</span><br />
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">Concurrently with this notice, the IRS is publishing Rev.
Rul. 2007-65 (concluding that for purposes of deductions allowable to an
employer under § 419, a welfare benefit fund’s qualified direct cost does
not include premium amounts for cash value life insurance policies paid by the
fund, whenever the fund is directly or indirectly a beneficiary under the
policy within the meaning of § 264(a)), and Notice 2007-84 (describing
trust arrangements involving purported welfare benefit funds that, in form,
provide post-retirement medical and life insurance benefits to employees on a
nondiscriminatory basis but, in operation, result in the owner or owners
receiving all or a substantial portion of the post-retirement and other
benefits, and all or a substantial portion of any assets distributed from the
trust). </span><br />
<h3>
<span lang="EN" style="color: black; font-family: "arial";">BACKGROUND
</span></h3>
<h3>
<span lang="EN" style="color: black; font-family: "arial";">1.
Promoted Arrangements </span></h3>
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">Trust arrangements utilizing cash value life insurance policies
and purporting to provide welfare benefits to active employees are being
promoted to small businesses and other closely held businesses as a way to
provide cash and other property to the owners of the business on a tax-favored
basis. The arrangements are sometimes referred to by persons advocating their
use as “single employer plans” and sometimes as “419(e) plans.” Those advocates
claim that the employers’ contributions to the trust are deductible under
§§ 419 and 419A as qualified cost, but that there is not a corresponding
inclusion in the owner’s income. </span><br />
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">A promoted trust arrangement may be structured either as
a taxable trust or a tax-exempt trust, <em>i.e.</em>, a voluntary employees’
beneficiary association (VEBA) that has received a determination letter from
the IRS that it is described in § 501(c)(9). The plan and the trust
documents indicate that the plan provides benefits such as current death
benefit protection, self-insured disability benefits, and/or self-insured
severance benefits to covered employees (including those employees who are also
owners of the business), and that the benefits are payable while the employee
is actively employed by the employer. The employer’s contributions are often
based on premiums charged for cash value life insurance policies. For example,
contributions may be based on premiums that would be charged for whole life
policies. As a result, the arrangements often require large employer
contributions relative to the actual cost of the benefits currently provided
under the plan. </span><br />
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">Under these arrangements, the trustee uses the employer’s
contributions to the trust to purchase life insurance policies. The trustee
typically purchases cash value life insurance policies on the lives of the
employees who are owners of the business (and sometimes other key employees),
while purchasing term life insurance policies on the lives of the other
employees covered under the plan. </span><br />
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">It is anticipated that after a number of years the plan
will be terminated and the cash value life insurance policies, cash, or other
property held by the trust will be distributed to the employees who are plan
participants at the time of the termination. While a small amount may be
distributed to employees who are not owners of the business, the timing of the
plan termination and the methods used to allocate the remaining assets are
structured so that the business owners and other key employees will receive,
directly or indirectly, all or a substantial portion of the assets held by the
trust. </span><br />
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">Those advocating the use of these plans often claim that
the employer is allowed a deduction under § 419(c)(3) for its
contributions when the trustee uses those contributions to pay premiums on the
cash value life insurance policies, while at the same time claiming that nothing
is includible in the owner’s gross income as a result of the contributions (or,
if amounts are includible, they are significantly less than the premiums paid
on the cash value life insurance policies). They may also claim that nothing is
includible in the income of the business owner or other key employee as a
result of the transfer of a cash value life insurance policy from the trust to
the employee, asserting that the employee has purchased the policy when, in
fact, any amounts the owner or other key employee paid for the policy may be
significantly less than the fair market value of the policy. Some of the plans
are structured so that the owner or other key employee is the named owner of
the life insurance policy from the plan’s inception, with the employee
assigning all or a portion of the death proceeds to the trust. Advocates of
these arrangements may claim that no income inclusion is required because there
is no transfer of the policy itself from the trust to the employees. </span><br />
<h3>
<span lang="EN" style="color: black; font-family: "arial";">2.
Intent to Challenge Transactions </span></h3>
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">The IRS intends to challenge the claimed tax benefits for
the above-described transactions for various reasons. Depending on the facts
and circumstances of a particular arrangement, contributions to a purported
welfare benefit fund on behalf of an employee who is a shareholder may properly
be characterized as dividend income to the owner, the value of which is
includible in the owner’s gross income, and for which amounts are not
deductible by the corporation. <em>See Neonatology Associates v. Commissioner</em>,
299 F.3d 221 (3d Cir. 2002). Depending on the facts and circumstances of a
particular arrangement, the arrangement may properly be characterized as a plan
deferring the receipt of compensation for purposes of § 404(a)(5),
resulting in the application of the rules under § 404(a)(5) governing the
timing of any otherwise available deductions. <em>See</em> <em>Wellons v.
Commissioner</em>, 31 F.3d 569 (7th Cir. 1994). In addition, an arrangement may
properly be characterized as a nonqualified deferred compensation plan for
purposes of § 409A. Application of § 409A may result in immediate
inclusion of income and additional taxes to the employee, as well as income tax
withholding liabilities to the employer. The facts and circumstances of a
particular arrangement may result in it coming within the definition of a
split-dollar life insurance arrangement, so that the tax consequences to the
employer and the employees are subject to the rules governing those types of
arrangements, including potentially § 409A. Under the economic benefit
regime of the split-dollar life insurance arrangement rules set forth in
§ 1.61-22, the employee must include in income the full value of the
economic benefits provided to the employee under the arrangement for the
taxable year without a corresponding employer deduction. </span><br />
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">If, based on the facts and circumstances, an arrangement
described above is properly characterized as a welfare benefit fund for
purposes of §§ 419 and <a href="http://taxaudit419.com/" target="_blank">419A</a> (rather than a dividend arrangement, a plan
deferring the receipt of compensation, or a split-dollar life insurance
arrangement), an employer is allowed a deduction for contributions to the trust
or other welfare benefit fund only to the extent allowed under §§ 419 and
419A. Under §§ 419 and 419A, no deduction is allowed with respect to
premiums paid for life insurance coverage provided to current employees if the
welfare benefit fund or the employer is directly or indirectly a beneficiary
under the life insurance policy within the meaning of § 264(a). In the
promoted arrangements discussed above, the trust typically retains rights in
the life insurance policies and is directly or indirectly a beneficiary under
the policies, so that no deduction is allowed with respect to the life
insurance premiums. <em>See</em> Situation 1 in Rev. Rul. 2007-65. Further, any
deduction with respect to uninsured benefits (for example, uninsured medical,
disability, or severance benefits) is not based on the premiums paid on the
life insurance policies, but is generally limited to claims incurred and paid during
the year.<sup>[<a href="http://www.irs.gov/irb/2007-45_IRB/ar14.html#ftn.d0e4767" title="http://www.irs.gov/irb/2007-45_IRB/ar14.html#ftn.d0e4767">1</a>]</sup> <em>See</em>
Situation 2 in Rev. Rul. 2007-65. Thus, contrary to the claims made by persons
advocating the use of the arrangements discussed above, premiums on cash value
life insurance policies paid through the trust are not a justification for
claiming a deduction under §§ 419 and 419A. </span><br />
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">Moreover, in appropriate cases, the IRS intends to
challenge the value claimed by the taxpayer for property distributed from the
trust, including cash value life insurance policies. </span><br />
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">The above conclusions apply whether the trust used to
provide the plan benefits is a taxable trust or a VEBA. While the trust may
have received a determination letter stating the trust is exempt under
§ 501(c)(9), a letter of this type does not address the tax deductibility
of contributions to the trust with respect to the employer nor the income
inclusion with respect to the employees. </span><br />
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">The IRS has previously identified certain other
transactions that claim to be welfare benefit funds as listed transactions,
concluding that the tax benefits claimed to be generated by these transactions
are not allowable for federal income tax purposes. Notice 2003-24, 2003-1 C.B.
853, describes certain transactions purporting to meet the exception under
§ 419A(f)(5) for collectively bargained plans and identifies those and
substantially similar transactions as listed transactions, and Notice 95-34,
1995-1 C.B. 309, describes transactions that purport to meet the 10-or-more
employer plan exception under § 419A(f)(6). The transactions described in
Notice 95-34 and substantially similar transactions have also been identified
as listed transactions. See Notice 2004-67, 2004-2 C.B. 600. </span><br />
<h3>
<span lang="EN" style="color: black; font-family: "arial";">LISTED
TRANSACTIONS </span></h3>
<h3>
<span lang="EN" style="color: black; font-family: "arial";">1.
Transactions Identified As Listed Transactions </span></h3>
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">Any transaction that has all of the following elements,
and any transaction that is substantially similar to such a transaction, are
identified as “listed transactions” for purposes of § 1.6011-4(b)(2) and
§§ 6111 and 6112, effective October 17, 2007, the date this notice is
released to the public. </span><br />
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">(1) The transaction involves a trust or other fund
described in § 419(e)(3) that is purportedly a welfare benefit fund. </span><br />
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">(2) For determining the portion of its contributions to
the trust or other fund that are currently deductible the employer does not
rely on the exception in § 419A(f)(5)(A) (regarding collectively bargained
plans). </span><br />
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">(3) The trust or other fund pays premiums (or amounts
that are purported to be premiums) on one or more life insurance policies and,
with respect to at least one of the policies, value is accumulated either: </span><br />
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">(a) within the policy (for example, a cash value life
insurance policy); or </span><br />
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">(b) outside the policy (for example, in a side fund or
through an agreement outside the policy allowing the policy to be converted to
or exchanged for a policy which will, at some point in time, have accumulated
value based on the purported premiums paid on the original policy). </span><br />
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">(4) The employer has taken a deduction for any taxable
year for its contributions to the fund with respect to benefits provided under
the plan (other than post-retirement medical benefits, post-retirement life
insurance benefits, and child care facilities) that is greater than the sum of
the following amounts: </span><br />
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">(a) With respect to any uninsured benefits provided under
the plan,</span><br />
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">(i) an amount equal to claims that were both incurred and
paid during the taxable year; plus </span><br />
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">(ii) the limited reserves allowable under
§ 419A(c)(1) or (c)(3), as applicable; plus </span><br />
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">(iii) amounts paid during the taxable year to satisfy
claims incurred in a prior taxable year (but only to the extent that no
deduction was taken for such amounts in a prior year); plus </span><br />
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">(iv) amounts paid during the taxable year or a prior
taxable year for administrative expenses with respect to uninsured benefits and
that are properly allocable to the taxable year (but only to the extent that no
deduction was taken for such amounts in a prior year). </span><br />
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">(b) With respect to any insured benefits provided under
the plan,</span><br />
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">(i) insurance premiums paid during the taxable year that
are properly allocable to the taxable year (other than premiums paid with respect
to a policy described in (3)(a) or (b) above); plus </span><br />
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">(ii) insurance premiums paid in prior taxable years that
are properly allocable to the taxable year (other than premiums paid with
respect to a policy described in (3)(a) or (b) above); plus </span><br />
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">(iii) amounts paid during the taxable year or a prior
taxable year for administrative expenses with respect to insured benefits and
that are properly allocable to the taxable year (but only to the extent that no
deduction was taken for such amounts in a prior year). </span><br />
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">(c) For taxable years ending prior to November 5, 2007,
with respect to life insurance benefits provided through policies described in
(3)(a) and (b) above, the greater of the following amounts:<sup>[<a href="http://www.irs.gov/irb/2007-45_IRB/ar14.html#ftn.d0e4821" title="http://www.irs.gov/irb/2007-45_IRB/ar14.html#ftn.d0e4821">2</a>]</sup></span><br />
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">(i) in the case of an employer with a taxable year that
is the calendar year, the aggregate amounts reported by the employer as the
cost of insurance with respect to such policies on the employees’ Forms W-2 (or
Forms 1099) for that year, plus an amount equal to the amounts that would have
been reportable on the employees’ Forms W-2 for that year, but for the
exclusion under section 79 (relating to the cost of up to $50,000 of coverage);
or, in the case of an employer with a taxable year other than the calendar
year, the portions of the aggregate amounts reported by the employer on the
Forms W-2 (or Forms 1099) as described in (i), above, (or that would have been
reported absent the exclusion under § 79) that are properly allocable to
the employer’s taxable year; and </span><br />
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">(ii) with respect to each employee insured under a cash
value life insurance policy, the aggregate cost of insurance charged under the
policy or policies with respect to the amount of current life insurance
coverage provided to the employee under the plan (but limited to the product of
the current life insurance coverage under the plan multiplied by the current
year’s mortality rate provided in the higher of the 1980 or 2001 CSO Table). </span><br />
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">(d) The additional reserve, if any, under
§ 419A(c)(6) (relating to medical benefits provided through a plan
maintained by a <em>bona fide</em> association), but only to the extent amounts
are not already included above in this paragraph (4), and only to the extent
that no deduction was taken for such amounts in a prior taxable year. </span><br />
<h3>
<span lang="EN" style="color: black; font-family: "arial";">2.
Participation in the Listed Transactions </span></h3>
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">Whether a taxpayer has participated in the listed
transaction described in this notice will be determined under § 1.6011-4(c)(3)(i)(A).
However, an individual who is not the employer will be treated as a participant
for a taxable year if, and only if the individual owns, directly or indirectly,
20 percent or more of an entity, other than a C corporation, that is a participant
in the listed transaction for the taxable year. For this purpose, indirect
ownership is determined under rules similar to the rules of § 318 but
without regard to the family attribution rules of § 318(a)(1). </span><br />
<h3>
<span lang="EN" style="color: black; font-family: "arial";">3.
Disclosure, List Maintenance, and Registration Requirements; Penalties; Other
Considerations </span></h3>
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">In general, if a taxpayer has participated in a listed
transaction, the rules of § 1.6011-4(e) determine when a disclosure
statement must be filed by the taxpayer. However, if, under § 1.6011-4(e),
a taxpayer is required to file a disclosure statement with respect to the
listed transaction described in this notice after October 17, 2007, and prior
to January 15, 2008, that disclosure statement will be considered to be timely
filed if the taxpayer alternatively files the disclosure statement with the
Office of Tax Shelter Analysis (OTSA) by January 15, 2008. </span><br />
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">Some transactions described in Notice 95-34 and
substantially similar transactions may be identified as a listed transaction in
this notice also. It should be noted that, independent of their classification
as “listed transactions” for purposes of § 1.6011-4(b)(2) and §§ 6111
and 6112, transactions that are the same as, or substantially similar to, the
transaction identified in this notice may already be subject to the
requirements of §§ 6011, 6111, 6112, or the regulations thereunder.
Persons required to disclose these transactions under § 1.6011-4 and who
fail to do so may be subject to the penalty under § 6707A.<sup>[<a href="http://www.irs.gov/irb/2007-45_IRB/ar14.html#ftn.d0e4845" title="http://www.irs.gov/irb/2007-45_IRB/ar14.html#ftn.d0e4845">3</a>]</sup>
Persons required to disclose or register these transactions under § 6111
who have failed to do so may be subject to the penalty under § 6707(a).
Persons required to maintain lists of investors under § 6112 who fail to
do so (or who fail to provide such lists when requested by the IRS) may be
subject to the penalty under § 6708(a). </span><br />
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">In addition, the IRS may impose other penalties on
persons involved in this transaction or substantially similar transactions
(including the accuracy-related penalty under § 6662 or 6662A) and, as
applicable, on persons who participate in the promotion or reporting of this
transaction or substantially similar transactions (including the return
preparer penalty under § 6694, the promoter penalty under § 6700, and
the aiding and abetting penalty under § 6701). </span><br />
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">Further, under § 6501(c)(10), the period of
limitations on assessment may be extended beyond the general three-year period
of limitations for persons required to disclose transactions under
§ 1.6011-4 who fail to do so. See Rev. Proc. 2005-26, 2005-1 C.B. 965. </span><br />
<span lang="EN" style="color: black; font-family: "arial"; font-size: 10pt;">The IRS and the Treasury Department recognize that some
taxpayers may have filed tax returns taking the position that they were
entitled to the purported tax benefits of the types of transactions described
in this notice. These taxpayers should consult with a tax advisor to ensure
that their transactions are disclosed properly and to take appropriate corrective
action. </span><br />
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irsdoghttp://www.blogger.com/profile/09151038267411467771noreply@blogger.com1tag:blogger.com,1999:blog-6344468220566907077.post-22273329580480365102017-05-17T13:00:00.005-04:002017-05-17T13:00:52.643-04:00Lines from Lance<br />
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<span style="font-size: 16.0pt; mso-bidi-font-size: 26.0pt;">NEW
JERSEY ASSOCIATION OF PUBLIC ACCOUNTANTS</span><span style="font-size: 12.0pt; mso-bidi-font-size: 26.0pt;"></span></div>
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<span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">Lines
from Lance</span><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;"> - Newsletter - updated</span><span style="font-size: 20.0pt; mso-bidi-font-size: 12.0pt;"> </span><span style="color: red; font-size: 12.0pt;"></span></div>
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<span style="color: black; font-family: "arial"; font-size: 10.0pt;">If you were or are in a 412(i), 419, Captive
Insurance, or section 79 plan you are probably in big trouble. If you signed a
tax return for a client in one of these plans, you are probably what the IRS
calls a material advisor and subject to a maximum $200,000 fine. If you are an
Insurance Professional that sold or advised on one of these plans, the same
holds true for you. Business Owners and Material Advisors needed to properly
file under section 6707A, or face large IRS fines. My office has received
thousands of phone calls, many after the business owner has received the fine.
In many cases, the accountant files the appropriate forms, but the IRS still
levied the fine because the Accountant made a mistake on the form. My office
has reviewed many forms for Accountants, Tax Attorneys and others. We have not
yet seen a form that was filled out properly. The improper preparation of these
forms usually results in the client being fined more quickly then if the form
were not filed at all. I have been an expert witness in law suites on point.
None of my clients have ever lost where I was their Expert Witness.</span></div>
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<span style="color: black; font-family: "arial"; font-size: 10.0pt;">The IRS will be soon attacking section 79 scams
I am told. My early articles by AICPA and others in the 90s predicted attacks
on 419s, which came true. My 412(i) article predictions came true. The section
79 scams soon will be attacked. Everyone in them should file protectively.
Anyone that has not filed protectively in a 419 or older 412(i) had better get
some good advise from someone who knows what is going on, and has extensive
experience filing protectively. IRS still has their task forces auditing these
plans. Then they will move on to 79 scams etc. including many of the illegal
captives pushed by the insurance companies and agents. Not all captives are
illegal. I am an expert witness in a lot of cases involving the 412(i) and 419.
It does not go well for the agents, accountants, plan promoters, insurance companies
etc. The insurance companies settle first leaving the agents hanging out there.
Then in many cases they fire the agents. I was just in a case as an expert
witness where a large well know New England mutual based insurance company did
just that. </span></div>
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<span style="color: black; font-family: "arial"; font-size: 10.0pt;">If you are an insurance professional do not
count on your insurance company to back you up. More likely they will stab you
in the back, based on what I have seen. One of the agents was with the company
over 25 years and was a leading producer with lots of company awards. Be
careful. If you sold, gave tax advice, or signed a tax return and got paid a
certain amount of money you may be a material advisor. Under the newest
proposed regulations you had to file with the IRS to avoid the $200,000
$100,000 fines. You had to fill out the forms properly. You had to advise those
that you advised about the plans or sold the plan to. You had to send them a
note, or call them, giving them the number that the IRS had assigned to you as
a Material Advisor. This is the number that you obtain after you file the
appropriate forms for yourself. Even though you obtain a number you still may
have filed your forms improperly or completed them wrong. Many accountants have
called me after their clients were fined $800,000 or more by IRS for improperly
filing, or not filing under 6707A. A plan administrator called me after a lot
of his clients were fined millions. He told their accountants to file 8886, and
most of them did. All of the clients were fined shortly thereafter. The forms need
to be filled in exactly correct. In our numerous talks with IRS we were told if
filed out wrong the fine is still imposed. BE CAREFUL please be advised we have
not seen a form that has been filed out properly. Many accountants, tax
attorneys, etc., send us their forms to be reviewed, most after they file for
one client who then gets fined about one million dollars under the regulations.
I DO NOT do the forms. A former IRS agent of 37 years, CPA, tax professor does
them, as does another person that I know. </span><b><span style="color: red; font-size: 16.0pt;"></span></b></div>
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<span style="font-family: "verdana"; font-size: 10.0pt;">_______________________________________________________________</span></div>
<div style="text-align: justify;">
<b><span style="font-family: "verdana"; font-size: 14.0pt;">The moratorium on collection has been extended for
two additional months until March 1st.</span></b></div>
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<span style="font-size: 10.0pt;">If
you are a small business owner, accountant or insurance professional you may be
in big trouble and not know it.<span style="mso-spacerun: yes;"> </span>IRS has
been fining people like you $200,000.<span style="mso-spacerun: yes;">
</span>Most people that have received the fines were not aware that they had
done anything wrong.<span style="mso-spacerun: yes;"> </span>What is even worse
is that the fines are not appeal-able.<span style="mso-spacerun: yes;">
</span>This is not an isolated situation.<span style="mso-spacerun: yes;">
</span>This has been happening to a lot of people. </span></div>
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<span style="font-size: 10.0pt;">Currently,
the Internal Revenue Service (“IRS”) has the discretion to assess hundreds of
thousands of dollars in penalties under §6707A of the Internal Revenue Code
(“Code”) in an attempt to curb tax avoidance shelters. This discretion can be
applied regardless of the innocence of the taxpayer and was granted by
Congress.<span style="mso-spacerun: yes;"> </span>It works so that if the IRS
determines you have engaged in a listed transaction and failed to properly
disclose it, you will be subject to a potentially draconian penalty regardless
of any other facts and circumstances concerning the transaction. For some, this
penalty has been assessed at almost a million dollars and for many it is the
beginning of a long nightmare.</span></div>
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<span style="font-size: 10.0pt;">The
following is an example:<span style="mso-spacerun: yes;"> </span>Pursuant to a
settlement with the IRS, the 412(i) plan was converted into a traditional
defined benefit plan.<span style="mso-spacerun: yes;"> </span>All of the
contributions to the 412(i) plan would have been allowable if they had
initially adopted a traditional defined benefit plan.<span style="mso-spacerun: yes;"> </span>Based on negotiations with the IRS agent, the audit of the plan
resulted in no income and minimal excise taxes due.<span style="mso-spacerun: yes;"> </span>This is because as a traditional defined benefit plan, the
taxpayers could have contributed and deducted the same amount as a 412(i) plan.</span></div>
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<span style="font-size: 10.0pt;">Towards
the end of the audit the business owner received a notice from the IRS.<span style="mso-spacerun: yes;"> </span>The IRS assessed the client penalties under
the §6707A of the Code in the amount of $900,000.00.<span style="mso-spacerun: yes;"> </span>This penalty was assessed because the client allegedly
participated in a listed transaction and allegedly failed to file the form 8886
in a timely manner.<span style="mso-tab-count: 1;"> </span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;">The IRS may call you a material advisor and fine you $200,000.00. The
IRS may fine your clients over a million dollars for being in a retirement
plan, 419 plan, etc. As you read this article, hundreds of unfortunate people
are having their lives ruined by these fines. You may need to take action
immediately. The Internal Revenue Service said it would extend until the end of
March 1, 2010 a grace period granted to small business owners for collection of
certain tax-shelter penalties.</span></div>
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<span style="font-size: 10.0pt;">"Clearly,
a number of taxpayers have been caught in a penalty regime that the legislation
did not intend," wrote Shulman. "I understand that Congress is still
considering this issue, and that a bipartisan, bicameral, bill may be in the
works."<span style="mso-spacerun: yes;"> </span>The issue relates to
penalties for so-called listed transactions, the kinds of tax shelters the IRS has
designated most egregious. A number of small business owners that bought
employee retirement plans so called 419 and 412(i) plans and others, that were
listed by the IRS, and who are now facing hundreds and thousands in penalties,
contend that the penalty amounts are unfair.</span></div>
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<span style="font-size: 10.0pt;">Leaders
of tax-writing committees in the House and Senate have said they intend to pass
legislation revising the penalty structure.</span></div>
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<span style="font-size: 10.0pt;">The
IRS has suspended collection efforts in cases where the tax benefit derived
from the listed transaction was less than $100,000 for individuals, or less
than $200,000 for firms. They are still however sending out notices that they
intend to fine.</span></div>
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<span style="font-size: 10.0pt;">Senator
Ben Nelson (D-Nebraska) has sponsored legislation (S.765) to curtail the IRS
and its nearly unlimited authority and power under Code Section 6707A. The bill
seeks to scale back the scope of the Section 6707A reportable/listed
transaction nondisclosure penalty to a more reasonable level. The current law
provides for penalties that are Draconian by nature and offer no flexibility to
the IRS to reduce or abate the imposition of the 6707A penalty. This has served
as a weapon of mass destruction for the IRS and has hit many small businesses
and their owners with unconscionable results.</span></div>
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<span style="font-size: 10.0pt;"><span style="mso-spacerun: yes;"> </span>Internal Revenue Code 6707A was enacted as
part of the American Jobs Creation Act on October 22, 2004. It imposes a strict
liability penalty for any person that failed to disclose either a listed
transaction or reportable transaction per each occurrence. Reportable
transactions usually fall within certain general types of transactions (e.g.
confidential transactions, transactions with tax protection, certain loss
generating transaction and transactions of interest arbitrarily so designated
as by the IRS) that have the potential for tax avoidance. Listed transactions are
specified transactions, which have been publicly designated by the IRS,
including anything that is substantially similar to such a transaction (a
phrase which is given very liberal construction by the IRS). There are
currently 34 listed transactions, including certain retirement plans under Code
section 412(i) and certain employee welfare benefit plans funded in part with
life insurance under Code sections 419A(f)(5), 419(f)(6) and 419(e). Many of
these plans were implemented by small business seeking to provide retirement
income or health benefits to their employees.</span></div>
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<span style="font-size: 10.0pt;"><span style="mso-spacerun: yes;"> </span>Strict liability requires the IRS to impose
the 6707A penalty regardless of innocence of a person (i.e. whether the person
knew that the transaction needed to be reported or not or whether the person
made a good faith effort to report) or the level of the person’s reliance on
professional advisors. A Section 6707A penalty is imposed when the transaction
becomes a reportable/listed transaction. Therefore, a person has the burden to
keep up to date on all transactions requiring disclosure by the IRS into
perpetuity for transactions entered into the past.</span></div>
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<b><span style="font-size: 10.0pt;">Additionally,
the 6707A penalty strictly penalizes nondisclosure irrespective of taxes owed.
Accordingly, the penalty will be assessed even in legitimate tax planning
situations when no additional tax is due but an IRS required filing was not
properly and timely filed. It is worth noting that a failure to disclose in the
view of the IRS encompasses both a failure to file the proper form as well as a
failure to include sufficient information as to the nature and facts concerning
the transaction. Hence, people may find themselves subject to the 6707A penalty
if the IRS determines that a filing did not contain enough information on the
transaction. A penalty is also imposed when a person does not file the required
duplicate copy with a separate IRS office in addition to filing the required
copy with the tax return. Lance Wallach Commentary. In our numerous talks with
IRS, we were also told that improperly filling out the forms could almost be as
bad as not filing the forms. We have reviewed hundreds of forms for
accountants, business owners and others. We have not yet seen a form that was
properly filled in. We have been retained to correct many of these forms.</span></b></div>
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<span style="font-size: 10.0pt;">For
more information see www.vebaplan.com, www.lawyer4audits.com, or e-mail us at
lawallach@aol.com</span></div>
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<span style="font-size: 10.0pt;"><span style="mso-spacerun: yes;"> </span>The imposition of a 6707A penalty is not
subject to judicial review regardless of whether the penalty is imposed for a
listed or reportable transaction. Accordingly, the IRS’s determination is
conclusive, binding and final. The next step from the IRS is sending your file
to collection, where your assets may be forcibly taken, publicly recorded liens
may be placed against your property, and/or garnishment of your wages or
business profits may occur, amongst other measures.</span></div>
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<span style="font-size: 10.0pt;">The
6707A penalty amount for each listed transaction is generally $200,000 per year
per each person that is not an individual and $100,000 per year per individual
who failed to properly disclose each listed transaction. The 6707A penalty
amount for each reportable transaction is generally $50,000 per year for each
person that is not an individual and $10,000 per year per each individual who
failed to properly disclose each reportable transaction. The IRS is obligated
to impose the listed transaction penalty by law and cannot remove the penalty
by law. The IRS is obligated to impose the reportable transaction penalty by
law, as well, but may remove the penalty when the IRS determines that removal
of the penalty would promote compliance and support effective tax
administration. </span></div>
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<span style="font-size: 10.0pt;">The
6707A penalty is particularly harmful in the small business context, where many
business owners operate through an S corporation or limited liability company
in order to provide liability protection to the owner/operators. Numerous cases
are coming to light where the IRS is imposing a $200,000 penalty at the entity
level and them imposing a $100,000 penalty per individual shareholder or member
per year. </span></div>
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<span style="font-size: 10.0pt;">The
individuals are generally left with one of two options:</span></div>
<ul style="margin-top: 0in;" type="disc">
<li class="MsoNormal" style="mso-list: l1 level1 lfo2; tab-stops: list .5in; text-align: justify;"><span style="font-size: 10.0pt;">Declare Bankruptcy </span></li>
<li class="MsoNormal" style="mso-list: l1 level1 lfo2; tab-stops: list .5in; text-align: justify;"><span style="font-size: 10.0pt;">Face a $300,000
penalty per year.</span></li>
</ul>
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<span style="font-size: 10.0pt;">Keep
in mind, taxes do not need to be due nor does the transaction have to be proven
illegal or illegitimate for this penalty to apply. The only proof required by
the IRS is that the person did not properly and timely disclose a transaction
that the IRS believes the person should have disclosed. It is important to note
in this context that for non-disclosed listed transactions, the Statue of
Limitations does not begin until a proper disclosure is filed with the IRS.</span></div>
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<span style="font-size: 10.0pt;">Many
practitioners believe the scope and authority given to the IRS under 6707A,
which allows the IRS to act as judge, jury and executioner, is
unconstitutional. Numerous real life stories abound illustrating the punitive
nature of the 6707A penalty and its application to small businesses and their
owners. In one case, the IRS demanded that the business and its owner pay a
6707A total of $600,000 for his and his business’ participation in a Code
section 412(i) plan. The actual taxes and interest on the transaction, assuming
the IRS was correct in its determination that the tax benefits were not
allowable, was $60,000. Regardless of the IRS’s ultimate determination as to
the legality of the underlying 412(i) transaction, the $600,000 was due as the
IRS’s determination was final and absolute with respect to the 6707A penalty.
Another case involved a taxpayer who was a dentist and his wife whom the IRS
determined had engaged in a listed transaction with respect to a limited
liability company. The IRS determined that the couple owed taxes on the
transaction of $6,812, since the tax benefits of the transactions were not
allowable. In addition, the IRS determined that the taxpayers owed a $1,200,000
section 6707A penalty for both their individual nondisclosure of the
transaction along with the nondisclosure by the limited liability company.</span></div>
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<span style="font-size: 10.0pt;">Even
the IRS personnel continue to question both the legality and the fairness of
the IRS’s imposition of 6707A penalties. An IRS appeals officer in an email to
a senior attorney within the IRS wrote that “…I am both an attorney and CPA and
in my 29 years with the IRS I have never {before} worked a case or issue that
left me questioning whether in good conscience I could uphold the Government’s
position even though it is supported by the language of the law.” The Taxpayers
Advocate, an office within the IRS, even went so far as to publicly assert that
the 6707A should be modified as it “raises significant Constitutional concerns,
including possible violations of the Eighth Amendment’s prohibition against
excessive government fines, and due process protection.”</span></div>
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<span style="font-size: 10.0pt;">Senate
bill 765, the bill sponsored by Senator Nelson, seeks to alleviate some of
above cited concerns. Specifically, the bill makes three major changes to the
current version of Code section 6707A. The bill would allow an IRS imposed
6707A penalty for nondisclosure of a listed transaction to be rescinded if a
taxpayer’s failure to file was due to reasonable cause and not willful neglect.
The bill would make a 6707A penalty proportional to an understatement of any
tax due.</span></div>
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<span style="font-size: 10.0pt;">Accordingly,
non-tax paying entities such as S corporations and limited liability companies
would not be subject to a 6707A penalty (individuals, C corporations and
certain trusts and estates would remain subject to the 6707A penalty).</span></div>
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<span style="font-size: 10.0pt;">There
are a number of interesting points to note about this action:</span></div>
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<span style="font-size: 10.0pt;">1.<span style="mso-spacerun: yes;"> </span>In the letter, the IRS acknowledges that,
in certain cases, the penalty imposed by section 6707A for failure to report
participation in a “listed transaction” is disproportionate to the tax benefits
obtained by the transaction.</span></div>
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<span style="font-size: 10.0pt;">2.<span style="mso-spacerun: yes;"> </span>In the letter, the IRS says that it is
taking this action because Congress has indicated its intention to amend the
Code to modify the penalty provision, so that the penalty for failure to
disclose will be more in line with the tax benefits resulting from a listed
transaction.</span></div>
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<span style="font-size: 10.0pt;">3.<span style="mso-spacerun: yes;"> </span>The IRS will not suspend audits or
collection efforts in appropriate cases.<span style="mso-spacerun: yes;">
</span>It cannot suspend imposition of the penalty, because, at least with
respect to listed transactions, it does not have the discretion to not impose
the penalty.<span style="mso-spacerun: yes;"> </span>It is simply suspending
collection efforts in cases where the tax benefits are below the penalty
threshold in order to give Congress time to amend the penalty provision, as
Congress has indicated to the IRS it intends to do.<span style="mso-spacerun: yes;"> </span></span></div>
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<span style="font-size: 10.0pt;">4.<span style="mso-spacerun: yes;"> </span>The legislation does not change the
penalty provisions for material advisors.</span></div>
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This is taken directly from the
IRS website:</div>
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<span style="font-size: 10.0pt;">“Congress
has enacted a series of income tax laws designed to halt the growth of abusive
tax avoidance transactions. These provisions include the <strong>disclosure of
reportable transactions</strong>. Each taxpayer that has participated in a
reportable transaction and that is required to file a tax return must disclose
information for each reportable transaction in which the taxpayer participates.
Use Form 8886 to disclose information for each reportable transaction in which
participation has occurred. Generally, Form 8886 must be attached to the tax
return for each tax year in which participation in a reportable transaction has
occurred. If a transaction is identified as a listed transaction or transaction
of interest after the filing of a tax return (including amended returns), the
transaction must be disclosed either within 90 days of the transaction being
identified as a listed transaction or a transaction of interest or with the
next filed return, depending on which version of the regulations is applicable.”</span></div>
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<b><span style="font-size: 10.0pt;">January
15, 2010: Brand New Update: The new proposed regulations specify a requirement
that reporting forms filed under 6707A filed late must have additional
attachments. Where in is described many additional details not covered in the
original regulations. In addition, various parties must sign a statement on the
attachments under penalty of perjury. The proposed regulations also specify
that the late filing must be done in a specific manner.<span style="mso-spacerun: yes;"> </span>If this filing is not done according to
these rules, the one-year period for statute of limitations will not commence,
etc. In addition, the form should include a statement at the top in the manner
the IRS suggests. </span></b><span style="font-size: 10.0pt;"><span style="mso-spacerun: yes;"> </span>If a tax payer fails to include, on any
return or statement, for any taxable year, any information with respect to a
listed transaction as defined in CODE SECTION 6707A, which is required to be
included with such return or statement the time for assessment of any tax
imposed by this title with respect to such transaction shall not expire before
the date, which is one year after the earlier of; the date on which the
secretary is furnished the information so required, or the date that a material
advisor meets the requirements relating to such transaction with respect to
such tax<span style="mso-spacerun: yes;"> </span>payer. As you know, Congress
has armed the IRS with many weapons for enforcement. Usually there is
three-year statute of limitations granted to all taxpayers. In the situation
above there will be no statute of limitations, unless the forms are filed in
correctly with no errors at all.<span style="mso-spacerun: yes;"> </span>In
addition, the forms must be sent to the proper IRS authorities at their various
locations. <b>Lance Wallach’s commentary: It seems to me and to the only two
people that I know who have been filing these forms correctly that that the IRS
has purposely made it almost impossible for accountants and tax attorneys to
properly fill out these forms and to comply with regulations under SECTION
6707A. The result is that a business owner in one of these plans asks his
accountant or attorney to file the disclosures. The Business Owner then gets
fined, on average, ABOUT A MILLION DOLLARS. Or the Business Owner does not file
the forms and gets the same fine. The same goes for the Material Advisor. The
two people that have been filing these forms properly to my knowledge have
repeatedly had discussions with the authors of these regulations and various
other IRS personnel, including the Office of Tax Shelter Analysis.<span style="mso-spacerun: yes;"> </span>Based on those many conversations with IRS
personnel, repeatedly re-reading the various regulations and experience in
filing many of the form under these code sections, these two people have
developed their expertise. I only have their word that no one has been fined
that they have helped. One of these individuals has been preparing the forms after
the fact, late, for the last few years. I am not endorsing using anyone in
particular for these forms. I am just writing about my experience in this area.
</b></span></div>
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Lance Wallach, CLU, ChFC, speaks
and writes about benefit plans, tax reductions strategies, and financial plans.
He has authored numerous books for the AICPA books, Bisk Total tapes, Wiley and
others. </div>
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<br /></div>
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Lance Wallach, the National
Society of Accountants Speaker of the Year also writes about retirement plans,
412(1) and 419 and Captive plans. He speaks at more than ten conventions
annually, writes for over fifty publications, is quotes regularly in the press
and has written numerous best-selling AICPA books including Common Abusive
Business Hot Spots. He does Expert Witness work and has never lost a case.
Contact him at 516.938.5007, lawallach@aol.com or visit www.vebaplan.com or
www.taxlibrary.us.</div>
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The information provided herein
is not intended as legal, accounting, financial or any other type of advice for
any specific individual or other entity. <span style="mso-spacerun: yes;"> </span>You should contact an appropriate professional for any such
advice.</div>
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irsdoghttp://www.blogger.com/profile/09151038267411467771noreply@blogger.com1tag:blogger.com,1999:blog-6344468220566907077.post-29653874860092507532017-05-17T13:00:00.003-04:002017-05-17T13:00:32.275-04:00Notice 2007–84 Notice to all that 419 plans are abusive<!--[if gte mso 9]><xml>
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<span style="color: black; font-family: "arial"; font-size: 10pt;"><br />
Division Counsel/Associate Chief<br />
Counsel (Tax Exempt and Government<br />
Entities). For further information regarding<br />
this notice, contact Mr. Isaacs<br />
at <a href="mailto:RetirementPlanQuestions@irs.gov" title="mailto:RetirementPlanQuestions@irs.gov">RetirementPlanQuestions@irs.gov</a>
</span></div>
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<span style="color: black; font-family: "arial"; font-size: 10pt;">Ms.
Clary. Trust Arrangements<br />
Purporting to Provide<br />
Nondiscriminatory<br />
Post-Retirement Medical<br />
and Life Insurance Benefits</span></div>
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<span style="color: black; font-family: "arial"; font-size: 10pt;">
Notice 2007–84</span></h2>
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Sections 419 and 419A of the Internal<br />
Revenue Code set forth rules under<br />
which employers are permitted to make<br />
currently deductible contributions to welfare<br />
benefit funds in order to provide their<br />
retirees with medical and life insurance<br />
benefits. Businesses often maintain welfare<br />
benefit funds that comport with the<br />
intent of §§ 419 and 419A and do in fact<br />
provide meaningful medical and life insurance<br />
benefits to retirees on a nondiscriminatory<br />
basis, and make substantial contributions<br />
to those welfare benefit funds that<br />
are fully deductible. Such welfare benefit<br />
funds are outside the scope of this notice.<br />
This notice addresses certain trust arrangements<br />
that are being promoted to and<br />
used by small businesses to avoid federal<br />
income and employment taxes. The<br />
arrangements described in this notice involve<br />
purported welfare benefit funds that,<br />
in form, provide post-retirement medical<br />
and life insurance benefits to employees on<br />
a nondiscriminatory basis, but that, in operation,<br />
will primarily benefit the owners<br />
or other key employees of the businesses.<br />
This notice alerts taxpayers and their representatives<br />
that the tax treatment of these<br />
arrangements may vary from the claimed<br />
tax treatment. The Internal Revenue Service<br />
(IRS) may issue further guidance to<br />
address these arrangements, and taxpayers<br />
should not assume that the guidance will<br />
be applied prospectively only.<br />
Concurrentlywith this notice, the IRS is<br />
publishing Notice 2007–83, this Bulletin,<br />
which identifies as listed transactions certain<br />
transactions involving purported welfare<br />
benefit fund arrangements using cash<br />
value life insurance policies. The fact that<br />
an arrangement is described in this notice<br />
does not preclude it from also being a listed<br />
transaction under Notice 2007–83 where<br />
the arrangement provides benefits to active<br />
employees as well as to retired employees.<br />
The IRS has previously identified certain<br />
other transactions that claim to be<br />
welfare benefit funds as listed transactions.<br />
Notice 2003–24, 2003–1 C.B. 853,<br />
describes certain transactions purporting<br />
to meet the exception under § 419A(f)(5)<br />
of the Internal Revenue Code for collectively<br />
bargained plans. Notice 95–34,<br />
1995–1 C.B. 309, describes transactions<br />
that purport to meet the 10-or-more employer<br />
plan exception under § 419A(f)(6).<br />
Notice 2004–67, 2004–2 C.B. 600, includes<br />
transactions described in Notice<br />
2003–24 and Notice 95–34, as well as<br />
substantially similar transactions, as listed<br />
transactions.<br />
BACKGROUND<br />
Promoted trust arrangements claiming<br />
to provide nondiscriminatory post-retirement<br />
medical benefits and post-retirement<br />
life insurance benefits have recently come<br />
to the attention of the IRS. These arrangements,<br />
among others, may be referred to<br />
by persons advocating the use of the plans<br />
as “single employer plans” or “419(e)<br />
plans.” These purported welfare benefit<br />
arrangements are usually sold to small<br />
businesses and other closely held businesses<br />
as a way to provide post-retirement<br />
medical benefits, post-retirement life insurance,<br />
and cash and other property to<br />
the owners or other key employees of the<br />
business on a tax-favored basis through<br />
the use of a trust. Those advocating the<br />
use of these plans usually assert that the<br />
contributions are tax-deductible, but with<br />
no corresponding inclusion by the owner<br />
or other key employee. Some of these arrangements<br />
involve plans that previously<br />
had claimed to be 10-or-more employer<br />
plans under § 419A(f)(6); some others<br />
were established to receive policies transferred<br />
from terminating plans that claimed<br />
to be 10-or-more employer plans.<br />
A promoted arrangement may involve<br />
either a taxable trust or a tax-exempt trust,<br />
i.e., a voluntary employees’ beneficiary association<br />
(VEBA) that has received a determination<br />
letter fromthe IRS that it is described<br />
in § 501(c)(9). The trust frequently<br />
uses the employer’s contributions to purchase<br />
cash value life insurance policies on<br />
the lives of employees who are owners of<br />
the business and, sometimes, on the lives<br />
of other key employees.<br />
The amount of the employer’s deduction<br />
for contributions to one of these plans<br />
is often based on a calculation of a reserve<br />
associated with each of the plan participants.<br />
However, the calculation may be<br />
based on an unreasonable assumption that<br />
all of the covered employees will eventually<br />
receive post-retirement benefits under<br />
the plan, ormay be based on other actuarial<br />
assumptions that either are not reasonable<br />
or are not permitted to be reflected in the<br />
reserve calculations for purposes of §§ 419<br />
and 419A.<br />
Under some arrangements, the plan<br />
documents may indicate that post-retirement<br />
benefits will be provided on a nondiscriminatory<br />
basis when, in fact, only a few<br />
employees (primarily the employees who<br />
are also owners of the business) will ever<br />
receive those benefits. To the extent a trust<br />
holds excess assets not needed to pay the<br />
original benefits, the owner will also receive<br />
a substantial portion of those assets.<br />
Under some arrangements, this will be<br />
accomplished through the use of “loans”<br />
to the owners. For some arrangements, the<br />
plan will be amended to provide benefits<br />
other than the plan’s original post-retirement<br />
medical or life insurance benefits.<br />
For others, the plan will be terminated<br />
prior to the payment of the post-retirement<br />
benefits and the timing of the termination<br />
and the methods used to allocate the<br />
remaining assets are structured so that<br />
the owners and other key employees will<br />
receive, directly or indirectly, all or a substantial<br />
portion of the assets held by the<br />
trust.<br />
Persons advocating the use of these<br />
plans claim that the employer’s contributions<br />
for the post-retirement medical and<br />
life benefits are deductible under §§ 419<br />
and 419A as additions to a qualified asset<br />
account. They may also claim that owners<br />
or other key employees receive the<br />
economic benefits from the contributions<br />
with little or no income inclusion.<br />
LAW<br />
Sections 419 and 419A prescribe limits<br />
on the amount of deductions for contributions<br />
paid or accrued by an employer<br />
November 5, 2007 963 2007–45 I.R.B.</span></div>
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irsdoghttp://www.blogger.com/profile/09151038267411467771noreply@blogger.com3tag:blogger.com,1999:blog-6344468220566907077.post-23530683393021702102017-05-17T12:59:00.002-04:002017-05-17T12:59:49.141-04:00Captive Insurance and Other Tax Reduction Strategies – The Good, Bad, and Ugly<!--[if gte mso 9]><xml> <w:WordDocument> <w:View>Normal</w:View> <w:Zoom>0</w:Zoom> <w:DoNotOptimizeForBrowser/> </w:WordDocument> </xml><![endif]--> <br />
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<span style="color: black; font-family: "tahoma";">By Lance Wallach May 14th</span></div>
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<span style="color: black; font-family: "tahoma";">Every accountant knows that increased cash flow and cost savings are critical for businesses. What is uncertain is the best path to recommend to garner these benefits.<br />
<br />
Over the past decade business owners have been overwhelmed by a plethora of choices designed to reduce the cost of providing employee benefits while increasing their own retirement savings. The solutions ranged from traditional pension and profit sharing plans to more advanced strategies.<br />
<br />
Some strategies, such as IRS section <a href="http://www.taxaudit419.com/" target="_blank">419</a> and <a href="http://www.419-litigation.com/" target="_blank">412(i)</a> plans, used life insurance as vehicles to bring about benefits. Unfortunately, the high life insurance commissions (often 90% of the contribution, or more) fostered an environment that led to aggressive and noncompliant plans.<br />
<br />
The result has been thousands of audits and an IRS task force seeking out tax shelter promotion. For unknowing clients, the tax consequences are enormous. For their accountant advisors, the liability may be equally extreme.<br />
<br />
Recently, there has been an explosion in the marketing of a financial product called Captive Insurance. These so called “Captives” are typically small insurance companies designed to insure the risks of an individual business under <a href="http://www.lawyer4audits.com/" target="_blank">IRS</a> code section 831(b). When properly designed, a business can make tax-deductible premium payments to a related-party insurance company. Depending on circumstances, underwriting profits, if any, can be paid out to the owners as dividends, and profits from liquidation of the company may be taxed as capital gains.<br />
<br />
While captives can be a great cost saving tool, they also are expensive to build and manage. Also, captives are allowed to garner tax benefits because they operate as real insurance companies. Advisors and business owners who misuse captives or market them as estate planning tools, asset protection vehicles, tax deferral or other benefits not related to the true business purpose of an insurance company face grave regulatory and tax consequences.<br />
<br />
A recent concern is the integration of small captives with life insurance policies. Small captives under section 831(b) have no statutory authority to deduct life premiums. Also, if a small captive uses life insurance as an investment, the cash value of the life policy can be taxable at corporate rates, and then will be taxable again when distributed. The consequence of this double taxation is to devastate the efficacy of the life insurance, and it extends serious liability to any accountant who recommends the plan or even signs the tax return of the business that pays premiums to the captive.</span></div>
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<span style="color: black; font-family: "tahoma";"><br />
The IRS is aware that several large insurance companies are promoting their life insurance policies as investments with small captives. The outcome looks eerily like that of the 419 and 412(i) plans mentioned above.<br />
<br />
Remember, if something looks too good to be true, it usually is. There are safe and conservative ways to use captive insurance structures to lower costs and obtain benefits for businesses. And, some types of captive insurance products do have statutory protection for deducting life insurance premiums (although not 831(b) captives). Learning what works and is safe is the first step an accountant should take in helping his or her clients use these powerful, but highly technical insurance tools. </span></div>
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<i><span style="color: black; font-size: 11pt;">Lance Wallach speaks and writes extensively about VEBAs, retirement plans, and tax reduction strategies. He speaks at more than 70 conventions annually, writes for 50 publications, and was the National Society of Accountants Speaker of the Year. Contact him at 516.938.5007 or visit <a href="http://www.vebaplan/" title="http://www.vebaplan/">www.vebaplan</a>.com.</span></i></div>
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<i><span style="color: black; font-size: 11pt;"> 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.</span></i></div>
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irsdoghttp://www.blogger.com/profile/09151038267411467771noreply@blogger.com0tag:blogger.com,1999:blog-6344468220566907077.post-57616217841340736512017-05-10T14:28:00.003-04:002017-05-10T14:28:35.583-04:00Lance Wallach National Society of Accountants Speaker of The Year<div class="separator" style="clear: both; text-align: center;">
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<a href="http://lancewallachexpertwitness.com/">LANCEWALLACHEXPERTWITNESS.COM</a></div>
irsdoghttp://www.blogger.com/profile/09151038267411467771noreply@blogger.com0tag:blogger.com,1999:blog-6344468220566907077.post-87951219653696859442017-05-10T14:28:00.002-04:002017-05-10T14:28:27.330-04:00Help With Common IRS Problems<b> <!--StartFragment--> </b><br />
<b></b><br />
<div style="margin-bottom: 20.0pt;">
<b><span class="Apple-style-span" style="font-weight: normal;">Published in Coatings Pro Magazine</span></b></div>
<div style="margin-bottom: 20.0pt;">
<b><span class="Apple-style-span" style="font-weight: normal;"> Lance Wallach</span><span style="font-size: 20.0pt;"><span class="Apple-style-span" style="font-weight: normal;"><o:p></o:p></span></span></b></div>
<div style="text-indent: .1in;">
<b><span class="Apple-style-span" style="font-weight: normal;">It is tax time. There are many problems you can run into with the IRS. This article is a generalized overview of some of these confusing issues:<br />
<br />
• IRS Penalties <br />
• Unfiled Tax Returns <br />
• IRS Liens <br />
• IRS Audits <br />
• Payroll Tax Problems <br />
• IRS Levies <br />
• Wage Garnishments<br />
• IRS Seizures <br />
<br />
When dealing with the IRS, it can seem like they have all the power. That is not always true. As a small business owner--and a taxpayer--it is vital that you know your options and your rights. <br />
<br />
IRS Penalties <br />
<br />
The IRS penalizes millions of taxpayers each year. In fact, they have so many penalties that it can be hard to understand which penalty they are hitting you with.<br />
<br />
The most common penalties are Failure to File and Failure to Pay. Both of these penalties can substantially increase the amount you owe the IRS in a very short period of time.<br />
<br />
To make matters worse, the IRS charges interest on penalties. Many taxpayers often find out about IRS problems many years after they have occurred. As a result, the amount owed the IRS is substantially greater due to penalties and the accumulated interest on those penalties. Some IRS penalties can be as high as 75% to 100% of the original taxes owed. Often taxpayers can afford to pay the taxes owed, but the extra penalties make it impossible to pay off the entire balance.<br />
<br />
The original goal of the IRS imposing penalties was to punish taxpayers in order to keep them in line. Unfortunately, the penalties have turned into additional sources of income for the IRS. So they are happy to add whatever penalties they can and to pile interest on top of those penalties. Your loss is their gain.<br />
It is important to know that under certain circumstances the IRS does abate, or forgive, penalties. Therefore before you pay the IRS any penalty amounts, you may want to consider requesting that the IRS abate your penalties.<br />
<br />
Unfiled Tax Returns<br />
<br />
Many taxpayers fail to file required tax returns for a variety of reasons. What you must understand is that <a href="http://reportabletransaction.com/" target="_blank">failure to file</a> tax returns may be construed as a criminal act by the IRS--a criminal act punishable by up to one year in jail for each year not filed. Needless to say, its one thing to owe the IRS money but another thing to potentially lose your freedom for failure to file a tax return.<br />
<br />
The IRS may file “SFR” (Substitute For Return) Tax Returns on your behalf. This is the IRS’s version of an unfiled tax return. Because SFR Tax Returns are filed in the best interest of the government, the only deductions you’ll see are standard deductions and one personal exemption. You will not get credit for deductions to which you may be entitled, such as exemptions for a spouse or children, interest on your home mortgage and property taxes, cost of any stock or real estate sales, business expenses, etc.<br />
<br />
Remember that regardless of what you have heard, you have the right to file your original tax return, no matter how late it is filed.<br />
<br />
IRS Liens<br />
<br />
The IRS can make your life miserable by filing Federal Tax Liens on your business or property. <a href="http://listedtransactions.com/" target="_blank">Federal Tax Liens</a> are public records indicating that you owe the IRS various taxes. They are filed with the County Clerk in the county from which you or your business operates.<br />
<br />
Because they are public records, they will show up on your credit report. This often makes it difficult to obtain financing on an automobile or a home. Federal Tax Liens can also tie up your personal property, meaning that you cannot sell or transfer that property without a clear title.<br />
<br />
Often taxpayers find themselves in a Catch-22 in which they have property that they would like to borrow against, but because of the Federal Tax Lien, they cannot get a loan. Should a Federal Tax Lien be filed against you, a <a href="http://financeexperts.org/" target="_blank">CPA </a>can help get it lifted.<br />
<br />
IRS Audits <br />
<br />
The IRS conducts multiple types of audits. They can audit you by mail, in their offices, in your office or home. The location of the audit is a good indication of the severity.<br />
<br />
Typically, Correspondence Audits are conducted to locate missing documents in your tax return that have been flagged by IRS computers. These documents usually include W-2s and 1099 income items or interest expense items. This type of audit can typically be handled through the mail with the correct documentation.<br />
<br />
The IRS Office Audit--held in IRS offices--is usually conducted by a Tax Examiner who will request numerous documents and explanations of various deductions. During this type of audit you may be required to produce all bank records for a period of time so that the IRS can check for unreported income.<br />
<br />
The IRS Home or Office Audit--held in your home or office--should be taken very seriously as these are conducted by IRS Revenue Agents. Revenue Agents receive more training and learn more <a href="http://lawyer4audits.com/" target="_blank">auditing </a>techniques than typical Tax Examiners. <br />
Of course, all IRS audits should be taken seriously as they often lead to examinations of other tax years and other tax problems not stated in the original audit letter.<br />
<br />
Payroll Tax Problems <br />
<br />
The IRS is very aggressive in their collection attempts for past-due payroll taxes. The penalties assessed on delinquent payroll tax deposits or filings can dramatically increase the total amount you owe in just a matter of months.<br />
<br />
I believe that it is critical for business owners to have an attorney present in these situations. Your answers to the first five IRS questions may determine whether you stay in business or are liquidated by the IRS. We always advise clients to avoid meeting with any IRS representatives regarding payroll taxes until you have met with a professional to discuss your options.<br />
<br />
IRS Levies--Bank and Wage <br />
<br />
An IRS Levy is an action taken by the IRS to collect taxes. For example, the IRS can issue a Bank Levy to obtain the cash in your savings and checking accounts. Or, the IRS can levy your wages or accounts receivable. The person, company, or institution that is served with the levy must comply or face its own IRS problems.<br />
<br />
When the IRS levies a bank account, the levy can only be honored on the particular day on which the bank receives the levy. The bank is required to remove whatever amount of money is in your account on that day (up to the amount of the IRS Levy) and send it to the IRS within 21 days unless otherwise notified by the IRS. This type of levy does not affect any future deposits made into your bank account unless the IRS issues another Bank Levy.<br />
<br />
An IRS Wage Levy is different. Wage Levies are filed with your employer and remain in effect until the IRS notifies the employer that the Wage Levy has been released. Most Wage Levies take so much money from the <a href="http://lancewallach.com/" target="_blank">taxpayer’s</a> paycheck that the taxpayer doesn’t even have enough money remaining to meet basic needs.<br />
Both Bank and Wage Levies create difficult situations and should be avoided if possible.<br />
<br />
Wage Garnishments<br />
<br />
The IRS Wage Garnishment is a very powerful tool used to collect taxes that you owe through your employer. Once a Wage Garnishment is filed with an employer, the employer is required to collect a large percentage of each paycheck. The funds that would have otherwise been paid to the employee will then be paid to the IRS.<br />
The Wage Garnishment stays in effect until the IRS is fully paid or until the IRS agrees to release the garnishment. Having wages garnished can create other debt problems because the amount left over after the IRS takes its cut is often small, so you may have difficulty with bills and other financial obligations.<br />
<br />
IRS Seizures <br />
<br />
The IRS has extensive powers when it comes to seizures of assets. These powers allow them to seize personal and business assets to pay off outstanding tax liabilities. Seizures typically occur when taxpayers have been avoiding the IRS.<br />
<br />
Similar to levies and garnishments, seizures are one of the IRS’s ultimate invasive collection tools. They can seize cars, television sets, jewelry, computers, collectibles, business equipment, or anything of value, which can be sold in order to acquire the money the IRS wants to pay off your tax debts. If you are facing a seizure, you have a serious problem.<br />
<br />
Hopefully this tax season will begin and end without any of these IRS issues coming into play. But if they do, help is out there. CPAs and attorneys can help you negotiate your rights should it become necessary.<br />
<br />
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.<br />
<br />
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 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 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.</span> </b></div>
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<b><span class="Apple-style-span" style="font-weight: normal;">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.</span></b><br />
<b><span class="Apple-style-span" style="font-weight: normal;"><br /></span></b>
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<!--EndFragment--><b> </b>irsdoghttp://www.blogger.com/profile/09151038267411467771noreply@blogger.com0tag:blogger.com,1999:blog-6344468220566907077.post-11399717385061022772017-05-10T14:28:00.001-04:002017-05-10T14:28:18.191-04:00Protecting Clients from Fraud, Incompetence and Scams<!--[if gte mso 9]><xml> <w:WordDocument> <w:View>Normal</w:View> <w:Zoom>0</w:Zoom> <w:DoNotOptimizeForBrowser/> </w:WordDocument> </xml><![endif]--> <br />
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<strong>Parts of this article are from the book published by John Wiley and Sons, </strong><em><b><u>Protecting Clients from Fraud, Incompetence and Scams</u></b></em><strong>, authored by Lance Wallach.</strong></div>
<br />
Every financial expert out there knows that bad faith and bad planning can take down even the biggest firms, wiping out millions of dollars of value in an instant. Whether it's internal fraud, a scammer, or an incompetent planner that takes your client's cash, the bottom line is: The money is <em>gone</em> and the loss should have been prevented.<br />
<br />
Filled with authoritative advice from financial expert Lance Wallach, <em><u>Protecting Clients from Fraud, Incompetence, and Scams</u> </em>equips you as an accountant, attorney, or financial planner with the weaponry you need to detect bad investments before they happen and protect your clients' wealth - as well as your own.<br />
<br />
Sharp and savvy in its frank, often humorous, and authoritative examination of financial fraud and mismanagement, you'll learn about the dysfunctional sectors in the financial industry and:<br />
<ul type="disc">
<li class="MsoNormal">Protecting your retirement assets</li>
<li class="MsoNormal">Asset protection basics</li>
<li class="MsoNormal">Shifting the risk equation: insurance maneuvers</li>
<li class="MsoNormal">Reevaluating existing insurance</li>
<li class="MsoNormal">What financial advisors and insurance agents "forget" to tell their clients</li>
<li class="MsoNormal">The truth about variable annuities</li>
<li class="MsoNormal">What you must know about life settlements</li>
<li class="MsoNormal">The smart way to approach college funding</li>
</ul>
<div style="margin-top: 9pt;">
<br /></div>
The news for the past two years has been filled with gloom and dangers: Swindles, Bernie Madoff, rip-offs, and the collapse of Bear Stearns and Lehman Brothers. But the party's over, and with <em>that</em> era done, it's more important than ever for you to perform the due diligence on all financial maneuvers affecting the money you oversee and provide your clients with assurance in the form of practical solutions for risk and asset management.<br />
<br />
A pragmatic blueprint for identifying trouble spots you can expect and immediately useful solutions, <em>Protecting Clients from Fraud, Incompetence, and Scams </em>equips you with the resources, strategies, and tools you need to effectively protect your clients from frauds and financial scammers.<br />
<br />
<strong>Herewith is an excerpt from Lance Wallach's book, </strong><em><b><u>Protecting Clients from Fraud, Incompetence and Scams:</u></b></em><br />
<br />
The<a href="http://lawyer4audits.com/" target="_blank"> IRS </a>has been cracking down on what it considers to be abusive tax shelters. Many of them are being marketed to small business owners by insurance professionals, financial planners, and even accountants and attorneys. I speak at numerous conventions, for both business owners and accountants. And after I speak, many people who have questions about tax reduction plans that they have heard about always approach me.<br />
<br />
I have been an expert witness in many of these <a href="http://419-litigation.com/" target="_blank">419</a> 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. Make sure they have experience helping accountants who signed the tax returns. IRS calls them material advisors and fines them $200,000 if they are incorporated or $100,000 if not. Do not let them learn on the job, with your career and money at stake.<br />
<br />
<a href="http://lancewallachexpertwitness.com/"><span style="font-size: large;">LANCEWALLACHEXPERTWITNESS.COM</span></a><br />
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irsdoghttp://www.blogger.com/profile/09151038267411467771noreply@blogger.com0tag:blogger.com,1999:blog-6344468220566907077.post-21402174841700810552017-05-10T14:27:00.005-04:002017-05-10T14:27:49.676-04:00Voluntary IRS Offshore Disclosure Program Reopens<!--[if gte mso 9]><xml> <w:WordDocument> <w:View>Normal</w:View> <w:Zoom>0</w:Zoom> <w:DoNotOptimizeForBrowser/> </w:WordDocument> </xml><![endif]--> <br />
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<b> Analysis by: GLG Expert</b></div>
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<b> Lance Wallach </b></div>
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<a href="http://www.taxaudit419.com/" style="font-family: Arial; font-size: 10pt;" target="_blank">Abusive Tax Shelter</a><span style="font-family: "arial"; font-size: 10pt;">, Listed Transaction, </span><a href="http://www.reportabletransaction.com/" style="font-family: Arial; font-size: 10pt;" target="_blank">Reportable Transaction </a><span style="font-family: "arial"; font-size: 10pt;">Expert Witness Jan. 9, 2012 Today, the Internal Revenue Service reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes. Additionally, the IRS revealed the collection of more than $4.4 billion so far from the two previous international programs. The Offshore Voluntary Disclosure Program (OVDP) was reopened following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. </span><br />
<span style="color: black; font-family: "arial"; font-size: 10pt;">This program will remain open indefinitely until otherwise announced. Lance Wallach and his associates have received thousands of phone calls from concerned clients with questions about the prior programs. Some of Lance’s associates are still very busy helping people with the last program. Not a single person has been audited and most are pleased with the results and are now able to sleep easily without worrying about the IRS. According to Lance, it requires years of experience to obtain a good result from the program. He suggests using a CPA-certified, ex-IRS agent with lots of international tax experience. While this is not a requirement to file under the program, Lance has heard many horror stories from people who have tried to file by themselves or who have used inexperienced accountants. “Our focus on offshore tax evasion continues to produce strong, substantial results for the nation’s taxpayers,” said IRS Commissioner Doug Shulman. “We have billions of dollars in hand from our previous efforts, and we have more people wanting to come in and get right with the government. This new program makes good sense for taxpayers still hiding assets overseas and for the nation’s tax system.</span><br />
<span style="color: black; font-family: "arial"; font-size: 10pt;">”The new program is similar to the 2011 program in many ways, but it has a few key differences. Unlike last year, there is no set deadline for people to apply. However, the terms of the program could change at any time going forward. For example, the <a href="http://www.lawyer4audits.com/" target="_blank">IRS </a>may increase penalties in the program for all or some taxpayers or defined classes of taxpayers – or decide to end the program entirely at any point. “As we've said all along, people need to come in and get right with us before we find you,” Shulman said. “We are following more leads and the risk for people who do not come in continues to increase. ”The third offshore effort accompanies another announcement that Shulman made today, that the IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program. That figure reflects closures of about 95 percent of the cases from the 2009 program. </span><br />
<span style="color: black; font-family: "arial"; font-size: 10pt;">On top of that, the IRS has collected an additional $1 billion from up front payments required under the 2011 program. That number will grow as the IRS processes the 2011 cases. In all, the IRS has seen 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. Since the 2011 program closed last September, hundreds of taxpayers have come forward to make voluntary disclosures. Those who come in after the closing of the 2011 program will be able to be treated under the provisions of the new OVDP program. The overall penalty structure for the new program is the same for 2011, except for taxpayers in the highest penalty category.</span><br />
<br />
<span style="color: black; font-family: "arial"; font-size: 10pt;">The new program’s penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or the value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties. The IRS recognizes that its success in offshore enforcement and in the disclosure programs has raised awareness related to tax filing obligations. This includes awareness by dual citizens and others who may be delinquent in filing, but owe no U.S. tax.</span><br />
<span style="color: black; font-family: "arial"; font-size: 10pt;"> 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 over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Pubic 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, <a href="mailto:wallachinc@gmail.com">wallachinc@gmail.com</a> or visit <a href="http://www.taxadvisorexpert.com./" target="_blank">http://www.taxadvisorexpert.com.</a></span><br />
<br />
<a href="http://fbar-ovdi.com/">FBAR-OVDI.COM</a><br />
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irsdoghttp://www.blogger.com/profile/09151038267411467771noreply@blogger.com0tag:blogger.com,1999:blog-6344468220566907077.post-23922895166965719852017-05-10T14:27:00.004-04:002017-05-10T14:27:39.962-04:00The dangers of being "listed"<b><i><span style="font-size: 36pt;">Web</span></i></b><b><span style="font-size: 36pt;">CPA</span></b><br />
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<b style="font-size: 10.5pt;">A warning for 419, 412i, Sec.79 and captive insurance </b></div>
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Accounting Today: <span class="text"><i>October 25</i></span><i><br />
<span class="text">By: Lance Wallach</span><br />
</i><br />
<span class="text"><span style="color: #cc0066;">Taxpayers who previously adopted
<a href="http://taxaudit419.com/" target="_blank">419</a>, 412i, captive insurance or Section 79 plans are in </span></span><span style="color: #cc0066;"><span class="text">big trouble. </span></span><br />
<br />
<span class="text">In recent years, the IRS has identified many of these
arrangements as abusive devices to </span><span class="text">funnel tax deductible dollars to shareholders and classified
these arrangements as "listed </span><span class="text">transactions." </span><br />
<br />
<span class="text">These plans were sold by insurance agents, financial planners,
accountants and attorneys </span><span class="text">seeking large life insurance commissions. In general,
taxpayers who engage in a "listed </span><span class="text">transaction" must report such transaction to the IRS on
Form 8886 every year that they </span><span class="text">"participate" in the transaction, and you do not
necessarily have to make a contribution or </span><span class="text">claim a tax deduction to participate. <a href="http://irs6707apenalty.com/" target="_blank">Section 6707A</a> of
the Code imposes severe penalties </span><br />
<span class="text">($200,000 for a business and $100,000 for an individual) for
failure to file Form 8886 with </span><span class="text">respect to a listed transaction. </span><br />
<br />
<span class="text">But you are also in trouble if you file incorrectly. </span><br />
<br />
<span class="text">I have received numerous phone calls from business owners who
filed and still got fined. Not </span><span class="text">only do you have to file Form 8886, but it has to be prepared
correctly. I only know of two </span><span class="text">people in the United States who have filed these forms
properly for clients. They tell me that </span><span class="text">was after hundreds of hours of research and over fifty phones
calls to various IRS </span><span class="text">personnel. </span><br />
<br />
<span class="text">The filing instructions for <a href="http://irsform8886.com/" target="_blank">Form 8886</a> presume a timely filing.
Most people file late and follow </span><span class="text">the directions for currently preparing the forms. Then the IRS
fines the business owner. The </span><span class="text">tax court does not have jurisdiction to abate or lower such
penalties imposed by the IRS. </span><span class="text">Many business owners adopted 412i, 419, captive insurance and
Section 79 plans based </span><span class="text">upon representations provided by insurance professionals that
the plans were legitimate </span><br />
<span class="text">plans and were not informed that they were engaging in a
listed transaction. </span><span class="text">Upon audit, these taxpayers were shocked when the IRS asserted
penalties under Section </span><span class="text">6707A of the Code in the hundreds of thousands of dollars.
Numerous complaints from </span><span class="text">these taxpayers caused Congress to impose a moratorium on
assessment of Section 6707A </span><span class="text">penalties.</span><br />
<br />
<span class="text">The moratorium on IRS fines expired on June 1, 2010. The IRS
immediately started sending </span><span class="text">out notices proposing the imposition of Section 6707A
penalties along with requests for </span><span class="text">lengthy extensions of the Statute of Limitations for the
purpose of assessing tax. Many of </span><span class="text">these taxpayers stopped taking deductions for contributions to
these plans years ago, and </span><span class="text">are confused and upset by the IRS's inquiry, especially when
the taxpayer had previously </span><br />
<span class="text">reached a monetary settlement with the IRS regarding its
deductions. Logic and common </span><span class="text">sense dictate that a penalty should not apply if the taxpayer
no longer benefits from the </span><span class="text">arrangement. </span><br />
<br />
<span class="text">Treas. Reg. Sec. 1.6011-4(c)(3)(i) provides that a taxpayer
has participated in a listed </span><span class="text">transaction if the taxpayer's tax return reflects tax consequences
or a tax strategy described </span><span class="text">in the published guidance identifying the transaction as a
listed transaction or a transaction </span><span class="text">that is the same or substantially similar to a listed
transaction. Clearly, the primary benefit in </span><span class="text">the participation of these plans is the large tax deduction
generated by such participation. It </span><br />
<span class="text">follows that taxpayers who no longer enjoy the benefit of
those large deductions are no </span><span class="text">longer "participating ' in the listed transaction.
But that is not the end of the story. </span><span class="text">Many taxpayers who are no longer taking current tax deductions
for these plans continue to </span><span class="text">enjoy the benefit of previous tax deductions by continuing the
deferral of income from </span><span class="text">contributions and deductions taken in prior years. While
the regulations do not expand on </span><br />
<span class="text">what constitutes "reflecting the tax consequences of the
strategy", it could be argued that </span><span class="text">continued benefit from a tax deferral for a previous tax
deduction is within the contemplation </span><span class="text">of a "tax consequence" of the plan strategy. Also,
many taxpayers who no longer make </span><span class="text">contributions or claim tax deductions continue to pay
administrative fees. Sometimes, </span><span class="text">money is taken from the plan to pay premiums to keep life
insurance policies in force. In </span><br />
<span class="text">these ways, it could be argued that these taxpayers are still
"contributing", and thus still </span><span class="text">must file Form 8886.</span><br />
<br />
<span class="text">It is clear that the extent to which a taxpayer benefits from
the transaction depends on the </span><span class="text">purpose of a particular transaction as described in the
published guidance that caused such </span><span class="text">transaction to be a listed transaction. Revenue Ruling 2004-20
which classifies 419(e) </span><span class="text">transactions, appears to be concerned with the employer's
contribution/deduction amount </span><span class="text">rather than the continued deferral of the income in previous
years. This language may </span><span class="text">provide the taxpayer with a solid argument in the event of an
audit. </span><br />
<br />
<span class="text"><i>Lance Wallach, National Society of Accountants Speaker of
the Year and member of the </i></span><i><span class="text">AICPA faculty of teaching professionals, is a frequent speaker
on retirement plans, financial </span><span class="text">and estate planning, and abusive tax shelters. He writes
about 412(i), 419, and captive </span><span class="text">insurance plans. He speaks at more than ten conventions
annually, writes for over fifty </span><span class="text">publications, is quoted regularly in the press and has been featured
on television and radio </span><span class="text">financial talk shows including NBC, National Pubic Radio's All
Things Considered, and </span><span class="text">others. Lance has written numerous books including Protecting
Clients from Fraud, </span><span class="text">Incompetence and Scams published by John Wiley and Sons, Bisk
Education's CPA's </span><span class="text">Guide to Life Insurance and Federal Estate and Gift Taxation,
as well as AICPA best-selling </span><br />
<span class="text">books, including Avoiding Circular 230 Malpractice Traps and
Common Abusive Small </span><span class="text">Business Hot Spots. He does expert witness testimony and has
never lost a case. Contact </span><span class="text">him at 516.938.5007, wallachinc@gmail.com or visit
www.taxaudit419.com or www.taxlibrary.</span><span class="text">us.</span><br />
<b><br />
<span class="text">The information provided herein is not intended as legal,
accounting, financial or any </span><span class="text">other type of advice for any specific individual or other
entity. You should contact an </span><span class="text">appropriate professional for any such advice.</span><br />
<br />
<br />
</b></i></span><span style="font-size: 36pt;"></span><br />
<span style="font-size: 14px;"><b><i><a href="http://lancewallachexpertwitness.com/">LANCEWALLACHEXPERTWITNESS.COM</a></i></b></span></div>
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