NEW
JERSEY ASSOCIATION OF PUBLIC ACCOUNTANTS
Lines
from Lance - Newsletter - updated
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.
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.
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.
_______________________________________________________________
The moratorium on collection has been extended for
two additional months until March 1st.
_____________________________________________________________________
If
you are a small business owner, accountant or insurance professional you may be
in big trouble and not know it. IRS has
been fining people like you $200,000.
Most people that have received the fines were not aware that they had
done anything wrong. What is even worse
is that the fines are not appeal-able.
This is not an isolated situation.
This has been happening to a lot of people.
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. 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.
The
following is an example: Pursuant to a
settlement with the IRS, the 412(i) plan was converted into a traditional
defined benefit plan. All of the
contributions to the 412(i) plan would have been allowable if they had
initially adopted a traditional defined benefit plan. Based on negotiations with the IRS agent, the audit of the plan
resulted in no income and minimal excise taxes due. This is because as a traditional defined benefit plan, the
taxpayers could have contributed and deducted the same amount as a 412(i) plan.
Towards
the end of the audit the business owner received a notice from the IRS. The IRS assessed the client penalties under
the §6707A of the Code in the amount of $900,000.00. 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.
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.
"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." 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.
Leaders
of tax-writing committees in the House and Senate have said they intend to pass
legislation revising the penalty structure.
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.
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.
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.
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.
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.
For
more information see www.vebaplan.com, www.lawyer4audits.com, or e-mail us at
lawallach@aol.com
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.
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.
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.
The
individuals are generally left with one of two options:
- Declare Bankruptcy
- Face a $300,000
penalty per year.
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.
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.
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.”
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.
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).
There
are a number of interesting points to note about this action:
1. 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.
2. 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.
3. The IRS will not suspend audits or
collection efforts in appropriate cases.
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. 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.
4. The legislation does not change the
penalty provisions for material advisors.
This is taken directly from the
IRS website:
“Congress
has enacted a series of income tax laws designed to halt the growth of abusive
tax avoidance transactions. These provisions include the disclosure of
reportable transactions. 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.”
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. 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. 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 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. In
addition, the forms must be sent to the proper IRS authorities at their various
locations. 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. 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.
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.
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.
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.
