IRS Probs: Lance Wallach

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Lance Wallach and his associates provide Expert Witness Services |

Can you or your business afford to pay the IRS $200,000 a year?

Did you get a letter from the IRS threatening to impose this fine? If you haven't already, you still may. Consider yourself lucky if you have not because this means that you have more time to straighten this situation out. Do not wait for this letter to come from the IRS before you call an expert to help you. Even if you have been audited already, you could still get the letter and/or fine. One has nothing to do with the other, and once the fine has been imposed, it is not able to be appealed.

Many businesses that participated in a 412i retirement plan or a 419 welfare benefit plan are being audited by the IRS. Many of these plans were not in compliance with the law and are considered abusive tax shelters. Many business owners are not even aware that the welfare benefit plan or retirement plan that they are participating in may be an abusive tax shelter and that they are in serious jeopardy of huge IRS penalties for each year that they have been in this type of plan.

Insurance companies, CPAs, sellers of these 419 welfare benefit plans or 412i retirement plans, as well as anyone that gave tax advice or recommended participation in one or more of these plans, also known as a material advisor, is in danger of being sued, fined by the IRS, or both.

There is help available if you think you may be involved with one of these 419 welfare benefit plans, 412i retirement plans, or any abusive tax shelter. IRS penalty abatement is an option if you act now. Feel free to contact me for more information.

Contact him at 516.938.5007, wallachinc@gmail.com, or visit:www.taxadvisorexperts.org

No Shelter Here: Beware of These Insurance Plans | Remodeling

During the past few years, the Internal Revenue Service (IRS) has fined many business owners hundreds of thousands of dollars for participating in several particular types of insurance plans.

The 412(i), 419, captive insurance, and section 79 plans were marketed as a way for small-business owners to set up retirement, welfare benefit plans, or other tax-deductible programs while leveraging huge tax savings, but the IRS put most of them on a list of abusive tax shelters, listed transactions, or similar transactions, etc., and has more recently focused audits on them. Many accountants are unaware of the issues surrounding these plans, and many big-name insurance companies are still encouraging participation in them.

IRS Issues Final Regulations for Material Advisors, Accountants, Attorneys and Insurance Agents - HG.org

Can You Recover Money from 419 and 412i Plans? - HG.org

Can You Recover Money from 419 and 412i Plans? - HG.org

Welfare Benefit Plan Fraud: What Remedies Are Available? If you’ve been the victim of a 419 Welfare Benefit Plan scheme and now find yourself owing the Internal Revenue Service (IRS) taxes on something you were told was going to be tax deductible, it’s important to know what remedies might be available to you.

Remedies for abusive tax shelter schemes

Lance Wallach says that there are remedies for those who have been injured by an insurance company’s abusive tax shelter schemes. He predicts that we’ll see a huge spike in the number of people getting audited by the IRS.

Small business retirement plans fuel litigation

Dolan Media Newswires

Small business retirement plans fuel litigation

Small businesses facing audits and potentially huge tax penalties over certain types of retirement plans are filing lawsuits against those who marketed, designed and sold the plans. The 412(i) and 419(e) plans were marketed in the past several years as a way for small business owners to set up retirement or welfare benefits plans while leveraging huge tax savings, but the IRS put them on a list of abusive tax shelters and has more recently focused audits on them.

The penalties for such transactions are extremely high and can pile up quickly - $100,000 per individual and $200,000 per entity per tax year for each failure to disclose the transaction - often exceeding the disallowed taxes.

There are business owners who owe $6,000 in taxes but have been assessed $1.2 million in penalties. The existing cases involve many types of businesses, including doctors' offices, dental practices, grocery store owners, mortgage companies and restaurant owners. Some are trying to negotiate with the IRS. Others are not waiting. A class action has been filed and cases in several states are ongoing. The business owners claim that they were targeted by insurance companies; and their agents to purchase the plans without any disclosure that the IRS viewed the plans as abusive tax shelters. Other defendants include financial advisors who recommended the plans, accountants who failed to fill out required tax forms and law firms that drafted opinion letters legitimizing the plans, which were used as marketing tools.

A 412(i) plan is a form of defined benefit pension plan. A 419(e) plan is a similar type of health and benefits plan. Typically, these were sold to small, privately held businesses with fewer than 20 employees and several million dollars in gross revenues. What distinguished a legitimate plan from the plans at issue were the life insurance policies used to fund them. The employer would make large cash contributions in the form of insurance premiums, deducting the entire amounts. The insurance policy was designed to have a "springing cash value," meaning that for the first 5-7 years it would have a near-zero cash value, and then spring up in value.

Just before it sprung, the owner would purchase the policy from the trust at the low cash value, thus making a tax-free transaction. After the cash value shot up, the owner could take tax-free loans against it. Meanwhile, the insurance agents collected exorbitant commissions on the premiums - 80 to 110 percent of the first year's premium, which could exceed $1 million.

Technically, the IRS's problems with the plans were that the "springing cash" structure disqualified them from being 412(i) plans and that the premiums, which dwarfed any payout to a beneficiary, violated incidental death benefit rules.

Under §6707A of the Internal Revenue Code, once the IRS flags something as an abusive tax shelter, or "listed transaction," penalties are imposed per year for each failure to disclose it. Another allegation is that businesses weren't told that they had to file Form 8886, which discloses a listed transaction.

According to Lance Wallach of Plainview, N.Y. (516-938-5007), who testifies as an expert in cases involving the plans, the vast majority of accountants either did not file the forms for their clients or did not fill them out correctly.

Because the IRS did not begin to focus audits on these types of plans until some years after they became listed transactions, the penalties have already stacked up by the time of the audits.

Another reason plaintiffs are going to court is that there are few alternatives - the penalties are not appealable and must be paid before filing an administrative claim for a refund.

The suits allege misrepresentation, fraud and other consumer claims. "In street language, they lied," said Peter Losavio, a plaintiffs' attorney in Baton Rouge, La., who is investigating several cases. So far they have had mixed results. Losavio said that the strength of an individual case would depend on the disclosures made and what the sellers knew or should have known about the risks.

In 2004, the IRS issued notices and revenue rulings indicating that the plans were listed transactions. But plaintiffs' lawyers allege that there were earlier signs that the plans ran afoul of the tax laws, evidenced by the fact that the IRS is auditing plans that existed before 2004.

"Insurance companies were aware this was dancing a tightrope," said William Noll, a tax attorney in Malvern, Pa. "These plans were being scrutinized by the IRS at the same time they were being promoted, but there wasn't any disclosure of the scrutiny to unwitting customers."

A defense attorney, who represents benefits professionals in pending lawsuits, said the main defense is that the plans complied with the regulations at the time and that "nobody can predict the future."

An employee benefits attorney who has settled several cases against insurance companies, said that although the lost tax benefit is not recoverable, other damages include the hefty commissions - which in one of his cases amounted to $860,000 the first year - as well as the costs of handling the audit and filing amended tax returns.

Defying the individualized approach an attorney filed a class action in federal court against four insurance companies claiming that they were aware that since the 1980s the IRS had been calling the policies potentially abusive and that in 2002 the IRS gave lectures calling the plans not just abusive but "criminal." A judge dismissed the case against one of the insurers that sold 412(i) plans.

The court said that the plaintiffs failed to show the statements made by the insurance companies were fraudulent at the time they were made, because IRS statements prior to the revenue rulings indicated that the agency may or may not take the position that the plans were abusive. The attorney, whose suit also names law firm for its opinion letters approving the plans, will appeal the dismissal to the 5th Circuit.

In a case that survived a similar motion to dismiss, a small business owner is suing Hartford Insurance to recover a "seven-figure" sum in penalties and fees paid to the IRS. A trial is expected in August.

Last July, in response to a letter from members of Congress, the IRS put a moratorium on collection of §6707A penalties, but only in cases where the tax benefits were less than $100,000 per year for individuals and $200,000 for entities. That moratorium was recently extended until March 1, 2010.

But tax experts say the audits and penalties continue. "There's a bit of a disconnect between what members of Congress thought they meant by suspending collection and what is happening in practice. Clients are still getting bills and threats of liens," Wallach said.

"Thousands of business owners are being hit with million-dollar-plus fines. ... The audits are continuing and escalating. I just got four calls today," he said. A bill has been introduced in Congress to make the penalties less draconian, but nobody is expecting a magic bullet.

"From what we know, Congress is looking to make the penalties more proportionate to the tax benefit received instead of a fixed amount."

Lance Wallach can be reached at: LaWallach@aol.com- 516-938-5007- or www.vebaplan.com

Listed Transactions

If you are in what the IRS calls a Listed Transaction, or something similar to it, you will probably receive a very large fine for each year that you have been in the program.

You are fined whether or not you make a contribution. If an accountant signs a tax return for a client who is in a listed transaction, he is fined 100k for being what is called a material advisor. If an insurance agent, or someone else, sells one of these plans he is also probably a material advisor.

We have assisted thousands of people in this situation. Once you receive the fine, we cannot help you. Usually, a lawsuit results.

Being "listed"

A warning for 419, 412i, Sec.79 and captive insurance

Accounting Today: October 25, 2010

By: Lance Wallach

Taxpayers who previously adopted 419, 412i, captive insurance or Section 79 plans are in
big trouble.

In recent years, the IRS has identified many of these arrangements as abusive devices to
funnel tax deductible dollars to shareholders and classified these arrangements as "listed
transactions."

These plans were sold by insurance agents, financial planners, accountants and attorneys
seeking large life insurance commissions. In general, taxpayers who engage in a "listed
transaction" must report such transaction to the IRS on Form 8886 every year that they
"participate" in the transaction, and you do not necessarily have to make a contribution or
claim a tax deduction to participate. Section 6707A of the Code imposes severe penalties
($200,000 for a business and $100,000 for an individual) for failure to file Form 8886 with
respect to a listed transaction.

But you are also in trouble if you file incorrectly.

I have received numerous phone calls from business owners who filed and still got fined. Not
only do you have to file Form 8886, but it has to be prepared correctly. I only know of two
people in the United States who have filed these forms properly for clients. They tell me that
was after hundreds of hours of research and over fifty phones calls to various IRS
personnel.

The filing instructions for Form 8886 presume a timely filing. Most people file late and follow
the directions for currently preparing the forms. Then the IRS fines the business owner. The
tax court does not have jurisdiction to abate or lower such penalties imposed by the IRS.
Many business owners adopted 412i, 419, captive insurance and Section 79 plans based
upon representations provided by insurance professionals that the plans were legitimate
plans and were not informed that they were engaging in a listed transaction.
Upon audit, these taxpayers were shocked when the IRS asserted penalties under Section
6707A of the Code in the hundreds of thousands of dollars. Numerous complaints from
these taxpayers caused Congress to impose a moratorium on assessment of Section 6707A
penalties.

The moratorium on IRS fines expired on June 1, 2010. The IRS immediately started sending
out notices proposing the imposition of Section 6707A penalties along with requests for
lengthy extensions of the Statute of Limitations for the purpose of assessing tax. Many of
these taxpayers stopped taking deductions for contributions to these plans years ago, and
are confused and upset by the IRS's inquiry, especially when the taxpayer had previously
reached a monetary settlement with the IRS regarding its deductions. Logic and common
sense dictate that a penalty should not apply if the taxpayer no longer benefits from the
arrangement.

Treas. Reg. Sec. 1.6011-4(c)(3)(i) provides that a taxpayer has participated in a listed
transaction if the taxpayer's tax return reflects tax consequences or a tax strategy described
in the published guidance identifying the transaction as a listed transaction or a transaction
that is the same or substantially similar to a listed transaction. Clearly, the primary benefit in
the participation of these plans is the large tax deduction generated by such participation. It
follows that taxpayers who no longer enjoy the benefit of those large deductions are no
longer "participating ' in the listed transaction. But that is not the end of the story.
Many taxpayers who are no longer taking current tax deductions for these plans continue to
enjoy the benefit of previous tax deductions by continuing the deferral of income from
contributions and deductions taken in prior years. While the regulations do not expand on
what constitutes "reflecting the tax consequences of the strategy", it could be argued that
continued benefit from a tax deferral for a previous tax deduction is within the contemplation
of a "tax consequence" of the plan strategy. Also, many taxpayers who no longer make
contributions or claim tax deductions continue to pay administrative fees. Sometimes,
money is taken from the plan to pay premiums to keep life insurance policies in force. In
these ways, it could be argued that these taxpayers are still "contributing", and thus still
must file Form 8886.

It is clear that the extent to which a taxpayer benefits from the transaction depends on the
purpose of a particular transaction as described in the published guidance that caused such
transaction to be a listed transaction. Revenue Ruling 2004-20 which classifies 419(e)
transactions, appears to be concerned with the employer's contribution/deduction amount
rather than the continued deferral of the income in previous years. This language may
provide the taxpayer with a solid argument in the event of an audit.

Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters. He writes about 412(i), 419, and captive
insurance plans. He speaks at more than ten conventions annually He does expert witness testimony and has never lost a case. Contact
him at 516.938.5007

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.

Being Listed

Being "listed"

A warning for 419, 412i, Sec.79 and captive insurance

Accounting Today: October 25, 2010

By: Lance Wallach

Taxpayers who previously adopted 419, 412i, captive insurance or Section 79 plans are in

big trouble.

In recent years, the IRS has identified many of these arrangements as abusive devices to

funnel tax deductible dollars to shareholders and classified these arrangements as "listed

transactions."

These plans were sold by insurance agents, financial planners, accountants and attorneys

seeking large life insurance commissions. In general, taxpayers who engage in a "listed

transaction" must report such transaction to the IRS on Form 8886 every year that they

"participate" in the transaction, and you do not necessarily have to make a contribution or

claim a tax deduction to participate. Section 6707A of the Code imposes severe penalties

($200,000 for a business and $100,000 for an individual) for failure to file Form 8886 with

respect to a listed transaction.

But you are also in trouble if you file incorrectly.

I have received numerous phone calls from business owners who filed and still got fined. Not

only do you have to file Form 8886, but it has to be prepared correctly. I only know of two

people in the United States who have filed these forms properly for clients. They tell me that

was after hundreds of hours of research and over fifty phones calls to various IRS

personnel.

The filing instructions for Form 8886 presume a timely filing. Most people file late and follow

the directions for currently preparing the forms. Then the IRS fines the business owner. The

tax court does not have jurisdiction to abate or lower such penalties imposed by the IRS.

Many business owners adopted 412i, 419, captive insurance and Section 79 plans based

upon representations provided by insurance professionals that the plans were legitimate

plans and were not informed that they were engaging in a listed transaction.

Upon audit, these taxpayers were shocked when the IRS asserted penalties under Section

6707A of the Code in the hundreds of thousands of dollars. Numerous complaints from

these taxpayers caused Congress to impose a moratorium on assessment of Section 6707A

penalties.

The moratorium on IRS fines expired on June 1, 2010. The IRS immediately started sending

out notices proposing the imposition of Section 6707A penalties along with requests for

lengthy extensions of the Statute of Limitations for the purpose of assessing tax. Many of

these taxpayers stopped taking deductions for contributions to these plans years ago, and

are confused and upset by the IRS's inquiry, especially when the taxpayer had previously

reached a monetary settlement with the IRS regarding its deductions. Logic and common

sense dictate that a penalty should not apply if the taxpayer no longer benefits from the

arrangement.

Treas. Reg. Sec. 1.6011-4(c)(3)(i) provides that a taxpayer has participated in a listed

transaction if the taxpayer's tax return reflects tax consequences or a tax strategy described

in the published guidance identifying the transaction as a listed transaction or a transaction

that is the same or substantially similar to a listed transaction. Clearly, the primary benefit in

the participation of these plans is the large tax deduction generated by such participation. It

follows that taxpayers who no longer enjoy the benefit of those large deductions are no

longer "participating ' in the listed transaction. But that is not the end of the story.

Many taxpayers who are no longer taking current tax deductions for these plans continue to

enjoy the benefit of previous tax deductions by continuing the deferral of income from

contributions and deductions taken in prior years. While the regulations do not expand on

what constitutes "reflecting the tax consequences of the strategy", it could be argued that

continued benefit from a tax deferral for a previous tax deduction is within the contemplation

of a "tax consequence" of the plan strategy. Also, many taxpayers who no longer make

contributions or claim tax deductions continue to pay administrative fees. Sometimes,

money is taken from the plan to pay premiums to keep life insurance policies in force. In

these ways, it could be argued that these taxpayers are still "contributing", and thus still

must file Form 8886.

It is clear that the extent to which a taxpayer benefits from the transaction depends on the

purpose of a particular transaction as described in the published guidance that caused such

transaction to be a listed transaction. Revenue Ruling 2004-20 which classifies 419(e)

transactions, appears to be concerned with the employer's contribution/deduction amount

rather than the continued deferral of the income in previous years. This language may

provide the taxpayer with a solid argument in the event of an audit.

Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters. He writes about 412(i), 419, and captive

insurance plans. He speaks at more than ten conventions annually He does expert witness testimony and has never lost a case. Contact

him at 516.938.5007

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.

Fast Pitch Networking

FAST PITCH NETWORKING

Posted: Dec. 10

By Lance Wallach

Here it is.

Here is your proof of my predictions. Perhaps you didn't believe me when I told you the IRS was coming after what it has deemed "abusive transactions," but here it is, right from the IRS's own job posting. If you were involved with a 419e, 412i, listed transaction, abusive tax shelter, Section 79, or captive, and you haven't yet approached an expert for help with your situation, you had better do it now, before the notices start piling up on

your desk.

A portion of the exact announcement from the Department of the Treasury:

Job Title: INTERNAL REVENUE AGENT (ABUSIVE TRANSACTIONS GROUP)

Agency: Internal Revenue Service

Sub Agency: Internal Revenue Service

Job Announcement Number: 11PH1-SBB0058-0512-12/13

Who May Be Considered:

· IRS employees on Career or Career Conditiona

l Appointments in the competitive service

· Treasury Office of Chief Counsel employees on Career or Career Conditional Appointments or with prior competitive status

· IRS employees on Term Appointments with potential conversion to a Career or Career Conditional Appointment in the same line of work

According to the job description, the agents of the Abusive Transactions Group will be conducting examinations of individuals, sole proprietorships, small corporations, partnerships an

d fiduciaries. They will be examining tax returns and will "determine the correct tax liability, and identify situations with potential for understated taxes."

These agents will work in the Small Business/Self Employed Business Division (SB/SE) which provides examinations for about 7 million small businesses and upwards of 33 million self-employed and supplemental income taxpayers. This group specifically goes after taxpayers who generally have higher incomes than most taxpayers, need to file more tax forms, and generally need to rely more on paid tax preparers." Their

examinations can contain "special audit features or anticipated accounting, tax law, or investigative issues," and look to make sure that, for example, specialty returns are filed properly.

The fines are severe. Under IRC 6707A, fines are up to $200,000 annually for not properly disclosing participation in a listed transaction. There was a moratorium on those fines until June 2010, pending new legislation to reduce them, but the new law virtually guarantees you will be fined. The fines had been $200,000 per year on the corporate level and $100,000 per year on the personal level. You got the fine even if you made no contributions for the year. All you had to do was to be in

the plan and fail to properly disclose your participation.

You can possibly still avoid all this by properly filing form 8886IMMEDIATELY with the IRS. Time is especially of the essence now. You MUST file before you are assessed the penalty. For months the Service has been holding off on actually collecting from people that they assessed because they did not know what Congress was going to do. But now they do know, so they are going to move aggressively to collection with people they have already assessed. There is no reason not to now. This is especially true because the new legislation still does not provide for a right of appeal or judicial review. The

Service is still judge, jury, and executioner. Its word is absolute as far as determining what is a listed transaction.

So you have to file form 8886 fast, but you also have to file it properly. The Service treats forms that are incorrectly filed as if they were never filed. You get fined for filing incorrectly, or for not filing at all. The Statute of Limitations does not begin unless you properly file. That means IRS can come back to get you any time in the future unless you file properly.

If you don't want these new IRS Agents, or any other IRS agents for that matter, to be earning their paychecks by coming after you, make sure you have done all you can to ensure that you have filed properly by reaching out for expert help today.

Serving Clients Nationwide

516-938-5007

Lance Wallach Expert Witness

Don't Get Caught in Section 79 Trap, One doctor almost lost everything....

Don’t Get Caught in Section 79 Trap

One doctor almost lost everything ………..

Don’t Get Caught in Section 79 Trap

One doctor almost lost everything ………..

In 2006 Doctor X found himself in what he thought was

the pleasant position of having a substantial amount of

cash on hand that was not essential to the operation of

his practice. That comfortable feeling did not last long.

He quickly fell prey to a predatory insurance agent who

sold him on the idea of Section 79 scam as a vehicle to

obtain tax deductions. Of course what really interested

the insurance agent was the funding vehicle, a large

life insurance contract with American General as the

insurance carrier, which just happened to net the

agent a large commission.

Unfortunately, the large, questionable tax deductions

claimed by Doctor X indeed attracted the attention of

the IRS. As a result of their audit, the IRS not only

disallowed all of the tax deductions, but also imposed

back taxes, an array of penalties, and interest, turning

the doctor’s anticipated investment vehicle into

something that could cost him everything he was

saving and more. As if that weren’t bad enough, even

that Draconian action was not the end of the story.

None of his so-called financial advisors had told Doctor

X about IRC Section 6707A. Under this section of the

Code, huge fines can be imposed on those who fail to

inform the Service about participation in listed or

reportable transactions, or transactions substantially

similar to listed transactions. Loosely defined, a

reportable transaction is any transaction that has the

potential for tax avoidance or evasion. Since he had no

knowledge of this requirement, the doctor did not make

the proper filings under Section 6707A, and is now

also being threatened with monstrous fines for that

failure to submit the proper forms in the proper format.

Although these issues had the potential for great

disaster and great financial loss for this doctor, all the

anxiety and stress he has been suffering over this

matter may soon have a happier ending than he

expected at its onset because he had the sense to

a result of putting experts with a great deal of

experience on his case, he now stands an excellent

chance of having at least some of the penalties from

the original audit abated. He will probably be able to

recover the money that he sank into that large

American General life insurance contract as well.

Sometimes a properly worded letter to the insurance

company is all it takes. Last, but certainly not least,

Doctor X also has an excellent chance of avoiding the

large Section 6707A penalties, as our experts in the art

of filing late without paying fines are currently at work

on that as well.

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.

Serving Clients Nationwide

516-938-5007

Lance Wallach Expert Witness

IRS Issues Final Regulations for Material Advisors, Accountants, Attorneys and Insurance Agents

By Lance Wallach, CLU, CHFC

On July 30, 2014, the Internal Revenue Service issued final regulations regarding the imposition of penalties under Internal Revenue Code section 6707 against material advisors who fail to file true, complete or timely disclosure returns with respect to reportable or listed transactions. The effective date of the final regulations is July 31, 2014.

Material advisors generally include any advisors who make or provide a tax statement with respect to any reportable or listed transaction, and directly or indirectly receive certain threshold levels of gross income in connection with such advice. Reportable transactions include listed transactions, transactions of interest, section 165 loss transactions, confidential transactions, and contractual protection transactions.

The final regulations make several changes to the proposed regulations that were published in 2008. The changes include:

• The applicable penalty under section 6707 for a transaction qualifying as both reportable and listed is limited to a single penalty, which is the greater of $200,000 or 50 percent of the gross income derived by the material advisor (75 percent if the failure is international).

• In cases where there is a failure to disclose more than one reportable or listed transaction, a separate section 6707 penalty will be imposed for each transaction.

• For purposes of computing the penalty in the case of a listed transaction, the gross income derived from the listed transaction only includes fees earned in connection with the listed transaction for which the advisor was a material advisor.

The final regulations also modify the factors considered by the IRS for rescission of a material advisor penalty. The final regulations now allow consideration of facts and circumstances relating to whether a material advisor’s failure to timely file the Form 8918, Material Advisor Disclosure Statement, was unintentional. However, if an unintentionally delinquent Form 8918 was filed either after the IRS had taken steps to identify the person as a material advisor or after the taxpayer disclosed a reportable transaction on Form 8886, Reportable Transaction Disclosure Statement, such a filing will not weigh in favor of rescission.

Lastly, the final regulations include additional examples to help clarify the application of the material advisor penalties.
Attorneys, accountants, financial and investment consultants and others advising on reportable or listed transactions should remain conscious of the applicable gross income thresholds for each type of transaction, as well as the timing of reporting obligations. The severe penalties and narrow provisions for rescission of such penalties require careful planning and awareness of compliance obligations.

Companies should carefully evaluate their proposed investments in plans such as the 419, 412i, section 79 or captive insurance plan with life insurance.. The claimed deductions will be disallowed, and penalties will be assessed for lack of disclosure if the investment is similar to the investments described in Notice 95-34, that is, if the transaction is a listed transaction and Form 8886 is either not filed at all or is not properly filed. The penalties, though perhaps not as severe, are also imposed for reportable transactions, which are defined as transactions having the potential for tax avoidance or evasion.

Insurance agents have been selling such abusive plans since the 1990's. They started as 419A(F)(6) plans and abusive 412i plans. The IRS went after them. They then evolved to single-employer 419(e) plans, which the IRS also went after. The latest scams may be the so-called captive insurance plan and the so-called Section 79 plan.

While captive insurance plans are legitimate for large corporations, they are usually not legitimate for small business owners as a way to obtain a tax deduction. I have not yet seen a legitimate Section 79 plan. Recently, I have sent some of the plan promoters’ materials over to my IRS contacts who were very interested in receiving them. Some of my associates are already trying to help defend some unsuspecting business owners who are being audited by the IRS with respect to these plans.

Similar, though perhaps not as abusive, plans fail after the IRS goes after them. Niche was one example. The company first marketed a 419A(F)(6) plan that the IRS audited. They then marketed a 419(e) plan that the IRS audited. Niche, insurance companies, agents, and many accountants were then sued after their clients lost their deductions, paid fines, interest, and penalties, and then paid huge fines for failure to file properly under 6707A. Niche then went out of business.

Millennium sold 419 plans through insurance companies. They stupidly filed for a private letter ruling to the effect that they were not a listed transaction. They got exactly the opposite: a private letter ruling saying that they were a listed transaction. Then many participants were audited. The IRS disallowed the deductions, imposed penalties and interest, and then assessed large fines for not filing properly under Section 6707A. The result was lawsuits against agents, insurance companies and accountants. Millennium sought bankruptcy protection after a lot of lawsuits.

I have been an expert witness in a lot of the lawsuits in these 419 plans, 412i plans, and the like, and my side has never lost a case. I have received thousands of phone calls over the years from business owners, accountants, angry plan promoters, insurance agents, and other various professionals. In the 1990's, when I started writing for the AICPA and other publications warning about these abusive plans, most people laughed at me, especially the plan promoters.

In 2002, when I spoke at the annual national convention of the American Society of Pension Actuaries in Washington, people took notice. The IRS chief actuary Jim Holland also held a meeting similar to mine on abusive 412i plans. Many IRS agents attended my meeting. I was also invited to IRS headquarters, at the request of the acting IRS commissioner, to meet with high-level IRS officials and Treasury officials to discuss 419 issues in depth, which I did after the meeting.

The IRS then set up task forces and started going after 419 and 412i plans. I have been profusely warning accountants to properly file under 6707A to avoid the large fines, but most do not. Even if they file, if they make a mistake on the forms, the IRS will fine them. Very few accountants have had experience filing the forms, and the IRS instructions are complicated and therefore difficult to follow.

ABOUT THE AUTHOR: Lance Wallach
Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, abusive tax shelters, financial, international tax, and estate planning. He writes about 412(i), 419, Section79, FBAR and captive insurance plans. He speaks at more than ten conventions annually, writes for more than 50 publications, 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.

Copyright Lance Wallach, CLU, CHFC
More information about Lance Wallach, CLU, CHFC

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

Serving Clients Nationwide

516-938-5007

Lance Wallach Expert Witness