| Reportable Transactions Are Causing Business Owners Big Trouble With the IRS Because They Are Being Handled Improperly |
| Did you know that you must report certain transactions, or face fines up to $50K per year? Do you even know if any of your transactions fit the definition of "reportable?" Let us guide you through this maze and keep you out of trouble with the IRS |
The IRS Says:
Reportable Transactions
 |  |  |  |  |
Call 516-935-7346 For Help NOW
| Natural persons who fail to disclose a reportable transaction to the IRS are subject to a $10,000 penalty. Other nonreporting taxpayers are subject to a $50,000 penalty. The penalties are increased to $100,000 and $200,000, respectively, for natural persons and other taxpayers who fail to disclose a reportable transaction that is a listed transaction |
Beware:
IRS has made many deductions reportable, but require specific
forms to properly disclose the transaction.
In an attempt to curb the use of abusive tax shelters, new, stiff
penalties are in effect for failure to adequately disclose a
reportable transaction to the IRS. But unlike most other
penalties, the law significantly limits the IRS’s ability to rescind
or abate these penalties for reasonable cause or other
reasons.
This means that taxpayers must be much more vigilant in
identifying and disclosing these transactions. Even your CPA
may not recognize a particular transaction as reportable.
Don't fall into the trap of thinking that reportable transactions
are solely limited to what the IRS calls "abusive tax shelters."
The definition of a reportable transaction includes many
transactions that are routine and perfectly legitimate. It can
include any transaction with the potential for tax evasion or
avoidance. If you entered into any arrangement with the
primary purpose of avoiding or reducing taxes, that is probably
a reportable transaction that need to be disclosed.
IRS has made many deductions reportable, but require specific
forms to properly disclose the transaction.
In an attempt to curb the use of abusive tax shelters, new, stiff
penalties are in effect for failure to adequately disclose a
reportable transaction to the IRS. But unlike most other
penalties, the law significantly limits the IRS’s ability to rescind
or abate these penalties for reasonable cause or other
reasons.
This means that taxpayers must be much more vigilant in
identifying and disclosing these transactions. Even your CPA
may not recognize a particular transaction as reportable.
Don't fall into the trap of thinking that reportable transactions
are solely limited to what the IRS calls "abusive tax shelters."
The definition of a reportable transaction includes many
transactions that are routine and perfectly legitimate. It can
include any transaction with the potential for tax evasion or
avoidance. If you entered into any arrangement with the
primary purpose of avoiding or reducing taxes, that is probably
a reportable transaction that need to be disclosed.
| Call 516 935-7346 For Help NOW! or email us HERE |
| For more information Reportable transactions Listed transactions Abusive Tax Shelters 6707A 419e 412i Visit these websites: listedtransactions taxaudit419.com irsdog.com taxlibrary.us irs.gov section79plans |
Some common examples are:
- Retirement plans
- Family limited partnerships
- Charitable Remainder Trust
- Foreign accounts
- Welfare benefit plans
- Captive Insurance
- Section 79 plans
- Life Insurance plans taken as a
tax deduction - Various types of trusts including
Guam and offshore trusts - Confidential transactions
- Loss transactions
- Back-dated retirement plan
contributions - Abusive straddles
- ESOP
- Offshore employee leasing
arrangements - 412i plans
- S-Corporation income shifting
IRS Audits 419, 412i, Captive Insurance Plans With Life Insurance, and Section 79 Scams
By Lance Wallach June 2011
The IRS started auditing 419 plans in the ‘90s, and then continued going after 412i and other plans that they considered abusive, listed, or
reportable transactions, or substantially similar to such transactions.
In a recent Tax Court Case, Curcio v. Commissioner (TC Memo 2010-115), the Tax Court ruled that an investment in an employee welfare benefit
plan marketed under the name “Benistar” was a listed transaction in that the transaction in question was substantially similar to the transaction
described in IRS Notice 95-34. A subsequent case, McGehee Family Clinic, largely followed Curcio, though it was technically decided on other
grounds. The parties stipulated to be bound by Curcio on the issue of whether the amounts paid by McGehee in connection with the Benistar 419
Plan and Trust were deductible. Curcio did not appear to have been decided yet at the time McGehee was argued. The McGehee opinion (Case No.
10-102) (United States Tax Court, September 15, 2010) does contain an exhaustive analysis and discussion of virtually all of the relevant issues.
Taxpayers and their representatives should be aware that the Service has disallowed deductions for contributions to these arrangements. The IRS
is cracking down on small business owners who participate in tax reduction insurance plans and the brokers who sold them. Some of these plans
include defined benefit retirement plans, IRAs, or even 401(k) plans with life insurance.
In order to fully grasp the severity of the situation, one must have an understanding of Notice 95-34, which was issued in response to trust
arrangements sold to companies that were designed to provide deductible benefits such as life insurance, disability and severance pay benefits.
The promoters of these arrangements claimed that all employer contributions were tax-deductible when paid, by relying on the 10-or-more-
employer exemption from the IRC § 419 limits. It was claimed that permissible tax deductions were unlimited in amount.
In general, contributions to a welfare benefit fund are not fully deductible when paid. Sections 419 and 419A impose strict limits on the amount of tax-
deductible prefunding permitted for contributions to a welfare benefit fund. Section 419A(F)(6) provides an exemption from Section 419 and Section
419A for certain “10-or-more employers” welfare benefit funds. In general, for this exemption to apply, the fund must have more than one
contributing employer, of which no single employer can contribute more than 10% of the total contributions, and the plan must not be experience-
rated with respect to individual employers.
According to the Notice, these arrangements typically involve an investment in variable life or universal life insurance contracts on the lives of the
covered employees. The problem is that the employer contributions are large relative to the cost of the amount of term insurance that would be
required to provide the death benefits under the arrangement, and the trust administrator may obtain cash to pay benefits other than death benefits,
by such means as cashing in or withdrawing the cash value of the insurance policies. The plans are also often designed so that a particular
employer’s contributions or its employees’ benefits may be determined in a way that insulates the employer to a significant extent from the
experience of other subscribing employers. In general, the contributions and claimed tax deductions tend to be disproportionate to the economic
realities of the arrangements.
Benistar advertised that enrollees should expect to obtain the same type of tax benefits as listed in the transaction described in Notice 95-34. The
benefits of enrollment listed in its advertising packet included:
* Virtually unlimited deductions for the employer;
* Contributions could vary from year to year;
* Benefits could be provided to one or more key executives on a selective basis;
* No need to provide benefits to rank-and-file employees;
* Contributions to the plan were not limited by qualified plan rules and would not interfere with pension, profit sharing or 401(k) plans;
* Funds inside the plan would accumulate tax-free;
* Beneficiaries could receive death proceeds free of both income tax and estate tax;
* The program could be arranged for tax-free distribution at a later date;
* Funds in the plan were secure from the hands of creditors.
The Court said that the Benistar Plan was factually similar to the plans described in Notice 95-34 at all relevant times. In rendering its decision the
court heavily cited Curcio, in which the court also ruled in favor of the IRS. As noted in Curcio, the insurance policies, overwhelmingly variable or
universal life policies, required large contributions relative to the cost of the amount of term insurance that would be required to provide the death
benefits under the arrangement. The Benistar Plan owned the insurance contracts.
Following Curcio, as the Court has stipulated, the Court held that the contributions to Benistar were not deductible under section 162(a) because
participants could receive the value reflected in the underlying insurance policies purchased by Benistar—despite the payment of benefits by
Benistar seeming to be contingent upon an unanticipated event (the death of the insured while employed). As long as plan participants were willing
to abide by Benistar’s distribution policies, there was no reason ever to forfeit a policy to the plan. In fact, in estimating life insurance rates, the
taxpayers’ expert in Curcio assumed that there would be no forfeitures, even though he admitted that an insurance company would generally
assume a reasonable rate of policy lapses.
The McGehee Family Clinic had enrolled in the Benistar Plan in May 2001 and claimed deductions for contributions to it in 2002 and 2005. The
returns did not include a Form 8886,Reportable Transaction Disclosure Statement, or similar disclosure.
The IRS disallowed the latter deduction and adjusted the 2004 return of shareholder Robert Prosser and his wife to include the $50,000 payment to
the plan. The IRS also assessed tax deficiencies and the enhanced 30% penalty totaling almost $21,000 against the clinic and $21,000 against the
Prossers. The court ruled that the Prossers failed to prove a reasonable cause or good faith exception.
More you should know:
* In recent years, some section 412(i) plans have been funded with life insurance using face amounts in excess of the maximum death benefit a
qualified plan is permitted to pay. Ideally, the plan should limit the proceeds that can be paid as a death benefit in the event of a participant’s death.
Excess amounts would revert to the plan. Effective February 13, 2004, the purchase of excessive life insurance in any plan is considered a listed
transaction if the face amount of the insurance exceeds the amount that can be issued by $100,000 or more and the employer has deducted the
premiums for the insurance.
* A 412(i) plan in and of itself is not a listed transaction; however, the IRS has a task force auditing 412i plans.
* An employer has not engaged in a listed transaction simply because it is a 412(i) plan.
* Just because a 412(i) plan was audited and sanctioned for certain items, does not necessarily mean the plan engaged in a listed transaction.
Some 412(i) plans have been audited and sanctioned for issues not related to listed transactions.
Companies should carefully evaluate proposed investments in plans such as the Benistar Plan. The claimed deductions will not be available, and
penalties will be assessed for lack of disclosure if the investment is similar to the investments described in Notice 95-34. In addition, under IRC
6707A, IRS fines participants a large amount of money for not properly disclosing their participation in listed, reportable or similar transactions; an
issue that was not before the Tax Court in either Curcio or McGehee. The disclosure needs to be made for every year the participant is in a plan. The
forms need to be properly filed even for years that no contributions are made. I have received numerous calls from participants who did disclose
and still got fined because the forms were not filled in properly. A plan administrator told me that he assisted hundreds of his participants file forms,
and they still all received very large IRS fines for not properly filling in the forms.
IRS has been attacking all 419 welfare benefit plans, many 412i retirement plans, captive insurance plans with life insurance in them and Section
79 plans.
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, lawallach@aol.com or visit www.vebaplan.com.
Lance Wallach
68 Keswick Lane
Plainview, NY 11803
Ph.: (516)938-5007
Fax: (516)938-6330 www.vebaplan.com
National Society of Accountants Speaker of The Year
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.
By Lance Wallach June 2011
The IRS started auditing 419 plans in the ‘90s, and then continued going after 412i and other plans that they considered abusive, listed, or
reportable transactions, or substantially similar to such transactions.
In a recent Tax Court Case, Curcio v. Commissioner (TC Memo 2010-115), the Tax Court ruled that an investment in an employee welfare benefit
plan marketed under the name “Benistar” was a listed transaction in that the transaction in question was substantially similar to the transaction
described in IRS Notice 95-34. A subsequent case, McGehee Family Clinic, largely followed Curcio, though it was technically decided on other
grounds. The parties stipulated to be bound by Curcio on the issue of whether the amounts paid by McGehee in connection with the Benistar 419
Plan and Trust were deductible. Curcio did not appear to have been decided yet at the time McGehee was argued. The McGehee opinion (Case No.
10-102) (United States Tax Court, September 15, 2010) does contain an exhaustive analysis and discussion of virtually all of the relevant issues.
Taxpayers and their representatives should be aware that the Service has disallowed deductions for contributions to these arrangements. The IRS
is cracking down on small business owners who participate in tax reduction insurance plans and the brokers who sold them. Some of these plans
include defined benefit retirement plans, IRAs, or even 401(k) plans with life insurance.
In order to fully grasp the severity of the situation, one must have an understanding of Notice 95-34, which was issued in response to trust
arrangements sold to companies that were designed to provide deductible benefits such as life insurance, disability and severance pay benefits.
The promoters of these arrangements claimed that all employer contributions were tax-deductible when paid, by relying on the 10-or-more-
employer exemption from the IRC § 419 limits. It was claimed that permissible tax deductions were unlimited in amount.
In general, contributions to a welfare benefit fund are not fully deductible when paid. Sections 419 and 419A impose strict limits on the amount of tax-
deductible prefunding permitted for contributions to a welfare benefit fund. Section 419A(F)(6) provides an exemption from Section 419 and Section
419A for certain “10-or-more employers” welfare benefit funds. In general, for this exemption to apply, the fund must have more than one
contributing employer, of which no single employer can contribute more than 10% of the total contributions, and the plan must not be experience-
rated with respect to individual employers.
According to the Notice, these arrangements typically involve an investment in variable life or universal life insurance contracts on the lives of the
covered employees. The problem is that the employer contributions are large relative to the cost of the amount of term insurance that would be
required to provide the death benefits under the arrangement, and the trust administrator may obtain cash to pay benefits other than death benefits,
by such means as cashing in or withdrawing the cash value of the insurance policies. The plans are also often designed so that a particular
employer’s contributions or its employees’ benefits may be determined in a way that insulates the employer to a significant extent from the
experience of other subscribing employers. In general, the contributions and claimed tax deductions tend to be disproportionate to the economic
realities of the arrangements.
Benistar advertised that enrollees should expect to obtain the same type of tax benefits as listed in the transaction described in Notice 95-34. The
benefits of enrollment listed in its advertising packet included:
* Virtually unlimited deductions for the employer;
* Contributions could vary from year to year;
* Benefits could be provided to one or more key executives on a selective basis;
* No need to provide benefits to rank-and-file employees;
* Contributions to the plan were not limited by qualified plan rules and would not interfere with pension, profit sharing or 401(k) plans;
* Funds inside the plan would accumulate tax-free;
* Beneficiaries could receive death proceeds free of both income tax and estate tax;
* The program could be arranged for tax-free distribution at a later date;
* Funds in the plan were secure from the hands of creditors.
The Court said that the Benistar Plan was factually similar to the plans described in Notice 95-34 at all relevant times. In rendering its decision the
court heavily cited Curcio, in which the court also ruled in favor of the IRS. As noted in Curcio, the insurance policies, overwhelmingly variable or
universal life policies, required large contributions relative to the cost of the amount of term insurance that would be required to provide the death
benefits under the arrangement. The Benistar Plan owned the insurance contracts.
Following Curcio, as the Court has stipulated, the Court held that the contributions to Benistar were not deductible under section 162(a) because
participants could receive the value reflected in the underlying insurance policies purchased by Benistar—despite the payment of benefits by
Benistar seeming to be contingent upon an unanticipated event (the death of the insured while employed). As long as plan participants were willing
to abide by Benistar’s distribution policies, there was no reason ever to forfeit a policy to the plan. In fact, in estimating life insurance rates, the
taxpayers’ expert in Curcio assumed that there would be no forfeitures, even though he admitted that an insurance company would generally
assume a reasonable rate of policy lapses.
The McGehee Family Clinic had enrolled in the Benistar Plan in May 2001 and claimed deductions for contributions to it in 2002 and 2005. The
returns did not include a Form 8886,Reportable Transaction Disclosure Statement, or similar disclosure.
The IRS disallowed the latter deduction and adjusted the 2004 return of shareholder Robert Prosser and his wife to include the $50,000 payment to
the plan. The IRS also assessed tax deficiencies and the enhanced 30% penalty totaling almost $21,000 against the clinic and $21,000 against the
Prossers. The court ruled that the Prossers failed to prove a reasonable cause or good faith exception.
More you should know:
* In recent years, some section 412(i) plans have been funded with life insurance using face amounts in excess of the maximum death benefit a
qualified plan is permitted to pay. Ideally, the plan should limit the proceeds that can be paid as a death benefit in the event of a participant’s death.
Excess amounts would revert to the plan. Effective February 13, 2004, the purchase of excessive life insurance in any plan is considered a listed
transaction if the face amount of the insurance exceeds the amount that can be issued by $100,000 or more and the employer has deducted the
premiums for the insurance.
* A 412(i) plan in and of itself is not a listed transaction; however, the IRS has a task force auditing 412i plans.
* An employer has not engaged in a listed transaction simply because it is a 412(i) plan.
* Just because a 412(i) plan was audited and sanctioned for certain items, does not necessarily mean the plan engaged in a listed transaction.
Some 412(i) plans have been audited and sanctioned for issues not related to listed transactions.
Companies should carefully evaluate proposed investments in plans such as the Benistar Plan. The claimed deductions will not be available, and
penalties will be assessed for lack of disclosure if the investment is similar to the investments described in Notice 95-34. In addition, under IRC
6707A, IRS fines participants a large amount of money for not properly disclosing their participation in listed, reportable or similar transactions; an
issue that was not before the Tax Court in either Curcio or McGehee. The disclosure needs to be made for every year the participant is in a plan. The
forms need to be properly filed even for years that no contributions are made. I have received numerous calls from participants who did disclose
and still got fined because the forms were not filled in properly. A plan administrator told me that he assisted hundreds of his participants file forms,
and they still all received very large IRS fines for not properly filling in the forms.
IRS has been attacking all 419 welfare benefit plans, many 412i retirement plans, captive insurance plans with life insurance in them and Section
79 plans.
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, lawallach@aol.com or visit www.vebaplan.com.
Lance Wallach
68 Keswick Lane
Plainview, NY 11803
Ph.: (516)938-5007
Fax: (516)938-6330 www.vebaplan.com
National Society of Accountants Speaker of The Year
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.
