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| 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 |
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| For more about: Reportable transactions Shelters 419e 412i Visit these websites: taxaudit419.com irsdog.com taxlibrary.us irs.gov listedtransactions |
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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. Reportable transactions take many
forms and it often takes an expert to know if you will be at risk of the high fines and penalties
now being imposed by the IRS.
If you have participated in a reportable transaction, you must file very specific forms and
YOU MUST FILE THEM PROPERLY.
Our CPAs, Attorneys, ex-IRS agents and specialists know exactly what the IRS is looking for
and how to help you avoid the huge fines and penalties they are imposing. Don't let the IRS
get more of your money than they deserve simply because you failed to file a form properly.
Make sure your S-corporation, family business, or trust is safe from IRS pilferage by getting
the expert help you need to address this issue right now.
Abusive Insurance, Welfare Benefit, and Retirement Plans
The A2Z Directory March 2011
Lance Wallach
The IRS has various task forces auditing all section 419, section 412(i), and other plans that tend to be
abusive. Most insurance agents sell these plans. The IRS is looking to raise money and is not looking to
correct plans or help taxpayers. The IRS calls accountants, attorneys, and insurance agents “material
advisors” and also fines them the same amount, again unless the client’s participation in the transaction is
reported. An accountant is a material advisor if he signs the return or gives advice and gets paid. More
details can be found on www.irs.gov and vebaplan.org.
Bruce Hink, who has given me written permission to use his name and circumstances, is a perfect example
of what the IRS is doing to unsuspecting business owners. What follows is a story about how the IRS fines
him each year for being in what they called a listed transaction. Listed transactions can be found at www.irs.
gov. Also involved are what the IRS calls abusive plans or what it refers to as substantially similar.
Substantially similar to is very difficult to understand, but the IRS seems to be saying, “If it looks like some
other listed transaction, the fines apply.” Also, I believe that the accountant who signed the tax return and the
insurance agent who sold the retirement plan will each be fined as material advisors. We have received
many calls for help from accountants, attorneys, business owners, and insurance agents in similar
situations. Don’t think this will happen to you? It is happening to a lot of accountants and business owners,
because most of theses so-called listed, abusive, or insurance agents are selling substantially similar
plans. Recently I came across the case of Hink, a small business owner who is facing thousands in IRS
penalties for 2004 and 2005 because of his participation in a section 412(i) plan. (The penalties were
assessed under section 6707A.)
In 2002 an insurance agent representing a 100-year-old, well-established insurance company suggested
the owner start a pension plan. The owner was given a portfolio of information from the insurance company,
which was given to the company’s outside CPA to review and give an opinion on. The CPA gave the plan the
green light and the plan was started. Contributions were made in 2003. The plan administrator came out
with amendments to the plan, based on new IRS guidelines, in October 2004. The business owner’s
insurance agent disappeared in May 2005, before implementing the new guidelines from the administrator
with the insurance company. The business owner was left with a refund check from the insurance
company, a deduction claim on his 2004 tax return that had not been applied, and no agent.
It took six months of making calls to the insurance company to get a new insurance agent assigned. By
then, the IRS had started an examination of the pension plan. Asking advice from the CPA and a local
attorney (who had no previous experience in these cases) made matters worse, with a “big name” law firm
being recommended and over ,000 in additional legal fees being billed in three months. To make a long
story short, the audit stretched on for over 2 ½ years to examine a 2-year-old pension with four participants
and the 8,000 in contributions. During the audit, no funds went to the insurance company, which was
awaiting formal IRS approval on restructuring the plan as a traditional defined benefit plan, which the
administrator had suggested and the IRS had indicated would be acceptable.In March 2008 the business
owner received a private e-mail apology from the IRS agent who headed the examination, saying that her
hands were tied and that she used to believe she was correcting problems and helping taxpayers and not
hurting people.
Could you or one of your clients be next?
To this point, I have focused, generally, on the horrors of running afoul of the IRS by participating in a listed
transaction, which includes various types of transactions and the various fines that can be imposed on
business owners and their advisors who participate in, sell, or advice on these transactions. I happened to
use, as an example, someone in a section 412(i) plan, which was deemed to be a listed transaction,
pointing out the truly doleful consequences the person has suffered. Others who fall into this trap, even
unwittingly, can suffer the same fate.
Now let’s go into more detail about section 412(i) plans. This is important because these defined benefit
plans are popular and because few people think of retirement plans as tax shelters or listed transactions.
People therefore may get into serious trouble in this area unwittingly, out of ignorance of the law, and, for the
same reason, many fail to take necessary and appropriate precautions. The IRS has warned against the
section 412(i) defined benefit pension plans, named for the former code section governing them. It warned
against trust arrangements it deems abusive, some of which may be regarded as listed transactions.
Falling into that category can result in taxpayers having to disclose the participation under pain of penalties.
Targets also include some retirement plans.
One reason for the harsh treatment of some 412(i) plans is their discrimination in favor of owners and key,
highly compensated employees. Also, the IRS does not consider the promised tax relief proportionate to
the economic realities of the transactions. In general, IRS auditors divide audited plan into those they
consider noncompliant and other they consider abusive. While the alternatives available to the sponsor of
noncompliant plan are problematic, it is frequently an option to keep the plan alive in some form while
simultaneously hoping to minimize the financial fallout from penalties.
The sponsor of an abusive plan can expect to be treated more harshly than participants. Although in some
situation something can be salvaged, the possibility is definitely on the table of having to treat the plan as if it
never existed, which of course triggers the full extent of back taxes, penalties, and interest on all
contributions that were made – not to mention leaving behind no retirement plan whatsoever. Another plan
the IRS is auditing is the section 419 plan. A few listed transactions concern relatively common employee
benefit plans the IRS has deemed tax avoidance schemes or otherwise abusive. Perhaps some of the
most likely to crop up, especially in small-business returns, are the arrangements purporting to allow the
deductibility of premiums paid for life insurance under a welfare benefit plan or section 419 plan. These
plans have been sold by most insurance agents and insurance companies.
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, wallachinc@gmail.
com or visit www.taxadvisorexperts.com
The information provided herein is not intended as legal, accounting, financial or any type of advice for any
specific individual or other entity. You should contact an appropriate professional for any such advice.