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Section 79, The Catch
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Assistance with IRS Issues
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Be Fined by the IRS Under Section 6707A Business Owners in 419, 412i, Section 79 and Captive Insurance Plans Will Probably
NCCPAP
November Newsletter
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 the taxpayer does not necessarily have to make a contribution or claim a tax deduction to be deemed 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 a taxpayer can also be in trouble if they file incorrectly. I have received numerous phone calls from business owners who filed and still got fined. Not only does
the taxpayer 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 told me that the form was prepared 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
they 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 the deductions
taken in prior years. 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; speaks at more than ten conventions annually; writes for over fifty publications; is quoted regularly in the press; and has been featured on TV and radio financial talk shows. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams (John Wiley and Sons), Bisk Education’s CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling books including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxadvisorexperts.org 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.
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.
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Important FBAR and International Tax Information For 2012
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The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.
By Lance Wallach
For individual tax returns (Forms 1040) due to be filed in 2012 (due this year by April 17, 2012, unless extended), the IRS has issued new Form 8938, "Statement of Specified Foreign Financial Assets," requiring the disclosure of certain foreign accounts and assets.
Whether an individual is required to file this form is complicated, but basically this applies to the following assets if owned in 2011:
Financial accounts in foreign financial institutions.
Any stock or securities issued by foreign corporations or entities, any interest in a foreign partnership, trust or estate, as well as any financial instrument or contract issued by a foreign person, and foreign pension plans and deferred compensation arrangements (but not foreign social security). You are not, however, required to report foreign assets (1) if the assets are held in a U.S. brokerage account; (2) if you are required to disclose the asset on certain other tax form such as Form 3520 or Form 5471; or (3) if such assets (other than stock) are used in your trade or business.
Financial accounts in foreign financial institutions.
Any stock or securities issued by foreign corporations or entities, any interest in a foreign partnership, trust or estate, as well as any financial instrument or contract issued by a foreign person, and foreign pension plans and deferred compensation arrangements (but not foreign social security). You are not, however, required to report foreign assets (1) if the assets are held in a U.S. brokerage account; (2) if you are required to disclose the asset on certain other tax form such as Form 3520 or Form 5471; or (3) if such assets (other than stock) are used in your trade or business.
Whether you have to file Form 8938 depends on the total value of such foreign assets at year end as well as the highest value at any point in the year. For U.S. citizens and residents filing joint tax returns, you must file Form 8938 if the year-end value of the foreign assets is $100,000 or more or, if the value at any time during the year exceeded $150,000. On joint returns, all foreign-based assets owned by the spouses are considered in determining these thresholds. For married spouses filing separately and for unmarried persons, the thresholds are $50,000 (year end) and $75,000 (high value during the year).
There are different rules regarding certain persons who live abroad. There are also rules regarding valuation of certain assets. These are spelled out in greater detail in the Form 8938 instructions.
If required, Form 8938 is to be filed with your Federal Income Tax Return (Form 1040). Currently only individuals having filing requirements must fill out the Form 8938, but it is expected that this will be extended to corporations, partnerships and trusts in the future.
The IRS may impose penalties for failure to file Form 8938 if you lack reasonable cause or willfully neglected to file. In addition, if you underpay your tax as a result of a transaction involving an undisclosed foreign financial asset, the penalty for such failure may be 40 percent of the underpayment (instead of the normal 20 percent). In addition, the statute of limitations for assessing tax may be extended if you fail to file the form.
It is important to note that Form 8938 is in addition to the annual Foreign Bank Account Form or "FBAR," which has different filing requirements. The FBAR, generally is required if you have ownership or signature authority over one or more foreign bank accounts with a value of over $10,000 on any date in the prior year. The FBAR is not part of your income tax return, but is filed separately and must be received by the Department of Treasury in Detroit by June 30 (timely mailing does not apply to that form).
Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters. He writes about 412(i), 419, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public Radio's All Things Considered, and others. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education's CPA's Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxaudit419.com and www.taxlibrary.us
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.
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You get what you pay for, how much do people pay for business appraisals?
You get what you pay for, how much do people pay for business appraisals?
Would you go to a dentist for heart surgery? They are both doctors?
Like any other professional service, such as legal services, medical care, or accounting services, the price of appraisal services should always be one consideration in selecting the professional or professional firm. However, it's usually not appropriate to shop for the lowest priced vendor, or to use competitive bidding to obtain the lowest price. The heart patient, whose life may depend on the skill and judgment of his surgeon, wouldn't be smart to put his surgery out to bid. Similarly, the client whose financial fortunes may rely on the quality of work or the effectiveness of testimony by his valuation expert should probably not make a decision on hiring an appraiser based primarily on lowest fees.
In a business appraisal, the low-end software-driven product should be approached with caution. In general these products are designed to give quick, and not necessarily accurate answers to price shoppers, and by design deny the client the expertise of the appraiser's many years of valuation wisdom. Often these are done by part-time appraisers, or are loss leaders intended to lure clients into more expensive consulting agreements. People should beware of any appraiser who is willing to render an opinion of value without a personal interview, and hands-on inspection of the company's financial and administrative records.
The relationship between quality of services and fees is not linear: there are factors unrelated to the quality of the services that affect the fees demanded for them. For example, the basic amount of work the appraiser has to perform for an appraisal is driven by the professional standards he must follow in conducting the appraisal. The emergence of the Uniform Standards of Professional Appraisal Practice (USPAP) as the controlling rules for appraisal engagements has increased the amount of work appraisers must do, even for simple appraisal assignments.
Services Offered:
business valuation services, acquisitions, mergers, buy-sell
agreements,business evaluation, expert testimony, estate taxes,
valuation services, business planning, company valuation methods
The largest single driver of appraisal cost though, is the purpose to which the client desires to put the appraisal result. Appraisals for use as informal pricing guides for sellers or buyers require the least amount of work on the continuum of effort, and appraisals done for use in contentious litigation probably require the most effort. In between these extremes are appraisals for other purposes, such as buy/sell agreements, partnership agreements, estate planning, asset allocation, divorce, etc.
Preliminary Analyses, Value Studies - $3,000 to $10,000.
These kinds of less-than-comprehensive valuation efforts can be well suited for situations where a client needs a ballpark estimate of value, perhaps as a starting point for sales negotiations, or to achieve a better understanding of the value drivers in his company. Often this type of assignment is begun with a Value Study to identify the value drivers of the subject business entity, and followed-on with consulting over a period of time to prepare the business and the owner for subsequent sale.
Limited Partnership Appraisals - Value in Real Property Assets Only - Discount Study - $3,000 to $10,000.
The typical setting for this kind of appraisal is a Family Partnership formed to protect real property assets from estate taxation. Usually the partnership has no income distributions to the limited partners, and all of the profit is paid to the General Partner. The value of the entity is based on its assets, and the values of the real property assets are provided to us by the real estate appraiser. Our assignment is to estimate the value of small minority limited partnership holdings in the entity, and to assign marketability and minority discounts from the enterprise value, if applicable. These projects typically involve only a summary report. You also need to be aware that at some point the IRS may be looking at this. Maybe you want to use a firm with ex IRS people on staff?
Other Services:
valuation discounts, business valuation resources, valuation research, business value, business appraisers, valuer, company appraisal, small business valuation, appraiser,
Comprehensive Appraisal - Summary Report - $7,500- $35,000.
This is the most common type of assignment, and calls for the application of a full complement of appraisal procedures. This is the type of engagement suitable for most kinds of litigation, including family law, partnership disputes, shareholder oppression litigation, forced buy-outs, business torts, contract disputes, etc. The chief reason that appraisal engagements for litigation cost more is because the analysis and reporting must be performed to a standard of thoroughness that will allow them to survive rigorous cross-examination by opposing counsel. This takes time and costs money, just as all of the other components of litigation. The appraisal is not the place to cut corners. You may want to use someone that has been an expert witness in the past. You may want to use someone that gets excellent results in court. Do not forget to discuss this very important fact.
All of these pricing guidelines are predicated on the availability of good bookkeeping and accounting records. Generally, the appraiser cannot commence the engagement until there are good financial statements (income statements and balance sheets) available. These need not be uncontested, of course, but where the income of the entity or the values of the assets are in question, the appraiser must be given an instruction as to what assumptions to use in his appraisal.
Lance Wallach
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.
Like any other professional service, such as legal services, medical care, or accounting services, the price of appraisal services should always be one consideration in selecting the professional or professional firm. However, it's usually not appropriate to shop for the lowest priced vendor, or to use competitive bidding to obtain the lowest price. The heart patient, whose life may depend on the skill and judgment of his surgeon, wouldn't be smart to put his surgery out to bid. Similarly, the client whose financial fortunes may rely on the quality of work or the effectiveness of testimony by his valuation expert should probably not make a decision on hiring an appraiser based primarily on lowest fees.
In a business appraisal, the low-end software-driven product should be approached with caution. In general these products are designed to give quick, and not necessarily accurate answers to price shoppers, and by design deny the client the expertise of the appraiser's many years of valuation wisdom. Often these are done by part-time appraisers, or are loss leaders intended to lure clients into more expensive consulting agreements. People should beware of any appraiser who is willing to render an opinion of value without a personal interview, and hands-on inspection of the company's financial and administrative records.
The relationship between quality of services and fees is not linear: there are factors unrelated to the quality of the services that affect the fees demanded for them. For example, the basic amount of work the appraiser has to perform for an appraisal is driven by the professional standards he must follow in conducting the appraisal. The emergence of the Uniform Standards of Professional Appraisal Practice (USPAP) as the controlling rules for appraisal engagements has increased the amount of work appraisers must do, even for simple appraisal assignments.
Services Offered:
business valuation services, acquisitions, mergers, buy-sell
agreements,business evaluation, expert testimony, estate taxes,
valuation services, business planning, company valuation methods
The largest single driver of appraisal cost though, is the purpose to which the client desires to put the appraisal result. Appraisals for use as informal pricing guides for sellers or buyers require the least amount of work on the continuum of effort, and appraisals done for use in contentious litigation probably require the most effort. In between these extremes are appraisals for other purposes, such as buy/sell agreements, partnership agreements, estate planning, asset allocation, divorce, etc.
Preliminary Analyses, Value Studies - $3,000 to $10,000.
These kinds of less-than-comprehensive valuation efforts can be well suited for situations where a client needs a ballpark estimate of value, perhaps as a starting point for sales negotiations, or to achieve a better understanding of the value drivers in his company. Often this type of assignment is begun with a Value Study to identify the value drivers of the subject business entity, and followed-on with consulting over a period of time to prepare the business and the owner for subsequent sale.
Limited Partnership Appraisals - Value in Real Property Assets Only - Discount Study - $3,000 to $10,000.
The typical setting for this kind of appraisal is a Family Partnership formed to protect real property assets from estate taxation. Usually the partnership has no income distributions to the limited partners, and all of the profit is paid to the General Partner. The value of the entity is based on its assets, and the values of the real property assets are provided to us by the real estate appraiser. Our assignment is to estimate the value of small minority limited partnership holdings in the entity, and to assign marketability and minority discounts from the enterprise value, if applicable. These projects typically involve only a summary report. You also need to be aware that at some point the IRS may be looking at this. Maybe you want to use a firm with ex IRS people on staff?
Other Services:
valuation discounts, business valuation resources, valuation research, business value, business appraisers, valuer, company appraisal, small business valuation, appraiser,
Comprehensive Appraisal - Summary Report - $7,500- $35,000.
This is the most common type of assignment, and calls for the application of a full complement of appraisal procedures. This is the type of engagement suitable for most kinds of litigation, including family law, partnership disputes, shareholder oppression litigation, forced buy-outs, business torts, contract disputes, etc. The chief reason that appraisal engagements for litigation cost more is because the analysis and reporting must be performed to a standard of thoroughness that will allow them to survive rigorous cross-examination by opposing counsel. This takes time and costs money, just as all of the other components of litigation. The appraisal is not the place to cut corners. You may want to use someone that has been an expert witness in the past. You may want to use someone that gets excellent results in court. Do not forget to discuss this very important fact.
All of these pricing guidelines are predicated on the availability of good bookkeeping and accounting records. Generally, the appraiser cannot commence the engagement until there are good financial statements (income statements and balance sheets) available. These need not be uncontested, of course, but where the income of the entity or the values of the assets are in question, the appraiser must be given an instruction as to what assumptions to use in his appraisal.
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, financial and estate planning, and abusive tax shelters. He writes about 412(i), 419, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public Radio's All Things Considered, and others. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education's CPA's Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxaudit419.com and www.taxlibrary.us
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.
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IRS DOG
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US health insurance trusts
By Lance Wallach
As their finances deteriorated, Detroit’s automakers earned the moniker “HMOs on wheels” for crippling employee healthcare liabilities (Health Maintenance Organizations are a type of insurer). This was worrisome not only for the companies but also some 850,000 active and retired beneficiaries who feared, with justification, that carmakers might one day go bust and shed these liabilities. That spurred the United Auto Workers union to agree in 2007 to Voluntary Employee Beneficiary Associations (VEBA) to absorb these liabilities. When the trusts were originally negotiated, the carmakers pledged cash contributions of nearly $60bn, somewhat less than their actual healthcare liabilities. As the crisis hit, they supplanted promised payments with their own equity and debt.
The UAW had little choice, but this partly defeated the purpose of creating the trusts. Not surprisingly, the trusts have tried to diversify quickly, most recently accepting around $4bn in cash from Ford, a slight discount for notes receivable, after redeeming stock warrants for $1.8bn earlier this year. General Motor’s retirees’ healthcare is backed by $13bn in cash plus $9bn in GM liabilities and up to a fifth of the automakers’ equity. That could fetch an additional $10bn once a public market exists. Chrysler’s employees are most exposed with only $2bn in cash plus $4.6bn in notes and up to 68 per cent of illiquid shares in Detroit’s weakest carmaker. Expert Witness Lance Wallach reckons these assets can never cover an estimated 80 years of full benefits.
But, by shedding exposure to Detroit and giving themselves the option of trimming benefits to conserve assets, UAW trustees are effectively creating a less-risky defined contribution plan. Beneficiaries may squeal, but something is better than nothing. America’s car industry might have fared better if only unions had let carmakers manage their liabilities with similar flexibility.
The UAW had little choice, but this partly defeated the purpose of creating the trusts. Not surprisingly, the trusts have tried to diversify quickly, most recently accepting around $4bn in cash from Ford, a slight discount for notes receivable, after redeeming stock warrants for $1.8bn earlier this year. General Motor’s retirees’ healthcare is backed by $13bn in cash plus $9bn in GM liabilities and up to a fifth of the automakers’ equity. That could fetch an additional $10bn once a public market exists. Chrysler’s employees are most exposed with only $2bn in cash plus $4.6bn in notes and up to 68 per cent of illiquid shares in Detroit’s weakest carmaker. Expert Witness Lance Wallach reckons these assets can never cover an estimated 80 years of full benefits.
But, by shedding exposure to Detroit and giving themselves the option of trimming benefits to conserve assets, UAW trustees are effectively creating a less-risky defined contribution plan. Beneficiaries may squeal, but something is better than nothing. America’s car industry might have fared better if only unions had let carmakers manage their liabilities with similar flexibility.
Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters. He writes about 412(i), 419, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public Radio’s All Things Considered, and others. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education’s CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxadvisorexperts.org 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.
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Using Captive Insurance Companies for Savings
Accounting Today
February 10th
Financial Planning
Small companies have been copying a method to control insurance costs and reduce taxes that used to be the domain of large businesses: setting up their own insurance companies to provide coverage when they think that outside insurers are charging too much.
Often, they are starting what is called a “captive insurance company” – an insurer founded to write coverage for the company, companies or founders.
Here’s how captive insurers work.
The parent business (your company) creates a captive so that it has a self-funded option for buying insurance, whereby the parent provides the reserves to back the policies. The captive then either retains that risk or pays reinsures to take it. The price for coverage is set by the parent business; reinsurance costs, if any, are a factor.
In the event of a loss, the business pays claims from its captive, or the reinsurer pays the captive.
Captives are overseen by corporate boards and, to keep costs low, are often based in places where there is favorable tax treatment and less onerous regulation – such as Bermuda and the Cayman Islands, or U.S states like Vermont and South Carolina.
Captives have become very popular risk financing tools that provide maximum flexibility to any risk financing program. And the additional possibility of adding several types of employee benefits is of further strategic value to the owners of captives.
While the employee benefit aspects have not emerged as quickly as had been predicted, there is little doubt that widespread use of captives for employee benefits is just a matter of time. While coverages like long term disability and term life insurance typically require Department of Labor approval, other benefit-related coverages such as medical stop loss can utilize a captive without the department’s approval. Additionally, some midsized corporate owners also view a captive as an integral part of their asset protection and wealth accumulation plans. The opportunities offered by a captive play a critical role in the strategic planning of many corporations.
A captive insurance company would be an insurance subsidiary that is owned by its parent business (es). There are now nearly 5,000 captive insurers worldwide. Over 80 percent of Fortune 500 Companies take advantage of some sort of captive insurance company arrangement. Now small companies can also.
By sharing a large captive, participants are insured under group policies, which provide for insurance coverage that recognizes superior claims experience in the form of experience-rated refunds of premiums, and other profit-sharing options made available to the insured.
A true captive insurance arrangement is where a parent company or some companies in the same economic family (related parties), pay a subsidiary or another member of the family, established as a licensed type of insurance company, premiums that cover the parent company.
In theory, underwriting profits from the subsidiary are retained by the parent. Single-parent captives allow an organization to cover any risk they wish to fund, and generally eliminate the commission-price component from the premiums. Jurisdictions in the U.S. and in certain parts of the world have adopted a series of laws and regulations that allow small non-life companies, taxed under IRC Section 831(b), or as 831(b) companies.
Try Sharing
There are a number of significant advantages that may be obtained through sharing a large captive with other companies. The most important is that you can significantly decrease the cost of insurance through this arrangement.
The second advantage is that sharing a captive does not require any capital commitment and has very low policy fees. The policy application process is similar to that of any commercial insurance company, is relatively straightforward, and aside from an independent actuarial and underwriting review, bears no additional charges.
By sharing a captive, you only pay a pro rata fee to cover all general and administrative expenses. The cost for administration is very low per insured (historically under 60 basis points annually). By sharing a large captive, loans to its insureds (your company) can be legally made. So you can make a tax deductible contribution, and then take back money tax free. Sharing a large captive requires little or no maintenance by the insured and can be implemented in a fraction of the time required for stand alone captives.
If done correctly, sharing a large captive can yield a small company significant tax and cost savings.
If done incorrectly, the results can be disastrous.
Buyer Beware
Stand alone captives are also likely to draw IRS attention. Another advantage of sharing a captive is that IRS problems are less likely if that path is followed, and they can be entirely eliminated as even a possibility by following the technique of renting a captive, which would involve no ownership interest in the captive on the part of the insured. (your company).
Lance Wallach speaks and writes extensively about retirement plans, estate planning and tax reduction strategies. Reach him at (516) 938-5007 or www.vebaplan.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.
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Captive Insurance and Other Tax Reduction Strategies – The Good, Bad, and Ugly
By Lance Wallach May 14th
Every accountant knows that increased cash flow and cost savings are critical for businesses. What is uncertain is the best path to recommend to garner these benefits.
Over the past decade business owners have been overwhelmed by a plethora of choices designed to reduce the cost of providing employee benefits while increasing their own retirement savings. The solutions ranged from traditional pension and profit sharing plans to more advanced strategies.
Some strategies, such as IRS section 419 and 412(i) plans, used life insurance as vehicles to bring about benefits. Unfortunately, the high life insurance commissions (often 90% of the contribution, or more) fostered an environment that led to aggressive and noncompliant plans.
To Read more Click Link: http://captiveinsuranceplans.wordpress.com/captive-insurance/
Over the past decade business owners have been overwhelmed by a plethora of choices designed to reduce the cost of providing employee benefits while increasing their own retirement savings. The solutions ranged from traditional pension and profit sharing plans to more advanced strategies.
Some strategies, such as IRS section 419 and 412(i) plans, used life insurance as vehicles to bring about benefits. Unfortunately, the high life insurance commissions (often 90% of the contribution, or more) fostered an environment that led to aggressive and noncompliant plans.
To Read more Click Link: http://captiveinsuranceplans.wordpress.com/captive-insurance/
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A warning for 419, 412i, Sec.79 and captive insurance
WebCPA
The dangers of being "listed"
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, writes for over fifty
publications, is quoted regularly in the press and has been featured on television and radio
financial talk shows including NBC, National Public Radio's All Things Considered, and
others. Lance has written numerous books including Protecting Clients from Fraud,
Incompetence and Scams published by John Wiley and Sons, Bisk Education's CPA's
Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling
books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small
Business Hot Spots. He does expert witness testimony and has never lost a case. Contact
him at 516.938.5007, wallachinc@gmail.com or visit www.taxaudit419.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.
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Protecting Clients from Fraud, Incompetence and Scams
Lance Wallach
Nov 12
Parts of this article are from the book published by John Wiley and Sons, Protecting Clients from Fraud, Incompetence and Scams, authored by Lance Wallach.
Every financial expert out there knows that bad faith and bad planning can take down even the biggest firms, wiping out millions of dollars of value in an instant. Whether it's internal fraud, a scammer, or an incompetent planner that takes your client's cash, the bottom line is: The money is gone and the loss should have been prevented.
Filled with authoritative advice from financial expert Lance Wallach, Protecting Clients from Fraud, Incompetence, and Scamsequips you as an accountant, attorney, or financial planner with the weaponry you need to detect bad investments before they happen and protect your clients' wealth - as well as your own.
Sharp and savvy in its frank, often humorous, and authoritative examination of financial fraud and mismanagement, you'll learn about the dysfunctional sectors in the financial industry and:
- Protecting your retirement assets
- Asset protection basics
- Shifting the risk equation: insurance maneuvers
- Reevaluating existing insurance
- What financial advisors and insurance agents "forget" to tell their clients
- The truth about variable annuities
- What you must know about life settlements
- The smart way to approach college funding
A pragmatic blueprint for identifying trouble spots you can expect and immediately useful solutions, Protecting Clients from Fraud, Incompetence, and Scams equips you with the resources, strategies, and tools you need to effectively protect your clients from frauds and financial scammers.
Herewith is an excerpt from Lance Wallach's book, Protecting Clients from Fraud, Incompetence and Scams:
The IRS has been cracking down on what it considers to be abusive tax shelters. Many of them are being marketed to small business owners by insurance professionals, financial planners, and even accountants and attorneys. I speak at numerous conventions, for both business owners and accountants. And after I speak, many people who have questions about tax reduction plans that they have heard about always approach me.
I have been an expert witness in many of these 419 and 412(i) lawsuits and I have not lost one of them. If you sold one or more of these plans, get someone who really knows what they are doing to help you immediately. Many advisors will take your money and claim to be able to help you. Make sure they have experience helping agents that have sold these types of plans. Make sure they have experience helping accountants who signed the tax returns. IRS calls them material advisors and fines them $200,000 if they are incorporated or $100,000 if not. Do not let them learn on the job, with your career and money at stake.
Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, abusive tax shelters, financial, international tax, and estate planning. He writes about 412(i), 419, Section79, FBAR, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public Radio’s All Things Considered, and others. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education’s CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation, as well as the AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxadvisorexpert.com or www.taxaudit419.com.
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.↧
Captive Insurance and Other Tax Reduction Strategies – The Good, Bad, and Ugly
By Lance Wallach May 14th
Every accountant knows that increased cash flow and cost savings are critical for businesses. What is uncertain is the best path to recommend to garner these benefits.
Over the past decade business owners have been overwhelmed by a plethora of choices designed to reduce the cost of providing employee benefits while increasing their own retirement savings. The solutions ranged from traditional pension and profit sharing plans to more advanced strategies.
Some strategies, such as IRS section 419 and 412(i) plans, used life insurance as vehicles to bring about benefits. Unfortunately, the high life insurance commissions (often 90% of the contribution, or more) fostered an environment that led to aggressive and noncompliant plans.
The result has been thousands of audits and an IRS task force seeking out tax shelter promotion. For unknowing clients, the tax consequences are enormous. For their accountant advisors, the liability may be equally extreme.
Recently, there has been an explosion in the marketing of a financial product called Captive Insurance. These so called “Captives” are typically small insurance companies designed to insure the risks of an individual business under IRS code section 831(b). When properly designed, a business can make tax-deductible premium payments to a related-party insurance company. Depending on circumstances, underwriting profits, if any, can be paid out to the owners as dividends, and profits from liquidation of the company may be taxed as capital gains.
While captives can be a great cost saving tool, they also are expensive to build and manage. Also, captives are allowed to garner tax benefits because they operate as real insurance companies. Advisors and business owners who misuse captives or market them as estate planning tools, asset protection vehicles, tax deferral or other benefits not related to the true business purpose of an insurance company face grave regulatory and tax consequences.
A recent concern is the integration of small captives with life insurance policies. Small captives under section 831(b) have no statutory authority to deduct life premiums. Also, if a small captive uses life insurance as an investment, the cash value of the life policy can be taxable at corporate rates, and then will be taxable again when distributed. The consequence of this double taxation is to devastate the efficacy of the life insurance, and it extends serious liability to any accountant who recommends the plan or even signs the tax return of the business that pays premiums to the captive.
Over the past decade business owners have been overwhelmed by a plethora of choices designed to reduce the cost of providing employee benefits while increasing their own retirement savings. The solutions ranged from traditional pension and profit sharing plans to more advanced strategies.
Some strategies, such as IRS section 419 and 412(i) plans, used life insurance as vehicles to bring about benefits. Unfortunately, the high life insurance commissions (often 90% of the contribution, or more) fostered an environment that led to aggressive and noncompliant plans.
The result has been thousands of audits and an IRS task force seeking out tax shelter promotion. For unknowing clients, the tax consequences are enormous. For their accountant advisors, the liability may be equally extreme.
Recently, there has been an explosion in the marketing of a financial product called Captive Insurance. These so called “Captives” are typically small insurance companies designed to insure the risks of an individual business under IRS code section 831(b). When properly designed, a business can make tax-deductible premium payments to a related-party insurance company. Depending on circumstances, underwriting profits, if any, can be paid out to the owners as dividends, and profits from liquidation of the company may be taxed as capital gains.
While captives can be a great cost saving tool, they also are expensive to build and manage. Also, captives are allowed to garner tax benefits because they operate as real insurance companies. Advisors and business owners who misuse captives or market them as estate planning tools, asset protection vehicles, tax deferral or other benefits not related to the true business purpose of an insurance company face grave regulatory and tax consequences.
A recent concern is the integration of small captives with life insurance policies. Small captives under section 831(b) have no statutory authority to deduct life premiums. Also, if a small captive uses life insurance as an investment, the cash value of the life policy can be taxable at corporate rates, and then will be taxable again when distributed. The consequence of this double taxation is to devastate the efficacy of the life insurance, and it extends serious liability to any accountant who recommends the plan or even signs the tax return of the business that pays premiums to the captive.
The IRS is aware that several large insurance companies are promoting their life insurance policies as investments with small captives. The outcome looks eerily like that of the 419 and 412(i) plans mentioned above.
Remember, if something looks too good to be true, it usually is. There are safe and conservative ways to use captive insurance structures to lower costs and obtain benefits for businesses. And, some types of captive insurance products do have statutory protection for deducting life insurance premiums (although not 831(b) captives). Learning what works and is safe is the first step an accountant should take in helping his or her clients use these powerful, but highly technical insurance tools.
Lance Wallach speaks and writes extensively about VEBAs, retirement plans, and tax reduction strategies. He speaks at more than 70 conventions annually, writes for 50 publications, and was the National Society of Accountants Speaker of the Year. Contact him at 516.938.5007 or visit www.vebaplan.com.
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.
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Regulatory framework
2. Entity Classification for Federal Tax Purposes
Sections 301.7701-1 through 301.7701-4 of the Procedure and Administration Regulations provide the framework for determining an organization’s entity classification for Federal tax purposes. Classification of an organization depends on whether the organization is treated as: (i) a separate entity under §301.7701-1, (ii) a “business entity” within the meaning of §301.7701-2(a) or a trust under §301.7701-4, and (iii) an “eligible entity” under §301.7701-3.
Section 301.7701-1(a)(1) provides that the determination of whether an entity is separate from its owners for Federal tax purposes is a matter of Federal tax law and does not depend on whether the organization is recognized as an entity under local law. Section 301.7701-1(a)(2) provides that a joint venture or other contractual arrangement may create a separate entity for Federal tax purposes if the participants carry on a trade, business, financial operation, or venture and divide the profits therefrom. However, a joint undertaking merely to share expenses does not create a separate entity for Federal tax purposes, nor does mere co-ownership of property where activities are limited to keeping property maintained, in repair, and rented or leased. Id.
Section 301.7701-1(b) provides that the tax classification of an organization recognized as a separate entity for tax purposes generally is determined under §§301.7701-2, 301.7701-3, and 301.7701-4. Thus, for example, an organization recognized as an entity that does not have associates or an objective to carry on a business may be classified as a trust under §301.7701-4.
Section 301.7701-2(a) provides that a business entity is any entity recognized for Federal tax purposes (including an entity with a single owner that may be disregarded as an entity separate from its owner under §301.7701-3) that is not properly classified as a trust or otherwise subject to special treatment under the Internal Revenue Code (Code). A business entity with two or more members is classified for Federal tax purposes as a corporation or a partnership. See §301.7701-2(a). A business entity with one owner is classified as a corporation or is disregarded. See §301.7701-2(a). If the entity is disregarded, its activities are treated in the same manner as a sole proprietorship, branch, or division of the owner. However, §301.7701-2(c)(2)(iv) and (v) provides for an otherwise disregarded entity to be treated as a corporation for certain Federal employment tax and excise tax purposes.
Section 301.7701-3(a) generally provides that an eligible entity, which is a business entity that is not a corporation under §301.7701-2(b), may elect its classification for Federal tax purposes.
The threshold question for determining the tax classification of a series of a series LLC or a cell of a cell company is whether an individual series or cell should be considered an entity for Federal tax purposes. The determination of whether an organization is an entity separate from its owners for Federal tax purposes is a matter of Federal tax law and does not depend on whether the organization is recognized as an entity under local law. Section 301.7701-1(a)(1). In Moline Properties, Inc. v. Commissioner, 319 U.S. 436 (1943), the Supreme Court noted that, so long as a corporation was formed for a purpose that is the equivalent of business activity or the corporation actually carries on a business, the corporation remains a taxable entity separate from its shareholders. Although entities that are recognized under local law generally are also recognized for Federal tax purposes, a state law entity may be disregarded if it lacks business purpose or any business activity other than tax avoidance. See Bertoli v. Commissioner, 103 T.C. 501 (1994); Aldon Homes, Inc. v. Commissioner, 33 T.C. 582 (1959).
The Supreme Court in Commissioner v. Culbertson, 337 U.S. 733 (1949), and Commissioner v. Tower, 327 U.S. 280 (1946), set forth the basic standard for determining whether a partnership will be respected for Federal tax purposes. In general, a partnership will be respected if, considering all the facts, the parties in good faith and acting with a business purpose intended to join together to conduct an enterprise and share in its profits and losses. This determination is made considering not only the stated intent of the parties, but also the terms of their agreement and their conduct. Madison Gas & Elec. Co. v. Commissioner, 633 F.2d 512, 514 (7th Cir. 1980); Luna v. Commissioner, 42 T.C. 1067, 1077-78 (1964).
Conversely, under certain circumstances, arrangements that are not recognized as entities under state law may be treated as separate entities for Federal tax purposes. Section 301.7701-1(a)(2). For example, courts have found entities for tax purposes in some co-ownership situations where the co-owners agree to restrict their ability to sell, lease or encumber their interests, waive their rights to partition property, or allow certain management decisions to be made other than by unanimous agreement among co-owners. Bergford v. Commissioner, 12 F.3d 166 (9th Cir. 1993); Bussing v. Commissioner, 89 T.C. 1050 (1987); Alhouse v. Commissioner, T.C. Memo. 1991-652. However, the Internal Revenue Service (IRS) has ruled that a co-ownership does not rise to the level of an entity for Federal tax purposes if the owner employs an agent whose activities are limited to collecting rents, paying property taxes, insurance premiums, repair and maintenance expenses, and providing tenants with customary services. Rev. Rul. 75-374, 1975-2 C.B. 261. See also Rev. Rul. 79-77, 1979-1 C.B. 448, (see §601.601(d)(2)(ii)(b).
Rev. Proc. 2002-22, 2002-1 C.B. 733, (see §601.601(d)(2)(ii)(b)), specifies the conditions under which the IRS will consider a request for a private letter ruling that an undivided fractional interest in rental real property is not an interest in a business entity under §301.7701-2(a). A number of factors must be present to obtain a ruling under the revenue procedure, including a limit on the number of co-owners, a requirement that the co-owners not treat the co-ownership as an entity (that is, that the co-ownership may not file a partnership or corporate tax return, conduct business under a common name, execute an agreement identifying any or all of the co-owners as partners, shareholders, or members of a business entity, or otherwise hold itself out as a partnership or other form of business entity), and a requirement that certain rights with respect to the property (including the power to make certain management decisions) must be retained by co-owners. The revenue procedure provides that an organization that is an entity for state law purposes may not be characterized as a co-ownership under the guidance in the revenue procedure.
The courts and the IRS have addressed the Federal tax classification of investment trusts with assets divided among a number of series. In National Securities Series-Industrial Stocks Series v. Commissioner, 13 T.C. 884 (1949), acq., 1950-1 C.B. 4, several series that differed only in the nature of their assets were created within a statutory open-end investment trust. Each series regularly issued certificates representing shares in the property held in trust and regularly redeemed the certificates solely from the assets and earnings of the individual series. The Tax Court stated that each series of the trust was taxable as a separate regulated investment company. See also Rev. Rul. 55-416, 1955-1 C.B. 416, (see §601.601(d)(2)(ii)(b)). But see Union Trusteed Funds v. Commissioner, 8 T.C. 1133 (1947), (series funds organized by a state law corporation could not be treated as if each fund were a separate corporation).
In 1986, Congress added section 851(g) to the Code. Section 851(g) contains a special rule for series funds and provides that, in the case of a regulated investment company (within the meaning of section 851(a)) with more than one fund, each fund generally is treated as a separate corporation. For these purposes, a fund is a segregated portfolio of assets the beneficial interests in which are owned by holders of interests in the regulated investment company that are preferred over other classes or series with respect to these assets.
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.
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Business Owners, Accountants, and Others Fined $200,000 by IRS and Don’t Know Why
NEW JERSEY ASSOCIATION OF PUBLIC ACCOUNTANTS
Lance Wallach
If you are a small business owner, accountant or insurance professional you may be in big trouble.
To Read More:
http://section79plan.org/article-006-WhyWasIFined.html
Lance Wallach
If you are a small business owner, accountant or insurance professional you may be in big trouble.
To Read More:
http://section79plan.org/article-006-WhyWasIFined.html
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IRS Hiring Agents in Abusive Transactions Group
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
Open Period: Monday, October 18, 2010 to Monday, November 01, 2010
Sub Agency: Internal Revenue Service
Job Announcement Number: 11PH1-SBB0058-0512-12/13
Who May Be Considered:
· IRS employees on Career or Career Conditional 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 and 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 8886 IMMEDIATELY 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.
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 gives expert witness testimony and his side has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxadvisorexperts.org or www.taxaudit419.com.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
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Accountants Business Owners and Others Face Large IRS Fines
June 17, 2011 By Lance Wallach, CLU, CHFC
Since the late nineties, unsuspecting business owners and professionals have purchased retirement plans and other plans from insurance professionals. The IRS has organized task forces to go after the abusive plans.
Since the late nineties, unsuspecting business owners and professionals have purchased retirement plans and other plans from insurance professionals. The IRS has organized task forces to go after the abusive plans. In the past, a business owner who was audited with an abusive plan would lose his tax deduction and pay interest and penalties. Now, there is also IRS code 6707A whereby in addition to the above, the IRS assesses additional huge fines on both the purchaser and material advisors for not reporting on themselves.
Accountants, insurance agents, and others sell 419 Welfare Benefit, 419, captive insurance, and section 79 plans to unsuspecting professionals and business owners. Since the IRS is calling many of these plans abusive tax shelters, many small business owners are getting audited and getting penalties under IRC 6707A. The IRS has even fined material advisors and accountants for their participation. The former business owner clients then sue the people who sold them these plans. The accountant who signed the tax return also is subject to lawsuits. I have been an expert witness in some of these cases and my side has never lost. For the accountant, this is an unbelievable situation. First he signed the tax return and did not know that anything was wrong. Then he sometimes tries to help his client with the 8886 forms, but since he has no experience with the form, he will make mistakes. The IRS treats these improperly filed and/or filled out forms as if they were never filed. My office occasionally gets a phone call from the accountant. When I try to explain the problem, the accountant usually does not believe it. Why would a legitimate insurance company that vetted the plan allow something abusive to be sold? Why hasn’t the accountant heard about these types of problems? Usually a few years following the initial phone call, the accountant or his client calls me with the big problem. The clients loses his tax deduction, pays interest and penalties, and is facing a large fine for failing to properly file form 8886. Sometimes the accountant is also facing a $100,000 fines as a material advisor. The IRS calls accountants material advisors if they get paid, give tax advice, or sign tax returns with abusive or similar plans on them. The accountant can also be referred to the office of professional responsibility.
Insurance companies through insurance agents and others sell 412i, 419, captive insurance and section 79 plans to unsuspecting business owners. The IRS considers many of these plans to be abusive tax shelters, listed transactions, reportable transactions, or what it calls “similar to,” which allows them to target the plan. Many of the business owners then get audited by the IRS, lose their deductions, and pay interest and penalties. Then comes the bad news. The IRS comes back and fines the business owners a large amount of money for not properly filing under IRC 6707A. They have even fined hundreds of business owners who have filed, claiming that they prepared the forms incorrectly, filed improperly, or lied to the IRS.
As I write this article, the situation becomes worse for the participants. Taxpayers must report certain transactions to the IRS under Section 6707A of the Tax Code which was enacted in 2004, to help detect, deter, and shut down abusive tax shelter activities. For example, reportable transactions may include being in a 419,412i, or other insurance plan sold by insurance agents for tax deduction purposes. Other abusive transactions could include captive insurance and section 79 plans, which are usually sold by insurance agents for tax deductions. Taxpayers must disclose their participation in these and other transactions by filing a Reportable Transactions Disclosure Statement (Form 8886) with their income tax returns. People who sell these plans are called material advisors and must also file 8918 forms properly. Failure to report the transactions could result in very large penalties. Accountants who sign tax returns that have these deductions can also be called material advisors and should also file forms 8918 properly.
The IRS has fined hundreds of taxpayers who did file under 6707A, alleging that they did not fill out the forms properly or did not file correctly. The plan administrator of a 412i advised over 200 of his clients on how to file. The clients were then all fined by the IRS for filling out the forms incorrectly. The fines averaged about $500,000 per taxpayer.
A report by the Treasury Inspector General for Tax Administration (TIGTA) found that the procedures for documenting and assessing the Section 6707A penalty were neither sufficient nor formalized, and cases often are not fully developed. TIGTA evaluated the IRS’s effectiveness in identifying, developing, and applying the Section 6707A penalty. Based on its review of 114 assessed Section 6707A penalties, TIGTA determined that many of these files were incomplete or did not contain sufficient audit evidence. TIGTA also found a need for better coordination between the IRS’s Office of Tax Shelter Analysis and other functions.
“As penalties are meant to encourage voluntary taxpayer compliance, it is important that IRS procedures for documenting and assessing them be well developed and fully documented,” said TIGTA Inspector General J. Russell George in a statement. “Any failure to do so raises the risk that taxpayers will not receive consistent and fair treatment under the law, and could further reduce their willingness to comply voluntarily.” The Section 6707A penalty is a stand-alone penalty and does not require an associated income tax examination. Therefore, it applies regardless of whether the reportable transaction results in an understatement of tax. TIGTA determined that in most cases, the Section 6707A penalty was substantially higher than additional tax assessments that taxpayers received from the audit of underlying tax returns. I have had phone calls from taxpayers that contributed less than $100,000 to a listed transaction and were fined over $500,000. I have had phone calls from taxpayers that went into 419 or 412i plans but made no contributions and were fined a large amount of money for being in a listed transaction and not properly filing forms under IRC section 6707A. The IRS claims that the fines are non appealable.
On July 7, 2009, at the request of Congress, the IRS agreed to suspend collection enforcement actions. However, this did not preclude the issuance of notices of assessment that are required by law or adjustment notices that inform the taxpayer of any account activity. In addition, taxpayers continued to receive balance due, final notices of intent to levy, and demands to pay Section 6707A penalties.
TIGTA recommended that the IRS fully develop, document, and properly process Section 6707A penalties. The IRS agreed with TIGTA’s recommendation and plans to take appropriate corrective actions. I think as a result of this many taxpayers who have not yet been fined will shortly receive the fines. Unless a taxpayer files properly, there is no statute of limitations. The IRS has and will continue to go back many years and fine people that are in listed, reportable, or substantially similar to transactions.
If you are, or were in a 412i, 419, captive insurance or section 79 plans you should immediately file under 6707A protectively. If you have already filed you should find an expert to review the forms. I only know of two people who know how to properly file. The instructions provided by the IRS are vague. If a taxpayer files incorrectly or fills out the forms incorrectly, he still gets the fine. I have had hundreds of phone calls from people in that situation.
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.
ABOUT THE AUTHOR: Lance Wallach
Lance Wallach, captive insurance and Section 79 plan expert, is the nation's leading authority on resolving IRS tax problems for individuals and businesses.
Mr. Wallach, National Society of Accountants' Speaker of the Year, is a member of the AICPA faculty of teaching professionals and he is a renowned national expert witness in many 419, 412i, and financial abuse cases. To date his side has never lost a case.
Mr. Wallach is often a featured speaker at national conventions for CPAs, attorneys, and business owners and other entrepreneurs, and has over 30 years experience helping people get the most possible money back from the IRS.
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.
Accountants, insurance agents, and others sell 419 Welfare Benefit, 419, captive insurance, and section 79 plans to unsuspecting professionals and business owners. Since the IRS is calling many of these plans abusive tax shelters, many small business owners are getting audited and getting penalties under IRC 6707A. The IRS has even fined material advisors and accountants for their participation. The former business owner clients then sue the people who sold them these plans. The accountant who signed the tax return also is subject to lawsuits. I have been an expert witness in some of these cases and my side has never lost. For the accountant, this is an unbelievable situation. First he signed the tax return and did not know that anything was wrong. Then he sometimes tries to help his client with the 8886 forms, but since he has no experience with the form, he will make mistakes. The IRS treats these improperly filed and/or filled out forms as if they were never filed. My office occasionally gets a phone call from the accountant. When I try to explain the problem, the accountant usually does not believe it. Why would a legitimate insurance company that vetted the plan allow something abusive to be sold? Why hasn’t the accountant heard about these types of problems? Usually a few years following the initial phone call, the accountant or his client calls me with the big problem. The clients loses his tax deduction, pays interest and penalties, and is facing a large fine for failing to properly file form 8886. Sometimes the accountant is also facing a $100,000 fines as a material advisor. The IRS calls accountants material advisors if they get paid, give tax advice, or sign tax returns with abusive or similar plans on them. The accountant can also be referred to the office of professional responsibility.
Insurance companies through insurance agents and others sell 412i, 419, captive insurance and section 79 plans to unsuspecting business owners. The IRS considers many of these plans to be abusive tax shelters, listed transactions, reportable transactions, or what it calls “similar to,” which allows them to target the plan. Many of the business owners then get audited by the IRS, lose their deductions, and pay interest and penalties. Then comes the bad news. The IRS comes back and fines the business owners a large amount of money for not properly filing under IRC 6707A. They have even fined hundreds of business owners who have filed, claiming that they prepared the forms incorrectly, filed improperly, or lied to the IRS.
As I write this article, the situation becomes worse for the participants. Taxpayers must report certain transactions to the IRS under Section 6707A of the Tax Code which was enacted in 2004, to help detect, deter, and shut down abusive tax shelter activities. For example, reportable transactions may include being in a 419,412i, or other insurance plan sold by insurance agents for tax deduction purposes. Other abusive transactions could include captive insurance and section 79 plans, which are usually sold by insurance agents for tax deductions. Taxpayers must disclose their participation in these and other transactions by filing a Reportable Transactions Disclosure Statement (Form 8886) with their income tax returns. People who sell these plans are called material advisors and must also file 8918 forms properly. Failure to report the transactions could result in very large penalties. Accountants who sign tax returns that have these deductions can also be called material advisors and should also file forms 8918 properly.
The IRS has fined hundreds of taxpayers who did file under 6707A, alleging that they did not fill out the forms properly or did not file correctly. The plan administrator of a 412i advised over 200 of his clients on how to file. The clients were then all fined by the IRS for filling out the forms incorrectly. The fines averaged about $500,000 per taxpayer.
A report by the Treasury Inspector General for Tax Administration (TIGTA) found that the procedures for documenting and assessing the Section 6707A penalty were neither sufficient nor formalized, and cases often are not fully developed. TIGTA evaluated the IRS’s effectiveness in identifying, developing, and applying the Section 6707A penalty. Based on its review of 114 assessed Section 6707A penalties, TIGTA determined that many of these files were incomplete or did not contain sufficient audit evidence. TIGTA also found a need for better coordination between the IRS’s Office of Tax Shelter Analysis and other functions.
“As penalties are meant to encourage voluntary taxpayer compliance, it is important that IRS procedures for documenting and assessing them be well developed and fully documented,” said TIGTA Inspector General J. Russell George in a statement. “Any failure to do so raises the risk that taxpayers will not receive consistent and fair treatment under the law, and could further reduce their willingness to comply voluntarily.” The Section 6707A penalty is a stand-alone penalty and does not require an associated income tax examination. Therefore, it applies regardless of whether the reportable transaction results in an understatement of tax. TIGTA determined that in most cases, the Section 6707A penalty was substantially higher than additional tax assessments that taxpayers received from the audit of underlying tax returns. I have had phone calls from taxpayers that contributed less than $100,000 to a listed transaction and were fined over $500,000. I have had phone calls from taxpayers that went into 419 or 412i plans but made no contributions and were fined a large amount of money for being in a listed transaction and not properly filing forms under IRC section 6707A. The IRS claims that the fines are non appealable.
On July 7, 2009, at the request of Congress, the IRS agreed to suspend collection enforcement actions. However, this did not preclude the issuance of notices of assessment that are required by law or adjustment notices that inform the taxpayer of any account activity. In addition, taxpayers continued to receive balance due, final notices of intent to levy, and demands to pay Section 6707A penalties.
TIGTA recommended that the IRS fully develop, document, and properly process Section 6707A penalties. The IRS agreed with TIGTA’s recommendation and plans to take appropriate corrective actions. I think as a result of this many taxpayers who have not yet been fined will shortly receive the fines. Unless a taxpayer files properly, there is no statute of limitations. The IRS has and will continue to go back many years and fine people that are in listed, reportable, or substantially similar to transactions.
If you are, or were in a 412i, 419, captive insurance or section 79 plans you should immediately file under 6707A protectively. If you have already filed you should find an expert to review the forms. I only know of two people who know how to properly file. The instructions provided by the IRS are vague. If a taxpayer files incorrectly or fills out the forms incorrectly, he still gets the fine. I have had hundreds of phone calls from people in that situation.
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.
ABOUT THE AUTHOR: Lance Wallach
Lance Wallach, captive insurance and Section 79 plan expert, is the nation's leading authority on resolving IRS tax problems for individuals and businesses.
Mr. Wallach, National Society of Accountants' Speaker of the Year, is a member of the AICPA faculty of teaching professionals and he is a renowned national expert witness in many 419, 412i, and financial abuse cases. To date his side has never lost a case.
Mr. Wallach is often a featured speaker at national conventions for CPAs, attorneys, and business owners and other entrepreneurs, and has over 30 years experience helping people get the most possible money back from the IRS.
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.
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On Lawline regarding Abusive Retirement Plans 412i
Lance Wallach featured on Lawline speaking about Abusive Retirement Plans 412i, IRS 6706A Fines and Abusive Insurance product. Here is the story about Bruce Hink purchasing a definet Benefit Retirement Plan & Abusive Tax Shelter from a Insurance Agent and well established Insurance Company. What's the problem??
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Employee Retirement Article
Lance Wallach
The IRS has been attacking All 419 welfare benefit plan.
To Read More:
http://www.section79plan.org/files/EmployeeRetirementArticlePDF.pdf
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Backlash on too-good-to-be-true insurance plan
No Shelter Here September 2011
By: Lance Wallach
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.
Seems Attractive
The plans are costly up-front, but your money builds over time, and there’s a large payout if the money is removed before death. While many business owners have retirement plans, they also must care for their employees. With one of these plans, business owners are not required to give their workers anything.Gotcha
Although small business has taken a recessionary hit and owners may not be spending big sums on insurance now, an IRS task force is auditing people who bought these as early as 2004. There is no statute of limitations.The IRS also requires participants to file Form 8886 informing the IRS of participation in this “abusive transaction.” Failure to file or to file incorrectly will cost the business owner interest and penalties. Plus, you’ll pay back whatever you claimed for a deduction, and there are additional fines — possibly 70% of the tax benefit you claim in a year. And, if your accountant does not confidentially inform on you, he or she will get fined $100,000 by the IRS. Further, the IRS can freeze assets if you don’t pay and can fine you on a corporate and a personal level despite the type of business entity you have.
Legal Wrangling
Currently, small businesses facing audits and potentially huge tax penalties over these plans are filing lawsuits against those who marketed, designed, and sold the plans. Find out promptly if you have one of these plans and seek advice from a knowledgeable accountant to help you properly file Form 8886.—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. www.taxaudit419.com,www.vebaplan.org, and www.section79plan.org
This article is for informational purposes only and should not be construed as specific legal or financial advice.
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LIFE INSURANCE FUNDAMENTALS IN APPLICATION
CPA’s Guide to Life Insurance
Lance Wallach
1.2.0 Why Get Life Insurance?
1.2.1 Risk Management
Simply put, insurance is risk management—preparing for either the eventual or the unfortunate. Risk management is one of the more difficult compo-nets of the financial planning activity as it addresses the unknown, the intangible, and the unexpected—that which everyone expects will not happen. It is essential for the practitioner to guide the client in the ramifications of loss due to poor risk management. In most cases, the client will have made a much better attempt at risk management from a property and casualty component than that of their most valuable asset: themselves. Bear in mind that car insurance in many states is legally mandated, while other forms of insurance are optional. For many, it is easier to visualize a crushed fender or fire in the house than it is to accept the possibility of illness, disability, or death. Risk management is the first foundation to a well-constructed financial plan.
1.2.2 Role of Life Insurance in Retirement Planning
There are a number of reasons why life insurance can play an important role in the retirement planning process. First and foremost, the ability to provide immediate cash as a death benefit to the surviving family members brings CPA’s Guide to Life Insurance1-4
Peace of mind and financial stability during the period of asset accumulation. In addition, a cash value style of policy can assist in the asset accumulation objective. This can effectively offset the net cost of risk management over the period of years before and after retirement.
1.2.3 Benefits
Life insurance is unique in that it has congressional backing for benefits not available in any other financial product. Also, certain life insurance policies that are properly designed can offer a tax-free stream of income as a retirement supplement. This income stream is not taken into account for the purpose of qualifying the tax liability associated with Social Security benefits.
1.2.4 Purposes
Life insurance can be used for a variety of purposes:
.1 Create wealth—to protect and provide for spouse, children, or others who may be dependent on the insured.
.2 Preserve wealth—to provide immediate liquidity for the purpose of paying final expenses, estate taxes, and existing debt, so that accumulated assets can be retained for the benefit of heirs.
.3 Transfer wealth—to provide for charitable gifts in supporting organizations or a cause that was important to the insured.
.4 Estate taxes—properly structured, insurance can be removed from the decedent’s estate and used for liquidity or estate equalization.
.5 Immediate liquidity—certain policies, properly structured, can be used as a “bank account.”
.6 Tax-deferred asset accumulation—to fund or supplement college educational funding, collateral to start a business, purchase a vacation home, or provide for retirement.
1.3.0 Determination of Need
1.3.1 Areas of Need
There are three principal areas in which to calculate need.
.1 Income replacement and family capital Life Insurance Fundamentals in Application 1-5
.2 Business insurance needs
.3 Estate preservation and liquidity needs
1.3.2 Statistics
Most American adults are underinsured. Studies show that only about 43 percent own any individual life insurance outside of group coverage. Those who do own individual life insurance have only an average of $45,000 of coverage.
1.3.3 Techniques
.1 The practitioner may apply diverse techniques to determine the life insurance needs of a family. Any method of determining a family’s insurance needs will be an estimate since future circumstances may change in unexpected ways and basic assumptions about earnings, interest rates, inflation, and other associated factors may prove incorrect. Life insurance planning is best conducted with a comprehensive study of the client’s financial needs and concerns.
.2 The simplest methods to understand, although the least reliable, are the various rules of thumb that are frequently used to estimate either the amount of insurance that is needed, or the amount of expense to be allocated toward insurance premiums.
Life insurance is the only vehicle that can provide immediate cash to replace the loss of income that occurs when a wage earner dies. By replacing years of lost income, life insurance can assure the family that economic stability will prevail and that their lifestyle can be continued. Life insurance can also assure the completion of stated goals, such as the monies needed for college education, payment of mortgage, and retirement of a spouse.
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.
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