IRS Makes Taxpayers Aware of Many Scams That Will Get Them in Trouble

 Published in RetirementSociety.com | January 19

By Lance Wallach

“Taxpayers should be wary of scams to avoid paying taxes that seem too good to be true, especially during these challenging economic times,” IRS Commissioner Doug Shulman said. “There is no secret trick that can eliminate a person’s tax obligations. People should be wary of anyone peddling any of these scams.”
Tax schemes are illegal and can lead to problems for both scam artists and taxpayers who risk significant penalties, interest and possible criminal prosecution.
The IRS urges taxpayers to avoid these common schemes.
The IRS continues to uncover abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). The IRS is looking for transactions that taxpayers are using to avoid the limitations on contributions to IRAs as well as transactions that are not properly reported as early distributions. Taxpayers should be wary of advisers who encourage them to shift appreciated assets into IRAs or companies owned by their IRAs at less than fair market value to circumvent annual contribution limits. Other variations have included the use of limited liability companies to engage in activity that is considered prohibited.
If they have cash value life insurance in them they are abusive. Some of the plans like Nova, run by Benistar can also be criminal. For more on 419 plans visit www.taxaudit419.com
412i Plans
Such plans can be abusive with cash value life insurance. For more information visit www.taxlibrary.com or www.experttaxadvisors.org.
Captive Insurance Plans
These were listed transactions and then taken off the list. IRS still looks closely at them. They are usually sold by life insurance agents.
Section 79 plans
 IRS is looking very closely at section 79 plans. They are usually sold by life insurance agents.
Hiding Income Offshore
The IRS aggressively pursues taxpayers and promoters involved in abusive offshore transactions. Taxpayers have tried to avoid or evade U.S. income tax by hiding income in offshore banks, brokerage accounts or through other entities. Recently, the IRS provided guidance to auditors on how to deal with those hiding income offshore in undisclosed accounts. The IRS draws a clear line between taxpayers with offshore accounts who voluntarily come forward and those who fail to come forward.
Taxpayers also evade taxes by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or life insurance plans. The IRS has also identified abusive offshore schemes including those that involve use of electronic funds transfer and payment systems, offshore business merchant accounts and private banking relationships.
Filing False or Misleading Forms
The IRS is seeing scam artists file false or misleading returns to claim refunds that they are not entitled to. Frivolous information returns, such as Form 1099-Original Issue Discount (OID), claiming false withholding credits are used to legitimize erroneous refund claims. The new scam has evolved from an earlier phony argument that a “strawman” bank account has been created for each citizen. Under this scheme, taxpayers fabricate an information return, arguing they used their “strawman” account to pay for goods and services and falsely claim the corresponding amount as withholding as a way to seek a tax refund.
Abuse of Charitable Organizations and Deductions
The IRS continues to observe the misuse of tax-exempt organizations. Abuse includes arrangements to improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or income from donated property. The IRS also continues to investigate various schemes involving the donation of non-cash assets, including easements on property, closely held corporate stock and real property. Often, the donations are highly overvalued or the organization receiving the donation promises that the donor can purchase the items back at a later date at a price the donor sets. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and new definitions of qualified appraisals and qualified appraisers for taxpayers claiming charitable contributions.

Return Preparer Fraud
Dishonest return preparers can cause many headaches for taxpayers who fall victim to their ploys. Such preparers derive financial gain by skimming a portion of their clients’ refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds. Taxpayers should choose carefully when hiring a tax preparer. As the saying goes, if it sounds too good to be true, it probably is. No matter who prepares the return, the taxpayer is ultimately responsible for its accuracy. Since 2002, the courts have issued injunctions ordering dozens of individuals to cease preparing returns, and the Department of Justice has filed complaints against dozens of others, which are pending in court.
Frivolous Arguments
Promoters of frivolous schemes encourage people to make unreasonable and unfounded claims to avoid paying the taxes they owe. The IRS has a list of frivolous legal positions that taxpayers should stay away from. Taxpayers who file a tax return or make a submission based on one of the positions on the list are subject to a $5,000 penalty. More information is available on IRS.gov.
False Claims for Refund and Requests for Abatement
This scam involves a request for abatement of previously assessed tax using Form 843 Claim for Refund and Request for Abatement. Many individuals who try this have not previously filed tax returns. The tax they are trying to have abated has been assessed by the IRS through the Substitute for Return Program. The filer uses Form 843 to list reasons for the request. Often, one of the reasons given is “Failed to properly compute and/or calculate Section 83-Property Transferred in Connection with Performance of Service.”
Disguised Corporate Ownership
Some taxpayers form corporations and other entities in certain states for the primary purpose of disguising the ownership of a business or financial activity. Such entities can be used to facilitate underreporting of income, fictitious deductions, non-filing of tax returns, participating in listed transactions, money laundering, financial crimes, and even terrorist financing. The IRS is working with state authorities to identify these entities and to bring the owners of these entities into compliance.
Zero Wages
Filing a phony wage- or income-related information return to replace a legitimate information return has been used as an illegal method to lower the amount of taxes owed. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer also may submit a statement rebutting wages and taxes reported by a payer to the IRS. Sometimes fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any of the variations of this scheme.
Misuse of Trusts
For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are many legitimate, valid uses of trusts in tax and estate planning, some promoted transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the promised tax benefits and are being used primarily as a means to avoid income tax liability and hide assets from creditors, including the IRS.
The IRS has recently seen an increase in the improper use of private annuity trusts and foreign trusts to divert income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering into a trust arrangement.
Fuel Tax Credit Scams
The IRS is receiving claims for the fuel tax credit that are unreasonable. Some taxpayers, such as farmers who use fuel for off-highway business purposes, may be eligible for the fuel tax credit. But some individuals are claiming the tax credit for nontaxable uses of fuel when their occupation or income level makes the claim unreasonable. Fraud involving the fuel tax credit is considered a frivolous tax claim, potentially subjecting those who improperly claim the credit to a $5,000 penalty.
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 Pubic Radio's All Things Considered, and others. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education's CPA's Guide to Life Insurance and Federal Estate and Gift Taxation, as well as 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.

Lance Wallach
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.


Will Your Municipal Bond or Your Life Insurance Company Still Have Value Next Year?

Commerical Flooring Report April 2009
Will Your Municipal Bond or Your Life Insurance Company Still Have Value Next Year?

By Lance Wallach

Investor protection with municipal bonds is so spotty that there is potential for much mischief.

Disclosure, that bedrock of fair securities markets, is the heart of the problem facing municipal investors. Municipal issuers often don’t file the most basic reports outlining their operating results or material changes in their financial conditions.

Even though hospitals, cities and states that borrow money are required by their bond covenants to make such filings, nondisclosure among the nearly 60,000 issuers is common.

With the S.E.C. largely on the sidelines, disclosure enforcement in the municipal market is left to participants. Do you think they really want to police themselves very closely? That leaves individuals who trade the securities, the investors, and the dealers, to monitor the disclosure information. There is almost no penalty for not complying with those requirements. This is another disaster waiting to happen. If you own municipal bonds, you had better be careful. You may want to investigate www.financeexperts.org and select someone that knows what they are doing to assist you.

How about another problem that nobody is thinking about? Do you have a life insurance or annuity policy? If so, you may be in trouble.

The plummeting financial markets are dragging down the life insurance industry, which is an important component of the U.S. economy. Continuously escalating losses weaken the companies’ capital and eat away at investor confidence.

More than a dozen life insurers have been awaiting action on applications for aid from the government’s $700 billion Troubled Asset Relief Program, and the industry is expecting an answer to its request for a bank-style bailout in the upcoming weeks. So far, the government hasn’t stated whether or not insurers qualify for the program.

Life insurers have undoubtedly been taking a beating in recent weeks. The Dow Jones Wilshire U.S. Life Insurance Index has fallen 82% since its May 2007 all time high. The Dow Jones Industrial Average has lost 21% this year to date, and it’s only March.

Among several of the hardest-hit companies are century-old names that insure the lives of millions of Americans. Shares of Hartford Financial Services Group Inc. are down 93% as of the close on Wednesday, March 11, 2009 from their 2008 high. MetLife Inc. and Prudential Financial Inc. are both suffering as the value of their vast investment portfolios declines.

As the economy weakens, analysts say many insurers face losses that can eat away at the capital cushions regulators require them to maintain.

In addition, experts say the industry is going through its most chaotic period in recent history and that it’s a pretty scary situation right now.

Ratings agencies and stock investors are beginning to grow concerned about how long the industry can avoid reckoning with the distressed assets on their books. Rating agencies Moody’s Investors Service, Standard & Poor’s and A.M. Best have cut the ratings of more than a dozen insurers in recent weeks.

The consequences of a weakened life-insurance industry for the overall economy are significant because life insurers are among the biggest holders of the nation’s corporate debt.
For example, if life insurers stop buying bonds, the capital markets may not fully recover. Their buying activity has already declined.

Any sign of susceptibility among life insurers could further erode confidence and make nervous consumers hesitant to buy insurance products.

Wall Street analysts say another problem for some life insurers is obligations for variable annuities, a retirement-income product that often guarantees minimum withdrawals or investment returns. As stock markets plunge to new lows, life insurers need to set aside additional funds to show regulators that they can meet their obligations, further crimping sparse capital.

As of this writing, the Treasury Department hasn’t said whether life insurers will be eligible for TARP funds.

One stumbling block is that the industry is overseen by state regulators, not a single federal agency. That means there’s no group of federal officials responsible for it or with a deep understanding of its challenges.

Life insurers’ woes have come largely from investment grade corporate bonds, commercial real estate and mortgages, regulatory filings show. Many insurers ended 2008 with high levels of losses that, due to accounting rules, they haven’t had to record on their bottom lines.

Hartford Financial had $14.6 billion in unrealized losses at year’s end. In addition, Hartford Insurance, through its agents, sold life insurance policies that were part of a welfare benefit plan popularly known as Niche Marketing, which has long been under IRS attack and is almost certainly regarded by the Service as an abusive tax shelter and/or listed transaction. Prudential, the second-largest insurer by assets, had nearly $11.3 billion in unrealized losses, up $5.4 billion in the fourth quarter from the previous quarter.

For additional advice and articles on this specific subject, you may want to look at www.IRS.gov, www.taxlibrary.us and www.financeexperts.org. You better review your policy and keep track of what is going on.

Lance Wallach, the National Society of Accountants Speaker of the Year, speaks and writes extensively about retirement plans, Circular 230 problems and tax reduction strategies. He speaks at more than 40 conventions annually, writes for over 50 publications, is quoted regularly in the press, and has written numerous best-selling AICPA books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Business Hot Spots. 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.

IRS Offshore voluntary disclosure program reopens.

Offshore International Today                                        

IRS Offshore Voluntary Disclosure Program Reopens




Today, the Internal Revenue Service reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes.  Additionally, the IRS revealed the collection of more than $4.4 billion so far from the two previous international programs.

The Offshore Voluntary Disclosure Program (OVDP) was reopened following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion.  This program will remain open indefinitely until otherwise announced.

Lance Wallach and his associates have received thousands of phone calls from concerned clients with questions about the prior programs. Some of Lance’s associates are still very busy helping people with the last program. Not a single person has been audited and most are pleased with the results and are now able to sleep easily without worrying about the IRS.  According to Lance, it requires years of experience to obtain a good result from the program.
He suggests using a CPA-certified, ex-IRS agent with lots of international tax experience. While this is not a requirement to file under the program, Lance has heard many horror stories from people who have tried to file by themselves or who have used inexperienced accountants.

“Our focus on offshore tax evasion continues to produce strong, substantial results for the nation’s taxpayers,” said IRS Commissioner Doug Shulman. “We have billions of dollars in hand from our previous efforts, and we have more people wanting to come in and get right with the government. This new program makes good sense for taxpayers still hiding assets overseas and for the nation’s tax system.”

The new program is similar to the 2011 program in many ways, but it has a few key differences. Unlike last year, there is no set deadline for people to apply.  However, the terms of the program could change at any time going forward.  For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers – or decide to end the program entirely at any point.

“As we've said all along, people need to come in and get right with us before we find you,” Shulman said. “We are following more leads and the risk for people who do not come in continues to increase.”

The third offshore effort accompanies another announcement that Shulman made today, that the IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program.  That figure reflects closures of about 95 percent of the cases from the 2009 program. On top of that, the IRS has collected an additional $1 billion from up front payments required under the 2011 program.  That number will grow as the IRS processes the 2011 cases.

In all, the IRS has seen 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. Since the 2011 program closed last September, hundreds of taxpayers have come forward to make voluntary disclosures.  Those who come in after the closing of the 2011 program will be able to be treated under the provisions of the new OVDP program.

The overall penalty structure for the new program is the same for 2011, except for taxpayers in the highest penalty category.

The new program’s penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or the value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011.

Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.

Participants face a 27.5 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty. Smaller offshore accounts will face a 12.5 percent penalty. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the new OVDP will qualify for this lower rate. As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.

The IRS recognizes that its success in offshore enforcement and in the disclosure programs has raised awareness related to tax filing obligations.  This includes awareness by dual citizens and others who may be delinquent in filing, but owe no U.S. tax. 

Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, abusive tax shelters, financial, international tax, and estate planning.  He writes about 412(i), 419, Section79, FBAR, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Pubic Radio’s All Things Considered, and others. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education’s CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation, as well as the AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxadvisorexpert.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.

Business Valuations: Business Valuations

Business Valuations: Business Valuations: Business Valuations By Lance Wallach      Business owners may face a number of issues when confronted with the death, disabil...

Abusive Insurance, Welfare Benefit, and Retirement Plans

The IRS has various task forces auditing all section 419, section 412(i), and other
plans that tend to be abusive. These plans are sold by most insurance agents. The IRS
is looking to raise money and is not looking to correct plans or help taxpayers. The
fines for being in a listed, abusive, or similar transaction are up to $200,000 per year
(section 6707A), unless you report on yourself. The IRS calls accountants, attorneys,
and insurance agents "material advisors" and also fines them the same amount, again
unless the client's participation in the transaction is reported. An accountant is a material
advisor if he signs the return or gives advice and gets paid. More details can be found on
http://www.irs.gov and http://www.vebaplan.com.

Bruce Hink, who has given me written permission to use his name and circumstances,
is a perfect example of what the IRS is doing to unsuspecting business owners. What
follows is a story about how the IRS fines him $200,000 a year for being in what they
called a listed transaction. Listed transactions can be found at http://www.irs.gov. Also
involved are what the IRS calls abusive plans or what it refers to as substantially similar.
Substantially similar to is very difficult to understand, but the IRS seems to be saying, "If
it looks like some other listed transaction, the fines apply." Also, I believe that the
accountant who signed the tax return and the insurance agent who sold the retirement
plan will each be fined $200,000 as material advisors. We have received many calls
for help from accountants, attorneys, business owners, and insurance agents in similar
situations. Don't think this will happen to you? It is happening to a lot of accountants
and business owners, because most of theses so-called listed, abusive, or substantially
similar plans are being sold by insurance agents.

Recently I came across the case of Hink, a small business owner who is facing $400,000
in IRS penalties for 2004 and 2005 because of his participation in a section 412(i) plan.
(The penalties were assessed under section 6707A.)

In 2002 an insurance agent representing a 100-year-old, well established insurance
company suggested the owner start a pension plan. The owner was given a portfolio of
information from the insurance company, which was given to the company's outside CPA
to review and give an opinion on. The CPA gave the plan the green light and the plan

was started.

Contributions were made in 2003. The plan administrator came out with amendments to
the plan, based on new IRS guidelines, in October 2004.

The business owner's insurance agent disappeared in May 2005, before implementing the
new guidelines from the administrator with the insurance company. The business owner
was left with a refund check from the insurance company, a deduction claim on his 2004
tax return that had not been applied, and no agent.

It took six months of making calls to the insurance company to get a new insurance agent
assigned. By then, the IRS had started an examination of the pension plan. Asking
advice from the CPA and a local attorney (who had no previous experience in these
cases) made matters worse, with a "big name" law firm being recommended and over
$30,000 in additional legal fees being billed in three months.

To make a long story short, the audit stretched on for over 2 ½ years to examine a 2-
year-old pension with four participants and the $178,000 in contributions. During the
audit, no funds went to the insurance company, which was awaiting formal IRS approval
on restructuring the plan as a traditional defined benefit plan, which the administrator
had suggested and the IRS had indicated would be acceptable. The $90,000 in 2005
contributions was put into the company's retirement bank account along with the 2004
contributions.

In March 2008 the business owner received a private e-mail apology from the IRS agent
who headed the examination, saying that her hands were tied and that she used to believe
she was correcting problems and helping taxpayers and not hurting people.

The IRS denied any appeal and ruled in October 2008 the $400,000 penalty would stand.
The IRS fine for being in a listed, abusive, or similar transaction is $200,000 per year for
corporations or $100,000 per year for unincorporated entities. The material advisor fine
is $200,000 if you are incorporated or $100,000 if you are not.

Could you or one of your clients be next?

To this point, I have focused, generally, on the horrors of running afoul of the IRS by
participating in a listed transaction, which includes various types of transactions and the
various fines that can be imposed on business owners and their advisors who participate
in, sell, or advice on these transactions. I happened to use, as an example, someone
in a section 412(i) plan, which was deemed to be a listed transaction, pointing out the

truly doleful consequences the person has suffered. Others who fall into this trap, even
unwittingly, can suffer the same fate.

Now let's go into more detail about section 412(i) plans. This is important because these
defined benefit plans are popular and because few people think of retirement plans as
tax shelters or listed transactions. People therefore may get into serious trouble in this
area unwittingly, out of ignorance of the law, and, for the same reason, many fail to take
necessary and appropriate precautions.

The IRS has warned against the section 412(i) defined benefit pension plans, named for
the former code section governing them. It warned against trust arrangements it deems
abusive, some of which may be regarded as listed transactions. Falling into that category
can result in taxpayers having to disclose the participation under pain of penalties,
potentially reaching $100,000 for individuals and $200,000 for other taxpayers. Targets
also include some retirement plans.

One reason for the harsh treatment of some 412(i) plans is their discrimination in favor
of owners and key, highly compensated employees. Also, the IRS does not consider
the promised tax relief proportionate to the economic realities of the transactions. In
general, IRS auditors divide audited plan into those they consider noncompliant and other
they consider abusive. While the alternatives available to the sponsor of noncompliant
plan are problematic, it is frequently an option to keep the plan alive in some form while
simultaneously hoping to minimize the financial fallout from penalties.

The sponsor of an abusive plan can expect to be treated more harshly than participants.
Although in some situation something can be salvaged, the possibility is definitely on
the table of having to treat the plan as if it never existed, which of course triggers the full
extent of back taxes, penalties, and interest on all contributions that were made – not to
mention leaving behind no retirement plan whatsoever.

Another plan the IRS is auditing is the section 419 plan. A few listed transactions
concern relatively common employee benefit plans the IRS has deemed tax avoidance
schemes or otherwise abusive. Perhaps some of the most likely to crop up, especially
in small-business returns, are the arrangements purporting to allow the deductibility of
premiums paid for life insurance under a welfare benefit plan or section 419 plan. These
plans have been sold by most insurance agents and insurance companies.

Some of theses abusive employee benefit plans are represented as satisfying section
419, which sets limits on purposed and balances of "qualified asset accounts" for the
benefits, although the plans purport to offer the deductibility of contributions without
any corresponding income. Others attempt to take advantage of the exceptions to qualified asset account limits, such as sham union plans that try to exploit the exception
for the separate welfare benefit funds under collective bargaining agreements provided
by section 419A(f)(5). Others try to take advantage of exceptions for plans serving 10
or more employers, once popular under section 419A(f)(6). More recently, one may
encounter plans relying on section 419(e) and, perhaps, defines benefit sections 412(i)pension plans.

Sections 419 and 419A were added to the code by the Deficit Reduction Act of 1984 in
an attempt to end employers' acceleration of deductions for plan contributions. But it
wasn't long before plan promoters found an end run around the new code sections. An
industry developed in what came to be known as 10-or-more-employer plans.

The IRS steadily added these abusive plans to its designations of listed transactions.
With Revenue Ruling 90-105, it warned against deducting some plan contributions
attributable to compensation earned by plan participants after the end of the tax year.
Purported exceptions to limits of sections 419 and 419A claimed by 10-or-more-
employer benefit funds were likewise prescribed in Notice 95-24 (Doc 95-5046, 95 TNT
98-11). Both positions were designated as listed transactions in 2000.

At that point, where did all those promoters go? Evidence indicates many are now
promoting plans purporting to comply with section 419(e). They are calling a life
insurance plan a welfare benefit plan (or fund), somewhat as they once did, and
promoting the plan as a vehicle to obtain large tax deductions. The only substantial
difference is that theses are now single-employer plans. And again, the IRS has tried
to rein them in, reminding taxpayers that listed transactions include those substantially
similar to any that are specifically described and so designated.

On October 17, 2007, the IRS issues Notices 2007-83 (Doc 2007-23225, 2007 TNT 202-
6) and 2007-84 (Doc 2007-23220, 2007 TNT 202-5). In the former, the IRS identified
some trust arrangements involving cash value life insurance policies, and substantially
similar arrangements, as listed transactions. The latter similarly warned against some
postretirement medical and life insurance benefit arrangements, saying they might be
subject to "alternative tax treatment." The IRS at the same time issued related Rev.
Rul. 2007-65 (Doc 2007-23226, 2007 TNT 202-7) to address situations in which an
arrangement is considered a welfare benefit fund but the employer's deduction for its
contributions to the fund id denied in whole or in part for premiums paid by the trust on
cash value life insurance policies. It states that a welfare benefit fund's qualified direct
cost under section 419 does not include premium amounts paid by the fund for cash value
life insurance policies if the fund is directly or indirectly a beneficiary under the policy,
as determined under sections264(a).

Notice 2007-83 targets promoted arrangements under which the fund trustee purchases

cash value insurance policies on the lives of a business's employee/owners, and
sometimes key employees, while purchasing term insurance policies on the lives of other
employees covered under the plan.

These plans anticipate being terminated and anticipate that the cash value policies will
be distributed to the owners or key employees, with little distributed to other employees.
The promoters claim that the insurance premiums are currently deductible by the business
and that the distributed insurance policies are virtually tax free to the owners. The ruling
makes it clear that, going forward, a business under most circumstances cannot deduct
the cost of premiums paid through a welfare benefit plan for cash value life insurance on
the lives of its employees.

Should a client approach you with one of these plans, be especially cautious, for both
of you. Advise your client to check out the promoter very carefully. Make it clear that
the government has the names of all former section 419A(f)(6) promoters and, therefore,
will be scrutinizing the promoter carefully if the promoter was once active in that area, as
many current section 419(e) (welfare benefit fund or plan) promoters were. This makes
an audit of your client more likely and far riskier.

It is worth noting that listed transactions are subject to a regulatory scheme applicable
only to them, entirely separate from Circular 230 requirements, regulations, and
sanctions. Participation in such a transaction must be disclosed on a tax return, and the
penalties for failure to disclose are severe – up to $100,000 for individuals and $200,000
for corporations. The penalties apply to both taxpayers and practitioners. And the
problem with disclosure, of course, is that it is apt to trigger an audit, in which case even
if the listed transaction was to pass muster, something else may not.

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 Pubic Radio's All
Things Considered, and others. Lance has written numerous books including Protecting
Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk
Education's CPA's Guide to Life Insurance and Federal Estate and Gift Taxation, as
well as 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/TaxHelp.html 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.

Don’t Become a ‘Material Advisor’

Accounting Today

 July 1, 2011

By Lance Wallach

Accountants, insurance professionals and others need to be careful that they don’t become what the IRS calls material advisors.
If they sell or give advice, or sign tax returns for abusive, listed or similar plans; they risk a minimum $100,000 fine. They will then probably be sued by their client, when the IRS finishes with their client
In 2010, the IRS raided the offices of Benistar in Simsbury, Conn., and seized the retirement benefit plan administration firm’s files and records. In McGehee Family Clinic, the Tax Court ruled that a clinic and shareholder’s investment in an employee benefit plan marketed under the name “Benistar” was a listed transaction because it was substantially similar to the transaction described in Notice 95-34 (1995-1 C.B. 309). This is at least the second case in which the court has ruled against the Benistar welfare benefit plan, by denominating it a listed transaction.
The McGehee Family Clinic enrolled in the Benistar Plan in May 2001 and claimed deductions for contributions to it in 2002 and 2005. The returns did not include a Form 8886, Reportable Transaction Disclosure Statement, or similar disclosure. The IRS disallowed the latter deduction and adjusted the 2004 return of shareholder Robert Prosser and his wife to include the $50,000 payment to the plan.
The IRS assessed tax deficiencies and the enhanced 30 percent penalty under Section 6662A, totaling almost $21,000, against the clinic and $21,000 against the Prossers. The court ruled that the Prossers failed to prove a reasonable cause or good faith exception.
In rendering its decision, the court cited Curcio v. Commissioner, in which the court also ruled in favor of the IRS. As noted in Curcio, the insurance policies, which were overwhelmingly variable or universal life policies, required large contributions relative to the cost of the amount of term insurance that would be required to provide the death benefits under the arrangement. The Benistar Plan owned the insurance contracts. The excessive cost of providing death benefits was a reason for the court’s finding in Curcio that tax deductions had been properly disallowed.
As in Curcio, the McGehee court held that the contributions to Benistar were not deductible under Section 162(a) because the participants could receive the value reflected in the underlying insurance policies purchased by Benistar—despite the payment of benefits by Benistar seeming to be contingent upon an unanticipated event (the death of the insured while employed). As long as plan participants were willing to abide by Benistar’s distribution policies, there was no reason ever to forfeit a policy to the plan. In fact, in estimating life insurance rates, the taxpayers’ expert in Curcio assumed that there would be no forfeitures, even though he admitted that an insurance company would generally assume a reasonable rate of policy lapse.
Companies should carefully evaluate their proposed investments in plans such as the Benistar Plan. The claimed deductions will be disallowed, and penalties will be assessed for lack of disclosure if the investment is similar to the investments described in Notice 95-34, that is, if the transaction is a listed transaction and Form 8886 is either not filed at all or is not properly filed. The penalties, though perhaps not as severe, are also imposed for reportable transactions, which are defined as transactions having the potential for tax avoidance or evasion.
Insurance agents have been selling such abusive plans since the 1990's. They started as 419A(F)(6) plans and abusive 412i plans. The IRS went after them. They then evolved to single-employer 419(e) plans, which the IRS also went after. The latest scams may be the so-called captive insurance plan and the so called Section 79 plan.
While captive insurance plans are legitimate for large corporations, they are usually not legitimate for small business owners as a way to obtain a tax deduction. I have not yet seen a legitimate Section 79 plan. Recently, I have sent some of the plan promoters’ materials over to my IRS contacts, who were very interested in receiving them. Some of my associates are already trying to help defend some unsuspecting business owners who are being audited by the IRS with respect to these plans.
Similar, though perhaps not as abusive, plans fail after the IRS goes after them. Niche was one example. The company first marketed a 419A(F)(6) plan that the IRS audited. They then marketed a 419(e) plan that the IRS audited. Niche, insurance companies, agents, and many accountants were then sued after their clients lost their deductions, paid fines, interest, and penalties, and then paid huge fines for failure to file properly under 6707A. Niche then went out of business.
Millennium sold 419A(F)(6) plans and then 419(e) plans through insurance companies. They stupidly filed for a private letter ruling to the effect that they were not a listed transaction. They got exactly the opposite: a private letter ruling saying that they were a listed transaction. Then many participants were audited. The IRS disallowed the deductions, imposed penalties and interest, and then assessed large fines for not filing properly under Section 6707A. The result was lawsuits against agents, insurance companies and accountants. Millennium sought bankruptcy protection after a lot of lawsuits.
I have been an expert witness in a lot of the lawsuits in these 419, 412i, etc., plans, and my side has never lost a case. I have received thousands of phone calls over the years from business owners, accountants, angry plan promoters, insurance agents, etc. In the 1990's, when I started writing for the AICPA and other publications warning about these abusive plans, most people laughed at me, especially the plan promoters.
In 2002, when I spoke at the annual national convention of the American Society of Pension Actuaries in Washington, people took notice. The IRS chief actuary Jim Holland also held a meeting, similar to mine on abusive 412i plans. Many IRS agents attended my meeting. I was also invited to IRS headquarters, at the request of the acting IRS commissioner, to meet with high-level IRS officials and Treasury officials to discuss 419 issues in depth, which I did after the meeting.
The IRS then set up task forces and started going after 419 and 412i plans. I have been warning accountants to properly file under 6707A to avoid the large fines, but most do not. Even if they file, if they  make a mistake on the forms the IRS fines. Very few accountants have had experience filing the forms, and the IRS instructions are difficult to follow. I only know of two people who have been successful in  properly filing the forms, especially after the fact. If the forms are filled out wrong they should be amended and corrected Most accountants call me a few years later when they and their clients get the large fines, either after improperly filling out the forms or not doing them at all, but then it is too late. If they don’t call me then, then they call me when their clients sue them.

Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, abusive tax shelters, financial, international tax, and estate planning.  He writes about 412(i), 419, Section79, FBAR, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Pubic Radio’s All Things Considered, and others. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education’s CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation, as well as the AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, lawallach@aol.com or visit www.vebaplan.com.

EP Abusive Tax Transactions

EP Abusive Tax Transactions

NOTE: General Questions About Retirement Plans
Technical and procedural questions about your retirement plans are answered by EP Customer Account Services. Questions should be directed to (877) 829-5500 (toll-free number).
The IRS is engaged in extensive efforts to curb abusive tax shelter schemes and transactions. The Tax Exempt and Government Entities Division of the IRS, including the office of Employee Plans, participates in this IRS-wide effort by devoting substantial resources to the identification, analysis, and examination of abusive tax shelter schemes and promotions.
  • Listed TransactionsThe IRS finalized regulations on abusive tax shelters. The regulations provide that a taxpayer must disclose certain transactions, known as "listed transactions," by filing a disclosure statement (Form 8886 and instructions) with its tax return.Form 8886-T and instructions should be used by tax-exempt entities in disclosing this information. The instructions include an explanation of the penalties if there is a failure to disclose a reportable transaction.

    A "listed transaction" is a transaction that is the same as, or substantially similar to, one that the IRS has determined to be a tax avoidance transaction and identified by IRS notice or other form of published guidance. The parties who participate in listed transactions may be required to disclose the transaction as required by the regulations, register the transaction with the IRS, or maintain lists of investors in the transactions and provide the list to the IRS on request.

    The IRS had identified the following transactions involving employee benefit plans as listed transactions:
  • Abusive Transactions That Affect Availability of Programs under EPCRSA detailed explanation on how abusive transactions are affected by the new Employee Plans Compliance Resolution System eligibility requirements.
  • Notice 2006-65(Excise Taxes With Respect To Prohibited Tax Shelter Transactions to Which Tax-Exempt Entities Are Parties and Related Disclosure Requirements)
    The Tax Increase Prevention and Reconciliation Act of 2005 ("TIPRA"), enacted on May 17, 2006, includes new excise taxes and disclosure rules that target certain potentially abusive tax shelter transactions to which a tax-exempt entity is a party. Entities that may be affected by the new provisions include, but are not limited to, charities, churches, state and local governments, Indian tribal governments, qualified pension plans, individual retirement accounts, and similar tax-favored savings arrangements. The managers of these entities, and in some cases the entities themselves, can be subject to excise taxes if the entity is a party to a prohibited tax shelter transaction.
  • IRS Corporate Abusive Tax Transactions Home Page
    Listed transactions, with citations of published guidance, regulations or court cases and other useful resources.
  • "Abusive Tax Avoidance Transactions (ATAT) and Emerging Issues" audioATAT and Emerging Issues EP Phone Forum audio and transcript.
  • Press Releases
    • Treasury, IRS Issue Section 409(p) Final RegulationsThe Treasury Department and IRS issued final regulations under Section 409(p). That section of the tax law generally prohibits accruals or allocations under an employee stock ownership plan (ESOP) that holds stock of an S corporation where the ownership interest in the ESOP or in rights to acquire the corporation are so concentrated among 10 percent owners that they hold 50 percent or more of the interests in the corporation. The final regulationsare available for review. (12/16/2006)
    • Abusive Transaction Settlement InitiativeInternal Revenue Service officials announced a broad-based, limited-in-time opportunity for taxpayers to come forward and settle an array of transactions the IRS considers abusive. (10/27/2005)