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Business Owners, Accountants, and Others Fined $200,000 by IRS and Don’t Know Why

By Lance Wallach

This article appeared in the November 2009 Newsletter to the New Jersey Association of Public Accountants

If you are a small business owner, accountant or insurance professional you may be in big trouble and not know it. IRS has been fining people like you $200,000. Most people that have received the fines were not aware that they had done anything wrong. What is even worse is that the fines are not appeal-able. This is not an isolated situation. This has been happening to a lot of people.

Currently, the Internal Revenue Service (“IRS”) has the discretion to assess hundreds of thousands of dollars in penalties under §6707A of the Internal Revenue Code (“Code”) in an attempt to curb tax avoidance shelters. This discretion can be applied regardless of the innocence of the taxpayer and was granted by Congress. It works so that if the IRS determines you have engaged in a listed transaction and failed to properly disclose it, you will be subject to a potentially draconian penalty regardless of any other facts and circumstances concerning the transaction. For some, this penalty has been assessed at almost a million dollars and for many it is the beginning of a long nightmare.

The following is an example: Pursuant to a settlement with the IRS, the 412(i) plan was converted into a traditional defined benefit plan. All of the contributions to the 412(i) plan would have been allowable if they had initially adopted a traditional defined benefit plan. Based on negotiations with the IRS agent, the audit of the plan resulted in no income and minimal excise taxes due. This is because as a traditional defined benefit plan, the taxpayers could have contributed and deducted the same amount as a 412(i) plan.

Towards the end of the audit the business owner received a notice from the IRS. The IRS assessed the client penalties under the §6707A of the Code in the amount of $900,000.00. This penalty was assessed because the client allegedly participated in a listed transaction and allegedly failed to file the form 8886 in a timely manner.

by Lance Wallach

This article was originally published on January 19, 2011 by RetirementSociety.com.

“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:

Abusive Retirement Plans

419 Plans

412i Plans

Captive Insurance Plans

Section 79 Plans

Hiding Income Offshore

Filing False or Misleading Forms

Abuse of Charitable Organizations and Deductions

Return Preparer Fraud

Frivolous Arguments

False Claims for Refund and Requests for Abatement

Disguised Corporate Ownership

Zero Wages

Misuse of Trusts

Fuel Tax Credit Scams

Full Article.

IRS Code Section 79 Plans and Captive Insurance History By Lance Wallach, CLU, CHFC Firm's Profile & ArticlesFirm's Profile & Articles Find a Law Firm: ► Need a Lawyer? Let Us Help You Insurance companies, agents, financial planners, and others have pushed abusive 419 and 412i plans for years. They claimed business owners could obtain large tax deductions. Insurance companies, agents and others earned very large life insurance commissions in the process. When trying to understand how a product becomes the focus of IRS scrutiny it helps to know its history. In the case of plans that fall under Internal Revenue Code Section 79, that history is complex. Eventually, the IRS cracked down on the unsuspecting business owners. Not only did they lose the tax deductions, but they were also fined, in addition to being charged penalties and interest. A skilled CPA with extensive IRS experience could usually eliminate the penalties and reduce the fines. Most accountants, tax attorneys and others, however, have been unsuccessful in accomplishing this. After the business owner was assessed the fines and lost his tax deduction, he had another huge, unforeseen problem. The IRS then came back and fined him a huge amount of money for not telling on himself under IRC 6707A. If you participate in a listed or reportable transaction, you must alert the IRS or face a large fine. In essence, you must alert the IRS if you were in a transaction that has the possibility of tax avoidance or evasion. Not only must you file Form 8886 telling on yourself, but the form needs to be filed properly, and done every year that you are in the plan in any way at all, even if you are no longer making contributions. According to IRC 6707A Expert Lance Wallach, "I have received hundreds of phone calls from business owners who filed Form 8886, usually with the help of their accountants or the plan promoter. They got the fine for either improperly filing, or for making mistakes on the form." The IRS directions about preparing the form are vague, especially if the form is filed late. They presume a timely filing. In addition, many states also require forms to be filed. "For example, if you work in New York State and manage to properly fill out the Federal form, but do not file the State form, you may still get fined," says Wallach, adding that he only knows of two people that know how to properly prepare and file the forms, especially forms being filed late. As an expert witness in such cases, Lance Wallach's side has never lost. The result of the all of the above was many lawsuits against insurance companies, including Hartford, Pacific Life, Indianapolis Life, AIG, and Penn Mutual, to name just a few. Agents, accountants, and attorneys were also successfully sued. Lately, insurance companies, agents, accountants, and others have been selling captive insurance and Section 79 scams. The motivations are exactly the same. They push large tax deductions for business owners. There are also huge commissions for salespeople, though this is usually mentioned only in passing, if at all. Anyone participating in a listed or reportable transaction must properly file Form 8886 or face large IRS fines. A listed transaction is any transaction specifically identified as such by published IRS guidance, or one substantially similar to that transaction. A reportable transaction is any transaction that has the potential for tax avoidance or evasion. "In my experience, the desire to avoid taxes is usually the principal and sometimes the only reason why people participate in Section 79, captive insurance, or 419 plans. That is why I generally take the position that virtually everyone participating in one of these arrangements should properly file Form 8886, if only protectively as a precaution," says Wallach. If you do not properly file Form 8886, there is no Statute of Limitations. That means the IRS can come back and fine you many years later. Anyone that wants to risk an IRS audit by utilizing a captive insurance or Section 79 scam should, at the very least, engage a competent professional to file 8886 forms. By filing protectively and properly, the Statute of Limitations starts running and you avoid the very large IRS penalties under 6707A. Never utilize directions from a plan promoter or salesman as to how to fill out 8886 forms. They would only be attempting to protect themselves, and doing so could result in you being fined. Lance Wallach stated that he knows of many examples of this happening, including a plan promoter who assisted almost 200 business owners in preparing and filing 8886 forms. All of them got fined for improper preparation of the forms. The two people that have been successful in filing 8886 forms for business owners have had numerous conversations with IRS personnel. They get the impression that it is almost impossible for an accountant, tax attorney, or anyone else to properly prepare and file the forms. One of them, who spent 35 plus years with the IRS, has also been successful in fighting the IRS on penalties and fines assessed against business owners who participate in these plans, though the IRS publicly claims that you cannot appeal the fine under 6707A. ABOUT THE AUTHOR: Lance Wallach Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, abusive tax shelters, financial, international tax, and estate planning. He writes about 412(i), 419, Section79, FBAR, and captive insurance plans. He speaks at more than ten conventions annually, writes for 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. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007 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.

Expert Witness Directory Customer Login List Your Company FOLLOW US Google+ Home Expert Witnesses Medical Expert Witnesses Forensic Experts Litigation Support Legal Services Speakers Publications By Expert Witnesses By Medical Expert Witnesses Marketing for Expert Witness Guidelines Guide to Expert Testimony Forensic Science Mediation Submit Article Sign In Contact printsubmit an articlerecent articlesback Find an Expert Witness: Captive Insurance but Be Careful By Lance Wallach, CLU, CHFC Abusive Tax Shelter, Listed Transaction, Reportable Transaction Expert Witness PhoneCall Lance Wallach at (516) 938-5007 Most business owners want to: build wealth and maximize the value of what is left behind for heirs; protect their wealth to insure that what they have spent a lifetime building isn’t eaten away by taxes, inflation and/or the cost of medical care; distribute their wealth so that their loved ones may be taken care of, and see to it that their assets and possessions go where they want them to go in the time frame they want this to happen. This is the essence of estate planning. Eventually the business owner leaves the business. If a family member or employee can buy the established business, planning needs to be done years in advance for the best possible results. If an outside buyer is desired, the company should be positioned so that, if a favorable opportunity arises or an unfortunate event occurs, the company is completely ready for transition. In other words, the business should be ready for sale versus up for sale. Determining the value of a business is an art. There are no fixed rules, just general guidelines. All characteristics of the business must be considered. The value, however, is ultimately what a buyer will pay considering all relevant circumstances and bargaining at arms length. This is referred to as the fair market value. Non-cash Payment Today’s would-be sellers are seeing attractive purchase prices offered in currencies other than cash. The purchase might be part cash, and the remainder an unsecured promissory note. But cash is the only sure thing. Should the business falter, the remainder of the purchase price may evaporate or become subject to litigation. A sale to the highest bidder is not always the most appropriate sale. Make Plans for the Future Most small business owners are so busy running the company they fail to plan for the eventual transfer of the business. By not planning, they jeopardize the futures of the business and, possibly, of his or her family. We are often consulted at this time, but, at this point, it is almost too late to help. Succession and estate planning involves various questions of tax, law and business planning. The business owner(s) should make the final decisions after being provided with various types of information. If planning is done early, the process is not difficult and the results are maximized. No one plans to fail, but many fail to plan. How to Use a Captive Insurer to Save Money 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 insurance companies to provide coverage when they think outside insurers are charging too much or coverage is simply unavailable. A small company can also use this as a tax reduction strategy, with the ability to get money back tax free. Often, they are starting what is called “a captive insurance company”— an insurer founded to write coverage for the company, companies, or people who founded it. Here’s how a captive insurer usually works. The parent business creates a captive so that it has a self-funded option for buying insurance, whereby the parent business provides the reserves to back the policies. The company then either retains that risk or pays reinsurers 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. A captive insurance company would be an insurance subsidiary that is owned by its parent(s). The Better Way for Large Tax Deductions There are a number of significant advantages that may be obtained through sharing a large captive (“Group Captive”) with other companies. The most important is that you can significantly decrease the cost of insurance for your insureds, as compared to a standalone captive, through this arrangement. The second advantage is that Group Captives do not require any capital commitment. By sharing a large captive you only pay a pro rata fee to cover all General and Administrative expenses of the insurance company. The cost for administration is very low per insured as compared to forming and operating a traditional stand alone captive insurance company. By renting 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 no significant financial commitment beyond the payment of premiums. Operation of a standalone captive insurance company may not achieve similar cost saving results that a small business could obtain through sharing a large captive. More importantly, group captives require little or no maintenance by the insureds, and can be implemented in a fraction of the time as compared to stand-alone captives. If you do this correctly, you can reduce insurance costs and obtain a large tax deduction, with the ability to get money back tax free. 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 Succession with a Captive, Be Careful - Slippery Rock Gazette February 17, 2008 Business Succession Planning; Facilitating the Sale of the Business How captive insurers can reduce taxes and insurance costs By Lance Wallach, Industry Consultant ABOUT THE AUTHOR: Lance Wallach Lance Wallach speaks and writes extensively about retirement plans, estate planning, 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. Copyright Lance Wallach, CLU, CHFC More information about Lance Wallach, CLU, CHFC 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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