Thursday, June 1, 2017

Material Advisors & 419 Plans Litigation: Lance Wallach National Society of Accountants Spea...

Material Advisors & 419 Plans Litigation: Lance Wallach National Society of Accountants Spea..




412i Plans
Such plans can be abusive with cash value life insurance. For more information visit www.taxlibrary.com orwww.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 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.




Wednesday, March 7, 2012


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.

Monday, March 5, 2012


Abusive 412(i) Retirement Plans Can Get Accountants Fined $200,000


California Enrolled Agent
January 2


By Lance Wallach & Ira Kaplan


Most insurance agents sell 412(i) retirement plans.  The large insurance commissions generate some of the enthusiasm.  Unlike other retirement plans, the 412(i) plan must have insurance products as the funding mechanism.  This seems to generate enthusiasm among insurance agents.  The IRS has been auditing almost all participants in 412(i) plans for the last few years.  At first, they thought all 412(i) plans were abusive.  Many participants’ contributions were disallowed and there were additional fines of $200,000 per year for the participants.  The accountants who signed the tax returns (who the IRS called “material advisors”) were also fined $200,000 with a referral to the Office of Professional Responsibility.  For more articles and details, see www.vebaplan.com and www.irs.gov/.

On Friday February 13, 2004, the IRS issued proposed regulations concerning the valuation of insurance contracts in the context of qualified retirement plans. 

The IRS said that it is no longer reasonable to use the cash surrender value or the interpolated terminal reserve as the accurate value of a life insurance contract for income tax purposes.  The proposed regulations stated that the value of a life insurance contract in the context of qualified retirement plans should be the contract’s fair market value.

The Service acknowledged in the regulations (and in a revenue procedure issued simultaneously) that the fair market value standard could create some confusion among taxpayers.  They addressed this possibility by describing a safe harbor position.

When I addressed the American Society of Pension Actuaries Annual National Convention, the IRS chief actuary also spoke about attacking abusive 412(i) pensions.

A “Section 412(i) plan” is a tax-qualified retirement plan that is funded entirely by a life insurance contract or an annuity.  The employer claims tax deductions for contributions that are used by the plan to pay premiums on an insurance contract covering an employee.  The plan may hold the contract until the employee dies, or it may distribute or sell the contract to the employee at a specific point, such as when the employee retires.

“The guidance targets specific abuses occurring with Section 412(i) plans”, stated Assistant Secretary for Tax Policy Pam Olson.  “There are many legitimate Section 412(i) plans, but some push the envelope, claiming tax results for employees and employers that do not reflect the underlying economics of the arrangements.”  Or, to put it another way, tax deductions are being claimed, in some cases, that the Service does not feel are reasonable given the taxpayer’s facts and circumstances. 

“Again and again, we’ve uncovered abusive tax avoidance transactions that game the system to the detriment of those who play by the rules,” said IRS Commissioner Mark W. Everson. 

The IRS has warned against Section 412(i) defined benefit pension plans, named for the former IRC section governing them. It warned against certain 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 such 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 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 these transactions. In general, IRS auditors divide audited plans into those they consider noncompliant and others they consider abusive. While the alternatives available to the sponsor of a 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. Although in some situations 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.  In addition, if the participant did not file Form 8886 and the accountant did not file Form 8918 (to report themselves), they would be fined $200,000.

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 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.


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    TAG ARCHIVES: LANCE WALLACH EXPERT WITNESS

    Captive Insurance
    Posted on February 12, 2014
    Choosing a domicile.

    ■ Regulatory environment. Some jurisdictions are friendlier than others, or their

    statutes may permit different used and forms of captives.

    ■ Minimum capitalization requirements – varies between jurisdictions from

    $150,000 to $750,000. Separate series of a group captive requires risk-based

    amount of capital, typically

    ■ Start-up costs and annual maintenance – typical start-up costs range from

    $50,000 to $80,000 for pure captive (plus required capital) and from $20,000

    to $25,000 for cell (or series) of group captive.

    ■ Underwriting risk classification

    • Traditional coverage or non-traditional coverage, such as loss of license.

    ■ Tax implications.

    • Small insurance company with premiums less than $1,200,000. See

    Section 831(b) of the Internal Revenue Code. Applies to US tax-law

    compliant companies.

    • Excise taxes on premiums paid for non-US captives.





    Posted in Uncategorized | Tagged Captive Insurance, Captive Insurance History, compliance, Expert Witness, Lance Wallach, Lance Wallach Expert Witness | Lea

    ReplyDelete