Aug 25, 2010
By Lance Wallach
Business owners and professionals who have adopted 419 welfare benefit plan
arrangements are in serious trouble. The IRS has attacked these arrangements as "listed
transactions." Business owners who engage in a "listed transaction" must report such
transactions on IRS Form 8886 every year that they are participating in the transaction,
and you are participating even in years when you do not make any contribution.
Internal Revenue Code 6707A imposes severe penalties ($200,000 annually for a
business and $100,000 per year for an individual) for failure to file Form 8886 with respect
to a listed transaction. Tax Court, according to both the IRS Appeals Office and its own
decisions, does not have jurisdiction to abate or lower any penalties imposed by the IRS.
Complaints caused Congress to impose a moratorium on collection of Section 6707A
penalties. On June 1, 2010, the moratorium ended, and the IRS immediately began
sending out notices warning of possible imposition of 6707A penalties. When you get this
notice it should be taken very seriously.
Accountants were required to properly prepare and file Form 8918 (if they signed and/or
prepare tax returns and got paid). The penalty for accountants for not properly filing the forms
is $100,000, or $200,000 if they are incorporated.
Businesses that were in some 419 welfare benefit plans or some 412i retirement as well as
some Captive Insurance and Section 79 Plans, were supposed to properly file under IRC
Section 6707A each year with the IRS. Either the taxpayer or the accountant was responsible,
though the ultimate, primary obligation falls on the taxpayer. The IRS has just begun sending
the notices referred to above to participants in many of these plans. This is in addition to any
IRS audit you might have had or currently may be having. The large 6707A fine has nothing
to do with any other IRS audit. The 6707A fine is for not having properly filed under 6707A
with your returns. You are required to file each year with your tax return.
Not only were you required to file with your Federal return, but many states also require
protective filings. Some participants in these types of plans have already received notices
from the IRS. You must act immediately if you wish to avoid possible huge IRS penalties and
interest that could put you out of business for good.
THE STATUTE OF LIMITATIONS IS NOT RUNNING. This means that the IRS can fine you
at any time in the future for anything regarding past or present participation in an abusive 419
welfare benefit plan or an abusive 412i retirement plan. There is still time to avoid the IRS
penalties and interest. You need to take action immediately and find out right away if the plan
you are participating in is abusive by consulting with a professional and experienced 419/412i
plan expert.
Most accountants do not know how to properly prepare the appropriate forms. Accountants
or other advisors will probably be fined as material advisors. This means that you may be
subject to a large fine. Once you get the large fine, the IRS claims it is not subject to an
appeal.
You should have filed protectively for every year your entity participated in the plan.
Once again, for every year after 2003, the penalty for not properly filing is $200,000 a year
for corporations and $100,000 a year for individuals. For example, it is possible an employer
in the plan since 2004 could be subject to over one million dollars in penalties solely as a
result of the failure to file. For all years in the plan, the Statute of Limitations will not begin to
run until after the form is properly filed. In addition, certain individual plan participants should
also file for every year of plan participation. Once again, none of this has anything to do with
any other audit that you may currently be involved in or may previously have experienced.
It is abundantly clear that taxpayers who receive notices from the IRS regarding Section
6707A penalties should take these letters extremely seriously. These notices do not lend
themselves to "do-it-yourself eye surgery".
A 419 Welfare Benefit Plan is generally a plan set up in the form of a trust to provide certain benefits to the employees of a company. You will notice that the term trust is used because the large whole life insurance policies that the owner is instructed to buy go into a trust where neither the company nor the business owner actually owns them. The trust owns the policies.
ReplyDeleteThe insurance agent or CPA wants you to set up a 419(e) plan because you are agreeing to buy high dollar life insurance with premiums payable until you retire. That can generate fees of up to 125% of the first year premium as a commission – that’s right, you read that correctly – 125%.
The plan is sold as a win-win for everyone. It is for the insurance company because it locks the business owner into long-term, expensive insurance. It is for the trust administrator (remember: the insurance policies must be put into a trust to make the plan work) because the business owner has to pay a fee every year to administer the plan. But for the business owner? Maybe not so much!
The big sales pitch often is that the contributions are tax deductible to the business and the business can exclude employees. Moreover, the seller promises that the big insurance policies that is paid for with tax free money can be cashed out or transferred from the trust to the business owner at some later date without paying taxes. It is all so easy: no taxes in and no taxes out. Good right?
Unfortunately, it is often too good to be true. The IRS has been actively attacking such 419 Welfare Benefit Plans as TAX SHELTERS. If a transaction is classified as a tax shelter then the salesperson and your CPA are supposed to tell you to file an 8886 form which highlights tax shelters to the IRS. Think of it as a beacon so that the IRS knows who to come pursue for taxes, penalties, interest and listed transaction charges.
The IRS focus on 419(e) plans came up in a case identified as Curcio v. Commissioner of Internal Revenue, T.C. Memo 2010-115, which can be found at http://www.ustaxcourt.gov/InOpHistoric/curcio.TCM.WPD.pdf. The end result was a financial disaster for the company that took the ordinary business deductions for the plan and the individual taxpayers that also took deductions on their personal taxes.
If something goes wrong on one of these plans (as it often does) who does the business owner look to? The insurance company will claim in defense that it simply sold insurance. The agent or the CPA will claim that it was the responsibility of the third party administrator (TPA) to make sure that the plan was solid and lawful. The TPA will claim that the business owner is not the owner of the product and cannot sue because it was in a trust. The business owner is often left facing the IRS on his or her own while paying other professionals to correct the tax situation.
If you are a business person being offered a 419(e) plan as a part of financial and tax planning, then talk to your CPA (so long as he or she is not selling the product) or your trusted attorney to determine if this is a proper product and plan for you and your company.