Lance Wallach, Managing Director, is the nation's leading expert on "employee benefit plans", "tax problem resolution" and IRS audits defense. Mr. Wallach's team of highly experienced tax attorneys, CPAs, and ex-IRS agents have helped his clients save hundreds of thousands of dollars successfully defending them in lawsuits and "IRS audits".
Today, the Treasury Department and the Internal Revenue Service issued guidance to shut down abusive transactions involving specially designed life insurance policies in retirement plans, section “412(i) plans.” The guidance designates certain arrangements as “listed transactions” for tax-shelter reporting purposes. 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.” “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. “Today’s action sends a strong signal to those taking advantage of certain insurance policies that these abusive schemes must stop.” The guidance covers three specific issues. First, a set of new proposed regulations states that any life insurance contract transferred from an employer or a tax-qualified plan to an employee must be taxed at its full fair market value. Some firms have promoted an arrangement where an employer establishes a section 412(i) plan under which the contributions made to the plan, which are deducted by the employer, are used to purchase a specially designed life insurance contract. Generally, these special policies are made available only to highly compensated employees. The insurance contract is designed so that the cash surrender value is temporarily depressed, so that it is significantly below the premiums paid. The contract is distributed or sold to the employee for the amount of the current cash surrender value during the period the cash surrender value is depressed; however the contract is structured so that the cash surrender value increases significantly after it is transferred to the employee. Use of this springing cash value life insurance gives employers tax deductions for amounts far in excess of what the employee recognizes in income. These regulations, which will be effective for transfers made on or after today, will prevent taxpayers from using artificial devices to understate the value of the contract. A revenue procedure issued today along with the proposed regulations provides a temporary safe harbor for determining fair market value. Second, a new revenue ruling states that an employer cannot buy excessive life insurance (i.e., insurance contracts where the death benefits exceed the death benefits provided to the employee’s beneficiaries under the terms of the plan, with the balance of the proceeds reverting to the plan as a return on investment) in order to claim large tax deductions. These arrangements generally will be listed transactions for tax-shelter reporting purposes. Third, another new revenue ruling states that a section 412(i) plan cannot use differences in life insurance contracts to discriminate in favor of highly paid employees. Copies of the proposed regulations, the revenue procedure, and the two revenue rulings are attached. Related Links: Revenue Ruling 2004-20 (PDF 65K) Revenue Ruling 2004-21 (PDF 58K) Revenue Procedure 2004-16 (PDF 71K) Proposed Regulations (PDF 50K) S
412i, pension plan audits lawsuits get your money back Published on Published onNovember 22, 2017 Edit article View stats Lance Wallach Lance Wallach Abusive tax shelters, 419, section 79, 412i micro captive insurance, VEBA expert witness 724 articles 1 Unlike 1 Comment 0
1 Revenue Ruling 2004-20 - Abusive Transactions Involving Insurance Policies in IRC 412(i) Retirement Plans (certain arrangements in which an employer deducts contributions to a qualified pension plan for premiums on life insurance contracts that provide for death benefits in excess of the participant’s death benefit, where under the terms of the plan, the balance of the death benefit proceeds revert to the plan as a return on investment) (identified as “listed transactions” on February 13, 2004)). See also Rev. Rul. 2004-21, 2004-10 I.R.B. 544, §§ 1.79-1(d)(3), 1.83-3(e) and 1.402(a)-1(a)(1) and (2) of the proposed Income Tax Regulations, and Rev. Proc. 2004-16, 2004-10 I.R.B. 559;
Search 22 new network updates. My Network Jobs Messaging Notifications Lance Wallach Me Work icon Work Learning Messaging Compose message Tap for popup settings 412i, pension plan audits lawsuits get your money back Published on Published onNovember 22, 2017 Edit article View stats Lance Wallach Lance Wallach Abusive tax shelters, 419, section 79, 412i micro captive insurance, VEBA expert witness 724 articles 4 Unlike 1 Comment 0
11 Revenue Ruling 2004-20 - Abusive Transactions Involving Insurance Policies in IRC 412(i) Retirement Plans (certain arrangements in which an employer deducts contributions to a qualified pension plan for premiums on life insurance contracts that provide for death benefits in excess of the participant’s death benefit, where under the terms of the plan, the balance of the death benefit proceeds revert to the plan as a return on investment) (identified as “listed transactions” on February 13, 2004)). See also Rev. Rul. 2004-21, 2004-10 I.R.B. 544, §§ 1.79-1(d)(3), 1.83-3(e) and 1.402(a)-1(a)(1) and (2) of the proposed Income Tax Regulations, and Rev. Proc. 2004-16, 2004-10 I.R.B. 559;
Captive insurance audits, u need help, 4355 views, 27 likes Published on Published onJanuary 30, 2018 Edit article View stats Lance Wallach Lance Wallach Abusive tax shelters, 419, section 79, 412i micro captive insurance, VEBA, expert witness, author, speaker 764 articles 26 Unlike 1 Comment 2
17 Why Representation Is Necessary Each year, the IRS lists a "dirty dozen" list of items that it considers abusive. For three years in a row, it has included the abusive use of "micro" captive insurance companies.
In Notice 2016-66, the IRS acknowledged that some taxpayers may use captive insurance companies that make elections under Section 831(b) "for risk management purposes that do not involve tax avoidance."
The IRS is seeking to argue that some of these entities do not provide real insurance, and that the transactions have no "economic substance." Therefore, they assert that the IRS should be able to assess tax, interest and severe penalties against the captive insurance company and its insured. They will also seek penalties against promoters that are setting up these captives.
In addition to a disastrous tax result, there is also potential for criminal charges in certain cases.
In cases where an attorney or promoter sets up a captive insurance company negligently or fraudulently, they could have massive exposure for the damages that they caused to their client.
Let Us Help You The IRS will be litigating captive insurance companies for the foreseeable future. For a detailed analysis of your captive insurance audit or case, or a malpractice claim related to a captive insurance company, contact
Report this 1 Like Lance Wallach 2 Comments Comments on Lance Wallach’s article Comments settings 5d Open options for Lance Wallach’s comment Lance Wallach Lance Wallach Abusive tax shelters, 419, section 79, 412i micro captive insurance, VEBA, expert witness, author, speaker A new law governing microcaptives is increasing the risk that the Internal Revenue Service will order an audit of the captive's parent company or the captive manager overseeing the company-owned insurer.
The use of the microcaptives, or those electing to be taxed under Section 831(b) of the U.S. Tax Code, has increased during the past five years, experts said.
The Protecting America from Tax Hikes Act of 2015, which was enacted last year, changed the limits and the rules governing those microcaptives.
Under the new law effective in 2017, 831(b) captives can avoid federal taxes on up to $2.2 million in annual premium income, which is up from the current limit of $1.2 million.
The higher limit is an opportunity for captive owners to place more risks in their captives, such as cyber; earthquake, wind and flood; pollution liability and cleanup; property mold; and difference in limits/difference in conditions risks, experts said during the Captive Insurance Companies Association's 2016 International Conference in Scottsdale, Arizona, earlier this month.
While the new law increases the premium income that is exempt from taxation, it also imposes stricter rules on the ownership structures of 831(b) captives, which are often used by family-run companies, to be eligible for that exemption.
“The IRS scrutinizes small captives very closely,…see more Like Unlike Lance Wallach’s comment Reply 1 Like 1 Like on Lance Wallach’s comment 18h Open options for Lance Wallach’s comment Lance Wallach Lance Wallach Abusive tax shelters, 419, section 79, 412i micro captive insurance, VEBA, expert witness, author, speaker Taxpayers should expect the IRS to take an even harder stance on “micro-captive” insurance arrangements after a recent U.S. Tax Court decision in the agency’s favor,
Today, the Treasury Department and the Internal Revenue Service issued guidance to shut down abusive transactions involving specially designed life insurance policies in retirement plans, section “412(i) plans.” The guidance designates certain arrangements as “listed transactions” for tax-shelter reporting purposes.
ReplyDeleteA “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.”
“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. “Today’s action sends a strong signal to those taking advantage of certain insurance policies that these abusive schemes must stop.”
The guidance covers three specific issues. First, a set of new proposed regulations states that any life insurance contract transferred from an employer or a tax-qualified plan to an employee must be taxed at its full fair market value. Some firms have promoted an arrangement where an employer establishes a section 412(i) plan under which the contributions made to the plan, which are deducted by the employer, are used to purchase a specially designed life insurance contract. Generally, these special policies are made available only to highly compensated employees. The insurance contract is designed so that the cash surrender value is temporarily depressed, so that it is significantly below the premiums paid. The contract is distributed or sold to the employee for the amount of the current cash surrender value during the period the cash surrender value is depressed; however the contract is structured so that the cash surrender value increases significantly after it is transferred to the employee. Use of this springing cash value life insurance gives employers tax deductions for amounts far in excess of what the employee recognizes in income. These regulations, which will be effective for transfers made on or after today, will prevent taxpayers from using artificial devices to understate the value of the contract. A revenue procedure issued today along with the proposed regulations provides a temporary safe harbor for determining fair market value.
Second, a new revenue ruling states that an employer cannot buy excessive life insurance (i.e., insurance contracts where the death benefits exceed the death benefits provided to the employee’s beneficiaries under the terms of the plan, with the balance of the proceeds reverting to the plan as a return on investment) in order to claim large tax deductions. These arrangements generally will be listed transactions for tax-shelter reporting purposes.
Third, another new revenue ruling states that a section 412(i) plan cannot use differences in life insurance contracts to discriminate in favor of highly paid employees.
Copies of the proposed regulations, the revenue procedure, and the two revenue rulings are attached.
Related Links:
Revenue Ruling 2004-20 (PDF 65K)
Revenue Ruling 2004-21 (PDF 58K)
Revenue Procedure 2004-16 (PDF 71K)
Proposed Regulations (PDF 50K)
S
412i, pension plan audits lawsuits get your money back
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Revenue Ruling 2004-20 - Abusive Transactions Involving Insurance Policies in IRC 412(i) Retirement Plans (certain arrangements in which an employer deducts contributions to a qualified pension plan for premiums on life insurance contracts that provide for death benefits in excess of the participant’s death benefit, where under the terms of the plan, the balance of the death benefit proceeds revert to the plan as a return on investment) (identified as “listed transactions” on February 13, 2004)). See also Rev. Rul. 2004-21, 2004-10 I.R.B. 544, §§ 1.79-1(d)(3), 1.83-3(e) and 1.402(a)-1(a)(1) and (2) of the proposed Income Tax Regulations, and Rev. Proc. 2004-16, 2004-10 I.R.B. 559;
Revenue Ruling 2004-21
Proposed Regulation 126967-03
Revenue Procedure 2004-16
News Release IR-2004-21
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412i, pension plan audits lawsuits get your money back
Published on Published onNovember 22, 2017
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Lance Wallach
Lance Wallach
Abusive tax shelters, 419, section 79, 412i micro captive insurance, VEBA expert witness
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Revenue Ruling 2004-20 - Abusive Transactions Involving Insurance Policies in IRC 412(i) Retirement Plans (certain arrangements in which an employer deducts contributions to a qualified pension plan for premiums on life insurance contracts that provide for death benefits in excess of the participant’s death benefit, where under the terms of the plan, the balance of the death benefit proceeds revert to the plan as a return on investment) (identified as “listed transactions” on February 13, 2004)). See also Rev. Rul. 2004-21, 2004-10 I.R.B. 544, §§ 1.79-1(d)(3), 1.83-3(e) and 1.402(a)-1(a)(1) and (2) of the proposed Income Tax Regulations, and Rev. Proc. 2004-16, 2004-10 I.R.B. 559;
Revenue Ruling 2004-21
Proposed Regulation 126967-03
Revenue Procedure 2004-16
News Release IR-2004-21
Captive insurance audits, u need help, 4355 views, 27 likes
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Why Representation Is Necessary
Each year, the IRS lists a "dirty dozen" list of items that it considers abusive. For three years in a row, it has included the abusive use of "micro" captive insurance companies.
In Notice 2016-66, the IRS acknowledged that some taxpayers may use captive insurance companies that make elections under Section 831(b) "for risk management purposes that do not involve tax avoidance."
The IRS is seeking to argue that some of these entities do not provide real insurance, and that the transactions have no "economic substance." Therefore, they assert that the IRS should be able to assess tax, interest and severe penalties against the captive insurance company and its insured. They will also seek penalties against promoters that are setting up these captives.
In addition to a disastrous tax result, there is also potential for criminal charges in certain cases.
In cases where an attorney or promoter sets up a captive insurance company negligently or fraudulently, they could have massive exposure for the damages that they caused to their client.
Let Us Help You
The IRS will be litigating captive insurance companies for the foreseeable future. For a detailed analysis of your captive insurance audit or case, or a malpractice claim related to a captive insurance company, contact
Report this
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Lance Wallach
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Abusive tax shelters, 419, section 79, 412i micro captive insurance, VEBA, expert witness, author, speaker
A new law governing microcaptives is increasing the risk that the Internal Revenue Service will order an audit of the captive's parent company or the captive manager overseeing the company-owned insurer.
The use of the microcaptives, or those electing to be taxed under Section 831(b) of the U.S. Tax Code, has increased during the past five years, experts said.
The Protecting America from Tax Hikes Act of 2015, which was enacted last year, changed the limits and the rules governing those microcaptives.
Under the new law effective in 2017, 831(b) captives can avoid federal taxes on up to $2.2 million in annual premium income, which is up from the current limit of $1.2 million.
The higher limit is an opportunity for captive owners to place more risks in their captives, such as cyber; earthquake, wind and flood; pollution liability and cleanup; property mold; and difference in limits/difference in conditions risks, experts said during the Captive Insurance Companies Association's 2016 International Conference in Scottsdale, Arizona, earlier this month.
While the new law increases the premium income that is exempt from taxation, it also imposes stricter rules on the ownership structures of 831(b) captives, which are often used by family-run companies, to be eligible for that exemption.
“The IRS scrutinizes small captives very closely,…see more
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Abusive tax shelters, 419, section 79, 412i micro captive insurance, VEBA, expert witness, author, speaker
Taxpayers should expect the IRS to take an even harder stance on “micro-captive” insurance arrangements after a recent U.S. Tax Court decision in the agency’s favor,