Reportable Transactions and 419 Plans Litigation - Welfare benefit, Medical, Retirement plan benefit and design, Pension specialists, 412i Lawsuits, 419 lawsuits, IRS Audits, 412i Problems, Expert Witness Lance Wallach
Reportable Transactions and 419 Plans Litigation - Welfare benefit, Medical, Retirement plan benefit and design, Pension specialists, 412i Lawsuits, 419 lawsuits, IRS Audits, 412i Problems, Expert Witness Lance Wallach
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IRS Audits 419, 412i, Captive Insurance Plans With Life Insurance, and Section 79 Scams
Lance Wallach Jun 24, 2011 | Comments (2)
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2 nsaction simply because it is a 412(i) plan.
· Just because a 412(i) plan was audited and sanctioned for certain items, does not necessarily mean the plan engaged in a listed transaction. Some 412(i) plans have been audited and sanctioned for issues not related to listed transactions.
Companies should carefully evaluate proposed investments in plans such as the Benistar Plan. The claimed deductions will not be available, and penalties will be assessed for lack of disclosure if the investment is similar to the investments described in Notice 95-34. In addition, under IRC 6707A, IRS fines participants a large amount of money for not properly disclosing their participation in listed, reportable or similar transactions; an issue that was not before the tax court in either Curcio or McGehee. The disclosure needs to be made for every year the participant is in a plan. The forms need to be properly filed even for years that no contributions are made. I have received numerous calls from participants who did disclose and still got fined because the forms were not filled in properly. A plan administrator told me that he assisted hundreds of his participants with filing forms, and they still all received very large IRS fines for not properly filling in the forms.
IRS has targeted all 419 welfare benefit plans, many 412(i) retirement plans, captive insurance plans with life insurance in them and Section 79 plans.
Lance Wallach, National Society of Accountants Speaker of the Year and member of the American Institute of CPAs faculty of teaching professionals, is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters. He speaks at more than ten conventions annually and writes for over fifty publications. 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. Mr. Wallach may be reached at 516/938.5007, wallachinc@gmail.com, or at www.taxaudit419.com or www.lancewallach.com.
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.
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IRS Targets 412(i) Plans
The ERISA Audit Bulletin
The IRS is aggressively auditing 412(i) plans –- that is, defined benefit pension plans funded exclusively with insurance contracts. It is seeking to curb what it believes to be abuses in the pay the income taxes it would have paid if it had not adopted the plan, plus interest and reduced penalties. (Altogether, 20 different types of employee benefit structures were included in this settlement initiative.)
Finally, in late 2005, the IRS began an audit campaign targeting 412(i) plans. A sample of the types of information the IRS is requesting in these audits is attached. The following are some key areas of concern:
Whether the plan has been funded to produce benefits that exceed the maximums under Code section 415. In defending an audit, it is essential for the taxpayer to obtain actuarial assistance in order to demonstrate that the benefits fall within the 415 limits;
Whether the plan complies with the February 2004 guidance, especially the non-discrimination rules;
Whether the plan document conforms with current legal requirements;
Whether the plan sponsor has complied with applicable deduction limits; and
Whether the plan has been operated in accordance with its terms.
We have been told in several of the audits we are handling that if the plan contains qualification defects (such as a failure of the plan document to be timely amended for EGTRRA), the plan is not eligible for correction under the IRS Audit CAP program –- even if the defects do not fall within the areas which the IRS considers abusive. Other IRS officials have stated a different view; but the fact that we are getting mixed messages from the Service emphasizes the need to proceed with great care in these cases.
Given the substantial taxes and penalties that may be assessed if the IRS concludes that a 412(i) plan has not been properly structured or administered -– and especially if it concludes that the plan is a listed transaction and the taxpayer failed to file the proper notice –- it is imperative that taxpayers obtain expert assistance from the outset in the handling of an audit. With competent preparation, analysis and presentation, it may be possible to substantially mitigate the damage.
The fact that the IRS is auditing 412(i) plans does not mean that every 412(i) plan is abusive. Indeed, a properly structured and administered 412(i) plan (sometimes called a “safe harbor” plan) can be a valuable structure for many employers. Distinguishing between abusive plans and those that are proper will be the challenge in this audit initiative.
IRS Targets 412(i) Plans
The ERISA Audit Bulletin
The IRS is aggressively auditing 412(i) plans –- that is, defined benefit pension plans funded exclusively with insurance contracts. It is seeking to curb what it believes to be abuses in the establishment and funding of some of these plans. As a practical matter, most of the targeted practices are found in smaller plans (1 to 15 participants). If the IRS is successful in attacking these practices, taxpayers that established these types of 412(i) plans in the last few years will face substantial taxes and penalties unless they properly present their positions in the audit process.
Over the past several years, the IRS has systematically escalated its challenge to “abusive” 412(i) plans. The chronology:
Beginning in the early 2000s, IRS officials began giving speeches at benefits conferences expressing the Service’s concern that 412(i) plans were being funded in a way that did not meet the letter or the spirit of the Internal Revenue Code. The officials commented that the IRS intended to take steps to prevent misuse of insurance products in qualified plans. The plans which seemed to generate the most IRS attention were those funded exclusively or almost exclusively with life insurance (asat every 412(i) plan is abusive. Indeed, a properly structured and administered 412(i) plan (sometimes called a “safe harbor” plan) can be a valuable structure for many employers. Distinguishing between abusive plans and those that are proper will be the challenge in this audit initiative.
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