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
Showing posts with label Listed transactions. Show all posts
Showing posts with label Listed transactions. Show all posts
Be Fined by the IRS Under Section 6707A Business Owners in 419, 412i, Section 79 and Captive Insurance Plans
NCCPAP
November Newsletter
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 the taxpayer does not necessarily have to make a contribution or claim a tax deduction to be deemed 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 a taxpayer can also be in trouble if they file incorrectly. I have received numerous phone calls from business owners who filed and still got fined. Not only does
the taxpayer 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 told me that the form was prepared 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
they 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 the deductions
taken in prior years. 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; speaks at more than ten conventions annually; writes for over fifty publications; is quoted regularly in the press; and has been featured on TV and radio financial talk shows. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams (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.taxadvisorexperts.org 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.
Lance Wallach
68 Keswick Lane
Plainview, NY 11803
Ph.: (516)938-5007
Fax: (516)938-6330 www.vebaplan.com
National Society of Accountants Speaker of The Year
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.
Class Action Challenges Propriety of 412(e)(3) Annuities for ERISA Defined Benefit Plans
Insurance Class Action Defense and ERISA Litigation
On August 1, 2012, a putative class action lawsuit was filed in the District of Connecticut challenging the propriety of certain insurance contracts used to fund defined benefit plans described in section 412(e)(3) of the Internal Revenue Code. U.S. Telemanagement, Inc. v. Fidelity Security Life Insurance Co. et al., No. 3:12-cv-1110 JBA (D. Conn.). Because we perceive that the complaint is attacking the appropriateness of the product, as well as the specifics of the product that the named defendant sold, it is a lawsuit that potentially could have industry-wide implications. In addition, as plaintiffs in some of the ERISA revenue-sharing lawsuits have attempted to do, the complaint alleges that the insurance company that sold the annuities acted as an ERISA fiduciary of the plans. This lawsuit thus extends the attack on insurance companies, as seen in the revenue-sharing class actions, that attempts to convert service providers into fiduciaries.
412(e)(3) Plans and Annuities
A 412(e)(3) plan is a tax-qualified, defined benefit pension plan that is funded with either annuities or a combination of annuities and life insurance. These sorts of plans are most often funded through annuities, and those annuities have come to be known as 412(e)(3) annuities, because of the section of the Internal Revenue Code that authorizes this sort of plan. Such 412(e)(3) plans are normally marketed to small businesses as vehicles that can provide large income tax deductions in connection with the establishment or continued funding of a pension plan. The annuities used to fund such a plan often are priced upon low assumed rates of return and other actuarial factors, which means that the employer is required to contribute a larger amount of money up front to fund the plan, and that in turn provides employers with larger tax deductions for their business.
IRS is looking at transfer pricing, FBAR and international tax. FBAR International Tax Problems Transfer Pricing and the IRS - By Lance Wallach - The IRS dedicates enormous resources toward dealing with taxpayers who are involved with any form of transfer pricing. The transfer pricing provisions of IRC 482 address four general types of transactions between commonly owned or controlled parties: 1- Use or transfer of tangible property; 2- Services; 3- Loans; 4- Use or transfer of intangible property (especially cost sharing arrangements). Use of tangible property: When one member of a controlled group rents or leases property to another member of the group, the price paid for use of such property must be appropriate for an arm’s length amount. Per Treas. Reg. 1.482-2(c)(2)(i), the arm’s length amount is determined by reference to the amount that would have been charged between independent parties for use of the same or similar property under similar circumstances. Determination of what is arm’s length for fair rental value transactions: a) Period of use; b) Location of use; c) Owner’s investment in property or rent paid; d) Expenses of maintaining the property; e) Type of property; f) Condition of property . Transfer of tangible property: When sales or transfers of tangible property are made between related parties (sales of goods), the arm’s length price generally is the price that an unrelated party would pay for similar property under similar circumstances. Determination of what is arm’s length for inter-company sales: The regulations specify six methods used to determine whether an arm’s length amount has been charged between members of a controlled group. Treas. Reg.1.482-3(a), states that the “best method" should be used to determine arm’s length price. The IRS views the “best method" as the method that produces the most reliable results based on facts and circumstances. The IRS is well aware of the fact that many transfer-pricing studies are prepared with the intention to validate year-end inter-company cost of sales regardless of whether they are arm’s length just to avoid the IRC 6662 penalties taxpayers would be best served if transfer-pricing studies were prepared by knowledgeable experts in the field. Inter-company Services: When one member performs services for another member of a controlled group, an arm’s length price is necessary. This includes services such as marketing, management, technical services, or any other type of service. Such services can be provided by one party for the joint benefit of all members, or can be provided between two members of the controlled group. Determination of what is arm’s length for inter-company services: The arm’s length standard for services between related parties is found in Treas. Reg. 1.482-2(b)(3) which states, “ an arm’s length charge for services rendered shall be the amount which was charged or would have been charged for the same or similar services in independent transactions with or between unrelated parties under similar circumstances considering all relevant facts." The arm’s length charge for services between related parties will depend upon the facts related to the services provided. The pricing rules fall within three categories: 1) An arm’s length charge will be based on the amount that would have been charged by an unrelated party. This generally means that the price should be based on reimbursement of cost, plus a mark-up for profit. 2) An arm’s length charge may be based on only the costs incurred, provided that certain criteria are met. 3) No charge is necessary, if certain criteria are met. The area that concerns the IRS most with these types of transactions is technical services with regard provided by larger U.S corporations to their foreign CPC’s, which are not charged for these services. In regards to smaller cases, the IRS typically examines management fees in detail to ensure they are arm’s length. Inter-company Loans: In the context of IRC 482, most of the areas of conflict in this area revolve around interest. When loans are made between members of a controlled group, interest rates charged do not always meet the required arm’s length standard. Determination of what is arm’s length for inter-company loans: The arm’s length standard for loans between related parties is found in Treas. Reg. 1.482-2(a)(2) which states that “ an arm’s length rate of interest shall be a rate of interest which was charged, or would have been charged, at the time the indebtedness arose, in independent transactions with or between unrelated parties under similar circumstances." Factors that are listed in Treas. Reg. 1.482-2(a)(2) that should be considered in determining arm’s length interest are: a) The principle amount and duration of the loan; b) The security involved; c) The credit standing of the borrower; d) The prevailing interest rate where the loan was made. The regulations provide further guidance in the following areas: a) Safe harbor rules; b) Ordering rules; c) Determination of bona fide indebtedness; d) Period for which interest is charged. Transfers of intangible properties: When transfers of intangible property are made between controlled parties, the arm’s length price is often difficult to determine, in part because the property’s value derives from intellectual capital such as ideas, the outcome of research and development or creation of software. Determination of what is arm’s length for transfer of intangible property: The regulations specify four methods to determine whether an arm’s length amount has been charged between the members of a controlled group with respect to the transfer or use of intangible property. Treas. Reg.1.482-4 (a) states that the “best method" should be used to determine the arm’s length price between related parties. Controlled parties may enter into a qualified cost sharing arrangements to share costs related to developing intangibles. They may also contribute existing intangibles for use in further development or for use in developing new and distinct intangibles. The following general rules of Treas. Reg.1.482-7 (a) and (b) apply to qualified cost sharing arrangements: a) Two or more controlled participants agree to share the costs of developing intangibles. b) Costs are shared based on each participant’s share of reasonably anticipated benefits from the intangibles to be developed. c) A “buy-in" must be paid to the participant that contributes pre-existing intangible property to the qualified cost sharing arrangement. As with transfer pricing reports, cost-sharing agreements should be prepared by qualified experts who are knowledgeable in this area. The ideal candidate would probably be someone with decades of experience preferably with the IRS in the international taxation area. Said ideal candidate should also of course be a CPA. If examined by the IRS, the cost sharing agreement will be reviewed in detail. For further guidance refer to the Coordinated Issue Paper utilized as a guideline for the IRS personnel dated June 5th 2009. As an expert witness Lance Wallach's side has never lost a case. People need to be careful of 419 Welfare Benefit Plans, 412i plans, Section 79 plans and Captive Insurance Plans. Most of these plans are sold by insurance agents. If you are in an abusive, listed or similar transaction plan you need to file under IRS 6707a. The participant files form 8886, and the salesmen or accountant who signs the tax returns files form 8918 if they got paid over $10,000. They are called Material Advisors and face a minimum $100,000 fine. Some plans are offshore which could involve FBAR or OVDI filings. If you have money overseas you probably need to file for IRS tax amnesty. If you want to reduce the tax we suggest that you first file and then opt out. For more information Google Lance Wallach. 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.
IRS is looking at transfer pricing, FBAR and international tax. FBAR International Tax Problems Transfer Pricing and the IRS - By Lance Wallach - The IRS dedicates enormous resources toward dealing with taxpayers who are involved with any form of transfer pricing.
The transfer pricing provisions of IRC 482 address four general types of transactions between commonly owned or controlled parties:
1- Use or transfer of tangible property;
2- Services;
3- Loans;
4- Use or transfer of intangible property (especially cost sharing arrangements).
Use of tangible property: When one member of a controlled group rents or leases property to another member of the group, the price paid for use of such property must be appropriate for an arm’s length amount. Per Treas. Reg. 1.482-2(c)(2)(i), the arm’s length amount is determined by reference to the amount that would have been charged between independent parties for use of the same or similar property under similar circumstances.
Determination of what is arm’s length for fair rental value transactions:
a) Period of use;
b) Location of use;
c) Owner’s investment in property or rent paid;
d) Expenses of maintaining the property;
e) Type of property;
f) Condition of property .
Transfer of tangible property: When sales or transfers of tangible property are made between related parties (sales of goods), the arm’s length price generally is the price that an unrelated party would pay for similar property under similar circumstances.
Determination of what is arm’s length for inter-company sales: The regulations specify six methods used to determine whether an arm’s length amount has been charged between members of a controlled group. Treas. Reg.1.482-3(a), states that the “best method" should be used to determine arm’s length price. The IRS views the “best method" as the method that produces the most reliable results based on facts and circumstances. The IRS is well aware of the fact that many transfer-pricing studies are prepared with the intention to validate year-end inter-company cost of sales regardless of whether they are arm’s length just to avoid the IRC 6662 penalties taxpayers would be best served if transfer-pricing studies were prepared by knowledgeable experts in the field.
Inter-company Services: When one member performs services for another member of a controlled group, an arm’s length price is necessary. This includes services such as marketing, management, technical services, or any other type of service. Such services can be provided by one party for the joint benefit of all members, or can be provided between two members of the controlled group.
Determination of what is arm’s length for inter-company services: The arm’s length standard for services between related parties is found in Treas. Reg. 1.482-2(b)(3) which states, “ an arm’s length charge for services rendered shall be the amount which was charged or would have been charged for the same or similar services in independent transactions with or between unrelated parties under similar circumstances considering all relevant facts." The arm’s length charge for services between related parties will depend upon the facts related to the services provided. The pricing rules fall within three categories:
1) An arm’s length charge will be based on the amount that would have been charged by an unrelated party. This generally means that the price should be based on reimbursement of cost, plus a mark-up for profit.
2) An arm’s length charge may be based on only the costs incurred, provided that certain criteria are met.
3) No charge is necessary, if certain criteria are met.
The area that concerns the IRS most with these types of transactions is technical services with regard provided by larger U.S corporations to their foreign CPC’s, which are not charged for these services. In regards to smaller cases, the IRS typically examines management fees in detail to ensure they are arm’s length.
Inter-company Loans: In the context of IRC 482, most of the areas of conflict in this area revolve around interest. When loans are made between members of a controlled group, interest rates charged do not always meet the required arm’s length standard.
Determination of what is arm’s length for inter-company loans: The arm’s length standard for loans between related parties is found in Treas. Reg. 1.482-2(a)(2) which states that “ an arm’s length rate of interest shall be a rate of interest which was charged, or would have been charged, at the time the indebtedness arose, in independent transactions with or between unrelated parties under similar circumstances."
Factors that are listed in Treas. Reg. 1.482-2(a)(2) that should be considered in determining arm’s length interest are:
a) The principle amount and duration of the loan;
b) The security involved;
c) The credit standing of the borrower;
d) The prevailing interest rate where the loan was made.
The regulations provide further guidance in the following areas:
a) Safe harbor rules;
b) Ordering rules;
c) Determination of bona fide indebtedness;
d) Period for which interest is charged.
Transfers of intangible properties: When transfers of intangible property are made between controlled parties, the arm’s length price is often difficult to determine, in part because the property’s value derives from intellectual capital such as ideas, the outcome of research and development or creation of software.
Determination of what is arm’s length for transfer of intangible property: The regulations specify four methods to determine whether an arm’s length amount has been charged between the members of a controlled group with respect to the transfer or use of intangible property. Treas. Reg.1.482-4 (a) states that the “best method" should be used to determine the arm’s length price between related parties. Controlled parties may enter into a qualified cost sharing arrangements to share costs related to developing intangibles. They may also contribute existing intangibles for use in further development or for use in developing new and distinct intangibles.
The following general rules of Treas. Reg.1.482-7 (a) and (b) apply to qualified cost sharing arrangements:
a) Two or more controlled participants agree to share the costs of developing intangibles.
b) Costs are shared based on each participant’s share of reasonably anticipated benefits from the intangibles to be developed.
c) A “buy-in" must be paid to the participant that contributes pre-existing intangible property to the qualified cost sharing arrangement.
As with transfer pricing reports, cost-sharing agreements should be prepared by qualified experts who are knowledgeable in this area. The ideal candidate would probably be someone with decades of experience preferably with the IRS in the international taxation area. Said ideal candidate should also of course be a CPA. If examined by the IRS, the cost sharing agreement will be reviewed in detail. For further guidance refer to the Coordinated Issue Paper utilized as a guideline for the IRS personnel dated June 5th 2009.
As an expert witness Lance Wallach's side has never lost a case. People need to be careful of 419 Welfare Benefit Plans, 412i plans, Section 79 plans and Captive Insurance Plans. Most of these plans are sold by insurance agents. If you are in an abusive, listed or similar transaction plan you need to file under IRS 6707a. The participant files form 8886, and the salesmen or accountant who signs the tax returns files form 8918 if they got paid over $10,000. They are called Material Advisors and face a minimum $100,000 fine. Some plans are offshore which could involve FBAR or OVDI filings. If you have money overseas you probably need to file for IRS tax amnesty. If you want to reduce the tax we suggest that you first file and then opt out. For more information Google Lance Wallach.
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.
The transfer pricing provisions of IRC 482 address four general types of transactions between commonly owned or controlled parties:
1- Use or transfer of tangible property;
2- Services;
3- Loans;
4- Use or transfer of intangible property (especially cost sharing arrangements).
Use of tangible property: When one member of a controlled group rents or leases property to another member of the group, the price paid for use of such property must be appropriate for an arm’s length amount. Per Treas. Reg. 1.482-2(c)(2)(i), the arm’s length amount is determined by reference to the amount that would have been charged between independent parties for use of the same or similar property under similar circumstances.
Determination of what is arm’s length for fair rental value transactions:
a) Period of use;
b) Location of use;
c) Owner’s investment in property or rent paid;
d) Expenses of maintaining the property;
e) Type of property;
f) Condition of property .
Transfer of tangible property: When sales or transfers of tangible property are made between related parties (sales of goods), the arm’s length price generally is the price that an unrelated party would pay for similar property under similar circumstances.
Determination of what is arm’s length for inter-company sales: The regulations specify six methods used to determine whether an arm’s length amount has been charged between members of a controlled group. Treas. Reg.1.482-3(a), states that the “best method" should be used to determine arm’s length price. The IRS views the “best method" as the method that produces the most reliable results based on facts and circumstances. The IRS is well aware of the fact that many transfer-pricing studies are prepared with the intention to validate year-end inter-company cost of sales regardless of whether they are arm’s length just to avoid the IRC 6662 penalties taxpayers would be best served if transfer-pricing studies were prepared by knowledgeable experts in the field.
Inter-company Services: When one member performs services for another member of a controlled group, an arm’s length price is necessary. This includes services such as marketing, management, technical services, or any other type of service. Such services can be provided by one party for the joint benefit of all members, or can be provided between two members of the controlled group.
Determination of what is arm’s length for inter-company services: The arm’s length standard for services between related parties is found in Treas. Reg. 1.482-2(b)(3) which states, “ an arm’s length charge for services rendered shall be the amount which was charged or would have been charged for the same or similar services in independent transactions with or between unrelated parties under similar circumstances considering all relevant facts." The arm’s length charge for services between related parties will depend upon the facts related to the services provided. The pricing rules fall within three categories:
1) An arm’s length charge will be based on the amount that would have been charged by an unrelated party. This generally means that the price should be based on reimbursement of cost, plus a mark-up for profit.
2) An arm’s length charge may be based on only the costs incurred, provided that certain criteria are met.
3) No charge is necessary, if certain criteria are met.
The area that concerns the IRS most with these types of transactions is technical services with regard provided by larger U.S corporations to their foreign CPC’s, which are not charged for these services. In regards to smaller cases, the IRS typically examines management fees in detail to ensure they are arm’s length.
Inter-company Loans: In the context of IRC 482, most of the areas of conflict in this area revolve around interest. When loans are made between members of a controlled group, interest rates charged do not always meet the required arm’s length standard.
Determination of what is arm’s length for inter-company loans: The arm’s length standard for loans between related parties is found in Treas. Reg. 1.482-2(a)(2) which states that “ an arm’s length rate of interest shall be a rate of interest which was charged, or would have been charged, at the time the indebtedness arose, in independent transactions with or between unrelated parties under similar circumstances."
Factors that are listed in Treas. Reg. 1.482-2(a)(2) that should be considered in determining arm’s length interest are:
a) The principle amount and duration of the loan;
b) The security involved;
c) The credit standing of the borrower;
d) The prevailing interest rate where the loan was made.
The regulations provide further guidance in the following areas:
a) Safe harbor rules;
b) Ordering rules;
c) Determination of bona fide indebtedness;
d) Period for which interest is charged.
Transfers of intangible properties: When transfers of intangible property are made between controlled parties, the arm’s length price is often difficult to determine, in part because the property’s value derives from intellectual capital such as ideas, the outcome of research and development or creation of software.
Determination of what is arm’s length for transfer of intangible property: The regulations specify four methods to determine whether an arm’s length amount has been charged between the members of a controlled group with respect to the transfer or use of intangible property. Treas. Reg.1.482-4 (a) states that the “best method" should be used to determine the arm’s length price between related parties. Controlled parties may enter into a qualified cost sharing arrangements to share costs related to developing intangibles. They may also contribute existing intangibles for use in further development or for use in developing new and distinct intangibles.
The following general rules of Treas. Reg.1.482-7 (a) and (b) apply to qualified cost sharing arrangements:
a) Two or more controlled participants agree to share the costs of developing intangibles.
b) Costs are shared based on each participant’s share of reasonably anticipated benefits from the intangibles to be developed.
c) A “buy-in" must be paid to the participant that contributes pre-existing intangible property to the qualified cost sharing arrangement.
As with transfer pricing reports, cost-sharing agreements should be prepared by qualified experts who are knowledgeable in this area. The ideal candidate would probably be someone with decades of experience preferably with the IRS in the international taxation area. Said ideal candidate should also of course be a CPA. If examined by the IRS, the cost sharing agreement will be reviewed in detail. For further guidance refer to the Coordinated Issue Paper utilized as a guideline for the IRS personnel dated June 5th 2009.
As an expert witness Lance Wallach's side has never lost a case. People need to be careful of 419 Welfare Benefit Plans, 412i plans, Section 79 plans and Captive Insurance Plans. Most of these plans are sold by insurance agents. If you are in an abusive, listed or similar transaction plan you need to file under IRS 6707a. The participant files form 8886, and the salesmen or accountant who signs the tax returns files form 8918 if they got paid over $10,000. They are called Material Advisors and face a minimum $100,000 fine. Some plans are offshore which could involve FBAR or OVDI filings. If you have money overseas you probably need to file for IRS tax amnesty. If you want to reduce the tax we suggest that you first file and then opt out. For more information Google Lance Wallach.
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.
FBAR Offshore Bank Accounts and Foreign Income Attacked by IRS. Lance Wallach, expert witness.
You may want to think about participation in the IRS’ offshore tax amnesty program (called the Offshore Voluntary Disclosure Initiative). Do you want to play audit roulette with the IRS? Some clients think they are too small to be prosecuted. They are wrong.
To the average businessperson, only the guys with tens of millions secretly stashed in Swiss bank accounts get prosecuted. Don't tell that to Michael Schiavo. He was just prosecuted for hiding money in a Swiss account back in 2003. How much money does the IRS say he hid? A whopping $90,000. That’s it.
But wait, there is more to the story. Schiavo attempted to do a quiet disclosure during the 2009 amnesty but instead of filling out the amnesty paperwork, he simply trusted that by coming forward voluntarily he could avoid criminal prosecution. He was wrong on all counts. Nothing is too small for the IRS, and nothing is too old.
“So, to save a whopping $40,624 in taxes, this guy risked a felony conviction and prison time, not to mention steep penalties that could very easily eat up the entire $90,000, and also his criminal and civil defense costs.
The smart taxpayers are the ones coming forward and not having to look over their shoulders for the next 10 years.
Time is running out. The tax amnesty runs through August but it takes at least days to jump through all the hoops. We will also fight hard to reduce the penalties down even more. Remember, the IRS can go as low as 5%.
As an expert witness Lance Wallach's side has never lost a case. People need to be careful of 419 Welfare Benefit Plans, 412i plans, Section 79 plans and Captive Insurance Plans. Most of these plans are sold by insurance agents. If you are in an abusive, listed or similar transaction plan you need to file under IRS 6707a. The participant files form 8886, and the salesmen or accountant who signs the tax returns files form 8918 if they got paid over $10,000. They are called Material Advisors and face a minimum $100,000 fine. Some plans are offshore which could involve FBAR or OVDI filings. If you have money overseas you probably need to file for IRS tax amnesty. If you want to reduce the tax we suggest that you first file and then opt out. For more information Google Lance Wallach.
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.
6707A Penalties & 419 Plans Litigation: More Problems for 419 Plans
6707A Penalties & 419 Plans Litigation: More Problems for 419 Plans: By Lance Wallach , CLU, Chic, CIMC and Ronald H. Snyder, JD, MAAA, EA For years, life insurance companies and agents have tri...
You get what you pay for, how much do people pay for business appraisals?
Lance Wallach
Like any other professional service, such as legal services, medical care, or accounting services, the price of appraisal services should always be one consideration in selecting the professional or professional firm. However, it's usually not appropriate to shop for the lowest priced vendor, or to use competitive bidding to obtain the lowest price. The heart patient, whose life may depend on the skill and judgment of his surgeon, wouldn't be smart to put his surgery out to bid. Similarly, the client whose financial fortunes may rely on the quality of work or the effectiveness of testimony by his valuation expert should probably not make a decision on hiring an appraiser based primarily on lowest fees.
In a business appraisal, the low-end software-driven product should be approached with caution. In general these products are designed to give quick, and not necessarily accurate answers to price shoppers, and by design deny the client the expertise of the appraiser's many years of valuation wisdom. Often these are done by part-time appraisers, or are loss leaders intended to lure clients into more expensive consulting agreements. People should beware of any appraiser who is willing to render an opinion of value without a personal interview, and hands-on inspection of the company's financial and administrative records.
The relationship between quality of services and fees is not linear: there are factors unrelated to the quality of the services that affect the fees demanded for them. For example, the basic amount of work the appraiser has to perform for an appraisal is driven by the professional standards he must follow in conducting the appraisal. The emergence of the Uniform Standards of Professional Appraisal Practice (USPAP) as the controlling rules for appraisal engagements has increased the amount of work appraisers must do, even for simple appraisal assignments.
Services Offered:
business valuation services, acquisitions, mergers, buy-sell
agreements,business evaluation, expert testimony, estate taxes,
valuation services, business planning, company valuation methods
The largest single driver of appraisal cost though, is the purpose to which the client desires to put the appraisal result. Appraisals for use as informal pricing guides for sellers or buyers require the least amount of work on the continuum of effort, and appraisals done for use in contentious litigation probably require the most effort. In between these extremes are appraisals for other purposes, such as buy/sell agreements, partnership agreements, estate planning, asset allocation, divorce, etc.
Preliminary Analyses, Value Studies - $3,000 to $10,000.
These kinds of less-than-comprehensive valuation efforts can be well suited for situations where a client needs a ballpark estimate of value, perhaps as a starting point for sales negotiations, or to achieve a better understanding of the value drivers in his company. Often this type of assignment is begun with a Value Study to identify the value drivers of the subject business entity, and followed-on with consulting over a period of time to prepare the business and the owner for subsequent sale.
Limited Partnership Appraisals - Value in Real Property Assets Only - Discount Study - $3,000 to $10,000.
The typical setting for this kind of appraisal is a Family Partnership formed to protect real property assets from estate taxation. Usually the partnership has no income distributions to the limited partners, and all of the profit is paid to the General Partner. The value of the entity is based on its assets, and the values of the real property assets are provided to us by the real estate appraiser. Our assignment is to estimate the value of small minority limited partnership holdings in the entity, and to assign marketability and minority discounts from the enterprise value, if applicable. These projects typically involve only a summary report. You also need to be aware that at some point the IRS may be looking at this. Maybe you want to use a firm with ex IRS people on staff?
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.
Backlash on too-good-to-be-true insurance plan
No Shelter Here September 2011
By: Lance Wallach
The 412(i), 419, captive insurance, and section 79 plans were marketed as a way for small-business owners to set up retirement, welfare benefit plans, or other tax-deductible programs while leveraging huge tax savings, but the IRS put most of them on a list of abusive tax shelters, listed transactions, or similar transactions, etc., and has more recently focused audits on them. Many accountants are unaware of the issues surrounding these plans, and many big-name insurance companies are still encouraging participation in them.
Seems Attractive
The plans are costly up-front, but your money builds over time, and there’s a large payout if the money is removed before death. While many business owners have retirement plans, they also must care for their employees. With one of these plans, business owners are not required to give their workers anything.Gotcha
Although small business has taken a recessionary hit and owners may not be spending big sums on insurance now, an IRS task force is auditing people who bought these as early as 2004. There is no statute of limitations.The IRS also requires participants to file Form 8886 informing the IRS of participation in this “abusive transaction.” Failure to file or to file incorrectly will cost the business owner interest and penalties. Plus, you’ll pay back whatever you claimed for a deduction, and there are additional fines — possibly 70% of the tax benefit you claim in a year. And, if your accountant does not confidentially inform on you, he or she will get fined $100,000 by the IRS. Further, the IRS can freeze assets if you don’t pay and can fine you on a corporate and a personal level despite the type of business entity you have.
Legal Wrangling
Currently, small businesses facing audits and potentially huge tax penalties over these plans are filing lawsuits against those who marketed, designed, and sold the plans. Find out promptly if you have one of these plans and seek advice from a knowledgeable accountant to help you properly file Form 8886.—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. www.taxaudit419.com, www.vebaplan.org, and www.section79plan.org
This article is for informational purposes only and should not be construed as specific legal or financial advice.
Lance Wallach, Expert Witness.
Offshore International Today
IRS Offshore Voluntary Disclosure Program Reopens
By Lance Wallach, CLU, CHFC
Abusive Tax Shelter, Listed Transaction, Reportable Transaction Expert Witness
Abusive Tax Shelter, Listed Transaction, Reportable Transaction Expert Witness
Today, the Internal Revenue Service reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes. Additionally, the IRS revealed the collection of more than $4.4 billion so far from the two previous international programs.
The Offshore Voluntary Disclosure Program (OVDP) was reopened following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. This program will remain open indefinitely until otherwise announced.
Lance Wallach and his associates have received thousands of phone calls from concerned clients with questions about the prior programs. Some of Lance’s associates are still very busy helping people with the last program. Not a single person has been audited and most are pleased with the results and are now able to sleep easily without worrying about the IRS. According to Lance, it requires years of experience to obtain a good result from the program.
He suggests using a CPA-certified, ex-IRS agent with lots of international tax experience. While this is not a requirement to file under the program, Lance has heard many horror stories from people who have tried to file by themselves or who have used inexperienced accountants.
“Our focus on offshore tax evasion continues to produce strong, substantial results for the nation’s taxpayers,” said IRS Commissioner Doug Shulman. “We have billions of dollars in hand from our previous efforts, and we have more people wanting to come in and get right with the government. This new program makes good sense for taxpayers still hiding assets overseas and for the nation’s tax system.”
The new program is similar to the 2011 program in many ways, but it has a few key differences. Unlike last year, there is no set deadline for people to apply. However, the terms of the program could change at any time going forward. For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers – or decide to end the program entirely at any point.
“As we've said all along, people need to come in and get right with us before we find you,” Shulman said. “We are following more leads and the risk for people who do not come in continues to increase.”
The third offshore effort accompanies another announcement that Shulman made today, that the IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program. That figure reflects closures of about 95 percent of the cases from the 2009 program. On top of that, the IRS has collected an additional $1 billion from up front payments required under the 2011 program. That number will grow as the IRS processes the 2011 cases.
In all, the IRS has seen 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. Since the 2011 program closed last September, hundreds of taxpayers have come forward to make voluntary disclosures. Those who come in after the closing of the 2011 program will be able to be treated under the provisions of the new OVDP program.
The overall penalty structure for the new program is the same for 2011, except for taxpayers in the highest penalty category.
The new program’s penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or the value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011.
Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.
Participants face a 27.5 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty. Smaller offshore accounts will face a 12.5 percent penalty. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the new OVDP will qualify for this lower rate. As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.
The IRS recognizes that its success in offshore enforcement and in the disclosure programs has raised awareness related to tax filing obligations. This includes awareness by dual citizens and others who may be delinquent in filing, but owe no U.S. tax.
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. 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 the 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.taxadvisorexpert.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.
No Shelter Here, Backlash on too-good-to-be-true insurance plan
Remodeling Hanley / Wood
September 2011
By: Lance Wallach
The 412(i), 419, captive insurance, and section 79 plans were marketed as a way for small-business owners to set up retirement, welfare benefit plans, or other tax-deductible programs while leveraging huge tax savings, but the IRS put most of them on a list of abusive tax shelters, listed transactions, or similar transactions, etc., and has more recently focused audits on them. Many accountants are unaware of the issues surrounding these plans, and many big-name insurance companies are still encouraging participation in them.
Seems Attractive
The plans are costly up-front, but your money builds over time, and there’s a large payout if the money is removed before death. While many business owners have retirement plans, they also must care for their employees. With one of these plans, business owners are not required to give their workers anything.Gotcha
Although small business has taken a recessionary hit and owners may not be spending big sums on insurance now, an IRS task force is auditing people who bought these as early as 2004. There is no statute of limitations.The IRS also requires participants to file Form 8886 informing the IRS of participation in this “abusive transaction.” Failure to file or to file incorrectly will cost the business owner interest and penalties. Plus, you’ll pay back whatever you claimed for a deduction, and there are additional fines — possibly 70% of the tax benefit you claim in a year. And, if your accountant does not confidentially inform on you, he or she will get fined $100,000 by the IRS. Further, the IRS can freeze assets if you don’t pay and can fine you on a corporate and a personal level despite the type of business entity you have.
Legal Wrangling
Currently, small businesses facing audits and potentially huge tax penalties over these plans are filing lawsuits against those who marketed, designed, and sold the plans. Find out promptly if you have one of these plans and seek advice from a knowledgeable accountant to help you properly file Form 8886.
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. 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 the 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, lawallach@aol.com or visit www.taxaudit419.com, www.vebaplan.org, www.section79.plan
This article is for informational purposes only and should not be construed as specific legal or financial advice.
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