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| 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 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 also has to be prepared correctly. I only know of two people in the U.S. who have filed these forms properly for clients. They tell me that was after hundreds of hours of research and over 50 phones calls to various IRS personnel. The filing instructions for Form 8886 presume a timely filling. 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.
Companies considering insurance plans that offer significant tax benefits should be on their guard. Negligent and unscrupulous tax shelter promoters could leave them – as they left a pair of Tampa small business owners — facing back taxes, fines and fees from the IRS as well as expensive and unnecessary insurance.
ReplyDeleteWhen properly designed and administered, Section 419 plans —so named because the law regarding them is found in Section 419 of the Internal Revenue Code — allow businesses to contribute tax deductible funds to a trust in order to provide certain tax-free benefits for business owners and their key employees. Benefits allowable under a properly created and implemented Section 419 plan may include health insurance premiums, uninsured medical care, long term care and death benefits.
Retirement income is never allowed as a benefit under a 419 Plan. But insurance agents holding themselves out as “retirement planning specialists” peddling “alternative investments” often lure small business owners into buying very high-commission life insurance policies with false promises, including promises of tax-free investment income.