IRS Goes on Offensive Against 419A(f)(6) Insurance Plans

It has blocked the use of these plans as a way of getting large tax deductions


Does the IRS hate all welfare benefit plans?

No, but it apparently has a strong bias against those plans purporting to comply with Section 419A(f)(6) of the Internal Revenue Code (IRC).

In a pair of moves recently, the IRS and the Treasury Department acted to eliminate such arrangements. In Notices 2000-15 and 2001-51, the IRS previously published its view that such arrangements are “potentially abusive tax shelters.” (called “listed transactions”). As such, participation in those arrangements was required must to be reported to the IRS on an attachment to the tax return of the businesses participating in them.

Under new regulations (T.D. 9000), the disclosure requirements have been extendedapply to individuals who participate in such arrangements, and the tax effect test of Notice 2000-15 has been eliminated. This requires all such arrangements to be disclosed. In addition, proposed regulations promulgated under IRC Section 419A(f)(6) have closed the door on variations between employers and products.

The proposed regulations rehash the requirements of Section 419A(f)(6) and add the following requirements:
o The plan documents must require the administrator to maintain records verifying compliance with Section 419A(f)(6).
o The IRS and participating employers (or their representatives) must have the right to examine and copy all such records.

In a new position, the IRS claims that all life insurance premiums must be “based on current age”, thus eliminating individual term and cash value life insurance policies.” And in a laughable position, the IRS, in one of the examples, asserts a claim claims that life insurance cash values are the reason that renewal premiums are lower than initial premiums. These examples illustrate IRS’ view that the only benefits that comply with the proposed regulations are those that could be provided and deducted without Section 419A(f)(6).

While Congress meant to leave the door open for something under IRC Section 419A(f)(6), IRS means to close it to everything.

While Congress meant to leave the door open for something under IRC Section 419A(f)(6), IRS means to close it to everything. Do the Committee Reports under 419A(f)(6) say anything about “tax shelters?” No. They speak about multiple-employer welfare benefit plans and the conditions under which Congress intended to authorize them. Apparently Congress forgot to check with the IRS first.

The irony is that as far as the new “blunderbuss” regulations and notices go in attempting to curtail abusive arrangements, their efforts will have little effect in the marketplace.

The promoters of many so-called 419 plans have already sent memos indicating that the notices do not apply to them. While Treasury Decision (TD) 9000 may not directly affect them, it certainly has an impact on their clients. Who would want to list their contribution on their tax returns as a potentially abusive tax shelter and risk getting an IRS audit? What taxpayer would buy such a plan knowing that the administrator under the new proposed regulations would have to furnish to the IRS upon request a list of all businesses that were in the plan? (See Proposed Reg. 1.419A(f)(6)–1(a)(2).) This information is required under the Listed Transaction rules--—Notice Rev. Pro. 2000-15 etc.)

Proposed eEffective dates

T.D. 9000 is effective as of June 14, 2002, and applies to any returns filed after that date (including tax returns for prior years) for which there is a “tax effect” are required to disclose participation in the listed transaction on an attachment to the return. In addition, a copy of the disclosure statement must be filed with the IRS’s Office of Tax Shelter Analysis.

The Proposed RExcept as explained later, these regulations--which generally clarify the existing law--are proposed to be effective for contributions paid or incurred in taxable years of an employer beginning on or after July 11, 2002the date of publication of the Notice of Proposed Rulemaking in the Federal Register.

For contributions made before theis proposed effective date, the IRS will continue to applying existing law, including the analysis set forth in Notice 95-34 and relevant case law. Thus, taxpayers should not infer that a contribution that would be nondeductible under the regulations would be deductible if made before that date. In this regard, taxpayers are reminded that, as noted earlier, the IRS has already identified transactions that are the same as, or substantially similar to the transactions described in Notice 95-34, as listed transactions for purposes of Sec. 1.6011-4T(b)(2) of the Temporary Income Tax Regulations and Sec. 301.6111-2T(b)(2) of the Temporary Procedure and Administration Regulations. …))

We expect to testify at hearings before the IRS about the proposed regulations under IRC 419A(f)(6) in November before they are made final. In addition, later t
This month, we will be meeting with IRS and Treasury officials from the Office of Chief Counsel, Office of Tax Policy, Treasury Department and Office of Tax Policy in Washington, D.C., to discuss the proposed regulations under 419A(f)(6) and T.D. 9000.

For agents and accountants who sell insurance under so-called 419 plans, it appears that the IRS has blocked the use of 10-or-more employer plans as a way of obtaining a large tax deduction under IRC 419A(f)(6). However, there are other ways to obtain a tax deduction for permanent life insurance under IRC Sections 79 or 501(c)(9) (“VEBA trust”) that have been approved by . tThe IRS has approved those methods in its rulings and regulations.

A VEBA is a tax-exempt organization described in IRC Section 501(c)(9) that has received a determination letter from the IRS.

What is a VEBA?

A VEBA is a tax-exempt organization (a trust) described in IRC Section 501(c)(9) and has received a determination letter from the IRS. If the statutory requirements are met, and the IRS issues a favorable letter of determination, then, in general, the qualified cost of contributions by an employer to the VEBA that are ordinary and necessary expenses are deductible for federal income tax purposes.

The VEBA usually provides for the payment of life, accident, sickness and other benefits to VEBA participants or their beneficiaries. The earnings of the VEBA trust are tax-exempt when the fund is accumulating.

Because of the numerous advantages of a VEBA trust, the following types of businesses and business owners should consider joining a VEBA:
o Businesses that would like to protect their assets from creditors
o Profitable businesses that want to reduce their tax liabilities
o Companies that can no longer make contributions to their qualified retirement plans because the plans are overfunded or the plans no longer favor the business owner
o Individuals who want to reduce, eliminate or provide liquidity for estate taxes
o Businesses that wish to supplement or enhance their business- succession plans

Advantages of a VEBA

A VEBA offers several benefits. Large, flexible, tax-deductible contributions can be made, which accumulate and compound while deferring all of the taxes. Participants can receive distributions at any age without penalties. The plan assets are protected from the claims of creditors. Survivor benefits are income tax free, and with proper planning, could be estate tax free. The program can also acquire tax-deductible life insurance, provide funds to pay estate taxes, fund a buy-sell agreement, provide for succession planning, and more.

Of all the benefits a VEBA provides, life insurance is perhaps the most common. A VEBA allows a business owner to deduct large amounts of insurance, the business owner does not use any of his gift-tax exemptions, and--what is most important--the death benefits will not be subject to income or estate taxes.

Bios:
Lance Wallach speaks at more than 70 conventions annually about VEBAs, 412(i) pensions and other unique ways to sell tax-deductible life insurance. For more information, call 516-938-5007.

Ron Snyder is an ERISA attorney and Enrolled Actuary. He has met and frequently spoken with IRS and Treasury officials involved in regulating 419A(f)(6) plans. Some of his comments were included in the proposed regulations.

This information 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.

IRS Audits Focus on Captive Insurance Plans
April 2011 Edition

By Lance Wallach

The IRS started auditing § 419 plans in the 1990s, and then continued going after § 412(i) and other plans that they considered abusive, listed, or reportable transactions, or substantially similar to such transactions. If an IRS audit disallows the § 419 plan or the § 412(i) plan, not only does the taxpayer lose the deduction and pay interest and penalties, but then the IRS comes back under IRC 6707A and imposes large fines for not properly filing.

Insurance agents, financial planners and even accountants sold many of these plans. The main motivations for buying into one were large tax deductions. The motivation for the sellers of the plans was the very large life insurance premiums generated. These plans, which were vetted by the insurance companies, put lots of insurance on the books. Some of these plans continue to be sold, even after IRS disallowances and lawsuits against insurance agents, plan promoters and insurance companies.

In a recent tax court case, Curcio v. Commissioner (TC Memo 2010-115), the tax court ruled that an investment in an employee welfare benefit plan marketed under the name “Benistar” was a listed transaction in that the transaction in question was substantially similar to the transaction described in IRS Notice 95-34. A subsequent case, McGehee Family Clinic, largely followed Curcio, though it was technically decided on other grounds. The parties stipulated to be bound by Curcio on the issue of whether the amounts paid by McGehee in connection with the Benistar 419 Plan and Trust were deductible. Curcio did not appear to have been decided yet at the time McGehee was argued. The McGehee opinion (Case No. 10-102, United States Tax Court, September 15, 2010) does contain an exhaustive analysis and discussion of virtually all of the relevant issues.

Taxpayers and their representatives should be aware that the IRS has disallowed deductions for contributions to these arrangements. The IRS is cracking down on small business owners who participate in tax reduction insurance plans and the brokers who sold them. Some of these plans include defined benefit retirement plans, IRAs, or even 401(k) plans with life insurance.

In order to fully grasp the severity of the situation, one must have an understanding of IRS Notice 95-34, which was issued in response to trust arrangements sold to companies that were designed to provide deductible benefits such as life insurance, disability and severance pay benefits. The promoters of these arrangements claimed that all employer contributions were tax-deductible when paid, by relying on the 10-or-more-employer exemption from the IRC § 419 limits. It was claimed that permissible tax deductions were unlimited in amount.

In general, contributions to a welfare benefit fund are not fully deductible when paid. Sections 419 and 419A impose strict limits on the amount of tax-deductible prefunding permitted for contributions to a welfare benefit fund. Section 419A(F)(6) provides an exemption from § 419 and § 419A for certain “10-or-more employers” welfare benefit funds. In general, for this exemption to apply, the fund must have more than one contributing employer, of which no single employer can contribute more than 10 percent of the total contributions, and the plan must not be experience-rated with respect to individual employers.

According to the Notice, these arrangements typically involve an investment in variable life or universal life insurance contracts on the lives of the covered employees. The problem is that the employer contributions are large relative to the cost of the amount of term insurance that would be required to provide the death benefits under the arrangement, and the trust administrator may obtain cash to pay benefits other than death benefits, by such means as cashing in or withdrawing the cash value of the insurance policies. The plans are also often designed so that a particular employer’s contributions or its employees’ benefits may be determined in a way that insulates the employer to a significant extent from the experience of other subscribing employers. In general, the contributions and claimed tax deductions tend to be disproportionate to the economic realities of the arrangements.

Benistar advertised that enrollees should expect to obtain the same type of tax benefits as listed in the transaction described in Notice 95-34. The benefits of enrollment listed in its advertising packet included:
· Virtually unlimited deductions for the employer;
· Contributions could vary from year to year;
· Benefits could be provided to one or more key executives on a selective basis;
· No need to provide benefits to rank-and-file employees;
· Contributions to the plan were not limited by qualified plan rules and would not interfere with pension, profit sharing or 401(k) plans;
· Funds inside the plan would accumulate tax-free;
· Beneficiaries could receive death proceeds free of both income tax and estate tax;
· The program could be arranged for tax-free distribution at a later date;
· Funds in the plan were secure from the hands of creditors.

The Court said that the Benistar Plan was factually similar to the plans described in Notice 95-34 at all relevant times.

In rendering its decision the court heavily cited Curcio, in which the court also ruled in favor of the IRS. As noted in Curcio, the insurance policies, overwhelmingly variable or universal life policies, required large contributions relative to the cost of the amount of term insurance that would be required to provide the death benefits under the arrangement. The Benistar Plan owned the insurance contracts.

Following Curcio, as the Court has stipulated, the Court held that the contributions to Benistar were not deductible under § 162(a) because participants could receive the value reflected in the underlying insurance policies purchased by Benistar—despite the payment of benefits by Benistar seeming to be contingent upon an unanticipated event (the death of the insured while employed). As long as plan participants were willing to abide by Benistar’s distribution policies, there was no reason ever to forfeit a policy to the plan. In fact, in estimating life insurance rates, the taxpayers’ expert in Curcio assumed that there would be no forfeitures, even though he admitted that an insurance company would generally assume a reasonable rate of policy lapses.

The McGehee Family Clinic had enrolled in the Benistar Plan in May 2001 and claimed deductions for contributions to it in 2002 and 2005. The returns did not include a Form 8886, Reportable Transaction Disclosure Statement, or similar disclosure.

The IRS disallowed the latter deduction and adjusted the 2004 return of shareholder Robert Prosser and his wife to include the $50, 000 payment to the plan. The IRS also assessed tax deficiencies and the enhanced 30 percent penalty totaling almost $21, 000 against the clinic and $21, 000 against the Prossers. The court ruled that the Prossers failed to prove a reasonable cause or good faith exception.

Other important facts:

· In recent years, some § 412(i) plans have been funded with life insurance using face amounts in excess of the maximum death benefit a qualified plan is permitted to pay. Ideally, the plan should limit the proceeds that can be paid as a death benefit in the event of a participant’s death. Excess amounts would revert to the plan. Effective February 13, 2004, the purchase of excessive life insurance in any plan is considered a listed transaction if the face amount of the insurance exceeds the amount that can be issued by $100, 000 or more and the employer has deducted the premiums for the insurance.
· A 412(i) plan in and of itself is not a listed transaction; however, the IRS has a task force auditing 412(i) plans.
· An employer has not engaged in a listed transaction 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, [email protected], 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.

419 Life Insurance Plans and Other Scams – Large IRS Fines –
The IRS Raids Plan Promoter Benistar, and What Does All This Mean To You?

Posted: Dec. 9, 2010
By Lance Wallach


Recently IRS raided Benistar, which is also known as the Grist Mill Trust, the promoter and operator of one of the better known and more heavily scrutinized of the Section 419 life insurance plans. IRS attacked the Benistar 419 plan, and one of its tactics was to demand the names of all the clients Benistar worked with — so they could be audited by the IRS, Benistar refused to give the names and actually appealed the decision to turn over the names. The appeal was unsuccessful, but Benistar officials still refused to give up the names. Recently, the IRS raided the Benistar office and took hundreds of boxes of information, which included information on clients who were in their 419 plan. In documents filed by Benistar itself, they stated that 35 to 50 armed IRS agents descended upon their office to seize documents.
IRS has visited, and is still visiting most of the other plans and obtaining names of participants, selling insurance agents, accountants, etc. They have a whole task force devoted to auditing 419, 412i and other abusive plans.
It’s important to understand what could happen to unsuspecting business owners if they get involved in plans that are not above board. Their names could be turned over to the IRS, where audits could ensue, and where the outcome could be the payment of back taxes and significant penalties. Then they would be fined another time under Section 6707A for not properly reporting on themselves.
Most 419 life insurance and 412i defined benefit pension plans were sold to successful business owners as plans with large tax deductions where money would grow tax free until needed in retirement. I would speak at national accounting and other conventions talking about the problems with most of these plans. I would be attacked by some attendees who where making large insurance commissions selling the plans. I would try to warn insurance company home office executives, but they too had their heads in the sand because of all the money these plans brought in. Then the IRS got tough and started fining the unsuspecting business owners hundreds of thousands a year for not reporting on themselves for being in the plan. The agents and insurance companies advise against filing. “This is a good plan. We have approval.” Not only were the business owners fined under IRS Code 6707A, but the insurance agents were also fined $100, 000 for not reporting on themselves. Accountants who signed tax returns are even being fined 100, 000 by IRS. Then the business owners sue the accountants, insurance agents, etc. I have been following these scenarios for a long time. In fact, I have been an expert witness in many of these cases, and my side has never lost.
Most promoters of 419 plans told clients that their plans complied with the laws and, therefore, were not listed tax transactions. Unfortunately, the IRS doesn’t care what a promoter of a tax-avoidance plan says; it makes its own determination and punishes those who don’t comply.

The McGehee Family Clinic, P.A. was recently hit with back taxes and a penalty under Code Sec. 666A in conjunction with a deduction to the Benistar 419 plan

Dr. McGehee's clinic took a deduction for a 419 plan (the Benistar plan) back in 2005. Eventually, the McGhee Family Clinic was audited. After the audit, the doctor was told that the deduction would be disallowed and that back taxes were due. Additionally, Dr. McGehee was hit with a 20 percent accuracy-related penalty under Code Sec. 6662A. Finally, the tax court sustained the IRS's determination that McGehee was subject to the increased 30 percent penalty, because its return did not include a disclosure statement indicating its participation in the Benistar Trust. I think that in addition to the aforementioned fines, IRS will now fine him, both on a corporate and personal level, another $200, 000 or more, under IRC 6707A, for not properly disclosing his participation in a listed transaction. There was a moratorium on those fines until June 2010, pending new legislation to reduce them. The fines had been 200, 000 per year on the corporate level and $100, 000 per year on the personal level. You got the fine even if you made no contributions for the year. All you had to do was to be in the plan. So Dr. McGehee's fine would be a total of $300, 000 per year for every year that he and his corporation were in the plan.
IRS also says the fine is not appealable. His fine would be in the million-dollar range and it would be in addition to the back taxes, interest, and penalties already discussed earlier in this paragraph.
Legislation just passed slightly reducing those fines, but you still have to properly file to start the Statute of Limitations running to avoid the fines. IRS is fining people who report on themselves, but make a mistake on the forms. Now that the moratorium on the fines has passed, and so has the new legislation, IRS has aggressively moved to fine unsuspecting business owners hundreds of thousands. This is usually after they get audited, and sometimes reach agreement with IRS. Then another division or department of the IRS imposes a fine under 6707A. I am receiving a lot of phone calls from business owners who this is happening to. Unfortunately, some of these people already had called me. I warned them to properly file under 6707A. Either they did not believe me - it is unbelievable - or their accountant or tax attorney filed incorrectly. Then they called again after being fined.
If you were involved with one of these abusive plans, there are steps that you can take to minimize IRS problems. With respect to filing under Section 6707A, I know the two best people in the country at filing after the fact, which is what you would be doing at this point, and still somehow avoiding the fine. It is an art that both learned through countless hours of research and numerous conversations with IRS personnel. Both have filed dozens of times for clients, after the fact, without the clients being fined. Either may well still be able to help you.
And the right accountant, one with the proper knowledge, experience, and Service contacts, can help with the other IRS problems as well. I recall a case where a CPA I knew and recommended was able to get $300, 000 or so in liabilities reduced to three thousand dollars and change. Do not count on a result like this, but help is available.

It’s not worth it!

Stay away from 419 and similar plans like Section 79 plans. Be very careful with 412i plans. Avoid most captive insurance plans.
It’s getting closer to the end of the year. This is when every scammer known to man/woman comes out of the woodwork to sell some fly-by-night tax-deductible plan to clients. Sometimes they come in the form of an accountant, insurance agent-financial planner, or even an attorney. I see this in all of my expert witness cases and when I speak at conventions. I have seen this since the 1990s. I wanted to remind readers that, if it sounds too good to be true, it probably is.
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 Pubic 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, [email protected] or visit www.taxaudit419.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.

Benistar got raided by over 25 IRS agents. For help see www.vebaplan.com

419 Life Insurance Plans and Other Scams – Large IRS Fines –
The IRS Raids Plan Promoter Benistar, and What Does All This Mean To You?

Posted: Dec. 9, 2010
By Lance Wallach


Recently IRS raided Benistar, which is also known as the Grist Mill Trust, the promoter and operator of one of the better known and more heavily scrutinized of the Section 419 life insurance plans. IRS attacked the Benistar 419 plan, and one of its tactics was to demand the names of all the clients Benistar worked with — so they could be audited by the IRS, Benistar refused to give the names and actually appealed the decision to turn over the names. The appeal was unsuccessful, but Benistar officials still refused to give up the names. Recently, the IRS raided the Benistar office and took hundreds of boxes of information, which included information on clients who were in their 419 plan. In documents filed by Benistar itself, they stated that 35 to 50 armed IRS agents descended upon their office to seize documents.
IRS has visited, and is still visiting most of the other plans and obtaining names of participants, selling insurance agents, accountants, etc. They have a whole task force devoted to auditing 419, 412i and other abusive plans.
It’s important to understand what could happen to unsuspecting business owners if they get involved in plans that are not above board. Their names could be turned over to the IRS, where audits could ensue, and where the outcome could be the payment of back taxes and significant penalties. Then they would be fined another time under Section 6707A for not properly reporting on themselves.
Most 419 life insurance and 412i defined benefit pension plans were sold to successful business owners as plans with large tax deductions where money would grow tax free until needed in retirement. I would speak at national accounting and other conventions talking about the problems with most of these plans. I would be attacked by some attendees who where making large insurance commissions selling the plans. I would try to warn insurance company home office executives, but they too had their heads in the sand because of all the money these plans brought in. Then the IRS got tough and started fining the unsuspecting business owners hundreds of thousands a year for not reporting on themselves for being in the plan. The agents and insurance companies advise against filing. “This is a good plan. We have approval.” Not only were the business owners fined under IRS Code 6707A, but the insurance agents were also fined $100, 000 for not reporting on themselves. Accountants who signed tax returns are even being fined 100, 000 by IRS. Then the business owners sue the accountants, insurance agents, etc. I have been following these scenarios for a long time. In fact, I have been an expert witness in many of these cases, and my side has never lost.
Most promoters of 419 plans told clients that their plans complied with the laws and, therefore, were not listed tax transactions. Unfortunately, the IRS doesn’t care what a promoter of a tax-avoidance plan says; it makes its own determination and punishes those who don’t comply.

The McGehee Family Clinic, P.A. was recently hit with back taxes and a penalty under Code Sec. 666A in conjunction with a deduction to the Benistar 419 plan

Dr. McGehee's clinic took a deduction for a 419 plan (the Benistar plan) back in 2005. Eventually, the McGhee Family Clinic was audited. After the audit, the doctor was told that the deduction would be disallowed and that back taxes were due. Additionally, Dr. McGehee was hit with a 20 percent accuracy-related penalty under Code Sec. 6662A. Finally, the tax court sustained the IRS's determination that McGehee was subject to the increased 30 percent penalty, because its return did not include a disclosure statement indicating its participation in the Benistar Trust. I think that in addition to the aforementioned fines, IRS will now fine him, both on a corporate and personal level, another $200, 000 or more, under IRC 6707A, for not properly disclosing his participation in a listed transaction. There was a moratorium on those fines until June 2010, pending new legislation to reduce them. The fines had been 200, 000 per year on the corporate level and $100, 000 per year on the personal level. You got the fine even if you made no contributions for the year. All you had to do was to be in the plan. So Dr. McGehee's fine would be a total of $300, 000 per year for every year that he and his corporation were in the plan.
IRS also says the fine is not appealable. His fine would be in the million-dollar range and it would be in addition to the back taxes, interest, and penalties already discussed earlier in this paragraph.
Legislation just passed slightly reducing those fines, but you still have to properly file to start the Statute of Limitations running to avoid the fines. IRS is fining people who report on themselves, but make a mistake on the forms. Now that the moratorium on the fines has passed, and so has the new legislation, IRS has aggressively moved to fine unsuspecting business owners hundreds of thousands. This is usually after they get audited, and sometimes reach agreement with IRS. Then another division or department of the IRS imposes a fine under 6707A. I am receiving a lot of phone calls from business owners who this is happening to. Unfortunately, some of these people already had called me. I warned them to properly file under 6707A. Either they did not believe me - it is unbelievable - or their accountant or tax attorney filed incorrectly. Then they called again after being fined.
If you were involved with one of these abusive plans, there are steps that you can take to minimize IRS problems. With respect to filing under Section 6707A, I know the two best people in the country at filing after the fact, which is what you would be doing at this point, and still somehow avoiding the fine. It is an art that both learned through countless hours of research and numerous conversations with IRS personnel. Both have filed dozens of times for clients, after the fact, without the clients being fined. Either may well still be able to help you.
And the right accountant, one with the proper knowledge, experience, and Service contacts, can help with the other IRS problems as well. I recall a case where a CPA I knew and recommended was able to get $300, 000 or so in liabilities reduced to three thousand dollars and change. Do not count on a result like this, but help is available.

It’s not worth it!

Stay away from 419 and similar plans like Section 79 plans. Be very careful with 412i plans. Avoid most captive insurance plans.
It’s getting closer to the end of the year. This is when every scammer known to man/woman comes out of the woodwork to sell some fly-by-night tax-deductible plan to clients. Sometimes they come in the form of an accountant, insurance agent-financial planner, or even an attorney. I see this in all of my expert witness cases and when I speak at conventions. I have seen this since the 1990s. I wanted to remind readers that, if it sounds too good to be true, it probably is.
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 Pubic 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, [email protected] or visit www.taxaudit419.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.