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The IRS says:
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Natural persons who fail
to disclose a reportable
transaction to the IRS
are subject to a $10,000
penalty. Other
nonreporting taxpayers
are subject to a $50,000

The penalties are
increased to $100,000
and $200,000,
respectively, for natural
persons and other
taxpayers who fail to
disclose a reportable
transaction that is a
listed transaction
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In an attempt to curb the use of abusive tax shelters, new, stiff penalties are in effect for failure to adequately disclose a
reportable transaction to the IRS. Reportable transactions take many forms and it often takes an expert to know if you will be at
risk of the high fines and penalties now being imposed by the IRS.

If you have participated in a reportable transaction,
you must file very specific forms and YOU MUST FILE THEM

Our CPAs, Attorneys, ex-IRS agents and specialists know exactly what the IRS is looking for and how to help you avoid the huge
fines and penalties they are imposing. Don't let the IRS get more of your money than they deserve simply because you failed to
file a form properly.

Make sure your S-corporation, family business, or trust is safe from IRS pilferage by getting the expert help you need to address
this issue right now.
NCCPAP November 2010                                                                Newsletter 2010

Business Owners in 419, 412i, Section 79 and Captive Insurance Plans Will Probably Be Fined by the IRS Under
Section 6707A

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

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

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, or visit or,

Lance Wallach
68 Keswick Lane
Plainview, NY 11803
Ph.: (516)938-5007
Fax: (516)938-6330,
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.
Call 516 935-7346
Call 516-935-7346