Tax Shelter Penalty Cases Hurt Thousands of Small Biz Owners

[Lance Wallach]

Tax Shelter Penalty Cases Hurt Thousands of Small Business Owners

March, 2011


Summary
Insurance agents and others sell 412i, 419, captive insurance and section 79 plans to unsuspecting business owners. Since the IRS is calling these plans abusive tax shelters, many small business owners are getting audited and getting penalties under IRC 6707A. They have even fined material advisors and accountants for their participation, and small business owners need to know how to protect themselves from the long reach of the IRS.

Analysis
Insurance agents and others sell 412i, 419, captive insurance and section 79 scams to unsuspecting business owners. The IRS considers many of these plans abusive tax shelters, listed transactions, reportable transactions, or what it calls “similar to,” which allows them to target the plan. The unsuspecting business owners then get audited by the IRS, lose their deductions, and pay interest and penalties. Then comes the bad news. The IRS comes back and fines the business owners a large amount of money for not properly filing under IRC 6707A. They have even fined hundreds of business owners who have filed. The IRS says that they prepared the forms incorrectly or filed improperly, or lied to the IRS.

Taxpayers must report certain transactions to the IRS under Section 6707A of the Tax Code, which was enacted in 2004 to help detect, deter, and shut down abusive tax shelter activities. For example, reportable transactions may include being in a 419,412i, or other insurance plan sold by insurance agents for tax deduction purposes. Other abusive transactions could include captive insurance and section 79 plans, which are usually sold by insurance agents for tax deductions. Taxpayers must disclose their participation in these and other transactions by filing a Reportable Transactions Disclosure Statement (Form 8886) with their income tax returns. People that sell these plans are called material advisors and must also file 8918 forms properly. Failure to report the transactions could result in very large penalties. Accountants who sign tax returns that have these deductions can also be called material advisors and should also file forms 8918 properly.

The IRS has fined hundreds of taxpayers who did file under 6707A. They said that they did not fill out the forms properly, or did not file correctly. The plan administrator or a 412i advised over 200 of his clients how to file. They were then all fined by the IRS for filling out the forms wrong. The fines averaged about $500,000 per taxpayer.
A report by the Treasury Inspector General for Tax Administration (TIGTA) found that the procedures for documenting and assessing the Section 6707A penalty were not sufficient or formalized, and cases often are not fully developed.

TIGTA evaluated the IRS’s effectiveness in identifying, developing, and applying the Section 6707A penalty. Based on its review of 114 assessed Section 6707A penalties, TIGTA determined that many of these files were incomplete or did not contain sufficient audit evidence. TIGTA also found a need for better coordination between the IRS’s Office of Tax Shelter Analysis and other functions.

“As penalties are meant to encourage voluntary taxpayer compliance, it is important that IRS procedures for documenting and assessing them be well developed and fully documented,” said TIGTA Inspector General J. Russell George in a statement. “Any failure to do so raises the risk that taxpayers will not receive consistent and fair treatment under the law, and could further reduce their willingness to comply voluntarily.”

The Section 6707A penalty is a stand-alone penalty and does not require an associated income tax examination; therefore, it applies regardless of whether the reportable transaction results in an understatement of tax. TIGTA determined that, in most cases, the Section 6707A penalty was substantially higher than additional tax assessments taxpayers received from the audit of underlying tax returns. I have had phone calls from taxpayers that contributed less than $100,000 to a listed transaction and were fined over $500,000. I have had phone calls from taxpayers that went into 419, or 412i plans but made no contributions and were fined a large amount of money for being in a listed transaction and not properly filing forms under IRC section 6707A. The IRS claims that the fines are non appealable.

On July 7, 2009, at the request of Congress, the IRS agreed to suspend collection enforcement actions. However, this did not preclude the issuance of notices of assessment that are required by law and adjustment notices that inform the taxpayer of any account activity. In addition, taxpayers continued to receive balance due and final notices of intent to levy, and demands to pay Section 6707A penalties.

TIGTA recommended that the IRS fully develop, document, and properly process Section 6707A penalties. The IRS agreed with TIGTA’s recommendation and plans to take appropriate corrective actions. I think as a result of this many taxpayers who have not yet been fined will shortly receive the fines. Unless a taxpayer files properly there is no statute of limitations. The IRS has, and will continue to go back many years and fine people that are in listed, reportable or substantially similar to transactions.

If you are, or were in a 412i, 419, captive insurance or section 79 plan you should immediately file under 6707A protectively. If you have already filed you should find someone who knows what he is doing to review the forms. I only know of two people who know how to properly file. The IRS instructions are vague. If a taxpayer files wrong, or fills out the forms wrong he still gets the fine. I have had hundreds of phone calls from people in that situation.

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.

[Moderator removes contact and biographical information. Poster please note: contributions are welcome, commercials are not.]

[bmielke]

Hey Lance, we don't allow comericals around here, I am sure a moderator will be arond to clean up shortly, but if the above is relevant and correct and you wish to keep it get rid of the link and the last paragraph and it can probably stick around.

[bmielke]

Also looking at your website four things bother me...

First you use a Gmail account, bad form, very bad form, it screams scam.

Second you say no office visits necessary, then you don't list an address, and the phone you have is unpublished again to me that screams scam.

Third you say in several places that you have never lost a case. Yet you list no cases you have been a part of. *Cough* scam *cough*

Fourth you say you have teams of expert witnesses, accountants, and lawyers, yet your name is the only one to appear on the site again to me that screams scam.

[armia741]

Hey Lance, we don't allow comericals around here, I am sure a moderator will be arond to clean up shortly, but if the above is relevant and correct and you wish to keep it get rid of the link and the last paragraph and it can probably stick around.

[JamesVincent]

Hey Lance, we don't allow comericals around here, I am sure a moderator will be arond to clean up shortly, but if the above is relevant and correct and you wish to keep it get rid of the link and the last paragraph and it can probably stick around.

Mods, ^^?

[Kestrel]

Don't you just love drive-by trolls who resurrect old threads like this?

[wserra]

Yeah, I see it. "armia741" - an obviously astute observer, answering a post from nearly three years ago - will very likely return to edit in a spam link. When s/he does, we'll deal with it. Until then, no preemptive strike.

But thanks, James.

[JamesVincent]

Didn't we talk before about removing the edit option for low post count posters? Like maybe under 5 posts?

[webhick]

Yeah, I see it. "armia741" - an obviously astute observer, answering a post from nearly three years ago - will very likely return to edit in a spam link. When s/he does, we'll deal with it. Until then, no preemptive strike.

But thanks, James.

Actually, armia741 copied bmielke's post word for word. Preemptive strike initiated.