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|Filing disclosure forms for listed
Late breaking news: Large 419 plan
files for Bankruptcy.
Recent court cases and other developments have
highlighted serious problems in plans, popularly know as
Benistar, issued by Nova Benefit Plans of Simsbury,
Connecticut. Recently unsealed IRS criminal case
information now raises concerns with other plans as well. If
you have any type plan issued by NOVA Benefit
Plans, U.S. Benefits Group, Benefit Plan Advisors, Grist Mill
trusts, Rex Insurance Service or Benistar, get help
at once. You may be subject to an audit or in some cases,
On November 17th, 59 pages of search warrant materials
were unsealed in the Nova Benefit Plans litigation
currently pending in the U.S. District Court for the District of
Connecticut. According to these documents, the
IRS believes that Nova is involved in a significant criminal
conspiracy involving the crimes of Conspiracy to
Impede the IRS and Assisting in the Preparation of False
Income Tax Returns. Read more here.
IRS Attacks Business Owners in 419, 412, Section 79
and Captive Insurance Plans Under Section 6707A
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
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
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
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. Read more here
Accounting Today July
Breaking News: Don't Become A
Accountants, insurance professionals and others need to be careful
that they don’t become what the IRS calls material advisors. If they sell
or give advice, or sign tax returns for abusive, listed or similar plans;
they risk a minimum $100,000 fine. Their client will then probably sue
them after having dealt with the IRS.
In 2010, the IRS raided the offices of Benistar in Simsbury, Conn., and
seized the retirement benefit plan administration firm’s files and
records. In McGehee Family Clinic, the Tax Court ruled that a clinic and
shareholder’s investment in an employee benefit plan marketed under
the name “Benistar” was a listed transaction because it was
substantially similar to the transaction described in Notice 95-34 (1995-
1 C.B. 309). This is at least the second case in which the court has
ruled against the Benistar welfare benefit plan, by denominating it a
The McGehee Family Clinic 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.
Click here to read more.
Business Meals and Entertainment Expenses
Excerpt from FCICA Presents Tax, Insurance, and Cost Reduction
Strategies for Small Business by Lance Wallach
The 1993 tax law changed the amount allowable as a deduction
for business meals and entertainment expenses incurred after. In
addition, some special rules were enacted into the tax law. The
limitation for deducting such expenses incurred after December
31, 1993 is 50%. Accordingly, after the general rules and
exceptions are applied to meals and entertainment expenses
incurred and the total dollar amount is determined, the 50% rule
must then be applied. Business people must keep current with
such rules or face the wrath of the IRS. The purpose of this
chapter is to explain the general rule, the exceptions, and the
special rules that are in effect for all business meals and
entertainment expenses. Read more here!
Lance Wallach July
419, 412i, Captive Insurance and section 79 plans continue to get large IRS fines.
By Lance Wallach
Life insurance agents recently have started pushing the newest variety of high ticket items. After the IRS has
almost put 419 plans out of business and severely curtailed abusive 412i plans they needed another way to
sell large commission life insurance policies. Many of the promoters of the 419 and 412i plans are now
promoting section 79 and captive insurance plans. They claim that these plans allow businesses to tax
deduct life insurance. These promoters as in the past claim, that most of the benefits would be for the
business owners. I have been an expert witness in many cases against these abusive plans and my side has
never lost a case.
Recently my office has been receiving over fifty calls per month from people that are being threatened with
large IRS fines. Most of these people (including CPAs) do not understand why this is happening. These
fines are primarily the result of greed. Insurance company, insurance agent, plan promoter and even IRS
greed. Insurance companies are always looking for ways to sell large amounts of life insurance. Taxpayers
are constantly looking for larger tax deductions. Insurance agents want to earn large life insurance
commissions. The IRS has started additional enforcement action against taxpayers and accountants. Read
FBAR Offshore Bank Accounts and Foreign Income Attacked by IRS
Offshore International Today Aug 2011
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%. Don’t want this to happen to you? Visit taxadvisorexpert.
IRS is attacking
419 plans, 419, 412i,
412(e)(3), Section 79,
Captive Insurance, many
other benefit plans,
and plans having
Taxpayers must report certain transactions to the IRS under Section
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 plans
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 monetary penalties in excess of $10,000.
Accountants who sign tax returns, which have these deductions, can also be called material
advisors and should also file forms 8918 properly.
To Read More:
6707A IRS Fines for Business Owners Reduced
Lance Wallach Council Member President, VEBA Plan
If President Obama signs the legislation, the 6707A penalties of $100,000 per individual
and $200,000 per entity for each failure to make special disclosures with respect to a
transaction that the Treasury Department characterizes as a “listed transaction” or
“substantially similar” to a listed transaction will soon be reduced. Unfortunately, the
existing fines have already put some entrepreneurs out of business. It will be interesting to
see how the final legislation addresses that problem.
By Lance Wallach
The 6707A penalties will be reduced for many taxpayers under the amended section,
once it becomes law. Below is my opinion about the existing 6707A fines that have put
business owners out of business and hurt accountants, insurance professionals and other
so called material advisors.
Notwithstanding the underlying Congressional intent in enacting Section 6707A, the
statute as it was written imposed unconscionable hardship on taxpayers. The statute
allows penalties of up to $300,000 per year to be imposed on taxpayers with no
underpayment of tax and no knowledge that they entered into transactions that the IRS
It is rare that a tax provision is found to violate the United States Constitution, but I think
the imposition of such a large penalty on a taxpayer who entered into a transaction that
produced little or even no tax savings and without regard to the taxpayer’s knowledge or
intent raises significant Constitutional concerns with respect to the Eighth Amendment
prohibition of excessive fines, etc. In practice, the requirement that this penalty be
imposed without regard to culpability may have the effect of bankrupting middle class
families who had no intention of entering into a tax shelter – an outcome that has
dismayed even hardened IRS enforcement personnel.
The 6707A section imposes a penalty of $100,000 per individual and $200,000 per entity
for each failure to make special disclosures with respect to a transaction that the Treasury
Department characterizes as a “listed transaction” or “substantially similar” to a listed
transaction. A listed transaction is one that is specifically identified as such by published
IRS guidance. The question of what is "substantially similar" to such a transaction is
increasingly troublesome, especially given the ever broadening IRS definition of the term,
beginning with Treasury Decision 9,000 in 2002.
The penalty applies without regard to whether the small business or the small business
owners have knowledge that the transaction has been listed.
The penalty applies even if the small business and/or the small business owners derived
no tax benefit from the transaction. The penalty also applies even if on audit the IRS
accepts the derived tax benefit, even if interest, penalties, etc., are not imposed.
The penalty is applied at multiple levels, which is devastating to small businesses; the
result is that small business and its owners are hit with multiple penalties. The two most
common problems are that fines are imposed on both the business entity and the owners
as individuals, and also that fines are imposed each year, and thus were sometimes
imposed for five years or more. In the case of a small business, the penalties can easily
exceed the total earnings of the business and cause bankruptcy – totally out of proportion
to any tax advantage that may or may not have been realized.
The penalty is final, must be imposed by the IRS (this is mandatory), and cannot be
There is no judicial review allowed, which raises another Constitutional issue, this time a
separation of powers argument, as it amounts to one branch of government prohibiting
another from functioning.
The taxpayer’s disclosure must initially be made twice – once with the IRS Office of Tax
Shelter Analysis and again with the tax return for the first year in which the transaction is
required to be disclosed. Thereafter, for each year the taxpayer “benefits” from the
transaction it must be reflected on the tax return. As a practical matter, the form should be
filed with the tax return. The IRS directions assume a timely filing. There are no directions
as to how to file late. A few experts have figured that out after months of study and
numerous conversations with IRS personnel. Those conversations were with IRS people
that drafted the regulations, those that receive the forms and others.
A taxpayer that discloses a transaction is subject to the penalty if the IRS deems the
disclosure to be incomplete. I have had numerous conversations with people who filed the
disclosure forms and got fined. They did not properly prepare or file the forms.
If a transaction is not “listed” at the time the taxpayer files a return but it later becomes
listed, the taxpayer becomes responsible for filing a disclosure statement and will be liable
for this penalty for failing to do so. This is true even if the taxpayer has no knowledge that
the transaction has been listed.
The penalty is imposed on transactions that the IRS in its sole discretion determines are
“substantially similar” to a listed transaction. Accordingly, taxpayers may never know or
realize that they are involved in a listed transaction, and accordingly the penalties
compound because they never made any disclosure. At least, if a transaction is
specifically identified, people can find out that it is a listed transaction. But how can
anyone be sure that something is “substantially similar”, or not?
The taxpayer must disclose each year, which can result in compounding of the already
The usual three-year Statute of Limitations does not apply. IRC 6501(c)(10) tolls the
statute until proper disclosure is made.
Because the penalty is required to be imposed without regard to culpability, it may have
the effect of bankrupting small business and/or their owners, even if they had no
knowledge or intention of entering into a listed transaction.
The Treasury Department announces on an ad hoc basis what is a listed transaction.
There is no regulatory process or public comment period involved in determining what
should be a listed transaction. Once a transaction is deemed to be a listed transaction,
the Draconian Section 6707A penalties are triggered. Section 6707A penalties not only
apply to listed transactions but also to transactions that are deemed by Treasury to be
“substantially similar” to any of the listed transactions. Some have said that under Section
6707A, IRS and Treasury are the judge, jury and executioner. Be that as it may, once
again Constitutional concerns need to be addressed, this time possible due process
violations pursuant to the Fourteenth Amendment.
While the penalties were aimed at transactions that the IRS considers abusive, the
penalty is tied to disclosure so that, even if a court finds that the IRS is incorrect in its
determination that a transaction is abusive, the penalty still applies.
Below are some examples.
I was an expert witness for the plaintiff who was sold a 401k with a springing cash value
policy. In court, the Judge called the defendant insurance agent a crook (off the record),
after I had explained the facts, and advised him to settle.
Another example is a business owner. He bought a type of life insurance policy known as
a "springing cash value" plan as an alternative to a pension plan for his employees. Two
years later, the IRS added this type of plan to its list of abusive tax shelters, and the
business owner should have disclosed his purchase to the IRS. But he says the financial
advisor who sold him the insurance plan at no point told him he needed to make such a
Now, the IRS is demanding taxes and interest totaling $60,000. On top of that, the IRS has
set penalties in the amount of $600,000, but has so far granted him several extensions,
"I trusted people, my advisor, to take care of this. Then the IRS came and said, 'Here's
$600,000 you're going to have to pay.' If I have to pay these fees, I will actually have to
declare bankruptcy," he said. And even that could be problematical, because government
obligations generally cannot be discharged in bankruptcy.
Another example is a taxpayer who filed his Form 8886 with his tax returns, but failed to
submit the Form 8886 also to the Office of Tax Shelter Analysis, as is required in the first
year. The IRS assessed the Section 6707A penalty because the taxpayer had not
A doctor thought he had settled his 419 welfare benefit plan issues with the IRS through
the Global Settlement Initiative (IRS Announcement 2005-80). He entered into a closing
agreement and paid his tax. After the closing agreement was executed, in full, the doctor
received a letter from the IRS telling him he was subject to an additional assessment of
penalty, for failing to file a Form 8886, in the amount of $300,000. The IRS publications
on the Global Settlement Initiative did not disclose to the dentist that he might be
assessed Code Section 6707A penalties even though he settled his tax issues through
the IRS’ national settlement program.
I can go on and on with examples of taxpayers fined hundreds of thousands for something
that they knew nothing about. I have been urging business owners to properly file 8886
forms protectively for years. When I speak at national accounting conventions, most
accountants have no knowledge of these large fines. The few that do don’t speak up,
possibly because the Office of Professional Responsibility is now investigating them as
material advisors. If you get paid a certain amount, and give tax advice about a listed,
etc., transaction, you are subject to a $100,000 fine and a referral to that office. If you are
incorporated, the fine is $200,000.00.
The new tax law will reduce the fines for some taxpayers. They still have to properly file.
The fines are still large and unfair.
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 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 his side has never lost a
case. For more information go to www.taxadvisorexperts.org or www.taxaudit419.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.
Copyright (C) 2015Lance Wallach
All rights reserved