IRS Criminal Investigation Department Audits Section 79, Captive Insurance, 412i and 419 Scams

IRS Criminal Investigation (CI) has developed a nationally coordinated program to combat these abusive tax schemes. CI's primary focus is on the identification and investigation of the tax scheme promoters as well as those who play a substantial or integral role in facilitating, aiding, assisting, or furthering the abusive tax scheme, such as accountants or lawyers. Just as important is the investigation of investors who knowingly participate in abusive tax schemes.

First 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.

Do You Have a Potential Abusive Tax Avoidance Transaction

People think that accountants and tax lawyers lead boring lives. Perhaps that may be true for some, but there is plenty of action these days with the IRS and their Employment Plans tax group. Recently, the IRS identified an “emerging issue” that it calls a potential Abusive Tax Avoidance Transaction. If you are a small business with an employment benefit plan, those words are never good to hear.

According to an internal IRS training document we recently obtained, the IRS is now targeting for audit small and medium sized businesses that created their own separate management companies. While creating a separate company to provide management services is legal, the IRS wants to make sure there is a legitimate business reason for doing so. The IRS is actively examining (auditing) businesses that are funneling large sums of money from the operating company to the management company and thus insuring the operating company pays little or no taxes. By transferring funds to the management company, the business strips away much of the income from operations.

Once the money is in the management company, the owners create a defined benefit plan that benefits only the owners and none of the rank and file workers.

http://www.hg.org/article.asp?id=33068 

Be Advised - Everyhting is Not Fine

by Lance Wallach

A few years ago, I testified as an expert witness in a case where a physician was in an abusive 401(k) plan with life insurance. It had a so-called “springing cash value” policy in it. The IRS calls plans with these types of policies “listed transactions.” The judge called the insurance broker “a crook.”

Keeping that in mind, you should know that 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.

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The New Law Guarantees A Substantial Fine Under 6707A

by Lance Wallach

The bill reducing fines for improperly or not filing under 6707A has passed. That sigh of relief you heard last week might have come from people participating in the plans named above, or anything seeking tax relief that is similar to them – what the IRS calls a listed transaction. People think that Congress bailed them out of trouble for participation in such transactions, and that the excessive fines that were being imposed are now a thing of the past. While the situation is certainly better than it was for some people, and while I do not want to rain on anyone’s parade, you are still in Disasterville, and the next to last bus out just left. 

Consider this: The new legislation calls for MINIMUM penalties of $5,000 per person per year, and $10,000 for a business. That is $15,000 per year if you are incorporated. So, if you have been in a plan since, say, 2003, you are looking at fines in excess of $100,000 before you even start to talk about how much of a tax benefit there has been. 
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