| For those who participated in a 419 welfare benefit | | | | disallowed taxes. |
| plan or a 412i retirement plan or other abusive tax | | | | There are business owners who owe $6,000 in taxes |
| shelter as well as those who prepared and/or signed a | | | | but have been assessed $1.2 million in penalties. The |
| tax return for someone who did participate in such a | | | | existing cases involve many types of businesses, |
| plan, the information that follows is critical. | | | | including doctors' offices, dental practices, grocery |
| Participants probably did not properly file with either the | | | | store owners, mortgage companies and restaurant |
| IRS or the Office of Tax Shelter Analysis, as required | | | | owners. |
| by IRC Section 6707A, or with their state. Non-filed or | | | | A 419 plan is a type of health and benefits plan and a |
| incorrectly filed forms mean the Statute of Limitations | | | | 412(i) plan is a retirement plan. Typically, these were |
| is open, and participants will probably be fined $200,000 | | | | sold to small, privately held businesses with fewer than |
| or a lot more. | | | | 20 employees and several million dollars in gross |
| In July I started receiving a lot of phone calls from | | | | revenues. |
| business owners who are being advised that the IRS | | | | Under §6707A of the Internal Revenue Code, once |
| is considering asserting penalties provided under | | | | the IRS flags something as an abusive tax shelter, or |
| Internal Revenue Code 6707A for not adequately | | | | "listed transaction," penalties are imposed per year for |
| disclosing a listed transaction. If plan participants have | | | | each failure to disclose it. Another allegation is that |
| not yet gotten the letter, they will shortly. | | | | businesses weren't told that they had to file Form |
| Even if plan participants stopped contributing to their | | | | 8886, which discloses a listed transaction. |
| plan years ago, they will still get the fine. Even if plan | | | | The vast majority of accountants either did not file the |
| participants got out of their plan years ago, or think | | | | forms for their clients or did not prepare them |
| they did, they will still get the fine. Even if they have | | | | correctly. |
| been audited already, they get the fine. The fine is for | | | | Because the IRS did not begin to focus audits on |
| not filing properly, or not at all. | | | | these types of plans until some years after they |
| The fines for 419 and/or 412i plan participants have | | | | became listed transactions, the penalties have already |
| averaged about $600,000. The accountants probably | | | | stacked up by the time of the audits. |
| cannot help the plan participants because the | | | | The penalties are not appealable and must be paid |
| accountants that signed the tax returns in question | | | | before filing an administrative claim for a refund. |
| also get fined. | | | | In 2004, the IRS issued notices and revenue rulings |
| It was not the responsibility of the plan administrator or | | | | indicating that the plans were listed transactions, but |
| insurance agent to assist the plan participants with | | | | plaintiffs' lawyers allege that there were earlier signs |
| Form 8886, which is required by the IRS. The | | | | that the plans ran afoul of the tax laws, evidenced by |
| accountants should have advised plan participants and | | | | the fact that the IRS is auditing plans that existed |
| helped them. It is now after the fact, and the | | | | before 2004. |
| accountants probably have no experience with these | | | | An attorney filed a class action in federal court against |
| matters after the fact. They will not know how to | | | | four insurance companies claiming that they were |
| repair the damage that has been done at this point. In | | | | aware that since the 1980s the IRS had been calling |
| fact, accountants also had to file properly for | | | | the policies potentially abusive and that in 2002 the IRS |
| themselves, and they probably did not. | | | | gave lectures calling the plans not just abusive but |
| Small businesses are facing potentially huge tax | | | | "criminal." |
| penalties over certain types of retirement plans. The | | | | Last July, in response to a letter from members of |
| plans were marketed in the past several years as a | | | | Congress, the IRS put a moratorium on collection of |
| way for small business owners to set up retirement or | | | | §6707A penalties. That moratorium was recently |
| welfare benefit plans while leveraging huge tax | | | | extended until June 1, 2010, at which time the Service |
| savings, but the IRS put them on a list of abusive tax | | | | allowed it to expire. So time is now obviously more of |
| shelters and has more recently focused audits on | | | | the essence than it ever was. |
| them. | | | | Thousands of business owners are being hit with |
| The penalties for such transactions are extremely high | | | | million-dollar-plus fines.... The audits are continuing and |
| and can pile up quickly - $100,000 per individual and | | | | escalating. A bill has been introduced in Congress to |
| $200,000 per entity per tax year for each failure to | | | | make the penalties less draconian, but nobody is |
| disclose the transaction - often exceeding the | | | | expecting a magic bullet. |