FBAR, International Tax, IRS audits be careful. IRS Offshore Voluntary Disclosure Program Reopens Do YOU have money overseas? By Lance Wallach, CLU, CHFC - Recently the Internal Revenue Service reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes.
Additionally, the IRS revealed the collection of more than $4.4 billion so far from the two previous international programs.
The Offshore Voluntary Disclosure Program (OVDP) was reopened following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. This program will remain open indefinitely until otherwise announced.
Lance Wallach and his associates have received thousands of phone calls from concerned clients with questions about the prior programs. Some of Lance’s associates are still very busy helping people with the last program. Not a single person has been audited and most are pleased with the results and are now able to sleep easily without worrying about the IRS. According to Lance, it requires years of experience to obtain a good result from the program.
He suggests using a CPA-certified, ex-IRS agent with lots of international tax experience. While this is not a requirement to file under the program, Lance has heard many horror stories from people who have tried to file by themselves or who have used inexperienced accountants.
“Our focus on offshore tax evasion continues to produce strong, substantial results for the nation’s taxpayers,” said IRS Commissioner Doug Shulman. “We have billions of dollars in hand from our previous efforts, and we have more people wanting to come in and get right with the government. This new program makes good sense for taxpayers still hiding assets overseas and for the nation’s tax system.”
The new program is similar to the 2011 program in many ways, but it has a few key differences. Unlike last year, there is no set deadline for people to apply. However, the terms of the program could change at any time going forward. For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers – or decide to end the program entirely at any point.
“As we've said all along, people need to come in and get right with us before we find you,” Shulman said. “We are following more leads and the risk for people who do not come in continues to increase.”
The third offshore effort accompanies another announcement that Shulman made today, that the IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program. That figure reflects closures of about 95 percent of the cases from the 2009 program. On top of that, the IRS has collected an additional $1 billion from upfront payments required under the 2011 program. That number will grow as the IRS processes the 2011 cases.
In all, the IRS has seen 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. Since the 2011 program closed last September, hundreds of taxpayers have come forward to make voluntary disclosures. Those who come in after the closing of the 2011 program will be able to be treated under the provisions of the new OVDP program.
The overall penalty structure for the new program is the same for 2011, except for taxpayers in the highest penalty category.
The new program’s penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or the value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011.
Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.
Participants face a 27.5 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty. Smaller offshore accounts will face a 12.5 percent penalty. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the new OVDP will qualify for this lower rate. As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.
The IRS recognizes that its success in offshore enforcement and in the disclosure programs has raised awareness related to tax filing obligations. This includes awareness by dual citizens and others who may be delinquent in filing, but owe no U.S. tax.
Abusive Tax Shelter, Listed Transaction, Reportable Transaction Expert Witness.
As an expert witness Lance Wallach's side has never lost a case. People need to be careful of 419 Welfare Benefit Plans, 412i plans, Section 79 plans and Captive Insurance Plans. Most of these plans are sold by insurance agents. If you are in an abusive, listed or similar transaction plan you need to file under IRS 6707a. The participant files form 8886, and the salesmen or accountant who signs the tax returns files form 8918 if they got paid over $10,000. They are called Material Advisors and face a minimum $100,000 fine. Some plans are offshore which could involve FBAR or OVDI filings. If you have money overseas you probably need to file for IRS tax amnesty. If you want to reduce the tax we suggest that you first file and then opt out. For more information Google Lance Wallach.
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.
Showing posts with label IRS Audits. Show all posts
Showing posts with label IRS Audits. Show all posts
Help With Common IRS Problems
Published in Coatings Pro Magazine
Lance Wallach
It is tax time. There are many problems you can run into with the IRS. This article is a generalized overview of some of these confusing issues:
• IRS Penalties
• Unfiled Tax Returns
• IRS Liens
• IRS Audits
• Payroll Tax Problems
• IRS Levies
• Wage Garnishments
• IRS Seizures
When dealing with the IRS, it can seem like they have all the power. That is not always true. As a small business owner--and a taxpayer--it is vital that you know your options and your rights.
IRS Penalties
The IRS penalizes millions of taxpayers each year. In fact, they have so many penalties that it can be hard to understand which penalty they are hitting you with.
The most common penalties are Failure to File and Failure to Pay. Both of these penalties can substantially increase the amount you owe the IRS in a very short period of time.
To make matters worse, the IRS charges interest on penalties. Many taxpayers often find out about IRS problems many years after they have occurred. As a result, the amount owed the IRS is substantially greater due to penalties and the accumulated interest on those penalties. Some IRS penalties can be as high as 75% to 100% of the original taxes owed. Often taxpayers can afford to pay the taxes owed, but the extra penalties make it impossible to pay off the entire balance.
The original goal of the IRS imposing penalties was to punish taxpayers in order to keep them in line. Unfortunately, the penalties have turned into additional sources of income for the IRS. So they are happy to add whatever penalties they can and to pile interest on top of those penalties. Your loss is their gain.
It is important to know that under certain circumstances the IRS does abate, or forgive, penalties. Therefore before you pay the IRS any penalty amounts, you may want to consider requesting that the IRS abate your penalties.
Unfiled Tax Returns
Many taxpayers fail to file required tax returns for a variety of reasons. What you must understand is that failure to file tax returns may be construed as a criminal act by the IRS--a criminal act punishable by up to one year in jail for each year not filed. Needless to say, its one thing to owe the IRS money but another thing to potentially lose your freedom for failure to file a tax return.
The IRS may file “SFR” (Substitute For Return) Tax Returns on your behalf. This is the IRS’s version of an unfiled tax return. Because SFR Tax Returns are filed in the best interest of the government, the only deductions you’ll see are standard deductions and one personal exemption. You will not get credit for deductions to which you may be entitled, such as exemptions for a spouse or children, interest on your home mortgage and property taxes, cost of any stock or real estate sales, business expenses, etc.
Remember that regardless of what you have heard, you have the right to file your original tax return, no matter how late it is filed.
IRS Liens
The IRS can make your life miserable by filing Federal Tax Liens on your business or property. Federal Tax Liens are public records indicating that you owe the IRS various taxes. They are filed with the County Clerk in the county from which you or your business operates.
Because they are public records, they will show up on your credit report. This often makes it difficult to obtain financing on an automobile or a home. Federal Tax Liens can also tie up your personal property, meaning that you cannot sell or transfer that property without a clear title.
Often taxpayers find themselves in a Catch-22 in which they have property that they would like to borrow against, but because of the Federal Tax Lien, they cannot get a loan. Should a Federal Tax Lien be filed against you, a CPA can help get it lifted.
IRS Audits
The IRS conducts multiple types of audits. They can audit you by mail, in their offices, in your office or home. The location of the audit is a good indication of the severity.
Typically, Correspondence Audits are conducted to locate missing documents in your tax return that have been flagged by IRS computers. These documents usually include W-2s and 1099 income items or interest expense items. This type of audit can typically be handled through the mail with the correct documentation.
The IRS Office Audit--held in IRS offices--is usually conducted by a Tax Examiner who will request numerous documents and explanations of various deductions. During this type of audit you may be required to produce all bank records for a period of time so that the IRS can check for unreported income.
The IRS Home or Office Audit--held in your home or office--should be taken very seriously as these are conducted by IRS Revenue Agents. Revenue Agents receive more training and learn more auditing techniques than typical Tax Examiners.
Of course, all IRS audits should be taken seriously as they often lead to examinations of other tax years and other tax problems not stated in the original audit letter.
Payroll Tax Problems
The IRS is very aggressive in their collection attempts for past-due payroll taxes. The penalties assessed on delinquent payroll tax deposits or filings can dramatically increase the total amount you owe in just a matter of months.
I believe that it is critical for business owners to have an attorney present in these situations. Your answers to the first five IRS questions may determine whether you stay in business or are liquidated by the IRS. We always advise clients to avoid meeting with any IRS representatives regarding payroll taxes until you have met with a professional to discuss your options.
IRS Levies--Bank and Wage
An IRS Levy is an action taken by the IRS to collect taxes. For example, the IRS can issue a Bank Levy to obtain the cash in your savings and checking accounts. Or, the IRS can levy your wages or accounts receivable. The person, company, or institution that is served with the levy must comply or face its own IRS problems.
When the IRS levies a bank account, the levy can only be honored on the particular day on which the bank receives the levy. The bank is required to remove whatever amount of money is in your account on that day (up to the amount of the IRS Levy) and send it to the IRS within 21 days unless otherwise notified by the IRS. This type of levy does not affect any future deposits made into your bank account unless the IRS issues another Bank Levy.
An IRS Wage Levy is different. Wage Levies are filed with your employer and remain in effect until the IRS notifies the employer that the Wage Levy has been released. Most Wage Levies take so much money from the taxpayer’s paycheck that the taxpayer doesn’t even have enough money remaining to meet basic needs.
Both Bank and Wage Levies create difficult situations and should be avoided if possible.
Wage Garnishments
The IRS Wage Garnishment is a very powerful tool used to collect taxes that you owe through your employer. Once a Wage Garnishment is filed with an employer, the employer is required to collect a large percentage of each paycheck. The funds that would have otherwise been paid to the employee will then be paid to the IRS.
The Wage Garnishment stays in effect until the IRS is fully paid or until the IRS agrees to release the garnishment. Having wages garnished can create other debt problems because the amount left over after the IRS takes its cut is often small, so you may have difficulty with bills and other financial obligations.
IRS Seizures
The IRS has extensive powers when it comes to seizures of assets. These powers allow them to seize personal and business assets to pay off outstanding tax liabilities. Seizures typically occur when taxpayers have been avoiding the IRS.
Similar to levies and garnishments, seizures are one of the IRS’s ultimate invasive collection tools. They can seize cars, television sets, jewelry, computers, collectibles, business equipment, or anything of value, which can be sold in order to acquire the money the IRS wants to pay off your tax debts. If you are facing a seizure, you have a serious problem.
Hopefully this tax season will begin and end without any of these IRS issues coming into play. But if they do, help is out there. CPAs and attorneys can help you negotiate your rights should it become necessary.
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.
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, abusive tax shelters, financial, international tax, and estate planning. He writes about 412(i), 419, Section79, FBAR, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public Radio’s All Things Considered, and others. Lance 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 the 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, wallachinc@gmail.com or visit www.taxadvisorexpert.com.
• IRS Penalties
• Unfiled Tax Returns
• IRS Liens
• IRS Audits
• Payroll Tax Problems
• IRS Levies
• Wage Garnishments
• IRS Seizures
When dealing with the IRS, it can seem like they have all the power. That is not always true. As a small business owner--and a taxpayer--it is vital that you know your options and your rights.
IRS Penalties
The IRS penalizes millions of taxpayers each year. In fact, they have so many penalties that it can be hard to understand which penalty they are hitting you with.
The most common penalties are Failure to File and Failure to Pay. Both of these penalties can substantially increase the amount you owe the IRS in a very short period of time.
To make matters worse, the IRS charges interest on penalties. Many taxpayers often find out about IRS problems many years after they have occurred. As a result, the amount owed the IRS is substantially greater due to penalties and the accumulated interest on those penalties. Some IRS penalties can be as high as 75% to 100% of the original taxes owed. Often taxpayers can afford to pay the taxes owed, but the extra penalties make it impossible to pay off the entire balance.
The original goal of the IRS imposing penalties was to punish taxpayers in order to keep them in line. Unfortunately, the penalties have turned into additional sources of income for the IRS. So they are happy to add whatever penalties they can and to pile interest on top of those penalties. Your loss is their gain.
It is important to know that under certain circumstances the IRS does abate, or forgive, penalties. Therefore before you pay the IRS any penalty amounts, you may want to consider requesting that the IRS abate your penalties.
Unfiled Tax Returns
Many taxpayers fail to file required tax returns for a variety of reasons. What you must understand is that failure to file tax returns may be construed as a criminal act by the IRS--a criminal act punishable by up to one year in jail for each year not filed. Needless to say, its one thing to owe the IRS money but another thing to potentially lose your freedom for failure to file a tax return.
The IRS may file “SFR” (Substitute For Return) Tax Returns on your behalf. This is the IRS’s version of an unfiled tax return. Because SFR Tax Returns are filed in the best interest of the government, the only deductions you’ll see are standard deductions and one personal exemption. You will not get credit for deductions to which you may be entitled, such as exemptions for a spouse or children, interest on your home mortgage and property taxes, cost of any stock or real estate sales, business expenses, etc.
Remember that regardless of what you have heard, you have the right to file your original tax return, no matter how late it is filed.
IRS Liens
The IRS can make your life miserable by filing Federal Tax Liens on your business or property. Federal Tax Liens are public records indicating that you owe the IRS various taxes. They are filed with the County Clerk in the county from which you or your business operates.
Because they are public records, they will show up on your credit report. This often makes it difficult to obtain financing on an automobile or a home. Federal Tax Liens can also tie up your personal property, meaning that you cannot sell or transfer that property without a clear title.
Often taxpayers find themselves in a Catch-22 in which they have property that they would like to borrow against, but because of the Federal Tax Lien, they cannot get a loan. Should a Federal Tax Lien be filed against you, a CPA can help get it lifted.
IRS Audits
The IRS conducts multiple types of audits. They can audit you by mail, in their offices, in your office or home. The location of the audit is a good indication of the severity.
Typically, Correspondence Audits are conducted to locate missing documents in your tax return that have been flagged by IRS computers. These documents usually include W-2s and 1099 income items or interest expense items. This type of audit can typically be handled through the mail with the correct documentation.
The IRS Office Audit--held in IRS offices--is usually conducted by a Tax Examiner who will request numerous documents and explanations of various deductions. During this type of audit you may be required to produce all bank records for a period of time so that the IRS can check for unreported income.
The IRS Home or Office Audit--held in your home or office--should be taken very seriously as these are conducted by IRS Revenue Agents. Revenue Agents receive more training and learn more auditing techniques than typical Tax Examiners.
Of course, all IRS audits should be taken seriously as they often lead to examinations of other tax years and other tax problems not stated in the original audit letter.
Payroll Tax Problems
The IRS is very aggressive in their collection attempts for past-due payroll taxes. The penalties assessed on delinquent payroll tax deposits or filings can dramatically increase the total amount you owe in just a matter of months.
I believe that it is critical for business owners to have an attorney present in these situations. Your answers to the first five IRS questions may determine whether you stay in business or are liquidated by the IRS. We always advise clients to avoid meeting with any IRS representatives regarding payroll taxes until you have met with a professional to discuss your options.
IRS Levies--Bank and Wage
An IRS Levy is an action taken by the IRS to collect taxes. For example, the IRS can issue a Bank Levy to obtain the cash in your savings and checking accounts. Or, the IRS can levy your wages or accounts receivable. The person, company, or institution that is served with the levy must comply or face its own IRS problems.
When the IRS levies a bank account, the levy can only be honored on the particular day on which the bank receives the levy. The bank is required to remove whatever amount of money is in your account on that day (up to the amount of the IRS Levy) and send it to the IRS within 21 days unless otherwise notified by the IRS. This type of levy does not affect any future deposits made into your bank account unless the IRS issues another Bank Levy.
An IRS Wage Levy is different. Wage Levies are filed with your employer and remain in effect until the IRS notifies the employer that the Wage Levy has been released. Most Wage Levies take so much money from the taxpayer’s paycheck that the taxpayer doesn’t even have enough money remaining to meet basic needs.
Both Bank and Wage Levies create difficult situations and should be avoided if possible.
Wage Garnishments
The IRS Wage Garnishment is a very powerful tool used to collect taxes that you owe through your employer. Once a Wage Garnishment is filed with an employer, the employer is required to collect a large percentage of each paycheck. The funds that would have otherwise been paid to the employee will then be paid to the IRS.
The Wage Garnishment stays in effect until the IRS is fully paid or until the IRS agrees to release the garnishment. Having wages garnished can create other debt problems because the amount left over after the IRS takes its cut is often small, so you may have difficulty with bills and other financial obligations.
IRS Seizures
The IRS has extensive powers when it comes to seizures of assets. These powers allow them to seize personal and business assets to pay off outstanding tax liabilities. Seizures typically occur when taxpayers have been avoiding the IRS.
Similar to levies and garnishments, seizures are one of the IRS’s ultimate invasive collection tools. They can seize cars, television sets, jewelry, computers, collectibles, business equipment, or anything of value, which can be sold in order to acquire the money the IRS wants to pay off your tax debts. If you are facing a seizure, you have a serious problem.
Hopefully this tax season will begin and end without any of these IRS issues coming into play. But if they do, help is out there. CPAs and attorneys can help you negotiate your rights should it become necessary.
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.
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, abusive tax shelters, financial, international tax, and estate planning. He writes about 412(i), 419, Section79, FBAR, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public Radio’s All Things Considered, and others. Lance 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 the 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, wallachinc@gmail.com or visit www.taxadvisorexpert.com.
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.
Offshore International Today
Offshore International Today
IRS Offshore Voluntary Disclosure Program Reopens
By Lance Wallach, CLU, CHFC
Abusive Tax Shelter, Listed Transaction, Reportable Transaction Expert Witness
Abusive Tax Shelter, Listed Transaction, Reportable Transaction Expert Witness
Today, the Internal Revenue Service reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes. Additionally, the IRS revealed the collection of more than $4.4 billion so far from the two previous international programs.
The Offshore Voluntary Disclosure Program (OVDP) was reopened following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. This program will remain open indefinitely until otherwise announced.
Lance Wallach and his associates have received thousands of phone calls from concerned clients with questions about the prior programs. Some of Lance’s associates are still very busy helping people with the last program. Not a single person has been audited and most are pleased with the results and are now able to sleep easily without worrying about the IRS. According to Lance, it requires years of experience to obtain a good result from the program.
He suggests using a CPA-certified, ex-IRS agent with lots of international tax experience. While this is not a requirement to file under the program, Lance has heard many horror stories from people who have tried to file by themselves or who have used inexperienced accountants.
“Our focus on offshore tax evasion continues to produce strong, substantial results for the nation’s taxpayers,” said IRS Commissioner Doug Shulman. “We have billions of dollars in hand from our previous efforts, and we have more people wanting to come in and get right with the government. This new program makes good sense for taxpayers still hiding assets overseas and for the nation’s tax system.”
The new program is similar to the 2011 program in many ways, but it has a few key differences. Unlike last year, there is no set deadline for people to apply. However, the terms of the program could change at any time going forward. For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers – or decide to end the program entirely at any point.
“As we've said all along, people need to come in and get right with us before we find you,” Shulman said. “We are following more leads and the risk for people who do not come in continues to increase.”
The third offshore effort accompanies another announcement that Shulman made today, that the IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program. That figure reflects closures of about 95 percent of the cases from the 2009 program. On top of that, the IRS has collected an additional $1 billion from up front payments required under the 2011 program. That number will grow as the IRS processes the 2011 cases.
In all, the IRS has seen 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. Since the 2011 program closed last September, hundreds of taxpayers have come forward to make voluntary disclosures. Those who come in after the closing of the 2011 program will be able to be treated under the provisions of the new OVDP program.
The overall penalty structure for the new program is the same for 2011, except for taxpayers in the highest penalty category.
The new program’s penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or the value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011.
Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.
Participants face a 27.5 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty. Smaller offshore accounts will face a 12.5 percent penalty. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the new OVDP will qualify for this lower rate. As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.
The IRS recognizes that its success in offshore enforcement and in the disclosure programs has raised awareness related to tax filing obligations. This includes awareness by dual citizens and others who may be delinquent in filing, but owe no U.S. tax.
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, abusive tax shelters, financial, international tax, and estate planning. He writes about 412(i), 419, Section79, FBAR, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Pubic Radio’s All Things Considered, and others. Lance 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 the 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, wallachinc@gmail.com or visit www.taxadvisorexpert.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.
412i Tax Shelter Fraud Litigation - How It Works
Lance Wallach
PARTIES:
Typically, these transactions will include an Insurance company, accountant, tax attorney, and a promoter (someone with an insurance background, perhaps an actuary, who knows how to structure the policy itself). These groups will use insurance brokerages and sub-agents (licensed in the various states) to sell the policies themselves.
INSURANCE COMPANIES
AMERICAN GENERAL LIFE INSURANCE COMPANY® INDIANAPOLIS LIFE INSURANCE COMPANY®
HARTFORD LIFE AND ANNUITY INSURANCE COMPANY® PACIFIC LIFE INSURANCE COMPANY®
BANKERS LIFE and OTHERS®?
4121iHOW THESE PLANS WORK:
In the late 1990’s, the individuals and groups above devised a scheme to sell abusive tax shelters under the auspices of Section 412(i) of the tax code. A 412(i) is a defined benefit pension plan. It provides specific retirement benefits to participants once they reach retirement and must contain assets sufficient to pay those benefits. A 412(i) plan differs from other defined benefit pension plans in that it must be funded exclusively by the purchase of individual life insurance products. To create a 412(i) plan, there must be a trust to hold the assets. The employer funds the plan by making cash contributions to the trust, and the Code allows the employer to take a tax deduction in the amount of the contributions, i.e. the entire amount.
The trust uses the contributed funds to purchase some combination of life insurance products (insurance or annuities) for the plan. As the plan participants retire, the trust will usually sell the policies for their present cash value and purchase annuities with the proceeds. The revenue stream from the annuities pays the specified retirement benefit to plan participants.
These defendants (with the aid and knowledge of the insurance companies) used the traditional structure and sold life insurance policies with excessively high premiums. The trust then uses the large cash contributions to pay high insurance premiums and the employer takes a deduction for the sum of those large contributions. As you might expect, these policies were designed with excessively high fees or “loads” which provided exorbitant commissions to the insurance companies and the agents who sold the products.
The policies that were sold were termed Springing Cash Value Policies. They had no cash value for the first 5-7 years, after which they had significant cash value. Under this scheme, after 5-7 years, and just before the cash value sprung, the participant purchases the policy from the trust for the policy’s surrender value. In theory, you have a tax free transaction.
The IRS does not recognize the tax benefit of such a plan and has repeatedly issued announcements indicating that such plans are contrary to federal tax laws and regulations.
I am not an attorney but I learned some of the above information from attorney’s Mr. Ford’s website.
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, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public Radio's All Things Considered, and others. Lance 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 has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxaudit419.com and www.taxlibrary.us
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.
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