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| 419 Plans Attacked by IRS: Huge Fines Imposed |
419e Article
| Call 516 935-7346 |
Expert Advice
| By Robert Sherman 8886 and 8918 form expertOctober 15, 2010 Welfare benefit plans are vehicles by which employers offer current employees and retirees certain types of insurance coverage, most often life insurance and health insurance, as well as other benefits. Also often included are severance payments and/or educational funding. If these plans are properly designed and comply with IRC Sections 419 and 419A, they offer employers a valid tax deduction. The problem, from a tax, audit, interest and penalties standpoint, is that most fail to comply with Federal tax law. The IRS has therefore, over the years, intermittently targeted welfare benefit plans, and it currently regards most of them as “listed transactions.” Listed transactions are transactions that have been specifically identified by the Service in published material, available to the public, as having the potential for tax avoidance. The definition, however, also includes - and this is the catch - any transaction “substantially similar” to the specifically named and described transaction. The IRS construes that term very broadly (see Treasury Decision 9,000 – June 18, 2002), thus making it difficult to determine with any degree of certainty whether a particular plan is a listed transaction. Given the disastrous consequences that could attend an incorrect choice in that area, it is safe to say that doubts should generally be resolved by assuming that any particular plan is a listed transaction. The Service appears to see all participants in welfare benefits plans, both corporate and individual, as potential audit targets. Often, revenue agents are primarily interested in securing a list of plan participants to target for audit, and make no serious effort to truly determine whether the plan complies with the tax laws. There are good and bad welfare benefit plans. The bad ones often rely on creative, usually strained interpretations of the Tax Code to justify large tax deductions, often in amounts bearing little or no relation to the economic realities of the transaction. The good ones make an honest effort to completely comply with the tax laws, and invariably achieve at least substantial compliance. Tax deductions are limited to those amounts authorized by IRC Section 419A. The problem, on audit, is that revenue agents often make little effort to distinguish the “good” from the “bad,” resulting usually, in unjust results to the audited taxpayers who are in good welfare benefit plans. Further, since these revenue agents either usually will not, or cannot (because they lack the authority to) negotiate in a meaningful manner, aggrieved taxpayers are often forced to go to the time, trouble, and expense of seeking relief in the Appeals Division, or even court. There is another aspect to an IRS determination that you have participated in a listed transaction that can be far worse than an audit. IRC Section 6707A presently authorizes annual fines for any year that a taxpayer participates in a listed transaction. Those fines are applied to both individual and corporate participants, and are currently a minimum of $5,000 annually for an individual and $10,000 annually for a business. The minimum fine of $15,000, applied for each year of participation, can easily result in a fine of more than $100,000 all by itself. But it gets worse; that is only the minimum. If a tax benefit was obtained, a tax deduction claimed, the minimum likely would not apply. Then the penalty becomes 75 percent of the tax benefit derived, again applied annually for each year of participation. Simple math makes it obvious that, in a situation where a tax benefit was derived, fines can mount up to several hundred thousand dollars. These fines can be avoided with a proper filing pursuant to Section 6707A. But most people caught up in this quagmire now cannot do that. They did not file timely. A few people know how to file and avoid these fines after the fact. It is an art form, and cannot be done by using IRS guidance, since that presumes a timely filing. Those people familiar with this art can usually file late and still avoid Section 6707A penalties.Robert Sherman has been working in this area for years.He has edited many books for the AICPA, BIS and others on point. He has been very successful in assisting business owners filing under 6707A after the fact. He can be reached at 516-935- 7346. 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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