Download Lance Wallach - CommPartners

Ethics: Insider Secrets
to Avoid Malpractice and Huge
Penalties

Thursday, May 22, 2008

2:00 - 4:00 pm Eastern Daylight Savings Time
(11:00 am Pacific)

Recommended for CPE Credit: 2 Hours Ethics
Presented by Lance Wallach, CLU, CHFC, CIMC, a frequent
speaker on pensions, VEBAs, financial and estate planning,
practice management, and tax-oriented strategies at
accounting and financial planning.
This webinar will help you navigate some of the
current ethical minefields inherent in practice today,
especially under Circular 230.
 Understand many of the abusive insurance and annuity based
products being marketed to your clients and how to alleviate
IRS scrutiny.
 Identify potentially abusive deductions claimed on tax returns,
which include many popular retirement and welfare benefit
plans. Learn about various disclosure requirements and how to
avoid large penalties, both to yourself and your client.
 Protect your senior clients from abusive life settlements, reverse
mortgages, annuities and more.
 Discover opportunities available under the Pension Protection
Act and new regulations, and how to use them correctly.
 This webinar will give you expertise in tax shelters, listed
transactions, captive insurance, 419 and 412i plans, premium
finance, and other potentially abusive products and strategies.
Disclaimer
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.
Notice Pursuant to IRS Circular 230
Any tax advice expressed in this communication
(including any attachments) is not intended to be
used, and cannot be used, for the purpose of avoiding
penalties imposed on the taxpayer by any
governmental taxing authority or agency.

Insurance agents often sell ways to deduct
life insurance premiums

This is usually done in 419 plans

Most of these deductions are disallowed
on audit

Notice 2007-83 was issued on 10/17/2007

It identified certain trust arrangements
involving cash value life insurance as listed
transactions.
Revenue Ruling 2007-65 was issued
simultaneously
It is now clear that an employer
cannot claim deductions for cash value
life insurance inside of 419 plans
Persons participating in a listed
transaction have disclosure obligations
They must file Form 8886 with their
tax returns
 Failure to file and disclose results in penalties
of up to $200,000
 These penalties can also be imposed upon
agents, advisors, and other professionals
 Taxpayers who otherwise would be required
to file a disclosure statement prior to Jan. 15,
2008, as a result of Notice 2007-83 had until
Jan. 15, 2008, to make the disclosure
 Revenue Ruling 2007-65 has the same target
as Notices 2007-83 and 2007-84
The target is those arrangements
where cash value life insurance is
purchased on employees who are
owners of the business
Sometimes it is also purchased on
key employees
Term insurance is them purchased on
the lives of other employees
These plans are currently sold as
419(e), 419A(f)(6), or 419 plans
 Sometimes they are sold as single employer plans
 It is anticipated that the plan will be terminated
with the cash value policies being distributed to
owners or key employees
 Little if anything goes to the other employees
 Promoters claim the insurance premiums are a
current deduction
 The ruling makes it absolutely clear that this is
not the case

Most businesses cannot deduct the cost of
premiums paid through a 419 (welfare
benefit) plan for cash value life insurance

The ruling also describes arrangements that
may be listed transactions

These plans are usually sold by insurance
agents and financial planners

They are also sometimes sold by accountants
and attorneys

There is an excellent chance that the
accountant with a client or or clients in these
plans will be deemed a “material advisor” to
these plans

You are a material advisor if the client
participated in the plan, you gave the client
tax advice with respect to the transaction,
and yourself and/or a related entity received
$10,000 or more in compensation

The material advisor must file Form 8918. As
with the 8886 form (for taxpayers) failure to file
or even incomplete, misleading, or inaccurate
filings can lead to penalties of $100,000 for
individuals or $200,000 for corporations

A filing on a protective basis is possible if the
advisor believes, in good faith, either that he
does not meet the income threshold or that the
transaction in question is not a listed one.
 Professional
discipline is even possible in
connection with this area, as is indirect
(as a witness) or even direct (as a
defendant) involvement in legal
proceedings
 There
are many reasons why the IRS
may challenge the claimed tax benefits
of these arrangements
 The
Section 4976 100 percent excise
tax may disqualify benefits provided to
owner-employees or key employees
 Where
property, including life insurance
policies, is not properly valued, the IRS
will challenge the value

In a proper arrangement, deductions are limited
by IRC Sections 419 and 419A

Depending on facts and circumstances,
the rules for split-dollar arrangements
may apply

Again depending on facts and circumstances,
contributions on behalf of an owner-employee
may be characterized as dividends or as
deferred compensation pursuant to IRC
404(a)(5) or 409A, or both

Be especially cautious should a client
approach you with any 419 plan, for both
yourself and the client

The Government has the names of most
former 419 A(f)(6) promoters, as many
current 419 promoters were

This leads to increased scrutiny of such
promoters, making audits far riskier an
more likely
More on listed transactions

Listed transactions are those deemed by the
IRS to be structured for the significant
purpose of tax avoidance or evasion

Participants in listed transactions must attach
Form 8886 to their tax returns

There are sever penalties for failure to file
Form 8886 disclosing such participation

There are also severe penalties for those who
aid and abet participation in listed
transactions
Abusive 412(i) and other
Retirement Plans
On Feb. 13, 2004, the Treasury Department
and Internal Revenue Service issued
guidance to shut down abusive transactions
involving specially designed life insurance
policies in retirement plans, section “412(i)
plans.” The guidance designates certain
arrangements as “listed transactions” for
tax-shelter reporting purposes
A
“Section 412(i) plan” is a tax qualified
retirement plan that is funded entirely
by a life insurance contract or and
annuity. The employer claims tax
deductions for contributions that are
used by the plan to pay premiums on
an insurance contract covering an
employee. The plan may hold the
contract until the employee dies, or it
may distribute or sell the contract to the
employee at a specific point, such as
when the employee retires.

One of the main abuses is that any life insurance
contract transferred from an employer or a tax-qualified
plan to an employee must be taxed at its full fair
market value. Some firms have promoted an
arrangement where an employer establishes a
Section 412(i) plan under which the contributions
made to the plan are used to purchase a specially
designed life insurance contract.

“There are many legitimate section 412(i) plans, but
some push the envelope, claiming tax results for
employees and employers that do not reflect the
underlying economics of the arrangements,” according to
the IRS.
 The
insurance contract is designed so
that the cash surrender value is
temporarily depressed
 These
contracts are sometimes called
springing cash value insurance
 These
abuses also occur in other types
of retirement plans