By: Lance Wallach
The IRS is cracking down on what it considers to be abusive
tax shelters. Many of them are being marketed to small business
owners by insurance professionals, financial planners and even
accountants and attorneys. I speak at numerous conventions, for
both business owners and accountants. And after I speak, I am
always approached by many people who have questions about tax
reduction plans that they have heard about. Below are the most
419 tax reduction insurance plans
These come in various versions, and most of them have or will get
the participant audited and the salesman sued. They purportedly
allow the business owner to make a large tax-deductible
contribution, and some or all of the contribution pays for a life
insurance product. The IRS has been disallowing most versions of
gets into trouble and the insurance agents get sued, the promoters of the abusive versions
companies whose policies are sold are legitimate companies. What usually is not legitimate is
the way that most of the plans are operated. There can also be a $200,000 IRS fine facing
the insurance agent who sold the plan if Form 8918 has not been properly filed. I've reviewed
hundreds of these forms for agents and have yet to see one that was filled out correctly.
When the IRS audits a participant in one of these plans, the tax deductions are lost. There is
also the interest and large penalties to consider. The business owner can also be facing a
$200,000-a-year fine if he did not properly file Form 8886. Most of these forms have been
filled out improperly. In my talks with the IRS, I was told that the IRS considers not filling
out Form 8886 properly almost the same as not filing at all.
412(i) retirement plans
The IRS has been auditing participants in these types of retirement plans. While there is
generally nothing wrong with many of the newer plans, the IRS considered most of the older
abusive plans. Forms 8918 and 8886 are also required for abusive 412(i) plans.
I have been an expert witness in a lot of these 419 and 412(i) lawsuits and I have not lost one
of them. If you sold one or more of these plans, get someone who really knows what they
are doing to help you immediately. Many advisors will take your money and claim to be able
to help you. Make sure they have experience helping agents that have sold these types of
plans. Don't let them learn on the job, with your career and money at stake.
Do not wait for IRS to come and get you, or for your client to sue you. Time is of the
essence. Most insurance professionals need help to correct their improperly completed Form
8918 or to fill it out properly in the first place. If you have not previously filled out the form it
is late, and therefore you should immediately seek assistance. There are plenty of legitimate
tax reduction insurance plans out there. Just make sure that you know the history of the
people with whom you conduct business.
Remember, if something looks too good to be true, it usually is. Be careful.
Lance Wallach, National Society of Accountants Speaker of the Year, speaks and writes
extensively about retirement plans, Circular 230 problems, and tax reduction strategies. He
speaks at more than 40 conventions annually, writes for over 50 publications, is quoted
regularly in the press, and has written numerous best-selling AICPA books, including
Avoiding Circular 230 Malpractice Traps and Common Abusive Business Hot Spots.
Contact him at 516.938.5007 or visit www.vebaplan.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.