IRS Extends Moratorium on Tax Shelter Penalties
The Small Businees Fair Tax bill S. 2917 was passed in the Senate unanimousley. We are still awaiting the House to vote on the sister bill HR4068.
IRS has extended the Moratorium on 6707A penalties until June 01, 2010.
Following are some of the links related to the news.
Webcpa – IRS-Extends-Moratorium-Tax-Shelter-Penalties
Bloomberg: IRS Extends Moratorium on Tax Penalty Fought by Small Business
Initially aimed at tax shelters for big corporations and wealthy individuals, the provision has also been applied to small-business owners who have paid into retirement accounts for themselves and their employees without following IRS disclosure requirements, said Kathleen Pakenham, a New York- based partner at White & Case, who represents 30 such clients.
“It’s a Band-Aid,” said Pakenham of the moratorium. “It’s not addressing the underlying problem.”
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Any update on if there will be another extension of the moratorium
Don’t just assume that the party is over! There are at least two other possibilities that immediately suggest themselves to me that could recover your money, among other things. A lot may depend on the details of what plan you were in and your situation. Feel free to contact me, I may be able to help. 516.938.5007
Don’t just assume that the party is over! There are at least two other possibilities that immediately suggest themselves to me that could recover your money among other things. A lot may depend on the details of what plan you were in and your situation. Feel free to contact me, I may be able to help. 516.938.5007
IRS Fines for Business Owners Reduced!
By Lance Wallach
September 27, 2010
The 6707A penalties will be reduced for many taxpayers under the amended section, once it becomes law. Below is my opinion about the existing 6707A fines that have put business owners out of business and hurt accountants, insurance professionals and other so called material advisors.
Notwithstanding the underlying Congressional intent in enacting Section 6707A, the statute as it was written imposed unconscionable hardship on taxpayers. The statute allows penalties of up to $300,000 per year to be imposed on taxpayers with no underpayment of tax and no knowledge that they entered into transactions that the IRS has “listed.”
It is rare that a tax provision is found to violate the United States Constitution, but I think the imposition of such a large penalty on a taxpayer who entered into a transaction that produced little or even no tax savings and without regard to the taxpayer’s knowledge or intent raises significant Constitutional concerns with respect to the Eighth Amendment prohibition of excessive fines, etc. In practice, the requirement that this penalty be imposed without regard to culpability may have the effect of bankrupting middle class families who had no intention of entering into a tax shelter – an outcome that has dismayed even hardened IRS enforcement personnel.
The 6707A section imposes a penalty of $100,000 per individual and $200,000 per entity for each failure to make special disclosures with respect to a transaction that the Treasury Department characterizes as a “listed transaction” or “substantially similar” to a listed transaction. A listed transaction is one that is specifically identified as such by published IRS guidance. The question of what is “substantially similar” to such a transaction is increasingly troublesome, especially given the ever broadening IRS definition of the term, beginning with Treasury Decision 9,000 in 2002.
· The penalty applies without regard to whether the small business or the small business owners have knowledge that the transaction has been listed.
· The penalty applies even if the small business and/or the small business owners derived no tax benefit from the transaction. The penalty also applies even if on audit the IRS accepts the derived tax benefit, even if interest, penalties, etc., are not imposed.
· The penalty is applied at multiple levels, which is devastating to small businesses; the result is that small business and its owners are hit with multiple penalties. The two most common problems are that fines are imposed on both the business entity and the owners as individuals, and also that fines are imposed each year, and thus were sometimes imposed for five years or more. In the case of a small business, the penalties can easily exceed the total earnings of the business and cause bankruptcy – totally out of proportion to any tax advantage that may or may not have been realized.
· The penalty is final, must be imposed by the IRS (this is mandatory), and cannot be rescinded.
· There is no judicial review allowed, which raises another Constitutional issue, this time a separation of powers argument, as it amounts to one branch of government prohibiting another from functioning.
· The taxpayer’s disclosure must initially be made twice – once with the IRS Office of Tax Shelter Analysis and again with the tax return for the year in which the transaction is first required to be disclosed. Thereafter, for each year the taxpayer “benefits” from the transaction it must be reflected on the tax return. As a practical matter, the form should be filed with the tax return. The IRS directions assume a timely filing. There are no directions as to how to file late. A few experts have figured that out after months of study and numerous conversations with IRS personnel. Those conversations were with IRS people that drafted the regulations, those that receive the forms and others.
· A taxpayer that discloses a transaction is subject to the penalty if the IRS deems the disclosure to be incomplete. I have had numerous conversations with people who filed the disclosure forms and got fined. They did not properly prepare or file the forms.
· If a transaction is not “listed” at the time the taxpayer files a return but it later becomes listed, the taxpayer becomes responsible for filing a disclosure statement and will be liable for this penalty for failing to do so. This is true even if the taxpayer has no knowledge that the transaction has been listed.
· The penalty is imposed on transactions that the IRS in its sole discretion determines are “substantially similar” to a listed transaction. Accordingly, taxpayers may never know or realize that they are involved in a listed transaction, and accordingly the penalties compound because they never made any disclosure. At least, if a transaction is specifically identified, people can find out that it is a listed transaction. But how can anyone be sure that something is “substantially similar”, or not?
· The taxpayer must disclose each year, which can result in compounding of the already large penalties.
· The usual three-year Statute of Limitations does not apply. IRC 6501(c)(10) tolls the statute until proper disclosure is made.
Because the penalty is required to be imposed without regard to culpability, it may have the effect of bankrupting small business and/or their owners, even if they had no knowledge or intention of entering into a listed transaction.
The Treasury Department announces on an ad hoc basis what is a listed transaction. There is no regulatory process or public comment period involved in determining what should be a listed transaction. Once a transaction is deemed to be a listed transaction, the Draconian Section 6707A penalties are triggered. Section 6707A penalties not only apply to listed transactions but also to transactions that are deemed by Treasury to be “substantially similar” to any of the listed transactions. Some have said that under Section 6707A, IRS and Treasury are the judge, jury and executioner. Be that as it may, once again Constitutional concerns need to be addressed, this time possible due process violations pursuant to the Fourteenth Amendment.
While the penalties were aimed at transactions that the IRS considers abusive, the penalty is tied to disclosure so that, even if a court finds that the IRS is incorrect in its determination that a transaction is abusive, the penalty still applies.
Below are some examples.
I was an expert witness for the plaintiff who was sold a 401k with a springing cash value policy. In court, the Judge called the defendant insurance agent a crook (off the record), after I had explained the facts, and advised him to settle.
Another example is a business owner. He bought a type of life insurance policy known as a “springing cash value” plan as an alternative to a pension plan for his employees. Two years later, the IRS added this type of plan to its list of abusive tax shelters, and the business owner should have disclosed his purchase to the IRS. But he says the financial advisor who sold him the insurance plan at no point told him he needed to make such a disclosure.
Now, the IRS is demanding taxes and interest totaling $60,000. On top of that, the IRS has set penalties in the amount of $600,000, but has so far granted him several extensions, he says.
“I trusted people, my advisor, to take care of this. Then the IRS came and said, ‘Here’s $600,000 you’re going to have to pay.’ If I have to pay these fees, I will actually have to declare bankruptcy,” he said. And even that could be problematical, because government obligations generally cannot be discharged in bankruptcy.
Another example is a taxpayer who filed his Form 8886 with his tax returns, but failed to submit the Form 8886 also to the Office of Tax Shelter Analysis, as is required in the first year. The IRS assessed the Section 6707A penalty because the taxpayer had not disclosed “perfectly.”
A doctor thought he had settled his 419 welfare benefit plan issues with the IRS through the Global Settlement Initiative (IRS Announcement 2005-80). He entered into a closing agreement and paid his tax. After the closing agreement was executed, in full, the doctor received a letter from the IRS telling him he was subject to an additional assessment of penalty, for failing to file a Form 8886, in the amount of $300,000. The IRS publications on the Global Settlement Initiative did not disclose to the dentist that he might be assessed Code Section 6707A penalties even though he settled his tax issues through the IRS’ national settlement program.
I can go on and on with examples of taxpayers fined hundreds of thousands for something that they knew nothing about. I have been urging business owners to properly file 8886 forms protectively for years. When I speak at national accounting conventions, most accountants have no knowledge of these large fines. The few that do don’t speak up, possibly because the Office of Professional Responsibility is now investigating them as material advisors. If you get paid a certain amount, and give tax advice about a listed, etc., transaction, you are subject to a $100,000 fine and a referral to that office. If you are incorporated, the fine is $200,000.00.
The new tax law will reduce the fines for some taxpayers. They still have to properly file. The fines are still large and unfair.
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 his side has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit http://www.taxadvisorexperts.org or http://www.taxaudit419.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.
Looks like the party is over. We were assessed $300,000.00 under the 6707a penalty in Dec 09/Jan 10. Just received notice (June 7) that collection action has been taken by IRS — a significant overpayment of 2009 taxes that were to be applied to 2010 estimates have now been applied to the civil penalty.
The Moratorium has not been extended by the IRS commissioner.
Now is the time to contact your representatives and ask for their support in passing the reconciliation of the two bills passed by the House of Representatives and the Senate bill.
6707A
There is still hope. A couple of solutions some to mind as I am reading and writing this. If you have or are participating in a 419 or 412i plan and haven’t gotten the IRS letter notifying you of the fines for participating in an abusive tax shelter, you may still get the fines as the IRS is in the process of sending out 6707A letters right now. You can avoid this headache but you need to act right away. Help is available.
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6707a
My client has disbursed a lot of money to the IRS, paying tax on the officers income, and about 12-14 months of audit and now has 6707a penalties hanging overhead. My client would probably have to file bankruptcy if the IRS position doesn’t change or if Congress doesn’t act. We have met with our Congressman and the NFIB to increase awareness.
No penalty has been assessed as of yet. Has anyone had the “material advisor” or accountant penalty assessment?
Please write/contact your representative in Congress.
Does anyone know the names of organizations that are lobbying to change the law.
NFIB
SBCA
USCC
and several individuals affected by the legislation.
6707A
I was one of the people lobbying. Passed but not the same so the bill was sent back.
I know of some material advisors that got fined.