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No Shelter Here                                                September 2011
Backlash on too-good-to-be-true insurance plan

By: Lance Wallach

During the past few years, the Internal Revenue Service (IRS) has fined many business owners hundreds of
thousands of dollars for participating in several particular types of insurance plans.
The 412(i), 419, captive insurance, and
section 79 plans were marketed as a way for small-business owners to
set up retirement,
welfare benefit plans, or other tax-deductible programs while leveraging huge tax savings,
but the IRS put most of them on a list of abusive tax shelters, listed transactions, or similar transactions, etc.,
and has more recently focused audits on them. Many accountants are unaware of the issues surrounding these
plans, and many big-name insurance companies are still encouraging participation in them.
Seems Attractive
The plans are costly up-front, but your money builds over time, and there’s a large payout if the money is
removed before death. While many business owners have retirement plans, they also must care for their
employees. With one of these plans, business owners are not required to give their workers anything.
Gotcha
Although small business has taken a recessionary hit and owners may not be spending big sums on insurance
now, an IRS task force is auditing people who bought these as early as 2004. There is no statute of limitations.
The IRS also requires participants to file
Form 8886 informing the IRS of participation in this “abusive
transaction.” Failure to file or to file incorrectly will cost the business owner interest and penalties. Plus, you’
ll pay back whatever you claimed for a deduction, and there are additional fines — possibly 70% of the tax
benefit you claim in a year. And, if your accountant does not confidentially inform on you, he or she will get
fined $100,000 by the IRS. Further, the IRS can freeze assets if you don’t pay and can fine you on a corporate
and a personal level despite the type of business entity you have.
Legal Wrangling
Currently, small businesses facing audits and potentially huge tax penalties over these plans are filing
lawsuits against those who marketed, designed, and sold the plans. Find out promptly if you have one of these
plans and seek advice from a knowledgeable accountant to help you properly file Form 8886.


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. www.taxaudit419.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.
IIMPORTANT!

Are You Being Audited by
The IRS Because
of a 419 Plan?

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