IRS Attacks Many Business Owners With Million Dollar Fines

Article from IMFPubs

by Lance Wallach

January 22, 2010

IRS Attacks Many Business Owners With Million Dollar Fines

If you were or are in a 412(i), 419, Captive Insurance, or section 79 plan you are probably in huge trouble. If you signed a tax return for a client in one of these plans, you are probably what the IRS calls a material advisor and subject to a maximum $200,000 fine. If you are an Insurance Professional that sold or advised on one of these plans, the same holds true for you. Business Owners and Material Advisors needed to properly file under section 6707A, or grappling massive IRS fines. My office has received thousands of phone calls, many after the business owner has received the fine. In many cases, the accountant files the appropriate forms, but the IRS still levied the fine because the Accountant made a mistake on the form. My office has reviewed many forms for Accountants, Tax Attorneys and others. We have not yet seen a form that was filled out properly. The improper preparation of these forms usually results in the client being fined more swiftly then if the form were not filed at all. I have been an expert witness in law suites on point. None of my clients have ever lost where I was their Expert Witness.

The IRS will be soon attacking section 79 scams I am told. My primeval articles by AICPA and others in the 90s predicted attacks on 419s, which came true. My 412(i) article predictions came true. The section 79 scams soon will be attacked. Everyone in them should file protectively. Anyone that has not filed protectively in a 419 or older 412(i) had superior get some good advise from someone who knows what is going on, and has extensive experience filing protectively. IRS still has their task forces auditing these plans. Then they will move on to 79 scams etc. including many of the illegal captives pushed by the insurance companies and agents. Not all captives are illegal. I am an expert witness in a lot of cases involving the 412(i) and 419. It does not go well for the agents, accountants, plan promoters, insurance companies etc. The insurance companies settle first leaving the agents hanging out there. Then in many cases they fire the agents. I was just in a case as an expert witness where a massive well know New England mutual based insurance company did just that.

If you are an insurance professional do not count on your insurance company to back you up. More likely they will stab you in the back, based on what I have seen. One of the agents was with the company over 25 years and was a leading producer with lots of company awards. Be careful. If you sold, gave tax advice, or signed a tax return and got paid a certain amount of money you might be a material advisor. Under the newest proposed regulations you had to file with the IRS to refrain the $200,000 $100,000 fines. You had to fill out the forms properly. You had to advise those that you advised about the plans or sold the plan to. You had to send them a note, or call them, giving them the number that the IRS had assigned to you as a Material Advisor. This is the number that you obtain after you file the appropriate forms for yourself. Even though you obtain a number you still might have filed your forms improperly or finished them wrong. Many accountants have called me after their clients were fined $800,000 or more by IRS for improperly filing, or not filing under 6707A. A plan administrator called me after a lot of his clients were fined millions. He told their accountants to file 8886, and most of them did. All of the clients were fined shortly thereafter. The forms need to be filled in exactly correct. In our numerous talks with IRS we were told if filed out wrong the fine is still imposed. BE CAREFUL please be advised we have not seen a form that has been filed out properly. Many accountants, tax attorneys, etc., send us their forms to be reviewed, most after they file for one client who then gets fined about one million dollars under the regulations. I DO NOT do the forms. A former IRS agent of 37 years, CPA, tax professor does them, as does another mortal that I know.

If you are a small business owner, accountant or insurance professional you might be in huge trouble and not know it.  IRS has been fining people like you $200,000.  Most people that have received the fines were not aware that they had done anything wrong.  What is even worse is that the fines are not appeal-able.  This is not an isolated situation.  This has been happening to a lot of people.

Currently, the Internal Revenue Service (“IRS”) has the discretion to assess hundreds of thousands of dollars in penalties under §6707A of the Internal Revenue Code (“Code”) in an attempt to curb tax rejection shelters. This discretion can be applied regardless of the innocence of the taxpayer and was allowed by Congress.  It works so that if the IRS determines you have engaged in a listed transaction and unsuccessful to properly disclose it, you will be subject to a potentially draconian penalty regardless of any other facts and circumstances concerning the transaction. For some, this penalty has been assessed at nearly a million dollars and for many it is the beginning of a long nightmare.

The following is an example:  Pursuant to a settlement with the IRS, the 412(i) plan was converted into a traditional defined benefit plan.  All of the contributions to the 412(i) plan would have been allowable if they had initially adopted a traditional defined benefit plan.  Based on negotiations with the IRS agent, the audit of the plan resulted in no income and minimal excise taxes due.   This is because as a traditional defined benefit plan, the taxpayers could have contributed and deducted the same amount as a 412(i) plan.

Towards the end of the audit the business owner received a notice from the IRS.  The IRS assessed the client penalties under the §6707A of the Code in the amount of $900,000.00.  This penalty was assessed because the client allegedly participated in a listed transaction and allegedly unsuccessful to file the form 8886 in a timely manner.

The IRS might call you a material advisor and fine you $200,000.00. The IRS might fine your clients over a million dollars for being in a retirement plan, 419 plan, etc. As you read this article, hundreds of unfortunate people are having their lives ruined by these fines. You might need to take action immediately. The Internal Revenue Service stated it would extend until the end of March 1, 2010 a grace period allowed to small business owners for collection of certain tax-shelter penalties.

“Clearly, a number of taxpayers have been caught in a penalty regime that the legislation did not intend,” wrote Shulman. “I comprehend that Congress is still considering this issue, and that a bipartisan, bicameral, bill might be in the works.”  The issue relates to penalties for so-called listed transactions, the kinds of tax shelters the IRS has designated most egregious. A number of small business owners that purchased employee retirement plans so called 419 and 412(i) plans and others, that were listed by the IRS, and who are now covering hundreds and thousands in penalties, contend that the penalty amounts are unfair.

Leaders of tax-writing committees in the Home and Senate have stated they intend to pass legislation revising the penalty structure.

The IRS has suspended collection efforts in cases where the tax benefit derived from the listed transaction was less than $100,000 for individuals, or less than $200,000 for firms. They are still however sending out notices that they intend to fine.

Senator Ben Nelson (D-Nebraska) has sponsored legislation (S.765) to curtail the IRS and its nearly unlimited dominance and power under Code Section 6707A. The bill seeks to scale back the scope of the Section 6707A reportable/listed transaction nondisclosure penalty to a more reasonable level. The current law provides for penalties that are Draconian by nature and offer no flexibility to the IRS to reduce or abate the imposition of the 6707A penalty. This has served as a weapon of mass destruction for the IRS and has hit many small businesses and their owners with unconscionable results.

 

Internal Revenue Code 6707A was enacted as part of the American Jobs Creation Act on October 22, 2004. It imposes a strict liability penalty for any mortal that unsuccessful to disclose either a listed transaction or reportable transaction per apiece occurrence. Reportable transactions usually start within certain general types of transactions (e.g. confidential transactions, transactions with tax protection, certain loss generating transaction and transactions of interest arbitrarily so designated as by the IRS) that have the potential for tax avoidance. Listed transactions are specified transactions, which have been publicly designated by the IRS, including anything that is substantially similar to such a transaction (a phrase which is given very liberal construction by the IRS). There are currently 34 listed transactions, including certain retirement plans under Code section 412(i) and certain employee welfare benefit plans funded in part with life insurance under Code sections 419A(f)(5), 419(f)(6) and 419(e). Many of these plans were implemented by small business seeking to wage retirement income or health benefits to their employees.

Strict liability requires the IRS to impose the 6707A penalty regardless of innocence of a mortal (i.e. whether the mortal knew that the transaction needed to be reported or not or whether the mortal made a good establishment effort to report) or the level of the person’s reliance on professional advisors. A Section 6707A penalty is imposed when the transaction becomes a reportable/listed transaction. Therefore, a mortal has the burden to keep up to date on all transactions requiring disclosure by the IRS into perpetuity for transactions entered into the past.

Additionally, the 6707A penalty strictly penalizes nondisclosure irrespective of taxes owed. Accordingly, the penalty will be assessed even in legitimate tax planning situations when no additional tax is due but an IRS required filing was not properly and timely filed. It is worth noting that a unfortunate to disclose in the view of the IRS encompasses both a unfortunate to file the proper form as well as a unfortunate to include adequate information as to the nature and facts concerning the transaction. Hence, people might find themselves subject to the 6707A penalty if the IRS determines that a filing did not contain enough information on the transaction. A penalty is also imposed when a mortal does not file the required duplicate copy with a separate IRS office in addition to filing the required copy with the tax return. Lance Wallach Commentary. In our numerous talks with IRS, we were also told that improperly filling out the forms could nearly be as bad as not filing the forms. We have reviewed hundreds of forms for accountants, business owners and others. We have not yet seen a form that was properly filled in. We have been retained to correct many of these forms.

For more information see www.taxlibrary.us, or e-mail us at wallachinc@gmail.com.

The imposition of a 6707A penalty is not subject to judicial review regardless of whether the penalty is imposed for a listed or reportable transaction. Accordingly, the IRS’s determination is conclusive, binding and final. The next step from the IRS is sending your file to collection, where your assets might be forcibly taken, publicly recorded liens might be put against your property, and/or garnishment of your consequence or business profits might occur, amongst other measures.

The 6707A penalty amount for apiece listed transaction is generally $200,000 per year per apiece mortal that is not an individual and $100,000 per year per individual who unsuccessful to properly disclose apiece listed transaction. The 6707A penalty amount for apiece reportable transaction is generally $50,000 per year for apiece mortal that is not an individual and $10,000 per year per apiece individual who unsuccessful to properly disclose apiece reportable transaction. The IRS is indebted to impose the listed transaction penalty by law and can't remove the penalty by law. The IRS is indebted to impose the reportable transaction penalty by law, as well, but might remove the penalty when the IRS determines that removal of the penalty would promote compliance and support effective tax administration.

The 6707A penalty is particularly harmful in the small business context, where many business owners operate through an S corporation or limited liability company in order to wage liability endorsement to the owner/operators. Numerous cases are coming to light where the IRS is imposing a $200,000 penalty at the entity level and them imposing a $100,000 penalty per individual shareholder or member per year.

The individuals are generally left with one of two options:

Keep in mind, taxes do not need to be due nor does the transaction have to be proven illegal or illegitimate for this penalty to apply. The only proof required by the IRS is that the mortal did not properly and timely disclose a transaction that the IRS believes the mortal should have disclosed. It is important to note in this context that for non-disclosed listed transactions, the Statue of Limitations does not start until a proper disclosure is filed with the IRS.

Many practitioners believe the scope and dominance given to the IRS under 6707A, which grants the IRS to act as judge, jury and executioner, is unconstitutional. Numerous real life stories abound illustrating the punitive nature of the 6707A penalty and its application to small businesses and their owners. In one case, the IRS demanded that the business and its owner pay a 6707A total of $600,000 for his and his business’ participation in a Code section 412(i) plan. The actual taxes and interest on the transaction, assuming the IRS was correct in its determination that the tax benefits were not allowable, was $60,000. Regardless of the IRS’s eventual determination as to the legality of the underlying 412(i) transaction, the $600,000 was due as the IRS’s determination was final and absolute with respect to the 6707A penalty. Another case involved a taxpayer who was a dentist and his wife whom the IRS determined had engaged in a listed transaction with respect to a limited liability company. The IRS determined that the couple owed taxes on the transaction of $6,812, since the tax benefits of the transactions were not allowable. In addition, the IRS determined that the taxpayers owed a $1,200,000 section 6707A penalty for both their individual nondisclosure of the transaction along with the nondisclosure by the limited liability company.

Even the IRS organisation continue to question both the legality and the impartiality of the IRS’s imposition of 6707A penalties. An IRS appeals officer in an email to a senior attorney within the IRS wrote that “…I am both an attorney and CPA and in my 29 years with the IRS I have never {before} worked a case or issue that left me questioning whether in good conscience I could uphold the Government’s position even though it is supported by the language of the law.” The Taxpayers Advocate, an office within the IRS, even went so far as to publicly assert that the 6707A should be altered as it “raises significant Constitutional concerns, including doable violations of the Eighth Amendment’s prohibition against excessive government fines, and due process protection.”

Senate bill 765, the bill sponsored by Senator Nelson, seeks to alleviate some of above cited concerns. Specifically, the bill makes three major changes to the current version of Code section 6707A. The bill would grant an IRS imposed 6707A penalty for nondisclosure of a listed transaction to be rescinded if a taxpayer’s unfortunate to file was due to reasonable cause and not willful neglect. The bill would make a 6707A penalty proportional to an understatement of any tax due.

Accordingly, non-tax paying entities such as S corporations and limited liability companies would not be subject to a 6707A penalty (individuals, C corporations and certain trusts and estates would remain subject to the 6707A penalty).

There are a number of interesting points to note about this action:

1.     In the letter, the IRS acknowledges that, in certain cases, the penalty imposed by section 6707A for unfortunate to report participation in a “listed transaction” is disproportionate to the tax benefits obtained by the transaction.

2.     In the letter, the IRS states that it is taking this action because Congress has indicated its intention to amend the Code to alter the penalty provision, so that the penalty for unfortunate to disclose will be more in line with the tax benefits resulting from a listed transaction.

3.     The IRS will not suspend audits or collection efforts in appropriate cases.  It can't suspend imposition of the penalty, because, at least with respect to listed transactions, it does not have the discretion to not impose the penalty.  It is simply suspending collection efforts in cases where the tax benefits are below the penalty threshold in order to give Congress time to amend the penalty provision, as Congress has indicated to the IRS it intends to do.

4.          The legislation does not change the penalty viands for material advisors.

 

This is taken directly from the IRS website:

“Congress has enacted a series of income tax laws designed to halt the growth of abusive tax rejection transactions. These viands include the disclosure of reportable transactions. Each taxpayer that has participated in a reportable transaction and that is required to file a tax return must disclose information for apiece reportable transaction in which the taxpayer participates. Use Form 8886 to disclose information for apiece reportable transaction in which participation has occurred. Generally, Form 8886 must be attached to the tax return for apiece tax year in which participation in a reportable transaction has occurred. If a transaction is identified as a listed transaction or transaction of interest after the filing of a tax return (including amended returns), the transaction must be disclosed either within 90 days of the transaction being identified as a listed transaction or a transaction of interest or with the next filed return, depending on which version of the regulations is applicable.”

January 15, 2010: Brand New Update: The new proposed regulations specify a stipulation that reporting forms filed under 6707A filed late must have additional attachments. Where in is described many additional details not covered in the original regulations. In addition, various celebrations must sign a statement on the attachments under penalty of perjury. The proposed regulations also specify that the late filing must be done in a specific manner.  If this filing is not done according to these rules, the one-year period for statute of limitations will not commence, etc. In addition, the form should include a statement at the top in the manner the IRS suggests. If a tax payer fails to include, on any return or statement, for any taxable year, any information with respect to a listed transaction as defined in CODE SECTION 6707A, which is required to be included with such return or statement the time for assessment of any tax imposed by this title with respect to such transaction shall not expire before the date, which is one year after the early of; the date on which the secretary is furnished the information so required, or the date that a material advisor meets the stipulations relating to such transaction with respect to such tax  payer. As you know, Congress has armed the IRS with many weapons for enforcement. Usually there is three-year statute of limitations allowed to all taxpayers. In the situation above there will be no statute of limitations, unless the forms are filed in correctly with no errors at all.  In addition, the forms must be sent to the proper IRS authorities at their various locations. Lance Wallach’s commentary: It seems to me and to the only two people that I know who have been filing these forms correctly that that the IRS has purposely made it nearly impossible for accountants and tax attorneys to properly fill out these forms and to comply with regulations under SECTION 6707A. The result is that a business owner in one of these plans asks his accountant or attorney to file the disclosures. The Business Owner then gets fined, on average, ABOUT A MILLION DOLLARS. Or the Business Owner does not file the forms and gets the same fine. The same goes for the Material Advisor. The two people that have been filing these forms properly to my knowledge have repeatedly had discussions with the authors of these regulations and various other IRS personnel, including the Office of Tax Shelter Analysis.  Based on those many conversations with IRS personnel, repeatedly re-reading the various regulations and experience in filing many of the form under these code sections, these two people have developed their expertise. I only have their word that no one has been fined that they have helped. One of these individuals has been preparing the forms after the fact, late, for the last few years. I am not endorsing using anyone in particular for these forms. I am just writing about my experience in this area.

 

Lance Wallach, CLU, ChFC, talks and writes about benefit plans, tax reductions strategies, and financial plans. He has authored numerous books for the AICPA books, Bisk Total tapes, Wiley and others.

Lance Wallach, the National Society of Accountants Speaker of the Year also writes about retirement plans, 412(1) and 419 and Captive plans. He talks at more than ten conventions annually, writes for over fifty publications, is quotes regularly in the press and has written numerous best-selling AICPA books including Common Abusive Business Hot Spots. He does Expert Witness work and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com, or visit www.taxlibrary.us.

 

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.

 

Credit Report and Repair Scams

Credit Report & Repair Scams Newspapers, radio, television and the World wide web are filled with advertisements that offer for a fee to erase accurate negative information in your credit file. The credit repair scam artists who run these ads can’t deliver. Only time, a deliberate effort, and a plan to repay your bills will improve your credit history record. This section is designed to help you comprehend credit reports and credit repair scams.

Credit Reports Does your credit report accurately represent you? A current study conducted by the Public Interest Research Group (PIRG) found over 70% of credit reports contain errors. Among the principal findings of the report were the following:

- Twenty-nine percent (29%) of the credit reports contained serious errors that could result in the denial of credit.”

- “Serious” errors included false delinquencies, public records or judgments that belonged to a stranger, or credit accounts that did not belong to the consumer; Seventy percent (70%) of the credit reports contained mistakes or errors of some kind, also including the following:

- Forty-one percent (41%) of the credit reports contained incorrect individualized demographic identifying information; Twenty percent (20%) of the credit reports were missing major credit cards, loans, mortgages, or other accounts that are critical to demonstrating consumer credit worthiness. Consolidate debt your debt now free — quote now! One of the first steps to credit repair, is understanding credit reports. When applying for mortgages, home loans and refinances, one of the most important factors in determining whether or not you will be approved is your credit.

This is true for other important factors as well, such as obtaining lower interest rate auto loans and credit cards. Good credit can open many doors. If you have had credit issues in the past, or are currently in a situation that will affect your credit, be prepared to address these issues upfront. The mortgage industry has its own language when it comes to your credit report. Mortgage lenders get their study from the grading system they use. Items that determine your credit rating (A+ to D-) are payment history, amount of debt payments, bankruptcies, equity positions, and credit scores. Credit scores are also known as “FICO” scores, and are used by the mortgage industry to determine credit risk.

The higher the credit score, the superior the credit risks. FICO stands for Fair Isaac Company, the company that created the original scoring system. Each credit agency has its own one-of-a-kind system that grants them to offer a score based solely on the contents of the credit bureau’s data about an individual. A numerical score at one agency is the equivalent of the same numerical score of another. For example, a score of 700 from Experian indicates the same creditworthiness as a score of 700 from Trans Union or Equifax.

However, the calculations used to determine these scores are different for apiece bureau. FICO scores range from 375 to 900 points. A score of 650 or above indicates a very good credit history. However, lenders do not necessarily give the same value to a particular credit score, and they do not necessarily use credit scoring! FICO scoring places a value on the types of accounts you hold, as well as your credit history. The formula that determines your scores, however, is not disclosed to the consumer.

The 5 most important factors to determining your credit score are:

• Your payment history
• The amount of outstanding debt you have compared to your credit limit
• Your credit history
• The types of credit you use
• Negative information

Remember, FICO scores range from 375 to 900 points. A score of 650 or above indicates a very good credit history. Credit Repair Scams You’ve seen it in newspapers, maybe even heard it on the broadcasting or television — Erase accurate negative information in your credit file! — The credit repair scam artists who run these ads can’t deliver. Only time, a deliberate effort, and a plan to repay your bills will improve your credit record. This section is designed to help you comprehend the two top credit repair scams that are circulating newspapers, television, magazines and radio.

Credit Repair Scam #1 – File Segregation If you filed bankruptcy, you might be the target of a credit repair scam called “file segregation.” In this scam, you are promised a chance to hide unfavorable credit information by establishing a new credit identity. That might sound like a good intent but, file segregation is illegal. If you use it, you could grappling fines or even a prison sentence.

Credit Repair Scam #2 – New Credit Identity If you have filed for bankruptcy, you might receive a letter from a credit repair company warning you about the inability to obtain credit cards, individualized loans, or any other types of credit for 10 years.

For a fee, the company promises to help you hide your bankruptcy and establish a new credit indistinguishability to use when you apply for credit. These companies also make pitches in classified ads, radio, TV, and the Internet. When signing up for the service you will be required to pay a fee and might be directed to apply for an Employer Identification Number, commonly referred to as an EIN, from the Internal Revenue Service (IRS).

Typically, an EIN is quite similar to a social security number and is used by businesses to report financial information to the IRS and the Social Security Administration. After you receive your EIN, the credit repair service will tell you to use it in place of your social security number when you apply for credit, inform you to use a new mailing address and obtain additional credit references. That might sound like a good intent but, using false information is illegal and considered fraud. If you use it, you could grappling fines or even slammer time.

Credit Repair Company’s And False Claims

Credit Repair False Claim #1: You will not be healthy to get credit for 10 years. Each creditor has its own criteria for granting credit. While one might reject your application because of bankruptcy, another might allow you credit. And, given a new reliable payment record, your chances of establishing additional credit could probably increase as time passes.

Credit Repair False Claim #2: The company or “file segregation” program is affiliated with the federal government. The federal government does not support or work with companies that offer such programs.

Credit Repair False Claim #3: The “file segregation” program is legal. It is a federal crime to make any false statements on a loan or credit application. It is a federal crime to misrepresent your Social Security number. It also is a federal crime to obtain an EIN from the IRS under false pretenses.

Further more, you could be charged with mail or wire fraud if you use the mail or the telephone to apply for credit and wage false information. Worse yet, file segregation likely would constitute civil fraud under many say laws. Your Rights Under The Credit Repair Organizations Act This law prohibits false claims about credit repair and makes it illegal for these companies to charge you until they have performed their services. It requires that companies tell you about your legal rights.

Credit repair companies must wage this in a written contract that also spells out just what services are to be performed, how long it will take to achieve results, the total cost, and any guarantees that are offered. Under the law, these contracts also must explain that consumers have three days to cancel at no charge. Finding Help for Credit Problems It’s a good intent to try to solve your debt problems with your creditors as soon as you foresee or realize that there is a financial problem.

Is anyone familiar with “payday loans”? If so, are these known to be scams or is it legitimate?

babydoll86 Asked:
Is anyone familiar with “payday loans”? If so, are these known to be scams or is it legitimate?

I see these payday loan websites pop up on my personal and find it in my inbox. I was wondering if these are all websites cheat, or are these legitimate loan quotes you can use if you have problems paying with your job? I would like to know information about these types of sites.

Best answer:

Answer by Judy
I hope you are aware how much trouble pay day loans can cause.
Our say passed a law that pay day loans places can not charge more than 430% interest.
The places have been closing down quickly.
I guess that’s not enough profit for them.
Be careful – ask anyone that has done one – they will only get you in deeper trouble.
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Add your own answer in the comments!