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 lawyers. I speak at conventions for both business owners and accountants. And after I speak, I’m always approached by lots of people who have questions about tax reduction plans they’ve heard of. Below are the most common.
419 Tax Reduction Insurance Package
These come in various versions, and most of them have or will have participants audited and salesmen prosecuted. They purportedly allow business owners to make substantial tax deduction contributions, and part or all of the contributions pay for life insurance products. The IRS has banned most versions of this plan for years, but they continue to be sold. After everyone gets into trouble and the insurance agent is sued, the promoters of the abusive version sometimes change their company name and call the plan something else. The insurance company whose policy is sold is a legitimate company. What is usually invalid is the way most plans operate. There is also a $200,000 IRS fine that the insurance agent selling the plan faces if Form 8918 is not filed properly. I’ve reviewed hundreds of these forms for agents and haven’t seen any of them filled out correctly.
When the IRS audits participants in one of these plans, the tax deduction is lost. There are also large interest and fines to consider. The business owner can also face a fine of $200,000 per year if he or she does not file Form 8886 correctly. Most of these forms are filled out incorrectly. In my conversations with the IRS, I was told that the IRS considers not filling out Form 8886 correctly as almost the same as not filling out at all.
412(i) Retirement Plan
The IRS has audited participants in this type of retirement plan. While there’s generally nothing wrong with many of the newer plans, the IRS considers most of the older plans rough. Forms 8918 and 8886 are also required for rough 412(i) plans.
I have been an expert witness in many of these 419 and 412(i) lawsuits and my side has not lost any of them. If you’re selling one or more of these plans, ask someone who really knows what they’re doing to help you right away. Many advisors will take your money and claim to be able to help you. Make sure they have experience helping agents who have sold these types of plans. Don’t let them learn on the job with your career and money at stake.
Don’t wait for the IRS to come and pick you up, or for your clients to sue you. Time is of the essence. Most insurance professionals need help fixing an incorrectly filled out Form 8918 or to fill it out correctly in the first place. If you have not filled out the form before then it is too late, therefore you should seek help immediately. There are many legitimate tax deduction insurance plans out there. Make sure you know the history of the people you do business with.
Remember, if something looks too good to be true, it usually is. Careful.
The information provided herein is not intended to constitute legal, accounting, financial or other type of advice to any particular individual or other entity. You should contact an appropriate professional for such advice.
