Benistar, SADI Trust,Beta 419,Millennium Plan,Bisys,Creative Services Group,Sterling Benefit Plan,Compass 419,Niche 419,CRESP,Sea Nine Veba, American Benefits Trust, National Benefit Plan and Trust,
ABT, Professional Benefits Trust
Benistar 419 Plan, Millennium 419 Plan,Bisys 419,Creative Services Group 419 Plan,Sterling Benefit 419 Plan,CRESP 419,Sea Nine Veba 419, National Benefit Plan and Trust 419, American Benefits Trust 419,
ABT 419
“Grist Mill Trust” “Penn Mont” “Real Veba” “United Financial Group” “Kenny Hartstein” “Millennium Plan” “Millennium Plan”  “captive insurance” cresp “Ridge Plan” “Professional benefits Trust” PBT “ Dennis
Cunning, Steve Toth, Michael Sonnenberg, Larry Bell, Scott Ridge, Randall Smith, Greg Roper, Tracy Sunderlage,
Hartford 419, Pacific Life 419, PAC Life 419, AVIVA, 419, Indianpolis Life, Penn Mutual419,Bankers Life 419, John Hancock 419, Security Mutual 419, Transamerica 419,Prudential 419, Kansas City Life 419,
Mass Mutual419, Guardian 419, Amerus 419, Wells Fargo 419, Fifth Third Bank 419, Arrow Head Trust 419,
Hartford 412, Pacific Life 412, PAC Life 412, AVIVA, 412, Indianpolis Life, Penn Mutual412,Bankers Life 412, John Hancock 412, Security Mutual 412, Transamerica 412,Prudential 412, Kansas City Life 412,
Mass Mutual412, Guardian 412, Amerus 412,
Get Help at
Your best source of help for proper completion of the"8886" forms for "419" and
"412i" plans, Captive Insurance, Section 79, or any plan the IRS calls a "listed
If you filed these forms improperly, you might as well not have filed them at all
and the penalties for not filing or FILING IMPROPERLY are substantial. Don't
let the IRS get your money for no good reason.

HERE to find out how to start correcting your errors
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Without A Fight!
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Late breaking news: Large 419 plan files for

Recent court cases and other developments have highlighted serious problems in plans,
popularly know as Benistar, issued by Nova Benefit Plans of Simsbury, Connecticut. Recently
unsealed IRS criminal case information now raises concerns with other plans as well. If you
have any type plan issued by
NOVA Benefit Plans, U.S. Benefits Group, Benefit Plan Advisors,
Grist Mill trusts, Rex Insurance Service or
Benistar, get help at once. You may be subject to an
audit or in some cases, criminal prosecution.

On November 17th, 59 pages of search warrant materials were unsealed in the
Nova Benefit
Plans litigation currently pending in the U.S. District Court for the District of Connecticut.
According to these documents, the IRS believes that Nova is involved in a significant criminal
conspiracy involving the crimes of Conspiracy to Impede the IRS and Assisting in the
Preparation of False Income Tax Returns.
Read more here
IRS Attacks Business Owners in 419, 412, Section 79 and
Captive Insurance Plans Under Section 6707A
By Lance Wallach

Taxpayers who previously adopted
419, 412i, captive
insurance or
Section 79 plans are in big trouble.

In recent years, the IRS has identified many of these arrangements as abusive devices
to funnel tax deductible dollars to shareholders and classified these
arrangements as listed transactions." These plans were sold by insurance agents,
financial planners, accountants and attorneys seeking large life insurance
commissions. In general, taxpayers who engage in a
“listed transaction” must report
such transaction to the IRS on
Form 8886 every year that they “participate” in
the transaction, and you do not necessarily have to make a contribution or claim a tax
deduction to participate.
Section 6707A of the Code imposes severe penalties
for failure to file Form 8886 with respect to a listed transaction. But you are also in
trouble if you file incorrectly. I have received numerous phone calls from
business owners who filed and still got fined. Not only do you have to file Form 8886, but
it also has to be prepared correctly. I only know of two people in the U.S. who have filed
these forms properly for clients. They tell me that was after hundreds of hours of
research and over 50 phones calls to various IRS personnel.
The filing instructions for Form 8886 presume a timely filling. Most people file late and
follow the directions for currently preparing the forms. Then the IRS fines
the business owner. The tax court does not have jurisdiction to abate or lower such
penalties imposed by the IRS.
Read more here

Business Meals and Entertainment Expenses

Excerpt from FCICA Presents Tax, Insurance, and Cost Reduction Strategies for Small Business by
Lance Wallach

The 1993 tax law changed the amount allowable as a deduction for business meals and entertainment
expenses incurred after. In addition, some special rules were enacted into the tax law. The limitation for
deducting such expenses incurred after December 31, 1993 is 50%. Accordingly, after the general rules
and exceptions are applied to meals and entertainment expenses incurred and the total dollar amount is
determined, the 50% rule must then be applied. Business people must keep current with such rules or
face the wrath of the IRS. The purpose of this chapter is to explain the general rule, the exceptions, and
the special rules that are in effect for all business meals and entertainment expenses.
Read more here!
IRS Audits 419, 412i, Captive Insurance Plans With Life Insurance, and Section
79 Scams

The IRS started auditing 419 plans in the ‘90s, and then continued going after 412i and other plans
that they considered abusive, listed, or reportable transactions, or substantially similar to such

In a recent Tax Court Case, Curcio v. Commissioner (TC Memo 2010-115), the Tax Court ruled that an
investment in an employee welfare benefit plan marketed under the name “Benistar” was a listed
transaction in that the transaction in question was substantially similar to the transaction described in
IRS Notice 95-34. A subsequent case, McGehee Family Clinic, largely followed Curcio, though it was
technically decided on other grounds. The parties stipulated to be bound by Curcio on the issue of
whether the amounts paid by McGehee in connection with the Benistar 419 Plan and Trust were
deductible. Curcio did not appear to have been decided yet at the time McGehee was argued. The
McGehee opinion (Case No. 10-102) (United States Tax Court, September 15, 2010) does contain an
exhaustive analysis and discussion of virtually all of the relevant issues.

Taxpayers and their representatives should be aware that the Service has disallowed deductions for
contributions to these arrangements. The IRS is cracking down on small business owners who
participate in tax reduction insurance plans and the brokers who sold them. Some of these plans
include defined benefit retirement plans, IRAs, or even 401(k) plans with life insurance.

In order to fully grasp the severity of the situation, one must have an understanding of Notice 95-34,
which was issued in response to trust arrangements sold to companies that were designed to
provide deductible benefits such as life insurance, disability and severance pay benefits. The
promoters of these arrangements claimed that all employer contributions were tax-deductible when
paid, by relying on the 10-or-more-employer exemption from the IRC § 419 limits. It was claimed that
permissible tax deductions were unlimited in amount.

In general, contributions to a welfare benefit fund are not fully deductible when paid. Sections 419 and
419A impose strict limits on the amount of tax-deductible prefunding permitted for contributions to a
welfare benefit fund. Section 419A(F)(6) provides an exemption from Section 419 and Section 419A for
certain “10-or-more employers” welfare benefit funds. In general, for this exemption to apply, the fund
must have more than one contributing employer, of which no single employer can contribute more
than 10% of the total contributions, and the plan must not be experience-rated with respect to
individual employers.

According to the Notice, these arrangements typically involve an investment in variable life or universal
life insurance contracts on the lives of the covered employees. The problem is that the employer
contributions are large relative to the cost of the amount of term insurance that would be required to
provide the death benefits under the arrangement, and the trust administrator may obtain cash to pay
benefits other than death benefits, by such means as cashing in or withdrawing the cash value of the
insurance policies. The plans are also often designed so that a particular employer’s contributions or
its employees’ benefits may be determined in a way that insulates the employer to a significant extent
from the experience of other subscribing employers. In general, the contributions and claimed tax
deductions tend to be disproportionate to the economic realities of the arrangements.

Benistar advertised that enrollees should expect to obtain the same type of tax benefits as listed in the
transaction described in Notice 95-34. The benefits of enrollment listed in its advertising packet
·        Virtually unlimited deductions for the employer;
·        Contributions could vary from year to year;
·        Benefits could be provided to one or more key executives on a selective basis;
·        No need to provide benefits to rank-and-file employees;
·        Contributions to the plan were not limited by qualified plan rules and would not interfere with
pension, profit sharing or 401(k) plans;
·        Funds inside the plan would accumulate tax-free;
·        Beneficiaries could receive death proceeds free of both income tax and estate tax;
·        The program could be arranged for tax-free distribution at a later date;
·        Funds in the plan were secure from the hands of creditors.
The Court said that the Benistar Plan was factually similar to the plans described in Notice 95-34 at
all relevant times. In rendering its decision the court heavily cited Curcio, in which the court also ruled
in favor of the IRS. As noted in Curcio, the insurance policies, overwhelmingly variable or universal life
policies, required large contributions relative to the cost of the amount of term insurance that would be
required to provide the death benefits under the arrangement. The Benistar Plan owned the insurance

Following Curcio, as the Court has stipulated, the Court held that the contributions to Benistar were
not deductible under section 162(a) because participants could receive the value reflected in the
underlying insurance policies purchased by Benistar—despite the payment of benefits by Benistar
seeming to be contingent upon an unanticipated event (the death of the insured while employed). As
long as plan participants were willing to abide by Benistar’s distribution policies, there was no reason
ever to forfeit a policy to the plan. In fact, in estimating life insurance rates, the taxpayers’ expert in
Curcio assumed that there would be no forfeitures, even though he admitted that an insurance
company would generally assume a reasonable rate of policy lapses.

The McGehee Family Clinic had enrolled in the Benistar Plan in May 2001 and claimed deductions for
contributions to it in 2002 and 2005. The returns did not include a Form 8886,Reportable Transaction
Disclosure Statement, or similar disclosure.

The IRS disallowed the latter deduction and adjusted the 2004 return of shareholder Robert Prosser
and his wife to include the $50,000 payment to the plan. The IRS also assessed tax deficiencies and
the enhanced 30% penalty totaling almost $21,000 against the clinic and $21,000 against the
Prossers. The court ruled that the Prossers failed to prove a reasonable cause or good faith exception.

More you should know:

·        In recent years, some section 412(i) plans have been funded with life insurance using face
amounts in excess of the maximum death benefit a qualified plan is permitted to pay.  Ideally, the plan
should limit the proceeds that can be paid as a death benefit in the event of a participant’s death.  
Excess amounts would revert to the plan.  Effective February 13, 2004, the purchase of excessive life
insurance in any plan is considered a listed transaction if the face amount of the insurance exceeds
the amount that can be issued by $100,000 or more and the employer has deducted the premiums
for the insurance.
·        A 412(i) plan in and of itself is not a listed transaction; however, the IRS has a task force auditing
412i plans.
·        An employer has not engaged in a listed transaction simply because it is a 412(i) plan.
·        Just because a 412(i) plan was audited and sanctioned for certain items, does not necessarily
mean the plan engaged in a listed transaction. Some 412(i) plans have been audited and sanctioned
for issues not related to listed transactions.

Companies should carefully evaluate proposed investments in plans such as the Benistar Plan. The
claimed deductions will not be available, and penalties will be assessed for lack of disclosure if the
investment is similar to the investments described in Notice 95-34. In addition, under IRC 6707A, IRS
fines participants a large amount of money for not properly disclosing their participation in listed,
reportable or similar transactions; an issue that was not before the Tax Court in either Curcio or
McGehee. The disclosure needs to be made for every year the participant is in a plan. The forms need
to be properly filed even for years that no contributions are made. I have received numerous calls from
participants who did disclose and still got fined because the forms were not filled in properly. A plan
administrator told me that he assisted hundreds of his participants file forms, and they still all
received very large IRS fines for not properly filling in the forms.

IRS has been attacking all
419 welfare benefit plans, many 412i retirement plans, captive insurance
plans with life insurance in them and Section 79 plans.

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, or visit

Lance Wallach
68 Keswick Lane
Plainview, NY 11803
Ph.: (516)938-5007
Fax: (516)938-6330

National Society of Accountants Speaker of The Year

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
Lines form Lance

IRS Attacks Many Business Owners with Million Dollar Fines

By Lance Wallach

If you were or are in a 412(i),
419 Captive Insurance, or section 79 plan you are probably in big 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 face large 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 quickly 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

To read More Click:

New BISK CPEasy™ CPE Self-Study Course

CPA’s Guide to Life Insurance

Author/Moderator: Lance Wallach, CLU, CHFC, CIMC

Below is an exert from one of Lance Wallach’s new books. It deals with how
Accountants Get Fined By IRS And Sued By Their Clients

Lance Wallach

Form 8886 is required to be filed by any taxpayer who is participating, or in some cases has
participated, in a listed or reportable transaction. What attracted the most attention with respect to it,
until very recently, were the penalties for failure to file, which were $100,000 annually for individuals
and $200,000 annually for corporations. Recent legislation has reduced those penalties in most
cases. However, there is still a minimum penalty of $5,000 annually for an individual and $10,000
annually for a corporation for failure to file. And those are the MINIMUM penalties. If the minimum
penalties do not apply, the annual penalty becomes 75 percent of whatever tax benefit was derived
from participation in the listed transaction, and the penalty is applied both to the business and to the
individual business owners. Since the form must be filed for every year of participation in the
transaction, the penalties can be cumulative; i.e., applied in more than one year. For example, a
corporation that participated in five consecutive years could find itself, depending on the amount of
claimed tax deductions, looking at several hundred thousand dollars in fines, even under the recently
enacted legislation, before even thinking about back taxes, penalties, interest, etc., that could result
from an audit. Even the minimum fine would be $15,000 per year, again in addition to all other
applicable taxes and penalties, etc. So even the minimum fines could mount up fast.

The penalties can also be imposed for incomplete, inaccurate, and/or misleading filings. And the
Service itself has not provided totally clear, unequivocal guidance to those hoping to avoid errors and
penalties. To illustrate this point, Lance Wallach, a leading authority in this area who has received
hundreds of calls and whose associates have literally aided dozens of taxpayers in completing these
forms, reports that his associates, on numerous occasions, have sought the opinions and
assistance of Service personnel, usually from the Office of Chief Counsel, with respect to questions
arising while assisting taxpayers in completing and filing the form. The answers are often somewhat
vague, and tend to be accompanied by a disclaimer advising not to rely on them.    

One popular type of listed transaction is the so-called welfare benefit plan, which once relied in IRC
Section 419A(F)(6) for its authority to claim tax deductions, but now more commonly relies on Section
419(e). The 419A(F)(6) plans used to claim that that section completely exempted business owners
from all limitations on how much tax could be deducted. In other words, it was claimed, tax
deductions were unlimited. These plans featured large amounts of life insurance and accompanying
large commissions, and were thus aggressively pushed by insurance agents, financial planners,
and sometimes even accountants and attorneys. Not to mention the insurance companies
themselves, who put millions of dollars in premiums on the books and, when confronted with
questions about the outlandish tax claims made in marketing these plans, claimed to be only selling
product, not giving opinions on tax questions.

In the summer of 2003, the Service issued guidance that had the effect of severely curtailing those
plans, and they began to largely, though not completely, disappear from the landscape. Most welfare
benefit plans now claim Section 419(e) as the authority to claim a corporate tax deduction, though the
promoters of these plans no longer claim that tax deductions are unlimited. Instead, they
acknowledge that the amount of possible tax deductions is limited by the limitations of Section 419A,
which Code section is a limitation on tax deductions that are authorized by other sections.

With respect to
Section 419(e) welfare benefit plans, and of particular importance in this listed
transaction/penalties arena, were the events of October 17, 2007, which over time have had roughly
the same effect on Section 419(e) welfare benefit plans as the aforementioned 2003 developments
had on Section 419A(F)(6) plans. On that date, the Service issued Notice 2007-83, which identified
certain trust arrangements involving cash value life insurance policies, and substantially similar
arrangements, as listed transactions. Translation: Section 419(e) welfare benefit plans that are
funded by cash value life insurance contracts are listed transactions, at least if a tax deduction is
taken for the amount of  premiums paid for such policies. On that same day, the Service also issued
Notice 2007-84 and Revenue Ruling 2007-65. The combined effect of these three IRS
pronouncements was that not only was the use of cash value life insurance in welfare benefit plans, if
combined with claiming tax deductions for the premiums paid, sufficient to cause IRS treatment of
these plans as listed transactions, but that discrimination as between owners and rank and file
employees in these plans was also being targeted.
To illustrate, in many of these promoted arrangements, these Section 419(e) welfare benefit plans,
cash value life insurance policies are purchased on the lives of the owners of the business, and
sometimes on key employees, while term insurance is purchased on the lives of the rank and file
employees. The plans in question tend to anticipate that the plan will be terminated within five years
or so, at which time the cash value policies will be distributed to the owners, and possibly key
employees, with very little distributed to rank and file employees. In general, the Internal Revenue
Code will not countenance the claiming of a tax deduction in connection with a welfare benefit plan
where such blatant unequal treatment (discrimination) is exhibited. Nevertheless, plan promoters
claim that insurance premiums are currently deductible by the business, and that the insurance
policies, when distributed to the owners, can be done so virtually tax free. And this also despite the
fact that an employer’s deductions for contributions to an arrangement that is properly characterized
as a welfare benefit fund are subject to the limitations and requirements of the rules in IRC sections
419 and 419A, including the use of reasonable actuarial assumptions and the satisfaction of
nondiscrimination requirements.

With respect to the preparation and filing of Form 8886, incidentally, it should not surprise that welfare
benefit promoters have been active in this area. This would include both the promoters of plans that
have been listed transactions for years as well as those that became listed transactions, at least
arguably, by virtue of the previously discussed October 2007 IRS activities. Some promoters take the
position that their plans are completely compliant and that, therefore, there is no need to file Form
8886. Others take a more precautionary approach. While never admitting to being a listed transaction,
they do urge clients to file on a protective basis. At least one went so far as to offer plan participants
complete guidance and instructions about precisely how to file protectively. Many, if not most, plan
promoters have, at the very least, forwarded completed sample forms to plan participants for
guidance and use in completing Form 8886. It is certainly possible to file protectively. Any remotely
good faith belief that the transaction is not a listed one justifies the protective filing. In fact and
practice, the Service is actually treating protective filings in the same manner as other filings.

But while many plan promoters have recognized the filing obligation and recommended filing, this
has led to another problem. As previously noted, they have been instructing taxpayers on how to
complete and file the form, and the problem is that their guidance, in many cases, has not been
particularly helpful and sometimes dangerous. In some cases, though this is difficult if not
impossible to ascertain, the suggestions of the plan promoters seem designed more to protect the
promoters than to assist the taxpayer. While this is a difficult call to make, it is absolutely clear,
Wallach says, that more than one promoter, whether carelessly or otherwise, has sent taxpayers
outdated forms to complete and file. Wallach, who you may recall has, between himself and his
associates, aided dozens of taxpayers in completing and filing Form 8886, notes that his associates
have frequently reported this problem. They also report never having seen a Form 8886 prepared
completely correctly, especially where a promoter’s instructions were relied on. So, because the fines
may be imposed for incomplete, misleading, or incorrect filings, the danger to plan participants can
be clearly seen. And the taxpayer who discovers errors subsequent to filing must decide whether to
amend the filing or not, which some plan participants are reluctant to do.

Burdens On Professionals With Clients In Welfare Benefit Plans And Other Listed Transactions

Form 8918 must be filed with the Internal Revenue Service by all “material advisors” to clients who
are participating in listed transactions. Exactly who, then, is a material advisor? You are a material
advisor if three requirements are satisfied. First, the client must actually be participating in the listed
transaction. Second, you must have given the client tax advice with respect to the transaction. This
does not necessarily mean that you recommended participation. For example, signing off on a tax
return claiming a tax deduction for participation in the listed transaction surely qualifies as having
given tax advice with respect to the transaction. In fact, even if you recommended against
participation, you would satisfy this threshold so long as you rendered tax advice, be it positive,
negative, or neutral.

The third threshold is that you must have received $10,000 or more in compensation (yourself and/or
a related entity). This is not quite as simple as it sounds. The money need not all be received as a
commission (as might be the case with a CPA who is insurance licensed), or even in a lump sum for
accounting services rendered in connection with the client’s participation. The money could be
received periodically over time. It is even possible that, so long as $10,000 in fees have been
received from the client for whatever reason over whatever period of time, the threshold is met. Lance
Wallach, previously referred to in the discussion about Form 8886 and whose associates are also
expert in assisting CPAs and others in the preparation and filing of Form 8918, reports that one of his
associates put this question directly to an attorney in the Office of the Chief Counsel who actually
wrote published IRS guidance with respect to Form 8918. While the gentleman from the IRS was very
courteous and professional, trying his best to be of assistance, a clear, unqualified, unequivocal
answer that could be “taken to the bank” proved impossible to elicit.

Like Form 8886, however, Form 8918 can be filed protectively. Failure to file or incomplete,
misleading, or inaccurate filings can lead to the penalties that used to apply to Form 8886, to wit:
$100,000.00 for individuals and $200,000.00 for corporations. For this purpose, it is CRITICAL to note
that the recent legislation reducing penalties applied ONLY to Form 8886. The penalties for failure to
file Form 8918, or for filing it incorrectly, remain the same as they were, to wit: $100,000 for individuals
and $200,000 for corporations.

A good faith belief that either you did not receive $10,000 in income or that the transaction in question
is not a listed one enables you to file on a protective basis. And, in fact, as with the 8886 form, the IRS
is, in fact, treating all filings identically in any event.

When the CPA files this form ( it need only be filed once, not on an annual basis, as Form 8886 must
be), the CPA is assigned a number by the IRS. The CPA or other professional then gives this number
to all of his affected clients, who are required to report it on the 8886 forms that they must file. Also, as
a perusal of Form 8918 makes clear, there is also a section where the material advisor is to give all
pertinent information with respect to other material advisors who participated in and/or advised the
client with respect to the transaction in question.

As with Form 8886, this area is replete with horror stories about advisors who, mostly innocently,
have fallen into this trap. One that we know of was sold by one promoter on a questionable plan,
recommended it to about fifteen clients, and now has been forced to file the 8918 form, help all those
involved who have to file Form 8886, and expend a fair amount of his own funds, both to find people
who can assist his clients with Form 8886 and in “rescuing” clients who want to get out of this plan.
Another called about something else, and was horrified to discover that he had six clients in a plan
that is a listed transaction. When he was apprised of his situation, he sank into a depression. These
are only two of the dozens of sad, and worse, stories in this area that we have been privy to. The
second person, for example, had no idea that anything was wrong. He initially called about
something totally unrelated. There have even been instances of professional discipline being
imposed in connection with this area, of CPAs being threatened with and perhaps even actually
suffering loss of their licenses. Such is the terrain in which the CPA must now operate.

Another problem is possible, especially if you recommended that the client participate. Most
practitioners are familiar with situations where, when things go wrong, clients often develop selective
memory failure. This happens here, as it does elsewhere. At best, it can lead to you spending an
inordinate amount of time, and perhaps money, on what is essentially a thankless exercise. At worst,
if the situation worsens to the point where a lawsuit may be in the air, you could find yourself the
subject of some sort of client complaint or, worse, a named defendant in a lawsuit, in which case
your malpractice carrier would become involved, with all of the negative effects upon yourself and your
practice that that could entail.

Section 6707A – Past, Present, and Future

Returning now to the Form 8886 aspect of Section 6707A, the disclosure requirement that applies to
actual participants in listed transactions, it has been noted, and discussed, that Congress recently
reduced the penalties under Section 6707A for many taxpayers. But it is still imperative to realize that
this is only a partial solution to the continuing problem caused by the penalties imposed by that
section. While the penalties have been reduced from the prior patently ridiculous, and probably
illegal, level that until so recently prevailed, they are still sufficient, in many cases, to put business
owners out of business, just as the prior penalties obviously were. And since the new legislation did
not address or affect obligations and penalties with respect to Form 8918 at all, accountants,
insurance professionals and other material advisors are as likely to be hurt as ever.

Whatever the underlying Congressional intent was in enacting the original Section 6707A in 2004,
whatever Congress hoped to accomplish, the statute as it was written imposed clearly
unconscionable burdens on taxpayers. Penalties of up to $300,000 annually could be imposed on
taxpayers who had not underpaid tax and who had no knowledge that they had entered into
transactions that the IRS deems “listed”.

Tax provisions are seldom found to violate the United States Constitution, but it is certainly arguable
that 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 violates the
Eighth Amendment prohibition on excessive fines, etc. In practice, the requirement that this penalty be
imposed without regard to culpability often had the effect of bankrupting middle class families who
had no intention of entering into a tax shelter – an outcome that dismayed even hardened IRS
enforcement personnel.

The section previously imposed 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, which declared,
on June 18, 2002, that, from that date forward, the term “substantially similar” would be construed
more broadly by the Service than it had up until that time. This started a trend that continues to this

It is important for the reader to understand that the only thing that was accomplished by the new,
amended Section 6707A is a reduction in the penalties. The penalties are still severe, severe enough
to seriously damage or even bankrupt most small businesses. And professional readers must
understand that there has been no effect on their obligations at all, and that the same (in their case,
even more severe) fines still apply.

For example, the following eleven statements are equally applicable to the new Section 6707A as
they are to its predecessor:

1.        The penalty applies without regard to whether the small business or the small business
owners have knowledge that the transaction has been listed.

2.        The penalty applies even if the small business and/or the small business owners derived no
tax benefit    from the transaction. Even under the new legislation, there are substantial minimum
penalties that are applied even if there has been no tax benefit.

3.        The penalty is applied at multiple levels, which is devastating to small businesses; the result is
that the 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 are 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

4.        The penalty is final, must be imposed by the IRS (this is mandatory), and cannot be rescinded.
There is no right of appeal, and there is no “good faith” exception, as business advocates had hoped
would be a part of the new legislation.

5.        Judicial review is expressly prohibited, which raises another Constitutional issue, this time a
separation of powers argument, as it amounts to one branch of government prohibiting another from

6.        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 that the taxpayer “benefits” from the transaction, it must be
reflected on the tax return. Aside: As a practical matter, the form should be filed with the tax return. The
IRS directions assume a timely filing. There are no directions on how to file late, which most
taxpayers must do, since few realized the need to disclose in this manner when they still could have
timely filed. A few experts have figured out how to file late and simultaneously avoid penalties, 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.

7.        A taxpayer that discloses a transaction is subject to penalty if the Service deems the disclosure
to be incomplete, incorrect, and/or misleading. I have had numerous conversations with people who
filed the disclosure forms and got fined. They did not properly prepare and/or file the forms.

8.        If a transaction is not  “listed” at the time the taxpayer files a return but it subsequently becomes
listed, the taxpayer becomes responsible for filing a disclosure statement and will be penalized for
failing to do so. This is true even if the taxpayer has no knowledge that the transaction has been
listed. This sort of thing is exactly why business interests , albeit unsuccessfully, pushed for a “good
faith” exception in the new legislation.

9.        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 in a listed transaction and, accordingly, the penalties compound annually 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?

10.        The taxpayer must disclose each year, which can result in compounding of already large
penalties; and

11.        The Statute of Limitations, usually three years, does not apply. IRC 6501(c)(10) tolls the
statute until proper disclosure is made.

The Treasury Department usually announces on a somewhat 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 that a transaction is deemed to be a listed transaction, the
Draconian Section 6707A  penalties are triggered. Section 6707A penalties not only apply to
specifically listed transactions, but also to transactions that are deemed by Treasury to be
“substantially similar” to any of the specifically 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.

Some Examples

A business owner bought a type of life insurance policy featuring what is known as a “springing cash
value” as an alternative to a pension plan. Two years later, this type of transaction was specifically
identified as an abusive tax shelter, a listed transaction, meaning that the business owner was now
obligated to file Form 8886. But the financial advisor, who years before had actually recommended
this course of action, either willfully or out of ignorance failed to advise the business owner to
The IRS demanded back taxes and interest in the neighborhood of $60,000. It also assessed
$600,000 of penalties under Section 6707A for failing to disclose participation in a listed transaction
for two separate years.

Another taxpayer filed Form 8886 with his tax returns, but failed to file, in the first year, with the Office of
Tax Shelter Analysis. The penalty was assessed for that failure, even though the IRS had the form,
though perhaps in a different place. Again, this scenario cries out for the “good faith” exception that
was not included in the new legislation.

Then there was the doctor who thought that he had settled his 419 welfare benefit plan issues with
the Service. He entered into a closing agreement and paid all taxes due and owing. Later, he was
assessed the penalty for failing to file Form 8886. Of course, this issue had been neither raised nor
even discussed in the doctor’s prior communications, negotiations, etc. with the Service.

I could go on and on with these horror stories, but the reader probably gets my drift by now. I have
been urging business owners to properly file Form 8886 for years. A surprising number of
accountants have little or no knowledge in this area, even being unaware of the fines that can be
imposed on “material advisors” which, as previously noted, have NOT changed as a result of the new
legislation. And if a professional assumes that he has no clients in “listed transactions”, he should
realize that there are numerous types of listed transactions. They are not restricted to welfare benefit
plans. For example, they include the popular Section 412(i) defined benefit pension plan, and even
some of the ubiquitous 401(k) plans. No business owner, and especially no financial, insurance or
accounting professional should ever assume that he or she is immune from any or all of the possible
repercussions outlined herein.

Summing up, the new legislation does reduce possible Section 6707A penalties for most taxpayers.
That, in my view, is its only benefit. And the reduction is not as great as one might expect. Depending
on surrounding circumstances, penalties of hundreds of thousands of dollars are still quite possible.
Even the minimum penalties, which are applied in the event that there is no tax benefit, amount to
$15,000 annually. Who can afford to just brush that aside? Over a period of years, and the fines in the
8886 area are still applied annually, the minimum fines all be themselves can add up to a
considerable amount.

Both the 8886 and 8918 forms must still be filed properly. The fines and penalties for failure to do so
remain substantial 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, 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 more than 50
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 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, or visit

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
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