Recently I have received phone calls from participants in the Sea Nine VEBA and have learned that the IRS may be auditing many more participating employers in the coming months.
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Failing to File Form 8886 for VEBAs like Sea Nine VEBA create multiple penalties.
Taxpayers who participate in 419A(f)(6) multiple employer plans like the Sea Nine VEBA are often very discouraged to find the IRS applying multiple penalties for the failure to file a form that they had no reason to know was required. The form, IRS Form 8886 is required for all taxpayers who participate in a listed transaction such as a multiple employer welfare benefit plan (or 419 plan). The following example illustrates the penalties that can apply.
Assume we have an S corporation taxpayer who deducted $100,000 to a multiple employer 419 VEBA for years 2008, 2009 and 2010. The IRS audits the taxpayer and disallows the $100,000 deduction. In most cases, the IRS will provide for the adjustment at the individual 1040 level and other than some interest, the taxpayer will be in a position similar to if the transaction had not occurred. If, however, the taxpayer was not told to file Form 8886 for every year of participation and in fact did not file, the IRS asserts the following additional penalties:
A $10,000 penalty at the S Corporation level for years 2008 – 2010 for the failure to file Form 8886. Total Penalty = $30,000. See Code Section 6707A. A penalty at the individual level of 75% of the tax benefit for years 2008-2010 for the failure to file Form 8886. This translates into a penalty of $26,250 for each year. Total Penalty = $78,750. See Code Section 6707A. An accuracy related penalty of 30% of the income tax adjustment for years 2008-2010. The worst part of this penalty is that if the taxpayer exercised due diligence and relied on an outside advisor, this penalty would normally be 20% of the tax and could be waived. However, because the Form 8886 was not filed, the penalty is 30% and cannot be waived. Total Penalty = $31,500. See Code Section 6662A. Grand Total of all Penalties = $140,250 (nearly 50% of the total investment)!
Lance Wallacacting IRS commissioner to meet with high level IRS executives to further discuss these issues. At this meeting with senior IRS officials, there was a speakerphone so that high level Treasury officials could listen in on the conversation. Within a year of this meeting, the IRS escalated attack on participants in 419 Welfare Benefit Plans.
The IRS has fined hundreds of taxpayers who did file under 6707A. They said that they did not fill out the forms properly, or did not file correctly. The plan administrator or a 412i advised over 200 of his clients how to file. They were then all fined by the IRS for filling out the forms wrong. The fines averaged about $200,000 per taxpayer.
A report by the Treasury Inspector General for Tax Administration (TIGTA) found that the procedures for documenting and assessing the Section 6707A penalty were not sufficient or formalized, and cases often are not fully developed.
TIGTA evaluated the IRS’s effectiveness in identifying, developing, and applying the Section 6707A penalty. Based on its review of 114 assessed Section 6707A penalties, TIGTA determined that many of these files were incomplete or did not contain sufficient audit evidence. TIGTA also found a need for better coordination between the IRS’s Office of Tax Shelter Analysis and other functions.
The Section 6707A penalty is a stand-alone penalty and does not require an associated income tax examination; therefore, it applies regardless of whether the reportable transaction results in an understatement of tax. TIGTA determined that, in most cases, the Section 6707A penalty was substantially higher than additional tax assessments taxpayers received from the audit of underlying tax returns. I have had phone calls from taxpayers that contributed less than $100,000 to a listed or reportable transaction and were fined over $500,000. I have had phone calls from taxpayers that went into 419 or 412i plans, made no contributions, but nevertheless were fined a large amount of money for being in a listed transaction and not properly filing forms under IRC section 6707A. The IRS claims that the fines are non-appealable.
If you are, or were in a 412i, 419, captive insurance or section 79 plan you should immediately file under 6707A protectively. If you have already filed you should find someone who knows what he is doing to review the forms. I only know of two people who know how to properly file. The IRS instructions are vague and are useless if you are filing late since they presume a timely file. If a taxpayer files wrong, or fills out the forms wrong he still gets the fine. I have had hundreds of phone calls from people in that situation.
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 and section 79 plans. He speaks at more than ten conventions annually, writes for more than 20 publications, is quoted regularly in the press and has been featured on television and radio financial talk s
Sea Nine VEBAs under attack by IRS We have received numerous calls from taxpayers who are under audit with the IRS with respect to their participation in the Sea Nine VEBA, a 419A(f)(6) multiple employer welfare benefit plan. The IRS audits are generally managed in one of several upstate New York offices of the IRS. Williams Coulson and Michael Lloyd have represented more than 400 clients in IRS audits in the last three years with respect to participation in 419 plans and more than 200 of those audits were with the New York offices of the IRS.
Failing to File Form 8886 for VEBAs like Sea Nine VEBA create multiple penalties.
ReplyDeleteTaxpayers who participate in 419A(f)(6) multiple employer plans like the Sea Nine VEBA are often very discouraged to find the IRS applying multiple penalties for the failure to file a form that they had no reason to know was required. The form, IRS Form 8886 is required for all taxpayers who participate in a listed transaction such as a multiple employer welfare benefit plan (or 419 plan). The following example illustrates the penalties that can apply.
Assume we have an S corporation taxpayer who deducted $100,000 to a multiple employer 419 VEBA for years 2008, 2009 and 2010. The IRS audits the taxpayer and disallows the $100,000 deduction. In most cases, the IRS will provide for the adjustment at the individual 1040 level and other than some interest, the taxpayer will be in a position similar to if the transaction had not occurred. If, however, the taxpayer was not told to file Form 8886 for every year of participation and in fact did not file, the IRS asserts the following additional penalties:
A $10,000 penalty at the S Corporation level for years 2008 – 2010 for the failure to file Form 8886. Total Penalty = $30,000. See Code Section 6707A.
A penalty at the individual level of 75% of the tax benefit for years 2008-2010 for the failure to file Form 8886. This translates into a penalty of $26,250 for each year. Total Penalty = $78,750. See Code Section 6707A.
An accuracy related penalty of 30% of the income tax adjustment for years 2008-2010. The worst part of this penalty is that if the taxpayer exercised due diligence and relied on an outside advisor, this penalty would normally be 20% of the tax and could be waived. However, because the Form 8886 was not filed, the penalty is 30% and cannot be waived. Total Penalty = $31,500. See Code Section 6662A.
Grand Total of all Penalties = $140,250 (nearly 50% of the total investment)!
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ReplyDeleteIRS tax relief firm, Lance Wallach, speaking Lance Wallach sho
Lance Wallacacting IRS commissioner to meet with high level IRS executives to further discuss these issues. At this meeting with senior IRS officials, there was a speakerphone so that high level Treasury officials could listen in on the conversation. Within a year of this meeting, the IRS escalated attack on participants in 419 Welfare Benefit Plans.
ReplyDeleteThe IRS has fined hundreds of taxpayers who did file under 6707A. They said that they did not fill out the forms properly, or did not file correctly. The plan administrator or a 412i advised over 200 of his clients how to file. They were then all fined by the IRS for filling out the forms wrong. The fines averaged about $200,000 per taxpayer.
A report by the Treasury Inspector General for Tax Administration (TIGTA) found that the procedures for documenting and assessing the Section 6707A penalty were not sufficient or formalized, and cases often are not fully developed.
TIGTA evaluated the IRS’s effectiveness in identifying, developing, and applying the Section 6707A penalty. Based on its review of 114 assessed Section 6707A penalties, TIGTA determined that many of these files were incomplete or did not contain sufficient audit evidence. TIGTA also found a need for better coordination between the IRS’s Office of Tax Shelter Analysis and other functions.
The Section 6707A penalty is a stand-alone penalty and does not require an associated income tax examination; therefore, it applies regardless of whether the reportable transaction results in an understatement of tax. TIGTA determined that, in most cases, the Section 6707A penalty was substantially higher than additional tax assessments taxpayers received from the audit of underlying tax returns. I have had phone calls from taxpayers that contributed less than $100,000 to a listed or reportable transaction and were fined over $500,000. I have had phone calls from taxpayers that went into 419 or 412i plans, made no contributions, but nevertheless were fined a large amount of money for being in a listed transaction and not properly filing forms under IRC section 6707A. The IRS claims that the fines are non-appealable.
If you are, or were in a 412i, 419, captive insurance or section 79 plan you should immediately file under 6707A protectively. If you have already filed you should find someone who knows what he is doing to review the forms. I only know of two people who know how to properly file. The IRS instructions are vague and are useless if you are filing late since they presume a timely file. If a taxpayer files wrong, or fills out the forms wrong he still gets the fine. I have had hundreds of phone calls from people in that situation.
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 and section 79 plans. He speaks at more than ten conventions annually, writes for more than 20 publications, is quoted regularly in the press and has been featured on television and radio financial talk s
Sea Nine VEBAs under attack by IRS
ReplyDeleteWe have received numerous calls from taxpayers who are under audit with the IRS with respect to their participation in the Sea Nine VEBA, a 419A(f)(6) multiple employer welfare benefit plan. The IRS audits are generally managed in one of several upstate New York offices of the IRS. Williams Coulson and Michael Lloyd have represented more than 400 clients in IRS audits in the last three years with respect to participation in 419 plans and more than 200 of those audits were with the New York offices of the IRS.