Forensic, General & Medical
Expert Witnesses

Accountants Business Owners and Others Face Large IRS Fines


     By Lance Wallach, CLU, CHFC Abusive Tax Shelter, Listed Transaction, Reportable Transaction Expert Witness

PhoneCall Lance Wallach at (516) 938-5007


Since the late nineties, unsuspecting business owners and professionals have purchased retirement plans and other plans from insurance professionals. The IRS has organized task forces to go after the abusive plans.
Since the late nineties, unsuspecting business owners and professionals have purchased retirement plans and other plans from insurance professionals. The IRS has organized task forces to go after the abusive plans. In the past, a business owner who was audited with an abusive plan would lose his tax deduction and pay interest and penalties. Now, there is also IRS code 6707A whereby in addition to the above, the IRS assesses additional huge fines on both the purchaser and material advisors for not reporting on themselves.

Accountants, insurance agents, and others sell 419 Welfare Benefit, 419, captive insurance, and section 79 plans to unsuspecting professionals and business owners. Since the IRS is calling many of these plans abusive tax shelters, many small business owners are getting audited and getting penalties under IRC 6707A. The IRS has even fined material advisors and accountants for their participation. The former business owner clients then sue the people who sold them these plans. The accountant who signed the tax return also is subject to lawsuits. I have been an expert witness in some of these cases and my side has never lost. For the accountant, this is an unbelievable situation. First he signed the tax return and did not know that anything was wrong. Then he sometimes tries to help his client with the 8886 forms, but since he has no experience with the form, he will make mistakes. The IRS treats these improperly filed and/or filled out forms as if they were never filed. My office occasionally gets a phone call from the accountant. When I try to explain the problem, the accountant usually does not believe it. Why would a legitimate insurance company that vetted the plan allow something abusive to be sold? Why hasn’t the accountant heard about these types of problems? Usually a few years following the initial phone call, the accountant or his client calls me with the big problem. The clients loses his tax deduction, pays interest and penalties, and is facing a large fine for failing to properly file form 8886. Sometimes the accountant is also facing a $100,000 fines as a material advisor. The IRS calls accountants material advisors if they get paid, give tax advice, or sign tax returns with abusive or similar plans on them. The accountant can also be referred to the office of professional responsibility.

Insurance companies through insurance agents and others sell 412i, 419, captive insurance and section 79 plans to unsuspecting business owners. The IRS considers many of these plans to be abusive tax shelters, listed transactions, reportable transactions, or what it calls “similar to,” which allows them to target the plan. Many of the business owners then get audited by the IRS, lose their deductions, and pay interest and penalties. Then comes the bad news. The IRS comes back and fines the business owners a large amount of money for not properly filing under IRC 6707A. They have even fined hundreds of business owners who have filed, claiming that they prepared the forms incorrectly, filed improperly, or lied to the IRS.

As I write this article, the situation becomes worse for the participants. Taxpayers must report certain transactions to the IRS under Section 6707A of the Tax Code which was enacted in 2004, to help detect, deter, and shut down abusive tax shelter activities. For example, reportable transactions may include being in a 419,412i, or other insurance plan sold by insurance agents for tax deduction purposes. Other abusive transactions could include captive insurance and section 79 plans, which are usually sold by insurance agents for tax deductions. Taxpayers must disclose their participation in these and other transactions by filing a Reportable Transactions Disclosure Statement (Form 8886) with their income tax returns. People who sell these plans are called material advisors and must also file 8918 forms properly. Failure to report the transactions could result in very large penalties. Accountants who sign tax returns that have these deductions can also be called material advisors and should also file forms 8918 properly.

The IRS has fined hundreds of taxpayers who did file under 6707A, alleging that they did not fill out the forms properly or did not file correctly. The plan administrator of a 412i advised over 200 of his clients on how to file. The clients were then all fined by the IRS for filling out the forms incorrectly. The fines averaged about $500,000 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 neither sufficient nor 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.

“As penalties are meant to encourage voluntary taxpayer compliance, it is important that IRS procedures for documenting and assessing them be well developed and fully documented,” said TIGTA Inspector General J. Russell George in a statement. “Any failure to do so raises the risk that taxpayers will not receive consistent and fair treatment under the law, and could further reduce their willingness to comply voluntarily.” 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 that 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 transaction and were fined over $500,000. I have had phone calls from taxpayers that went into 419 or 412i plans but made no contributions and 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.

On July 7, 2009, at the request of Congress, the IRS agreed to suspend collection enforcement actions. However, this did not preclude the issuance of notices of assessment that are required by law or adjustment notices that inform the taxpayer of any account activity. In addition, taxpayers continued to receive balance due, final notices of intent to levy, and demands to pay Section 6707A penalties.

TIGTA recommended that the IRS fully develop, document, and properly process Section 6707A penalties. The IRS agreed with TIGTA’s recommendation and plans to take appropriate corrective actions. I think as a result of this many taxpayers who have not yet been fined will shortly receive the fines. Unless a taxpayer files properly, there is no statute of limitations. The IRS has and will continue to go back many years and fine people that are in listed, reportable, or substantially similar to transactions.

If you are, or were in a 412i, 419, captive insurance or section 79 plans you should immediately file under 6707A protectively. If you have already filed you should find an expert to review the forms. I only know of two people who know how to properly file. The instructions provided by the IRS are vague. If a taxpayer files incorrectly or fills out the forms incorrectly, he still gets the fine. I have had hundreds of phone calls from people in that situation.

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.

ABOUT THE AUTHOR: Lance Wallach
Lance Wallach, captive insurance and Section 79 plan expert, is the nation's leading authority on resolving IRS tax problems for individuals and businesses.

Mr. Wallach, National Society of Accountants' Speaker of the Year, is a member of the AICPA faculty of teaching professionals and he is a renowned national expert witness in many 419, 412i, and financial abuse cases. To date his side has never lost a case.

Mr. Wallach is often a featured speaker at national conventions for CPAs, attorneys, and business owners and other entrepreneurs, and has over 30 years experience helping people get the most possible money back from the IRS.

Copyright Lance Wallach, CLU, CHFC

More information about Lance Wallach, CLU, CHFC


While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

Find an Expert Witness