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Do You Have a Potential Abusive Tax Avoidance Transaction


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

PhoneCall Lance Wallach at (516) 938-5007


People think that accountants and tax lawyers lead boring lives. Perhaps that may be true for some, but there is plenty of action these days with the IRS and their Employment Plans tax group. Recently, the IRS identified an “emerging issue” that it calls a potential Abusive Tax Avoidance Transaction. If you are a small business with an employment benefit plan, those words are never good to hear.
According to an internal IRS training document we recently obtained, the IRS is now targeting for audit small and medium sized businesses that created their own separate management companies. While creating a separate company to provide management services is legal, the IRS wants to make sure there is a legitimate business reason for doing so. The IRS is actively examining (auditing) businesses that are funneling large sums of money from the operating company to the management company and thus insuring the operating company pays little or no taxes. By transferring funds to the management company, the business strips away much of the income from operations.

Once the money is in the management company, the owners create a defined benefit plan that benefits only the owners and none of the rank and file workers.

Accountants and business owners with these set ups should expect an audit. While there are many valid business reasons to create captive management companies, those with well funded defined benefit plans that only benefit the owner should expect a knock on the door from the IRS and some high penalties as well.

Recently the IRS has been focusing a great deal of audit resources within the employment plan area. In addition to the management company issue, IRS continues to look for noncompliant 412 and 419 plans, often called “welfare benefit plans” or similar names. These are considered reportable transactions and many are abusive tax shelters. The penalties for these plans can be $100,000 to $200,000 per year!

Plans set up by Internet and outside promoters often look slick but are often fraught with problems. We have seen some marketing materials replete with supposed IRS opinion letters and legal opinions. Before you sign the dotted line, have the plan reviewed by a tax attorney or experienced CPA. Some CPAs and lawyers have even been duped by these plans – if you lose an audit and relied on professional advice in purchasing a plan, you may have a professional malpractice claim.

ABOUT THE AUTHOR: Lance Wallach
Lance Wallach, CLU, ChFC, CIMC, speaks and writes extensively about financial planning, retirement plans, and tax reduction strategies. He is an American Institute of CPA’s course developer and instructor and has authored numerous bestselling books about abusive tax shelters, IRS crackdowns and attacks and other tax matters. He speaks at more than 20 national conventions annually and writes for more than 50 national publications.

Copyright Lance Wallach, CLU, CHFC

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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.

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