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IRS Issues Final Regulations for Material Advisors, Accountants, Attorneys and Insurance Agents


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

PhoneCall Lance Wallach at (516) 938-5007


If you sold, advised on or had anything to do with a listed transaction you will be fined by the IRS. For those that bought listed transactions like, 419 welfare benefit plans or 412i plans, you have been or will also be fined.
On July 30, 2014, the Internal Revenue Service issued final regulations regarding the imposition of penalties under Internal Revenue Code section 6707 against material advisors who fail to file true, complete or timely disclosure returns with respect to reportable or listed transactions. The effective date of the final regulations is July 31, 2014.

Material advisors generally include any advisors who make or provide a tax statement with respect to any reportable or listed transaction, and directly or indirectly receive certain threshold levels of gross income in connection with such advice. Reportable transactions include listed transactions, transactions of interest, section 165 loss transactions, confidential transactions, and contractual protection transactions.

The final regulations make several changes to the proposed regulations that were published in 2008. The changes include:

• The applicable penalty under section 6707 for a transaction qualifying as both reportable and listed is limited to a single penalty, which is the greater of $200,000 or 50 percent of the gross income derived by the material advisor (75 percent if the failure is international).

• In cases where there is a failure to disclose more than one reportable or listed transaction, a separate section 6707 penalty will be imposed for each transaction.

• For purposes of computing the penalty in the case of a listed transaction, the gross income derived from the listed transaction only includes fees earned in connection with the listed transaction for which the advisor was a material advisor.

The final regulations also modify the factors considered by the IRS for rescission of a material advisor penalty. The final regulations now allow consideration of facts and circumstances relating to whether a material advisor’s failure to timely file the Form 8918, Material Advisor Disclosure Statement, was unintentional. However, if an unintentionally delinquent Form 8918 was filed either after the IRS had taken steps to identify the person as a material advisor or after the taxpayer disclosed a reportable transaction on Form 8886, Reportable Transaction Disclosure Statement, such a filing will not weigh in favor of rescission.

Lastly, the final regulations include additional examples to help clarify the application of the material advisor penalties.
Attorneys, accountants, financial and investment consultants and others advising on reportable or listed transactions should remain conscious of the applicable gross income thresholds for each type of transaction, as well as the timing of reporting obligations. The severe penalties and narrow provisions for rescission of such penalties require careful planning and awareness of compliance obligations.

Companies should carefully evaluate their proposed investments in plans such as the 419, 412i, section 79 or captive insurance plan with life insurance.. The claimed deductions will be disallowed, and penalties will be assessed for lack of disclosure if the investment is similar to the investments described in Notice 95-34, that is, if the transaction is a listed transaction and Form 8886 is either not filed at all or is not properly filed. The penalties, though perhaps not as severe, are also imposed for reportable transactions, which are defined as transactions having the potential for tax avoidance or evasion.

Insurance agents have been selling such abusive plans since the 1990's. They started as 419A(F)(6) plans and abusive 412i plans. The IRS went after them. They then evolved to single-employer 419(e) plans, which the IRS also went after. The latest scams may be the so-called captive insurance plan and the so-called Section 79 plan.

While captive insurance plans are legitimate for large corporations, they are usually not legitimate for small business owners as a way to obtain a tax deduction. I have not yet seen a legitimate Section 79 plan. Recently, I have sent some of the plan promoters’ materials over to my IRS contacts who were very interested in receiving them. Some of my associates are already trying to help defend some unsuspecting business owners who are being audited by the IRS with respect to these plans.

Similar, though perhaps not as abusive, plans fail after the IRS goes after them. Niche was one example. The company first marketed a 419A(F)(6) plan that the IRS audited. They then marketed a 419(e) plan that the IRS audited. Niche, insurance companies, agents, and many accountants were then sued after their clients lost their deductions, paid fines, interest, and penalties, and then paid huge fines for failure to file properly under 6707A. Niche then went out of business.

Millennium sold 419 plans through insurance companies. They stupidly filed for a private letter ruling to the effect that they were not a listed transaction. They got exactly the opposite: a private letter ruling saying that they were a listed transaction. Then many participants were audited. The IRS disallowed the deductions, imposed penalties and interest, and then assessed large fines for not filing properly under Section 6707A. The result was lawsuits against agents, insurance companies and accountants. Millennium sought bankruptcy protection after a lot of lawsuits.

I have been an expert witness in a lot of the lawsuits in these 419 plans, 412i plans, and the like, and my side has never lost a case. I have received thousands of phone calls over the years from business owners, accountants, angry plan promoters, insurance agents, and other various professionals. In the 1990's, when I started writing for the AICPA and other publications warning about these abusive plans, most people laughed at me, especially the plan promoters.

In 2002, when I spoke at the annual national convention of the American Society of Pension Actuaries in Washington, people took notice. The IRS chief actuary Jim Holland also held a meeting similar to mine on abusive 412i plans. Many IRS agents attended my meeting. I was also invited to IRS headquarters, at the request of the acting IRS commissioner, to meet with high-level IRS officials and Treasury officials to discuss 419 issues in depth, which I did after the meeting.

The IRS then set up task forces and started going after 419 and 412i plans. I have been profusely warning accountants to properly file under 6707A to avoid the large fines, but most do not. Even if they file, if they make a mistake on the forms, the IRS will fine them. Very few accountants have had experience filing the forms, and the IRS instructions are complicated and therefore difficult to follow.

ABOUT THE AUTHOR: Lance Wallach
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.

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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