Disclosures Notice 2007–85 This notice provides guidance to material advisors required to file a disclosure

Disclosures
Notice 2007–85
This notice provides guidance to material
advisors required to file a disclosure
statement.

Disclosures
Notice 2007–85
This notice provides guidance to material
advisors required to file a disclosure
statement by October 31, 2007, under
§ 301.6111–3 of the Procedure and Administration
Regulations.
BACKGROUND
On August 3, 2007, the Internal
Revenue Service and Treasury Department
published final regulations under
§ 301.6111–3 in the Federal Register
(72 FR 43157) providing the rules relating
to the disclosure of reportable transactions
by material advisors under section 6111
of the Internal Revenue Code. See T.D.
9351, 2007–38 I.R.B. 616. In general,
these regulations apply to transactions
with respect to which a material advisor
makes a tax statement on or after August
3, 2007. However, these regulations apply
to transactions of interest entered into on
or after November 2, 2006, with respect
to which a material advisor makes a tax
statement on or after November 2, 2006.
The regulations provide that each material
advisor, with respect to any reportable
transaction, must file a return as
described in § 301.6111–3(d). Section
301.6111–3(d) provides that each material
advisor required to file a disclosure
statement under § 301.6111–3 must file
a completed Form 8918, “Material Advisor
Disclosure Statement” (or successor
form). The Form 8918 must be filed with
the Office of Tax Shelter Analysis (OTSA)
by the last day of the calendar month that
follows the end of the calendar quarter
in which the advisor became a material
advisor with respect to the reportable
transaction or in which the circumstances
necessitating an amended disclosure occur.
Prior to the publication of the final regulations,
material advisors were required
to disclose reportable transactions on Form
8264, “Application for Registration of a
Tax Shelter.” Notice 2004–80, 2004–2
C.B. 963, and Notice 2005–22, 2005–1
C.B. 756, described the manner in which
the Form 8264 was to be completed.
INTERIM PROVISION
The next due date for disclosures by
material advisors is October 31, 2007. As
of the date of release of this notice, Form
8918 has not yet been published. The IRS
anticipates that the Form 8918 will be published
soon.
Due to the unavailability of Form 8918,
a material advisor required to file a completed
Form 8918 by October 31, 2007,
will be treated as satisfying the disclosure
requirement of § 301.6111–3(d) if the
material advisor files Form 8264 instead.
If Form 8918 is published on or before
October 31, 2007, material advisors may
choose to use either Form 8918 or Form
8264 for disclosures required to be filed by
October 31, 2007. For disclosures required
to be filed after October 31, 2007, material
advisors must use Form 8918 (or successor
form) unless instructed otherwise by the
IRS. Reportable transactions disclosed on
the Form 8264 should be disclosed in the
manner described in Notice 2004–80 and
Notice 2005–22.
EFFECTIVE DATE
This notice is effective October 16,
2007, the date this notice was released to
the public.
DRAFTING INFO

Abusive 412(i) Retirement Plans Can Get Accountants Fined $200,000

California Enrolled Agent

January 2

By Lance Wallach & Ira Kaplan

Most insurance agents sell 412(i) retirement plans.  The large insurance commissions generate some of the enthusiasm.  Unlike other retirement plans, the 412(i) plan must have insurance products as the funding mechanism.  This seems to generate enthusiasm among insurance agents.  The IRS has been auditing almost all participants in 412(i) plans for the last few years.  At first, they thought all 412(i) plans were abusive.  Many participants’ contributions were disallowed and there were additional fines of $200,000 per year for the participants.  The accountants who signed the tax returns (who the IRS called “material advisors”) were also fined $200,000 with a referral to the Office of Professional Responsibility.  For more articles and details, see www.vebaplan.com and www.irs.gov/.

On Friday February 13, 2004, the IRS issued proposed regulations concerning the valuation of insurance contracts in the context of qualified retirement plans. 

The IRS said that it is no longer reasonable to use the cash surrender value or the interpolated terminal reserve as the accurate value of a life insurance contract for income tax purposes.  The proposed regulations stated that the value of a life insurance contract in the context of qualified retirement plans should be the contract’s fair market value.

The Service acknowledged in the regulations (and in a revenue procedure issued simultaneously) that the fair market value standard could create some confusion among taxpayers.  They addressed this possibility by describing a safe harbor position.

When I addressed the American Society of Pension Actuaries Annual National Convention, the IRS chief actuary also spoke about attacking abusive 412(i) pensions.

A “Section 412(i) plan” is a tax-qualified retirement plan that is funded entirely by a life insurance contract or an annuity.  The employer claims tax deductions for contributions that are used by the plan to pay premiums on an insurance contract covering an employee.  The plan may hold the contract until the employee dies, or it may distribute or sell the contract to the employee at a specific point, such as when the employee retires.

“The guidance targets specific abuses occurring with Section 412(i) plans”, stated Assistant Secretary for Tax Policy Pam Olson.  “There are many legitimate Section 412(i) plans, but some push the envelope, claiming tax results for employees and employers that do not reflect the underlying economics of the arrangements.”  Or, to put it another way, tax deductions are being claimed, in some cases, that the Service does not feel are reasonable given the taxpayer’s facts and circumstances. 

“Again and again, we’ve uncovered abusive tax avoidance transactions that game the system to the detriment of those who play by the rules,” said IRS Commissioner Mark W. Everson. 

The IRS has warned against Section 412(i) defined benefit pension plans, named for the former IRC section governing them. It warned against certain trust arrangements it deems abusive, some of which may be regarded as listed transactions. Falling into that category can result in taxpayers having to disclose such participation under pain of penalties, potentially reaching $100,000 for individuals and $200,000 for other taxpayers. Targets also include some retirement plans.

One reason for the harsh treatment of 412(i) plans is their discrimination in favor of owners and key, highly compensated employees. Also, the IRS does not consider the promised tax relief proportionate to the economic realities of these transactions. In general, IRS auditors divide audited plans into those they consider noncompliant and others they consider abusive. While the alternatives available to the sponsor of a noncompliant plan are problematic, it is frequently an option to keep the plan alive in some form while simultaneously hoping to minimize the financial fallout from penalties.

The sponsor of an abusive plan can expect to be treated more harshly. Although in some situations something can be salvaged, the possibility is definitely on the table of having to treat the plan as if it never existed, which of course triggers the full extent of back taxes, penalties and interest on all contributions that were made, not to mention leaving behind no retirement plan whatsoever.  In addition, if the participant did not file Form 8886 and the accountant did not file Form 8918 (to report themselves), they would be fined $200,000.

Lance Wallach, the National Society of Accountants Speaker of the Year, speaks and writes extensively about retirement plans, Circular 230 problems and tax reduction strategies.  He speaks at more than 40 conventions annually, writes for over 50 publications and has written numerous best selling AICPA books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Business Hot Spots.  Contact him at 516.938.5007 or visit www.vebaplan.com.

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.