New Transaction of Interest - Charitable Remainder Trust Interests


Lance Wallach Council Member President, VEBA Plan
 
December 08, 2010


Premise
Potential for Avoidance of Tax Through Sale of Charitable Remainder Trust Interests Notice 2008-99 identifies a transaction of interest in which a sale or other disposition of all interests in a charitable remainder trust (subsequent to the contribution of appreciated assets to and their reinvestment by the trust), results in the grantor or other noncharitable recipient receiving the value of that person's trust interest while claiming to recognize little or no taxable gain.

Discussion
Persons entering into these transactions on or after November 2, 2006, must disclose the transaction as described in section 1.6011-4. Material advisors who make a tax statement on or after November 2, 2006, with respect to transactions entered into on or after November 2, 2006, have disclosure and list maintenance obligations under sections 6111 and 6112. Persons required to disclose these transactions and/or maintain lists of advisees who fail to do so may be subject to the penalties under sections 6707A, 6707, 6708, 6662, and/or 6662A.



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 plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Pubic Radio's All Things Considered, and others. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education's CPA's Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots.
The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

RAMESH SARVA

RAMESH SARVA: Lance Wallach - Expert Witness Services, Section 79, insurance Expert Witness

IRS: Disclose Offshore Accounts or Go to Jail

IRS: Disclose Offshore Accounts or Go to Jail

Brian

That's pretty much the headline from a CNBC article on Friday. And it's true.

In 2009, 15,000 Americans came forward and admitted having foreign bank accounts. Unfortunately, Uncle Sam estimates there are some 500,000 more people hiding money offshore. Opening a bank account in another country isn't illegal. There are a whole host of reasons why people may wish to send money offshore. It only becomes illegal when you send money to a foreign country in the hopes of cheating Uncle Sam.

U.S. law makes it a felony if you fail to declare the income from foreign investments on your U.S. tax return and makes it illegal to not disclose the existence of the foreign account.

So what is a person to do? Taxpayers can do nothing and hope they don't lose the "audit lottery" (there are no winners with the IRS). Or taxpayers can come into compliance, report the account and pay the government ¼ of the highest dollar amount that was in the account. That's right, if you had an account with $200,000 in it, get out the checkbook and write a check to the IRS for $50,000.

Taxpayers wanting to take advantage of the current amnesty program (called the Offshore Voluntary Disclosure Initiative) must move quickly, however. Unlike the 2009 program, which simply said you had to apply be the deadline, the current amnesty requires that all missing forms ("FBAR's"), amended returns and payment must be made by the deadline. There is a great deal of paperwork involved with the new program, waiting until the last minute is a recipe for disaster.

Those that don't comply face prison and loss of 50% of their highest account value.

So what is the risk of getting caught? We think it is quite high.

Transparency within the international banking community is at an all time high. And the developed countries are exchanging information. That means if Germany obtains information about accounts in a Bermuda bank it will likely share that information with other countries.

The U.S. has been issuing "John Doe" subpoenas to foreign banks fishing for the names of American account holders. Countries like Germany have been bribing foreign bank officials to simply steal the information and turn it over.

Still not convinced? The IRS paid its first award under the new whistleblower program - $4.5 million to an accountant who reported his employer! If anyone, anywhere knows you have a foreign account; they may report you and keep a large percentage of what you pay.

The world suddenly got much smaller.

This is interesting article but I do not believe everything in it is correct. I have received numerous phone calls from participants in these plans and the IRS is auditing.  For the most accurate information contact: Lance Wallach at lancewallach.com or call 516-935-7346

Help With Common IRS Problems


Published in Coatings Pro Magazine
 Lance Wallach
It is tax time. There are many problems you can run into with the IRS. This article is a generalized overview of some of these confusing issues:

•    IRS Penalties
•    Unfiled Tax Returns 
•    IRS Liens
•    IRS Audits
•    Payroll Tax Problems
•    IRS Levies
•    Wage Garnishments
•    IRS Seizures

When dealing with the IRS, it can seem like they have all the power. That is not always true. As a small business owner--and a taxpayer--it is vital that you know your options and your rights.

 IRS Penalties


The IRS penalizes millions of taxpayers each year. In fact, they have so many penalties that it can be hard to understand which penalty they are hitting you with.

The most common penalties are Failure to File and Failure to Pay. Both of these penalties can substantially increase the amount you owe the IRS in a very short period of time.

To make matters worse, the IRS charges interest on penalties. Many taxpayers often find out about IRS problems many years after they have occurred. As a result, the amount owed the IRS is substantially greater due to penalties and the accumulated interest on those penalties. Some IRS penalties can be as high as 75% to 100% of the original taxes owed. Often taxpayers can afford to pay the taxes owed, but the extra penalties make it impossible to pay off the entire balance.

The original goal of the IRS imposing penalties was to punish taxpayers in order to keep them in line. Unfortunately, the penalties have turned into additional sources of income for the IRS. So they are happy to add whatever penalties they can and to pile interest on top of those penalties. Your loss is their gain.
It is important to know that under certain circumstances the IRS does abate, or forgive, penalties. Therefore before you pay the IRS any penalty amounts, you may want to consider requesting that the IRS abate your penalties.

Unfiled Tax Returns


Many taxpayers fail to file required tax returns for a variety of reasons. What you must understand is that failure to file tax returns may be construed as a criminal act by the IRS--a criminal act punishable by up to one year in jail for each year not filed. Needless to say, its one thing to owe the IRS money but another thing to potentially lose your freedom for failure to file a tax return.

The IRS may file “SFR” (Substitute For Return) Tax Returns on your behalf. This is the IRS’s version of an unfiled tax return. Because SFR Tax Returns are filed in the best interest of the government, the only deductions you’ll see are standard deductions and one personal exemption. You will not get credit for deductions to which you may be entitled, such as exemptions for a spouse or children, interest on your home mortgage and property taxes, cost of any stock or real estate sales, business expenses, etc.

Remember that regardless of what you have heard, you have the right to file your original tax return, no matter how late it is filed.

IRS Liens

The IRS can make your life miserable by filing Federal Tax Liens on your business or property. Federal Tax Liens are public records indicating that you owe the IRS various taxes. They are filed with the County Clerk in the county from which you or your business operates.

Because they are public records, they will show up on your credit report. This often makes it difficult to obtain financing on an automobile or a home. Federal Tax Liens can also tie up your personal property, meaning that you cannot sell or transfer that property without a clear title.

Often taxpayers find themselves in a Catch-22 in which they have property that they would like to borrow against, but because of the Federal Tax Lien, they cannot get a loan. Should a Federal Tax Lien be filed against you, a CPA can help get it lifted.

IRS Audits 

The IRS conducts multiple types of audits. They can audit you by mail, in their offices, in your office or home. The location of the audit is a good indication of the severity.

Typically, Correspondence Audits are conducted to locate missing documents in your tax return that have been flagged by IRS computers. These documents usually include W-2s and 1099 income items or interest expense items. This type of audit can typically be handled through the mail with the correct documentation.

The IRS Office Audit--held in IRS offices--is usually conducted by a Tax Examiner who will request numerous documents and explanations of various deductions. During this type of audit you may be required to produce all bank records for a period of time so that the IRS can check for unreported income.

The IRS Home or Office Audit--held in your home or office--should be taken very seriously as these are conducted by IRS Revenue Agents. Revenue Agents receive more training and learn more auditing techniques than typical Tax Examiners.
Of course, all IRS audits should be taken seriously as they often lead to examinations of other tax years and other tax problems not stated in the original audit letter.

Payroll Tax Problems

The IRS is very aggressive in their collection attempts for past-due payroll taxes. The penalties assessed on delinquent payroll tax deposits or filings can dramatically increase the total amount you owe in just a matter of months.

I believe that it is critical for business owners to have an attorney present in these situations. Your answers to the first five IRS questions may determine whether you stay in business or are liquidated by the IRS. We always advise clients to avoid meeting with any IRS representatives regarding payroll taxes until you have met with a professional to discuss your options.

IRS Levies--Bank and Wage 

An IRS Levy is an action taken by the IRS to collect taxes. For example, the IRS can issue a Bank Levy to obtain the cash in your savings and checking accounts. Or, the IRS can levy your wages or accounts receivable. The person, company, or institution that is served with the levy must comply or face its own IRS problems.

When the IRS levies a bank account, the levy can only be honored on the particular day on which the bank receives the levy. The bank is required to remove whatever amount of money is in your account on that day (up to the amount of the IRS Levy) and send it to the IRS within 21 days unless otherwise notified by the IRS. This type of levy does not affect any future deposits made into your bank account unless the IRS issues another Bank Levy.

An IRS Wage Levy is different. Wage Levies are filed with your employer and remain in effect until the IRS notifies the employer that the Wage Levy has been released. Most Wage Levies take so much money from the taxpayer’s paycheck that the taxpayer doesn’t even have enough money remaining to meet basic needs.
Both Bank and Wage Levies create difficult situations and should be avoided if possible.

Wage Garnishments

The IRS Wage Garnishment is a very powerful tool used to collect taxes that you owe through your employer. Once a Wage Garnishment is filed with an employer, the employer is required to collect a large percentage of each paycheck. The funds that would have otherwise been paid to the employee will then be paid to the IRS.
The Wage Garnishment stays in effect until the IRS is fully paid or until the IRS agrees to release the garnishment. Having wages garnished can create other debt problems because the amount left over after the IRS takes its cut is often small, so you may have difficulty with bills and other financial obligations.

IRS Seizures

The IRS has extensive powers when it comes to seizures of assets. These powers allow them to seize personal and business assets to pay off outstanding tax liabilities. Seizures typically occur when taxpayers have been avoiding the IRS.

Similar to levies and garnishments, seizures are one of the IRS’s ultimate invasive collection tools. They can seize cars, television sets, jewelry, computers, collectibles, business equipment, or anything of value, which can be sold in order to acquire the money the IRS wants to pay off your tax debts. If you are facing a seizure, you have a serious problem.

Hopefully this tax season will begin and end without any of these IRS issues coming into play. But if they do, help is out there. CPAs and attorneys can help you negotiate your rights should it become necessary.

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

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 over fifty 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. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education’s CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation, as well as the AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxadvisorexpert.com.
The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

The Future of Life Settlements

           
Gerson Lehrman Group

September 28

Summary

By Lance Wallach

Many insurance professionals now think that the life settlement market is ending. Agents assisting their clients in the sale of their unneeded life insurance policies have no doubt been frustrated by the lack of bids in the current life settlement market. It doesn't help much either when the few bids that are made are often much less than what they would have been in years past. So the future of the life settlement market is dim.

Analysis

 And what about the lawsuits that have started? The life settlement market saw double-digit annual growth for a decade until 2008. When the financial crisis hit, global markets and credit evaporated, and the life settlement markets came to a standstill. How did this happen to a market that was supposedly not correlated to other markets?
The life settlement market has long been touted as a non-corollary asset class. Even today many promoters looking to raise funds from investors still highlight this investment benefit. I have always doubted everything about the market and have urged people to stay away. How would you know if Tony Soprano is buying your mother’s life insurance policy? I am a member of the Sons of Italy. I was awarded membership even though I am Jewish. Why? Because I am a friend of the President.
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Interest rates and stock market prices impact the portfolios of life insurance carriers. The solvency of a life insurance company directly impacts its ability to meet death claims. Why would life settlements be immune? If carriers like AIG teeter on the edge of financial ruin, then credit risk becomes a primary concern for life settlement investors. You may have heard that an ‘A’-rated carrier has never failed to pay a death claim. This is a great lie. The insurance company is usually no longer rated ‘A’ by the time they fail to pay.

I think that the life settlement market will not have any future source of funds within two years.

Life insurance companies have been attacking the market for years. Their vast experience in underwriting has already proven victorious as table changes in 2008 damaged the Net Asset Value of all life settlement funds. Their lobbying against life settlements has also been successful. Overly burdensome and poorly written life settlement regulation in various states has simultaneously increased the operating expenses for life settlement firms and decreased the opportunity for the consumer. 

Life insurance companies are adjusting their COI rates higher and blaming life settlements for the change. They will sell insurance to preserve and protect wealth, yet the very products they sell are backed by investments mired in mountains of debt, equities with high P/E ratios, and issued in a currency that is deeply flawed. Even though many carriers survived the Great Depression, our financial markets are considerably more complex today than they were then and this may cause many carriers to soon find themselves with big problems in the future.

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 over fifty 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. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education’s CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation, as well as the AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit 
www.vebaplan.comwww.taxadvisorexpert.com

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.



Some 419 Insurance Welfare Benefit Plans Continue To Get Accountants Into Trouble

Popular so-called "419 Insurance Welfare Benefit Plans," sold by most insurance professionals, are getting accountants and their clients into more and more trouble. A CPA who is approached by a client about one of the abusive arrangements and/or situations to be described and discussed in this article must exercise the utmost degree of caution, not only on behalf of the client, but for his/her own good as well. The penalties noted in this article can also be applied to practitioners who prepare and/or sign returns that fail to properly disclose listed transactions, including those discussed herein.

On October 17, 2007, the IRS issued Notice 2007-83, Notice 2007-84, and Revenue Ruling 2007-65. Notice 2007-83 essentially lists the characteristics of welfare benefit plans that the Service regards as listed transactions. Put simply, to be a listed transaction, a plan cannot rely on the union exception set forth in IRC Section 419A(f)(5), there must be cash value life insurance within the plan and excessive tax deductions for life insurance, in excess of what may be permitted by Sections 419 and 419A, must have been claimed.

In Notice 2007-84, the Service expressed concern with plans that provide all or a substantial portion of benefits to owners and/or key and highly compensated employees. The notice identified numerous specific concerns, among them:

1. The granting of loans to participants
2. Providing deferred compensation
3. Plan terminations that result in the distribution of assets rather than being used post-
retirement, as originally established.
4. Permitting the transfer of life insurance policies to participants.

Alternative tax treatment may well be in the offing for such arrangements, as the IRS intends to re-characterize such arrangements as dividends, non-qualified deferred compensation (under IRC Section 404(a)(5) or Section 409A), split-dollar life insurance arrangements, or disqualified benefits pursuant to Section 4976. Taxpayers participating in these listed transactions should have, in most cases, already disclosed such participation to the Service. Those who have not should do so at the earliest possible moment. Failure to disclose can result in severe penalties – up to $100,000 for
individuals and $200,000 for corporations.

Finally, Revenue Ruling 2007-65 focused on situations where cash value life insurance is purchased on owner employees and other key employees, while only term insurance is offered to the rank and file. These are sold as 419(e), 419A (f)(6), and 419 plans. Life insurance premiums are not inherently tax deductible and authority must be found in Section 79 to justify such a deduction. Section 264(a), in fact, specifically disallows tax deductions for life insurance, at least in some cases. And moreover, the Service declared, interposition of a trust does not change the nature of the transaction.

Lance Wallach, CLU, ChFC, CIMC, speaks and writes extensively about financial planning, retirement plans, and tax reduction strategies. He speaks at more than 70 national conventions annually and writes for more than 50 national publications. For more information and additional articles on these subjects, visit www.taxadvisorexperts.org or call 516-938-5007.

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.

Help with Common IRS Problems: FBAR/OVDI LANCE WALLACH: FBAR Offshore Bank Accoun...

Help with Common IRS Problems: FBAR/OVDI LANCE WALLACH: FBAR Offshore Bank Accoun...: FBAR/OVDI LANCE WALLACH: FBAR Offshore Bank Accounts and Foreign Income Att... : You may want to think about participation in the IRS’ offsh...





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FBAR OVDI Offshore Tax Issues


     By Lance Wallach, CLU, CHFC



Find a Law Firm:   

In 2012 the IRS announced another offshore voluntary disclosure program (the 2012 OVDI). These programs offer reduced penalties in exchange for taxpayers’ voluntarily coming into compliance before the IRS is aware of their prior tax indiscretions.

The 2012 OVDI is patterned after the 2011 OVDI, but increases the maximum Report of Foreign Bank and Financial Accounts (FBAR)-related penalty from 25 percent to 27.5 percent of the highest account value at any time between 2003 and 2010. The IRS can terminate it at any time as to specific classes of taxpayers or as to all taxpayers. In all, the IRS has seen 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. Since the 2011 program closed last September, hundreds of taxpayers have come forward to make voluntary disclosures. Those who have come in since the 2011 program closed last year will be able to be treated under the provisions of the new OVDI program.
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The 2011 OVDI, brought in an additional 12,000 eligible taxpayers who filed original and amended tax returns and agreed to make payments (or good-faith arrangements to pay) for taxes, interest and accuracy-related penalties. The 2011 OVDI FBAR-related penalty framework required a 25 percent “FBAR-related” penalty equal to the highest value of the financial account between 2003 and 2010. Only one 25 percent offshore penalty is to be applied with respect to voluntary disclosures relating to the same financial account. The penalty may be allocated among the taxpayers with beneficial ownership making the voluntary disclosures in any way they choose. Potentially applicable penalties are identified in a series of Frequently Asked Questions available at irs.gov. Participants in the 2011 OVDI also had to pay back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties. Subject to certain limitations, financial transactions occurring before 2003 were generally irrelevant for those participating in the OVDI.

Under the 2011 OVDI, taxpayers who are foreign residents and who were unaware they were U.S. citizens may qualified for a reduced five percent FBAR-related penalty (FAQ 52). Others qualified for the five percent penalty if they:

a. Did not open or cause the account to be opened (unless the bank required t

IRS Hiring Agents in Abusive Transactions Group


  FAST PITCH NETWORKING

 osted: Dec. 10

  By Lance Wallach

Here it is. Here is your proof of my predictions. Perhaps you didn’t believe me when I told you the IRS was coming after what it has deemed “abusive transactions,” but here it is, right from the IRS’s own job posting. If you were involved with a 419e, 412i, listed transaction, abusive tax shelter, Section 79, or captive, and you haven’t yet approached an expert for help with your situation, you had better do it now, before the notices start piling up on your desk.

A portion of the exact announcement from the Department of the Treasury:

Job Title: INTERNAL REVENUE AGENT (ABUSIVE TRANSACTIONS GROUP)

Agency: Internal Revenue Service

Open Period: Monday, October 18, 2010 to Monday, November 01, 2010

Sub Agency: Internal Revenue Service

Job Announcement Number: 11PH1-SBB0058-0512-12/13

Who May Be Considered:

·        IRS employees on Career or Career Conditional Appointments in the competitive service

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·        Treasury Office of Chief Counsel employees on Career or Career Conditional Appointments or with prior competitive status

·        IRS employees on Term Appointments with potential conversion to a Career or Career Conditional Appointment in the same line of work

According to the job description, the agents of the Abusive Transactions Group will be conducting examinations of individuals, sole proprietorships, small corporations, partnerships and fiduciaries. They will be examining tax returns and will “determine the correct tax liability, and identify situations with potential for understated taxes.”

These agents will work in the Small Business/Self Employed Business Division (SB/SE) which provides examinations for about 7 million small businesses and upwards of 33 million self-employed and supplemental income taxpayers. This group specifically goes after taxpayers who generally have higher incomes than most taxpayers, need to file more tax forms, and generally need to rely more on paid tax preparers.” Their examinations can contain “special audit features or anticipated accounting, tax law, or investigative issues,” and look to make sure that, for example, specialty returns are filed properly.

The fines are severe. Under IRC 6707A, fines are up to $200,000 annually for not properly disclosing participation in a listed transaction. There was a moratorium on those fines until June 2010, pending new legislation to reduce them, but the new law virtually guarantees you will be fined. The fines had been $200,000 per year on the corporate level and $100,000 per year on the personal level. You got the fine even if you made no contributions for the year. All you had to do was to be in the plan and fail to properly disclose your participation.

You can possibly still avoid all this by properly filing form 8886 IMMEDIATELY with the IRS. Time is especially of the essence now. You MUST file before you are assessed the penalty. For months the Service has been holding off on actually collecting from people that they assessed because they did not know what Congress was going to do. But now they do know, so they are going to move aggressively to collection with people they have already assessed. There is no reason not to now. This is especially true because the new legislation still does not provide for a right of appeal or judicial review. The Service is still judge, jury, and executioner. Its word is absolute as far as determining what is a listed transaction.

So you have to file form 8886 fast, but you also have to file it properly. The Service treats forms that are incorrectly filed as if they were never filed. You get fined for filing incorrectly, or for not filing at all. The Statute of Limitations does not begin unless you properly file. That means IRS can come back to get you any time in the future unless you file properly.

If you don’t want these new IRS Agents, or any other IRS agents for that matter, to be earning their paychecks by coming after you, make sure you have done all you can to ensure that you have filed properly by reaching out for expert help today.

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 plans. He gives expert witness testimony and his side has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxadvisorexperts.org or www.taxaudit419.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

 

 


Captive Insurance and Other Tax Reduction Strategies – The Good, Bad, and Ugly



By Lance Wallach                                                                  May 14th


Every accountant knows that increased cash flow and cost savings are critical for businesses.  What is uncertain is the best path to recommend to garner these benefits.

Over the past decade business owners have been overwhelmed by a plethora of choices designed to reduce the cost of providing employee benefits while increasing their own retirement savings. The solutions ranged from traditional pension and profit sharing plans to more advanced strategies.

Some strategies, such as IRS section 419 and 412(i) plans, used life insurance as vehicles to bring about benefits. Unfortunately, the high life insurance commissions (often 90% of the contribution, or more) fostered an environment that led to aggressive and noncompliant plans.

The result has been thousands of audits and an IRS task force seeking out tax shelter promotion. For unknowing clients, the tax consequences are enormous. For their accountant advisors, the liability may be equally extreme.

Recently, there has been an explosion in the marketing of a financial product called Captive Insurance. These so called “Captives” are typically small insurance companies designed to insure the risks of an individual business under IRS code section 831(b). When properly designed, a business can make tax-deductible premium payments to a related-party insurance company. Depending on circumstances, underwriting profits, if any, can be paid out to the owners as dividends, and profits from liquidation of the company may be taxed as capital gains.

While captives can be a great cost saving tool, they also are expensive to build and manage. Also, captives are allowed to garner tax benefits because they operate as real insurance companies. Advisors and business owners who misuse captives or market them as estate planning tools, asset protection vehicles, tax deferral or other benefits not related to the true business purpose of an insurance company face grave regulatory and tax consequences.

A recent concern is the integration of small captives with life insurance policies. Small captives under section 831(b) have no statutory authority to deduct life premiums. Also, if a small captive uses life insurance as an investment, the cash value of the life policy can be taxable at corporate rates, and then will be taxable again when distributed.  The consequence of this double taxation is to devastate the efficacy of the life insurance, and it extends serious liability to any accountant who recommends the plan or even signs the tax return of the business that pays premiums to the captive.

The IRS is aware that several large insurance companies are promoting their life insurance policies as investments with small captives. The outcome looks eerily like that of the 419 and 412(i) plans mentioned above.

Remember, if something looks too good to be true, it usually is. There are safe and conservative ways to use captive insurance structures to lower costs and obtain benefits for businesses. And, some types of captive insurance products do have statutory protection for deducting life insurance premiums (although not 831(b) captives). Learning what works and is safe is the first step an accountant should take in helping his or her clients use these powerful, but highly technical insurance tools. 



Lance Wallach speaks and writes extensively about VEBAs, retirement plans, and tax reduction strategies.  He speaks at more than 70 conventions annually, writes for 50 publications, and was the National Society of Accountants Speaker of the Year.  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.



Important FBAR and International Tax Information For 2012

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By Lance Wallach

For individual tax returns (Forms 1040) due to be filed in 2012 (due this year by April 17, 2012, unless extended), the IRS has issued new Form 8938, "Statement of Specified Foreign Financial Assets," requiring the disclosure of certain foreign accounts and assets.

Whether an individual is required to file this form is complicated, but basically this applies to the following assets if owned in 2011:
Financial accounts   in foreign financial institutions.
Any stock or   securities issued by foreign corporations or entities, any interest in a   foreign partnership, trust or estate, as well as any financial instrument or   contract issued by a foreign person, and foreign pension plans and deferred   compensation arrangements (but not foreign social security).  You are   not, however, required to report foreign assets (1) if the assets are held in   a U.S. brokerage account; (2) if you are required to disclose the asset on   certain other tax form such as Form 3520 or Form 5471; or (3) if such assets   (other than stock) are used in your trade or business.
Whether you have to file Form 8938 depends on the total value of such foreign assets at year end as well as the highest value at any point in the year.  For U.S. citizens and residents filing joint tax returns, you must file Form 8938 if the year-end value of the foreign assets is $100,000 or more or, if the value at any time during the year exceeded $150,000.  On joint returns, all foreign-based assets owned by the spouses are considered in determining these thresholds.  For married spouses filing separately and for unmarried persons, the thresholds are $50,000 (year end) and $75,000 (high value during the year).

There are different rules regarding certain persons who live abroad.  There are also rules regarding valuation of certain assets.  These are spelled out in greater detail in the Form 8938 instructions.

If required, Form 8938 is to be filed with your Federal Income Tax Return (Form 1040).  Currently only individuals having filing requirements must fill out the Form 8938, but it is expected that this will be extended to corporations, partnerships and trusts in the future.

The IRS may impose penalties for failure to file Form 8938 if you lack reasonable cause or willfully neglected to file.  In addition, if you underpay your tax as a result of a transaction involving an undisclosed foreign financial asset, the penalty for such failure may be 40 percent of the underpayment (instead of the normal 20 percent).  In addition, the statute of limitations for assessing tax may be extended if you fail to file the form.

It is important to note that Form 8938 is in addition to the annual Foreign Bank Account Form or "FBAR," which has different filing requirements.  The FBAR,  generally is required if you have ownership or signature authority over one or more foreign bank accounts with a value of over $10,000 on any date in the prior year.  The FBAR is not part of your income tax return, but is filed separately and must be received by the Department of Treasury in Detroit by June 30 (timely mailing does not apply to that form).


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 plans. He speaks at more than ten conventions annually, writes for over fifty 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. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education's CPA's Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxaudit419.com and www.taxlibrary.us

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.