Over the past few years we have reviewed a number of 412(i), and before that 419A(f)(6), proposals that were brought to us by insurance agents. Luckily for the client, and insurance agent, we were able to “convert” the 412(i) plans to regular Defined Benefit Plans, with or without insurance, in such a manner that no deductions were lost. Regarding 419A(f)(6) we advised the client that getting an IRS approval letter would not happen and that this type of plan should be implemented only
Journal of Accountancy Large Logo Should a client approach you with one of these plans, be especially cautious, for both of you. Advise your client to check out the promoter very carefully. Make it clear that the government has the names of all former 419A(f)(6) promoters and, therefore, will be scrutinizing the promoter carefully if the promoter was once active in that area, as many current 419(e) (welfare benefit fund or plan) promoters were. This makes an audit of your client far riskier and more likely.
DEFINED-BENEFIT 412(i) PLANS UNDER FIRE
The IRS has warned against so-called 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.
AICPA RESOURCES
CPE Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots, by Sid Kess, a CPE self-study course (#733720) Sid Kess’ Practical Alternatives to Commonly Misused and Abused Small Business Tax Strategies: Insuring Your Client’s Future, a CPE self-study course (#733730)
For more information or to place an order, visit www.cpa2biz.com or call the Institute at 888-777-7077.
AICPA PFP Center and PFS Credential The AICPA Personal Financial Planning (PFP) Center provides resources to CPAs for professional and ethical financial planning. The center also contains information about the AICPA Personal Financial Specialist (PFS) credential and PFP section membership. Visit the PFP Center at http://pfp.aicpa.org.
AICPA Tax Membership Section The Tax Membership Section provides tools, technologies and peer interaction to CPAs with tax practices. The Section keeps members up to date on tax legislative and regulatory developments. For more information, visit the AICPA’s Tax Center at http://tax.aicpa.org.
OTHER RESOURCES
Law, rulings and guidance Internal Revenue Code §§ 264, 419, 419A, 6111 and 6112 News Releases IR 2007-170 and IR 2004-21 Revenue Ruling 2007-65 Notices 2007-83 and 2007-84
412(i) and 419A(f)(6)
ReplyDeleteOver the past few years we have reviewed a number of 412(i), and before that 419A(f)(6),
proposals that were brought to us by insurance agents. Luckily for the client, and insurance
agent, we were able to “convert” the 412(i) plans to regular Defined Benefit Plans, with or
without insurance, in such a manner that no deductions were lost. Regarding 419A(f)(6) we
advised the client that getting an IRS approval letter would not happen and that this type of plan
should be implemented only
Journal of Accountancy Large Logo
ReplyDeleteShould a client approach you with one of these plans, be especially cautious, for both of you. Advise your client to check out the promoter very carefully. Make it clear that the government has the names of all former 419A(f)(6) promoters and, therefore, will be scrutinizing the promoter carefully if the promoter was once active in that area, as many current 419(e) (welfare benefit fund or plan) promoters were. This makes an audit of your client far riskier and more likely.
DEFINED-BENEFIT 412(i) PLANS UNDER FIRE
The IRS has warned against so-called 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.
AICPA RESOURCES
CPE
Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots, by Sid Kess, a CPE self-study course (#733720)
Sid Kess’ Practical Alternatives to Commonly Misused and Abused Small Business Tax Strategies: Insuring Your Client’s Future, a CPE self-study course (#733730)
For more information or to place an order, visit www.cpa2biz.com or call the Institute at 888-777-7077.
AICPA PFP Center and PFS Credential
The AICPA Personal Financial Planning (PFP) Center provides resources to CPAs for professional and ethical financial planning. The center also contains information about the AICPA Personal Financial Specialist (PFS) credential and PFP section membership. Visit the PFP Center at http://pfp.aicpa.org.
AICPA Tax Membership Section
The Tax Membership Section provides tools, technologies and peer interaction to CPAs with tax practices. The Section keeps members up to date on tax legislative and regulatory developments. For more information, visit the AICPA’s Tax Center at http://tax.aicpa.org.
OTHER RESOURCES
Law, rulings and guidance
Internal Revenue Code §§ 264, 419, 419A, 6111 and 6112
News Releases IR 2007-170 and IR 2004-21
Revenue Ruling 2007-65
Notices 2007-83 and 2007-84