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Lance Wallach
Managing Director

    By Lance Wallach                                                                                             Wednesday, April 8, 2009

    The IRS is cracking down on what it considers to be abusive tax shelters. Many of them are being
    marketed to small business owners by insurance professionals, financial planners and even
    accountants and attorneys. I speak at numerous conventions, for both business owners and
    accountants. And after I speak, I am always approached by many people who have questions
    about tax reduction plans that they have heard about. Below are the most common.

    419 tax reduction insurance plans

    These come in various versions, and most of them have or will get the participant audited and the
    salesman sued. They purportedly allow the business owner to make a large tax-deductible
    contribution, and some or all of the contribution pays for a life insurance product. The IRS has
    been disallowing most versions of these plans for years, yet they continue to be sold. After
    everyone gets into trouble and the insurance agents get sued, the promoters of the abusive
    versions sometimes change the name of their company and call the plan something else. The
    insurance companies whose policies are sold are legitimate companies. What usually is not
    legitimate is the way that most of the plans are operated. There can also be a $200,000 IRS fine
    facing the insurance agent who sold the plan if Form 8918 has not been properly filed. I've
    reviewed hundreds of these forms for agents and have yet to see one that was filled out

    When the IRS audits a participant in one of these plans, the tax deductions are lost. There is also
    the interest and large penalties to consider. The business owner can also be facing a $200,000-a-
    year fine if he did not properly file Form 8886. Most of these forms have been filled out
    improperly. In my talks with the IRS, I was told that the IRS considers not filling out Form 8886
    properly almost the same as not filing at all.

    412(i) retirement plans

    The IRS has been auditing participants in these types of retirement plans. While there is
    generally nothing wrong with many of the newer plans, the IRS considered most of the older
    abusive plans. Forms 8918 and 8886 are also required for abusive 412(i) plans.

    I have been an expert witness in a lot of these 419 and 412(i) lawsuits and I have not lost one of
    them. If you sold one or more of these plans, get someone who really knows what they are doing
    to help you immediately. Many advisors will take your money and claim to be able to help you.
    Make sure they have experience helping agents that have sold these types of plans. Don't let
    them learn on the job, with your career and money at stake.

    Do not wait for IRS to come and get you, or for your client to sue you. Time is of the essence.
    Most insurance professionals need help to correct their improperly completed Form 8918 or to
    fill it out properly in the first place. If you have not previously filled out the form it is late, and
    therefore you should immediately seek assistance. There are plenty of legitimate tax reduction
    insurance plans out there. Just make sure that you know the history of the people with whom
    you conduct business.

    Remember, if something looks too good to be true, it usually is. Be careful.

    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, is quoted regularly
    in the press, 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

    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.



Get sued!
The IRS is cracking down on what it considers to be abusive
tax shelters. Many of them are being marketed to small business owners by
insurance professionals, financial planners and even accountants and attorneys.

The Lance Wallach Network