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    Lance Wallach
    Recently, penalties for tax return preparers have increased, and so have the legal
    standards which failing to meet may trigger the penalties.  For example, in the case of
    an undisclosed position on a tax return, there must now be a reasonable belief that
    the tax treatment of the position would more likely than not be sustained on its
    merits.  This replaces the former “realistic possibility” standard, which was generally
    interpreted as “one chance in three”.  For disclosed positions, there must now be a
    reasonable basis for the tax treatment.  Essentially, 33% has now become 51%.

    The practitioner who wants more detailed knowledge in this area would probably do
    well to start by familiarizing himself with Notice 2008-13.  But the principal problem
    with all of this, from the practical viewpoint of the on the line practitioner, is that there
    are just so many situations where it is difficult, if not impossible, to place numbers or
    percentages on the likelihood of what might happen, as now seems to be required.  
    Many factual and legal issues that the practitioner is likely to encounter simply do not
    lend themselves to analysis by employing “more likely than not” or some similar

    It may also be that referrals to the Office of Professional Responsibility will be seen,
    which office could add to the misery of fines by imposing penalties under Circular
    230.  Not to mention that adverse action by the Office of Professional Responsibility
    may well, in turn, lead to sanctions at the state level.  In short, possible penalties are
    not just monetary.  There is at least a potential threat to your license to practice.  All of
    which is going to make even the bravest tax preparer hesitate to advocate any
    position that is any way questionable, even if there exists a good faith belief in it.  

    Perhaps the saddest possible effect of all this is the de facto, by means of these
    veiled threats, conversion of the practitioner, at least to some extent, into a deputy
    revenue agent as opposed to an advocate to his taxpayer clients.  And this is only
    one area where this disturbing trend is being seen.  Another example, as the reader
    will now see, is the panoply of penalties now surrounding what are known as “listed

    Welfare benefit plans are a creation of and are sanctioned by Section 419 of the
    Internal Revenue Code. There are single employer plans and multiple employer plans;
    the latter rely mostly on IRC Section 419A (f) (6) (in the most common cases where
    there are ten or more employers as part of the same plan). The 419A(f)(6) plans are,
    and perhaps always were, generally regarded as abusive, and were substantially
    curtailed in recent years by harsh IRS regulation. Amazingly, however, they refuse to
    totally die, and are still being marketed.  These plans are called listed transactions
    (more on that later).

    Single employer welfare benefit plans are now more popular than multiple employer
    plans. All welfare benefit plans tend to share certain characteristics, however. They
    tend to be marketed most frequently by insurance agents and financial planners, and
    sometimes by accountants and attorneys. Prospects tend to be professionals and
    profitable small businesses. The most attractive selling point is the ability to claim
    large tax deductions and remove money tax free. Life insurance tends to be the
    funding vehicle. Often cheap term insurance is purchased for rank and file workers
    and some form of permanent coverage (universal life, variable life, etc., for the
    owners and key employees. But many times workers are completely left out of the
    plan. For businesses looking to do as little as possible for workers, a selling point is
    that the great majority of benefits, in most cases, eventually go to the owners. This
    type of discrimination was recently addressed by IRS Notice 2007-84, which disallowed
    tax deductions and penalties with respect to welfare benefit plans that discriminate. If
    done correctly, the plans can accomplish things like facilitating estate planning,
    business succession, and asset protection. But the promised tax deduction is usually
    the sizzle that sells the steak.

          In October of 2007, welfare benefit plans were affected by IRS rulings. The two
    most important developments were Revenue Ruling 2007-65, which declared, in
    essence, that premiums paid inside of a welfare benefit plan for cash value life
    insurance were not tax deductible, and Notice 2007-83, which identified the trust
    within welfare benefit plans involving cash value life insurance policies, AND
    substantially similar arrangements, as listed transactions. In other words, in essence,
    not only are premiums paid for cash value life insurance policies in welfare benefit
    plans not tax deductible, but, and far more importantly, the plans themselves are now
    listed transactions. This, in turn, means that most welfare benefit plans are now listed
    transactions, because most feature cash value life insurance, although at least one
    promoter has taken the position that his plan, which does feature cash value life
    insurance, is not a listed transaction, and has ably defended the plan in a series of
    memoranda to his plans participants.  And ultimately, of course, the courts, not the
    Service, will decide the law as to what is or is not a listed transaction.  Be all this as it
    may, the listed transaction designation creates disclosure obligations with absurdly
    harsh penalties both for failure to disclose or incorrectly or incompletely disclosing,
    as we shall soon see.   

          Any practitioner who has clients in these plans must proceed with utmost
    caution, both for the client’s sake and his own.  A listed transaction, basically, is any
    transaction identified as such by specific IRS guidance, OR any transaction
    substantially similar to the specifically identified transaction. Participants in listed
    transactions must file Form 8886 with both the Service and the Office of Tax Shelter
    Analysis.  Failure to timely and completely file leads to penalties of $100,000 for
    individuals and $200,000 for corporate tax-payers.  It is also worth noting that
    incomplete or incorrect filings can be treated as harshly by the Service as a complete
    failure to file.  And we should also note that virtually every Form 8886 that we have
    been asked to review has been defective to one extent or another.

          The practitioner has filing requirements, also, which can lead to equally severe
    penalties, if the practitioner qualifies as a “material advisor” with respect to one of
    these transactions. What is a material advisor? Basically, someone who gives advice,
    sells, or otherwise plays a significant part in the promotion, sale, or paperwork with
    respect to a taxpayer’s participation in a listed transaction. Put simply, from an
    accountant’s standpoint, you must give advice, the client must do it, and you must
    satisfy a certain income threshold with respect to the transaction, usually $10,000. The
    accountant who signs a return taking a tax deduction with respect to the transaction
    is surely a material advisor, if the income threshold is met.  And we also note, as we
    did with respect to Form 8886 in the preceding paragraph, that virtually every Form
    8918 that we have been asked to review has been defective to one extent or

          The material advisor must file Form 8918 describing her exact role in the client’s
    participation in the transaction. Failure to file can lead to penalties imposed on the
    advisor that are as severe as those imposed on taxpayers ($100,000 for individuals
    and $200,000 for corporations) who fail to file Form 8886. The accountant may escape
    material advisor status by not meeting the $10,000 income threshold. A problem,
    however, is the accountant who is paid $10,000 in the aggregate by the client, but not
    that much specifically with respect to the listed transaction. Does such a person
    satisfy the income threshold? The author and his associates have discussed this
    point, among others, directly with IRS personnel who actually wrote published
    guidance in this area. The best we have been able to get is a declaration that any test
    that would be applied to the determination of any of these issues would have to
    consider all surrounding facts and circumstances. This would be unlikely to yield any
    general rules, for each situation has its own facts and circumstances.
    Lance Wallach speaks and writes about benefit plans, and has authored numerous
    books for the AICPA, Bisk Total tape, and others. He can be reached at (516) 938-5007
    or For more articles on this or other subjects, feel free to visit his
    website at

    The information contained in this article is not intended as legal, accounting, financial
    or any other type of advice for any specific individual or entity. You should seek such
    advice from an appropriate professional.

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