6707A and Section 79: This is Why You Have a Problem

Insurance companies, agents, financial planners, and others have pushed abusive 419 and 412i plans for years. They claimed business owners could obtain large tax deductions. Insurance companies, agents and others earned very large life insurance commissions in the process. Eventually, the IRS cracked down on the unsuspecting business owners. Not only did they lose the tax deductions, but they were also fined, in addition to being charged penalties and interest.

After the business owner was assessed the fines and lost his tax deduction, he had another huge, unforeseen problem. The IRS then came back and fined him a huge amount of money for not telling on himself under IRC 6707A. If you participate in a listed or reportable transaction, you must alert the IRS or face a large fine. In essence, you must alert the IRS if you were in a transaction that has the possibility of tax avoidance or evasion. Not only must you file Form 8886 telling on yourself, but the form needs to be filed properly, and done every year that you are in the plan in any way at all, even if you are no longer making contributions. I have received hundreds of phone calls from business owners who filed Form 8886, usually with the help of their accountants or the plan promoter. They got the fine for either improperly filing, or for making mistakes on the form.

The IRS directions about preparing the form are vague, especially if the form is filed late. They presume a timely filing. In addition, many states also require forms to be filed. For example, if you work in New York State and manage to properly fill out the Federal form, but don’t file the State form, you may still get fined.

Lately, insurance companies, agents, accountants, and others have been selling captive insurance and Section 79 scams. The motivations are exactly the same. They push large tax deductions for business owners. There are also huge commissions for salespeople, though this is usually mentioned only in passing, if at all.

If you do not properly file Form 8886, there is no Statute of Limitations. That means the IRS can come back and fine you many years later.

Anyone that wants to risk an IRS audit by utilizing a captive insurance or Section 79 scam should, at the very least, engage a competent professional to file 8886 forms. By filing protectively and properly, the Statute of Limitations starts running and you avoid the very large IRS penalties under 6707A.

Never utilize directions from a plan promoter or salesman as to how to fill out 8886 forms. They would only be attempting to protect themselves, and doing so usually results in you being fined. I know of many examples of this happening, including a plan promoter who assisted almost 200 business owners in preparing and filing 8886 forms. All of them got fined for improper preparation of the forms.

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 more than 20 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. He does expert witness testimony and his side has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com, or visit www.taxaudit419.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.