HOW TO AVOID IRS FINES FOR YOUR AND YOUR CLIENTS

How to Avoid IRS Fines for You and Your Clients Beware: The IRS is cracking down on small-business owners who participate in tax-reduction insurance plans sold by insurance agents, including defined benefit retirement plans, IRAs, and even 401(k) plans with life insurance. In these cases, the business owner is motivated by a large tax deduction; the insurance agent is motivated by a substantial commission

A few years ago, I testified as an expert witness in a case in which a physician was in an abusive 401(k) plan with life insurance. It had a so-called “springing cash value policy” in it. The IRS calls plans with these types of policies “listed transactions.” The judge called the insurance agent “a crook.”

If your client was currently is in a 412(i), 419, captive insurance, or Section 79 plan, they may be in big trouble. Accountants who signed a tax return for a client in one of these plans may be what the IRS calls a “material adviser” and subject to a maximum $200,000 fine.

If you are an insurance professional who sold or advised on one of these plans, the same holds true for you.

Section 79 scams

The attack on 412(i) and 419 plans has been going on for some time now, but the IRS will likely begin cracking down on Section 79 plans more heavily in the near future. So what is a Section 79 plan? It is a tax plan where small-business owners are told that they’re allowed to take a tax deduction through their businesses in order to purchase life insurance. That sounds pretty good, doesn’t it? When you break down the math and the sales pitch, however, it just doesn’t make sense.