A warning for Section 79 Plans
Taxpayers who previously adopted 419, 412i, captive insurance or Section 79 plans are in big trouble.
In recent years, the IRS has identified many of these arrangements as abusive devices to funnel tax deductible dollars to shareholders and classified these arrangements as “listed transactions.”
These plans were sold by insurance agents, financial planners, accountants and attorneys seeking large life insurance commissions. In general, taxpayers who engage in a “listed transaction” must report such transaction to the IRS on Form 8886 every year that they “participate” in the transaction, and you do not necessarily have to make a contribution or claim a tax deduction to participate. Section 6707A of the Code imposes severe penalties ($200,000 for a business and $100,000 for an individual) for failure to file Form 8886 with respect to a listed transaction.
But you are also in trouble if you file incorrectly.
The IRS has Turned your Accountant into their Policeman
Every business owner thinks he pays too much in taxes, and in reality, most actually do. These days your accountant has to “play it safe”. This is not reducing your tax bill.
Many times a tax preparer’s work on a typical return is subject to ‘+interpretations+’ of the tax code. New legislation may force preparers who hope to lower a client’s tax bill to be less aggressive with respect to these interpretations, or else they may risk substantially increased penalties.
Furthermore, if a tax preparer’s client insists on an aggressive deduction, the preparer may include a form explaining the circumstances. This could eliminate the potential preparer penalty, but it is a certain red flag for the IRS.
This should anger taxpayers who feel strongly about particular deductions. What’s more, these penalties do not apply to taxpayers preparing their own returns. This could prompt a taxpayer to tell a preparer: “who needs you; I’ll do it myself”. The remainder of this article explains why your accountant is reluctant to be aggressive anymore, and is less likely to give you the benefit of the doubt on tax deductions.