What to do if you have a 419 Plan

By Lance Wallach, CLU, ChFC, CIMC

The IRS to attack the legitimacy of deductions taken for contributions to Section 419 plans in all circumstances. In addition, the IRS has classified most Section 419 arrangements as “listed transactions.” Any employer who currently sponsors a plan is well advised to take immediate action to terminate the plan and seek the assistance of an Expert Witness before the IRS contacts you.

A listed transaction refers to transactions that the IRS considers “abusive” and/or “tax shelters” transactions. Under applicable Treasury Regulations, taxpayers who enter into such transactions are required to notify the IRS each year by filing Form 8886 with their annual tax return. Those employers who do not file Form 8886 for a particular year are liable for a penalty under Section 6707A of the Code equal to the lesser of $200,000 or 75% of the amount of the decrease in tax occasioned by the listed transaction; this comes with a minimum penalty of $10,000. Individuals may also be liable for a tax equal to the lessor of $100,000 or 75% of the decrease in tax, with a minimum penalty of $5000. You may not amend you tax returns to file Form 8886 if one has not been filed with the initial return.

Those sponsors who are under audit by the IRS have reason for concern. In most cases there is typically room for some negotiation. In cases where the deduction is relatively small and the taxpayer was simply following the instructions of a promoter or tax professional, there is a possibility that the IRS can be convinced not to assert a listed transaction penalty

Taxpayers who fail to contact an experienced professional could get into a lot of trouble. All taxpayers, whether under audit or not, should take immediate steps to separate themselves from the Section 419 arrangement. Most plans will return benefits and/or policies to participating employers or eligible employees upon the employer’s withdrawal from participation. However, to the extent a tax deduction was taken for contributions to the plan, the employer or individual will incur taxable income and taxpayers need to plan for this eventuality.

With the assistance of knowledgeable Expert Witness, employers and business owners who participated in Section 419 arrangements can survive the ordeal with minimal cost and disruption to their business.

THE GOOD NEWS… As an expert witness Lance Wallach has never lost a case. Everyone that we have helped has been made whole!


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