WELFARE BENEFIT 419 INSURANCE PLANS NAMED LISTED TRANSACTIONS

by Lance Wallach
by Lance Wallach

During tax season, many accountants will unknowingly allow clients to deduct listed transactions or potentially abusive tax shelters.  Under existing and new regulations both the taxpayer and the accountant can be held accountable. For example, in February 2007 alone, we received over one thousand phone calls asking about 419, 412(i) and other potentially abusive plans.

The IRS has named most 419 welfare benefit insurance plans as listed transactions. Previously the IRS had named 419A (f)(6) plans as listed transactions. Taxpayers participating in these listed transactions must disclose such participation to the IRS. In addition, material advisors must also disclose their involvement. This involvement might include allowing the deduction of the plan on the client’s tax return. The penalty for nondisclosure can be $200,000.

Most accountants are not aware of these plans, which are sold by many insurance agents and financial planners. I have received hundreds of phone calls after the IRS has disallowed plans on audit. The IRS is now making the accountants policemen for these and other abusive plans that their clients may be participating in.

When I speak at accounting conventions about abusive plans, most accountants are not aware of what I am talking about, and do not think that their clients would be involved in these types of plans. Unfortunately once they find out that their clients have contributed to these plans much of the damage has been done.

On Oct.17, 2007, the IRS, in Notice 2007-83, identified as listed transactions certain trust arrangements involving cash-value life insurance. Also simultaneously issued was Notice 2007-84, which disallows tax deductions and imposed severe penalties for welfare benefit plans that discriminate.

Many of these plans have already or will, go out of business. At least two of these plans have stolen the participant’s money.

An accountant who has a client in one of these plans, or who is approached by a client about one of these plans should be cautious, both for the client and for himself.

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