Reportable and listed transactions. The Senate bill limits the section 6707A penalty for failure to disclose a reportable transaction (that is, a transaction determined by the IRS to have a potential for tax avoidance or evasion) to 75% of the decrease in tax resulting from the transaction. The maximum annual penalty allowed will be $10,000 in the case of a natural person and $50,000 for all other persons for failure to disclose a reportable transaction. For listed transactions, the maximum penalty will be $100,000 in the case of a natural person and $200,000 for all other persons. The minimum penalty is $5,000 for natural persons and $10,000 for all other persons.
The bill also requires the IRS to report to Congress by Dec. 31, 2010, and then annually, on penalties assessed for certain tax shelters and reportable transactions (under sections 6662A, 6700(a), 6707, 6707A and 6708). The penalty under section 6707A has been criticized because the penalty amounts often exceed the tax benefit of the targeted transactions. The IRS has since last July been working under a self-imposed moratorium on collection enforcement of the section 6707A penalty to give Congress time to amend the penalty amounts. The AICPA has recommended that the IRS be allowed to abate the section 6707A penalty in cases where the taxpayer has acted reasonably and in good faith. The AICPA also believes that judicial review should be allowed in cases where the IRS has assessed a penalty under section 6707A. The Senate bill does not adopt either of these recommendations. http://www.journalofaccountancy.com/Web/20103340.htm
Also see:
1. http://blogs.forbes.com/deanzerbe/2010/09/14/small-business-tax-bill-moves-forward-as-senate-invokes-cloture/?boxes=financechannelforbes
2. http://www.webcpa.com/debits_credits/Small-Business-Bill-Offers-Tax-Shelter-Penalty-Relief-55620-1.html
3. http://www.fastpitchnetworking.com/pressrelease.cfm?PRID=46367
Friday, September 17, 2010
Wednesday, August 18, 2010
Judge Remands 412(i) Case Back to State Court
On August 17th, United States District Judge Jane Boyle granted the Plaintiffs request and remanded the case of Sawaged vs. Indianapolis Life, et al. back to the Superior Court of New Jersey, Law Division, Essex County.
Like many others, this case concerns the promotion, marketing, and sale of life insurance policies used to fund a defined pension plan pursuant to 26 U.S.C § 412(i) of the Internal Revenue Code.
Indianapolis Life removed the case from the New Jersey state court on a theory of complete preemption under ERISA. Specifically, Indy Life claimed that certain of Plaintiffs' allegations pertaining to misconduct following plan formation can be recharacterized as claims for breach of fiduciary duty under ERISA §§ 502(a)(2) and (a)(3). The court specifically rejected this argument.
Additionally, the court found that "although admittedly failure to file form 8886 may have been undertaken in a fiduciary capacity, the Court determines that it is an isolated allegation which is insufficient to support a finding of complete preemption."
For more information or to request a copy of the opinion, contact Chris Hellums at Chrish@pittmandutton.com
Like many others, this case concerns the promotion, marketing, and sale of life insurance policies used to fund a defined pension plan pursuant to 26 U.S.C § 412(i) of the Internal Revenue Code.
Indianapolis Life removed the case from the New Jersey state court on a theory of complete preemption under ERISA. Specifically, Indy Life claimed that certain of Plaintiffs' allegations pertaining to misconduct following plan formation can be recharacterized as claims for breach of fiduciary duty under ERISA §§ 502(a)(2) and (a)(3). The court specifically rejected this argument.
Additionally, the court found that "although admittedly failure to file form 8886 may have been undertaken in a fiduciary capacity, the Court determines that it is an isolated allegation which is insufficient to support a finding of complete preemption."
For more information or to request a copy of the opinion, contact Chris Hellums at Chrish@pittmandutton.com
Thursday, March 4, 2010
IRS Extends Moratorium on Tax Shelter Penalties
Under pressure from Congress, the Internal Revenue Service has once again extended its moratorium on collection enforcement actions on certain types of tax shelter penalties.
Last month, the Senate unanimously approved a bill that would prevent small businesses from incurring tax penalties aimed at large corporations and wealthy individuals who invest in tax shelters (see Senate Passes Bill to Fix Small Biz Tax Penalties). The Small Business Penalty Fairness Act revises Section 6707A of the Tax Code to set the penalty for failure to disclose reportable transactions to the IRS at 75 percent of the tax benefit received.
Last year, the IRS temporarily suspended its efforts to collect penalties on some listed tax transactions until Sept. 30, and later until the end of the year, after hearing complaints from members of Congress and National Taxpayer Advocate Nina Olson about the disproportionate penalties levied on small-business owners (see IRS Extends Moratorium on Small Business Tax Shelter Penalties).
On Wednesday, IRS Commissioner Doug Shulman notified Congress that the IRS is extending until June 1, 2010, the current moratorium on collection enforcement actions relating to tax shelter penalties assessed under Section 6707A. In addition, the IRS will continue to hold off on filing new notices of lien on amounts due solely related to Section 6707A penalties until June 1, 2010.
Chris Hellums
PITTMAN, DUTTON, & HELLUMS, P.C.
2001 Park Place North
1100 Park Place Tower
Birmingham, Alabama 35203
(205) 322-8880
(205) 328-2711 (facsimile)
Email: chrish@pdkhlaw.com
Firm Website: www.pdkhlaw.com
Last month, the Senate unanimously approved a bill that would prevent small businesses from incurring tax penalties aimed at large corporations and wealthy individuals who invest in tax shelters (see Senate Passes Bill to Fix Small Biz Tax Penalties). The Small Business Penalty Fairness Act revises Section 6707A of the Tax Code to set the penalty for failure to disclose reportable transactions to the IRS at 75 percent of the tax benefit received.
Last year, the IRS temporarily suspended its efforts to collect penalties on some listed tax transactions until Sept. 30, and later until the end of the year, after hearing complaints from members of Congress and National Taxpayer Advocate Nina Olson about the disproportionate penalties levied on small-business owners (see IRS Extends Moratorium on Small Business Tax Shelter Penalties).
On Wednesday, IRS Commissioner Doug Shulman notified Congress that the IRS is extending until June 1, 2010, the current moratorium on collection enforcement actions relating to tax shelter penalties assessed under Section 6707A. In addition, the IRS will continue to hold off on filing new notices of lien on amounts due solely related to Section 6707A penalties until June 1, 2010.
Chris Hellums
PITTMAN, DUTTON, & HELLUMS, P.C.
2001 Park Place North
1100 Park Place Tower
Birmingham, Alabama 35203
(205) 322-8880
(205) 328-2711 (facsimile)
Email: chrish@pdkhlaw.com
Firm Website: www.pdkhlaw.com
Monday, August 24, 2009
Small Business Council of America Postition Paper on 6707a Penalties
As I previously indicated, I do not think that the efforts in Congress will result in the elimination of 6707A penalties (as many brokers and promoters are representing to clients); however, I do think there is substantial likelihood that legislation will pass which will provide some relief to individuals and small businesses who are potentially subject to these penalties.
Attached below is the position paper of the SBC. It provides a good road map as to where this legislation is headed.
Read the Small Business Council of America Position Paper on 6707a Penalties (read the paper by clicking here)
As always, feel free to contact me at Chrish@PDKHlaw.com
Attached below is the position paper of the SBC. It provides a good road map as to where this legislation is headed.
Read the Small Business Council of America Position Paper on 6707a Penalties (read the paper by clicking here)
As always, feel free to contact me at Chrish@PDKHlaw.com
Sunday, August 9, 2009
More on Section 6707A Penalties
I receive quit a few calls about 412(i) plans and the subject of 6707A penalties seems to be an issue that is on the minds of almost every accountant, attorney, or individual who contacts me. It is for this reason that I wanted to post some additional information on this issue. Let me begin by saying that I am not an accountant or tax attorney.
I am a litigation attorney who represents individuals and small business against the entities or individuals involved in selling or promoting what I consider to be inappropriate, improper, or fraudulent plans. As part of that endeavor, I have come to learn quite a bit about 412(i) and 6707A penalties.
BACKGROUND ON 6707A
The American Jobs Creation Act of 2004 created Section 6707A of the Internal Revenue Code which was intended to stop the proliferation of multi-million-dollar abusive tax shelters. Pursuant to the Act, a strict liability penalty was imposed on "listed transactions" not reported to the IRS.
A listed transaction is a transaction the IRS has determined, through audits and reviews of other returns, has the potential for avoidance or evasion. The strict liability penalty applies if the taxpayer fails to disclose a listed transaction. The penalty is $100,000 per year for individuals and $200,000 per year for corporations and these penalties are stackable.
6707A penalties are in addition to the 30% accuracy related penalty imposed on the tax understatement under section 6662A. The 6707A penalties apply regardless of the amount of the understatement and regardless of whether the taxpayer can show a "reasonable cause" for the failure to make a disclosure AND regardless of whether the taxpayer amends prior to audit. Furthermore, the Commissioner of the IRS has no discretion to abate the listed transaction penalty. As if it could not get any worse, 6707A does not grant due process of law because there is no judicial review in the Tax Court.
WHAT IS BEING DONE ABOUT THIS PROBLEM
Currently, there are bills pending in both houses of Congress to address the 6707A problem. The National Taxpayer Advocate and the IRS Commissioner have both indicated the need for change and the IRS is currently in a stand down position on some of these penalties (for more information, see prior post http://412ilitigation.blogspot.com/2009/07/irs-suspends-6707a-penalites-until.html). The Small Business Council of America is releasing a position paper on the legislation and I will review and post it shortly.
In my opinion, despite what happens in Congress, Taxpayers need to understand that there are going to be penalties. There is not going to be a magic bullet. We are not going to wake up one day and these plans are going to be "legal" and the penalties are going to magically disappear. The penalties may become proportionate to the tax understatement, the pass- through penalties may be reduced, the Commissioner may be allowed discretion to review, and the taxpayer may get judicial review---BUT---taxpayers should not think that this is all simply going to go away.
Taxpayers who are confronted with these penalties need to evaluate a realistic strategy to include to include claims against the individuals responsible for promoting and selling of these plans, and the insurance companies who sold them after being advised of the ultimate result.
Chris Hellums can be reached at Chrish@pdkhlaw.com or toll free at 1-866-515-8880.
I am a litigation attorney who represents individuals and small business against the entities or individuals involved in selling or promoting what I consider to be inappropriate, improper, or fraudulent plans. As part of that endeavor, I have come to learn quite a bit about 412(i) and 6707A penalties.
BACKGROUND ON 6707A
The American Jobs Creation Act of 2004 created Section 6707A of the Internal Revenue Code which was intended to stop the proliferation of multi-million-dollar abusive tax shelters. Pursuant to the Act, a strict liability penalty was imposed on "listed transactions" not reported to the IRS.
A listed transaction is a transaction the IRS has determined, through audits and reviews of other returns, has the potential for avoidance or evasion. The strict liability penalty applies if the taxpayer fails to disclose a listed transaction. The penalty is $100,000 per year for individuals and $200,000 per year for corporations and these penalties are stackable.
6707A penalties are in addition to the 30% accuracy related penalty imposed on the tax understatement under section 6662A. The 6707A penalties apply regardless of the amount of the understatement and regardless of whether the taxpayer can show a "reasonable cause" for the failure to make a disclosure AND regardless of whether the taxpayer amends prior to audit. Furthermore, the Commissioner of the IRS has no discretion to abate the listed transaction penalty. As if it could not get any worse, 6707A does not grant due process of law because there is no judicial review in the Tax Court.
WHAT IS BEING DONE ABOUT THIS PROBLEM
Currently, there are bills pending in both houses of Congress to address the 6707A problem. The National Taxpayer Advocate and the IRS Commissioner have both indicated the need for change and the IRS is currently in a stand down position on some of these penalties (for more information, see prior post http://412ilitigation.blogspot.com/2009/07/irs-suspends-6707a-penalites-until.html). The Small Business Council of America is releasing a position paper on the legislation and I will review and post it shortly.
In my opinion, despite what happens in Congress, Taxpayers need to understand that there are going to be penalties. There is not going to be a magic bullet. We are not going to wake up one day and these plans are going to be "legal" and the penalties are going to magically disappear. The penalties may become proportionate to the tax understatement, the pass- through penalties may be reduced, the Commissioner may be allowed discretion to review, and the taxpayer may get judicial review---BUT---taxpayers should not think that this is all simply going to go away.
Taxpayers who are confronted with these penalties need to evaluate a realistic strategy to include to include claims against the individuals responsible for promoting and selling of these plans, and the insurance companies who sold them after being advised of the ultimate result.
Chris Hellums can be reached at Chrish@pdkhlaw.com or toll free at 1-866-515-8880.
Monday, August 3, 2009
UBS UPDATE: Swiss & US Government Reach Confidential Settlement In Tax Evasion/Bank Secrecy Case Involving 52,000 Names
An agreement reached Friday between the Swiss and US governments prevents an interesting trial proceeding today. On Friday, U.S. District Judge Alan S. Gold told the parties at a hearing that it was the last chance for to strike a deal before trial would begin Monday.
Just a few weeks ago, the Swiss government made it clear that their long-standing bank secrecy laws do not allow UBS to disclose information wanted by the Americans; Swiss bank account holders who are American citizens.
"The US civil proceedings against UBS are to be settled out of court after Switzerland and the USA reached an Agreement in Principle on Friday," Swiss Federal Department of Foreign Affairs (FDFA) said in a statement on Friday.
The dispute involves about 52,000 Americans the U.S. believes are hiding billions of dollars of assets possibly evading taxes. Swiss government and the UBS bank say the names cannot be disclosed without violating long-standing Swiss bank secrecy laws.
In February, UBS had paid USD 780 million to the US government to settle criminal charges related allegations of the bank helping Americans in tax evasion.
Check out the LA Times article describing the time line of legal events this past year.
http://www.latimes.com/business/nationworld/wire/sns-ap-eu-ubs-timeline,0,7323298.story
May 2008: Authorities in the United States begin investigating the Switzerland-based services UBS offers to customers living in the United States. UBS manager Martin Liechti is detained as a witness in the United States.
June 19, 2008: Former UBS client adviser Bradley Birkenfeld admits to a U.S. District Court in Fort Lauderdale, Florida, to assisting tax evasion.
June 30, 2008: The U.S. Department of Justice applies to a U.S. court in Miami for the Internal Revenue Service to be allowed to issue a "John Doe" summons for the Swiss to provide information about American clients of UBS without singling them out by name. The court approves the request a day later.
July 17, 2008: The Swiss government receives a formal request for assistance from the IRS to help uncover UBS clients involved in tax fraud. UBS manager Mark Branson apologizes to a U.S. Senate panel for the bank's failings and announces that UBS will accelerate its withdrawal from
the U.S. cross-border business.
Nov. 12, 2008: A U.S. court in Miami charges senior UBS manager Raoul Weil with conspiracy to commit tax fraud.
Feb. 18, 2009: UBS reaches a settlement with the Justice Department and the U.S. Securities and Exchange Commission in a U.S. District Court, agreeing to pay $780 million dollars in fines, penalties, interest and restitution. On the same day Swiss officials give U.S. authorities files on 255 American clients suspected by the U.S. of tax fraud without allowing for the right of appeal required under Switzerland's banking secrecy law.
Feb. 19, 2009: The IRS submits the John Doe summons in a civil lawsuit in Miami, asking for the details on 52,000 UBS clients to be handed over.
March 13, 2009: Threatened with international sanctions, the Swiss government agrees to drop the distinction between tax fraud and tax evasion when dealing with foreign requests for legal assistance. Until then Switzerland had refused to provide information to other countries in cases of alleged tax evasion, which is an administrative offense in Switzerland but not a felony.
June 18, 2009: Switzerland and the United States agree on a new double taxation accord to increase Swiss cooperation in U.S. tax evasion probes.
July 2009: UBS freezes the accounts of U.S. offshore clients who failed to act on a letter asking them to close their accounts or transfer funds to a U.S.-supervised unit of the bank.
July 7, 2009: The Swiss government announces that it may seize UBS customer files to prevent them from being handed over to the United States.
July 8, 2009: Federal Judge Alan Gold in Miami asks the U.S. government whether it would consider seizing the U.S. assets of UBS in order to enforce the outcome of the case.
July 13, 2009: Judge Gold postpones until Aug. 3 the trial at the request of the U.S. and Swiss government and UBS in order to give the governments more time to negotiate a settlement.
July 31, 2009: The U.S. and Swiss governments say they have agreed on most major disputes in the U.S. effort to get names of thousands of wealthy Americans suspected of evading taxes by hiding billions in assets with UBS. The trial is postponed.
Just a few weeks ago, the Swiss government made it clear that their long-standing bank secrecy laws do not allow UBS to disclose information wanted by the Americans; Swiss bank account holders who are American citizens.
"The US civil proceedings against UBS are to be settled out of court after Switzerland and the USA reached an Agreement in Principle on Friday," Swiss Federal Department of Foreign Affairs (FDFA) said in a statement on Friday.
The dispute involves about 52,000 Americans the U.S. believes are hiding billions of dollars of assets possibly evading taxes. Swiss government and the UBS bank say the names cannot be disclosed without violating long-standing Swiss bank secrecy laws.
In February, UBS had paid USD 780 million to the US government to settle criminal charges related allegations of the bank helping Americans in tax evasion.
Check out the LA Times article describing the time line of legal events this past year.
http://www.latimes.com/business/nationworld/wire/sns-ap-eu-ubs-timeline,0,7323298.story
May 2008: Authorities in the United States begin investigating the Switzerland-based services UBS offers to customers living in the United States. UBS manager Martin Liechti is detained as a witness in the United States.
June 19, 2008: Former UBS client adviser Bradley Birkenfeld admits to a U.S. District Court in Fort Lauderdale, Florida, to assisting tax evasion.
June 30, 2008: The U.S. Department of Justice applies to a U.S. court in Miami for the Internal Revenue Service to be allowed to issue a "John Doe" summons for the Swiss to provide information about American clients of UBS without singling them out by name. The court approves the request a day later.
July 17, 2008: The Swiss government receives a formal request for assistance from the IRS to help uncover UBS clients involved in tax fraud. UBS manager Mark Branson apologizes to a U.S. Senate panel for the bank's failings and announces that UBS will accelerate its withdrawal from
the U.S. cross-border business.
Nov. 12, 2008: A U.S. court in Miami charges senior UBS manager Raoul Weil with conspiracy to commit tax fraud.
Feb. 18, 2009: UBS reaches a settlement with the Justice Department and the U.S. Securities and Exchange Commission in a U.S. District Court, agreeing to pay $780 million dollars in fines, penalties, interest and restitution. On the same day Swiss officials give U.S. authorities files on 255 American clients suspected by the U.S. of tax fraud without allowing for the right of appeal required under Switzerland's banking secrecy law.
Feb. 19, 2009: The IRS submits the John Doe summons in a civil lawsuit in Miami, asking for the details on 52,000 UBS clients to be handed over.
March 13, 2009: Threatened with international sanctions, the Swiss government agrees to drop the distinction between tax fraud and tax evasion when dealing with foreign requests for legal assistance. Until then Switzerland had refused to provide information to other countries in cases of alleged tax evasion, which is an administrative offense in Switzerland but not a felony.
June 18, 2009: Switzerland and the United States agree on a new double taxation accord to increase Swiss cooperation in U.S. tax evasion probes.
July 2009: UBS freezes the accounts of U.S. offshore clients who failed to act on a letter asking them to close their accounts or transfer funds to a U.S.-supervised unit of the bank.
July 7, 2009: The Swiss government announces that it may seize UBS customer files to prevent them from being handed over to the United States.
July 8, 2009: Federal Judge Alan Gold in Miami asks the U.S. government whether it would consider seizing the U.S. assets of UBS in order to enforce the outcome of the case.
July 13, 2009: Judge Gold postpones until Aug. 3 the trial at the request of the U.S. and Swiss government and UBS in order to give the governments more time to negotiate a settlement.
July 31, 2009: The U.S. and Swiss governments say they have agreed on most major disputes in the U.S. effort to get names of thousands of wealthy Americans suspected of evading taxes by hiding billions in assets with UBS. The trial is postponed.
Friday, July 24, 2009
LA TIMES: Tax penalty reprieve brings collective sigh of relief at firms
It appears that the movement to repeal or modify 6707(a) penalties has finally reached critical mass. This story from the Los Angeles Times illustrates the inherent problems with these penalties and the failure to give the IRS any discretion in imposing these penalties.
http://www.latimes.com/business/la-fi-smallbiz14-2009jul14,0,3018084.story
I recently met with a client who also illustrates this point. She was a long time employee. Her employer wanted to do something for her, and for himself. He purchased a 412(i). As the plan has collapsed, she is facing $100,000 per year in penalties for a plan she was not involved in purchasing or funding, and for which she was to receive relatively little benefit.
http://www.latimes.com/business/la-fi-smallbiz14-2009jul14,0,3018084.story
I recently met with a client who also illustrates this point. She was a long time employee. Her employer wanted to do something for her, and for himself. He purchased a 412(i). As the plan has collapsed, she is facing $100,000 per year in penalties for a plan she was not involved in purchasing or funding, and for which she was to receive relatively little benefit.
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