The IRS's response to these 412(i) plans was predictable. The IRS had long criticized the features that characterized 412(i) plans. When the proliferation of these plans hit critical mass, the IRS honed in on these plans and gave fair warning of what was about to come.
The IRS does not make law. Its job is collection, enforcement and interpretation of existing law.
In 2002 and and early 2003 IRS officials began giving speeches at benefits conferences advising that 412(i) plans met neither the spirit nor the letter of the Code. They made it clear that the IRS would not be gentle and even indicated that potential criminal liability existed.
Insurance company representatives attended these conferences.
Neither the brokers, promoters, or Insurance companies relayed this information to their clients and insureds at this time.
On February 13, 2004, the IRS issued a press release, two revenue rulings, and proposed regulations to shut down abusive transactions involving specifically designed life insurance policies in retirement plans, section 412(i) plans. See http://www.irs.gov/pub/irs-utl/ir-04-021.pdf
In October of 2005, the IRS invited those who sponsored 412(i) plans that were treated as listed transactions to enter a settlement program in which the taxpayer would recind the plan and pay the income taxes it would have paid had it not engaged in the plan, plus interest and reduced penalties.
In late 2005, the IRS began obtaining information from advisors and actively auditing plans and more recently, levying section 6707 penalties.