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

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.

IRS SUSPENDS 6707a PENALITES UNTIL SEPTEMBER 30, 2009 AFTER CONGRESS & GAO URGE REFORM

Last week, IRS Commissioner Douglas Shulman agreed to temporarily suspended 6707a penalties until September 30, 2009 in his letter to Congress.

(See Shulman response letter here)

The IRS Commissioner acted in response to a June 12, 2009 letter from the Senate Finance Committee, which urged the IRS to suspend its efforts to collect penalties for some listed tax shelter transactions, or 6707a penalties. (See Congressional letter here.)

Last month, the IRS received a report with recommendations from the Government Accounting Office indicating that the IRS should develop a plan to better focus its penalty efforts (see the GAO report here.)

The report says the GAO conducted their work “from October 2007 through May 2009 in accordance with generally accepted government auditing standards."

The GAO recommended:

"The Commissioner of Internal Revenue should direct the Office of Servicewide Penalties (OSP) to evaluate penalty administration and penalties’ effect on voluntary compliance and develop a plan to focus its efforts. The Commissioner also should use IRS’s standard outreach methods to again alert taxpayers of the need to disclose reportable loss transactions. In commenting on a draft of this report, IRS concurred with GAO’s recommendations, and summarized the actions it plans to take."

Congressional Response : (See Press Release)

Sen. Grassley said “It’s good to have the reprieve from the IRS, though the suspension will probably need to be longer in order to get necessary changes through Congress.”

“The IRS should also do the right thing by studying why only small businesses have been hit with the penalties since they’re less likely to have the expensive lawyers that big corporations do. It’s a matter of tax fairness for both the IRS and Congress.”

Sen. Baucus also commented: “I’m pleased the IRS complied with our request so that Congress can do its part to ensure the Tax Code treats small businesses fairly.”

“Make no mistake, I will continue to go after tax cheats and tax shelter investments, but these are disproportionate and undue penalties on honest, hardworking American business owners and their employees. I appreciate the IRS’ help on this, and I will move this forward until the issue is resolved.”

“We are working — both sides of the aisle and the Capitol — to ensure assessed tax penalties fall in line with received tax benefits. Until we reach that goal, we require cooperation from the IRS so that millions of American small businesses don’t get another chip stacked against them in the lagging economy."

412(i) Lawsuit Filed in New Jersey

A second 412(i) lawsuit has been filed in Essex County Superior Court in New Jersey.

It is believed to be the second lawsuit filed in New Jersey against the following defendants : Indianapolis Life Insurance Company, Matt Lang, Lorac Financial Services, Inc., Summit Enterprises, Economic Concepts, Inc., Kenneth R. Hartstein, Harold Dischino and Dischino & Associates.

In this transaction, Lang acted as the agent and Dischino was the accountant for the plaintiff.

The complaint asserts the Defendants not only engaged in a pattern and practice of misrepresentations and omissions relating to life insurance policies promoted and represented as suitable products to be used as part of a comprehensive retirement plan, but also engaged in racketerring activity in violation of New Jersey's RICO statute.

The complaint further alleges Defendants knowingly sold Plaintiffs an abusive tax shelter causing them to incur significant financial losses by working in concert with one another and devised a scheme to sell, promote and administer abusive and illegal tax shelters as retirement plans under the auspices of Section 412(i) of the Internal Revenue Code.

The complaint states Defendants knew or should have known that these arrangements would be heavily scrutinized by the IRS, be deemed abusive tax avoidance transactions by the IRS, and expose those participating in such arrangement to costly IRS audits, including substantial tax liabilities, penalties, and interest.

Moreover, Plaintiffs assert Defendants knew or should have known that their continuing representations and omissions they made after the issuance of an IRS ruling in 2004 regarding the tax-related consequences of 412(i) plans and how the policies should be funded in the future were intentionally misleading, deceptive and fraudulent.

For a copy of the complaint, contact Chris Hellums @ Chrish@pdhklaw.com

Pittman Dutton Kirby & Hellums currently represents individuals and small businesses against brokers, promoters, accountants, and in some cases attorneys, regarding the sale of 412(i) plans. If you have purchased a 412(i) or have any questions about this litigation, please do not hestitate to contact us.

West Virginia farmers claim MassMutual and their accountants engaged in fraudulent conduct involving 412(i) plan

MassMutual has recently been sued in a 412(i) case in West Virginia. According to published reports, an elderly farming family in West Virginia has filed suit against MassMutual, several of it’s agents, and a West Virginia accounting firm.

In their suit, they claim that the accountants and MassMutual agents set up a 412(i) pension plan that included policies and annuities that generated hundreds of thousands dollars in commissions to the MassMutual agents and their accountants (who did not disclose that they would benefit as well). In their suit, the plaintiffs claim they were not qualified for the plan, that the agents and accountants allegedly falsified information, forged signatures on insurance and annuity documents, and fraudulently amended tax returns.

Unfortunately, this type of conduct is not uncommon. I represented a client in a single person ESOP who made similar allegations against another insurance company and broker and I am currently representing a physician with a 412(i) plan who is making similar allegations.

You can contact Chris Hellums at ChrisH@PDKHLAW.com