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.