Showing posts with label Captive Insurance. Show all posts
Showing posts with label Captive Insurance. Show all posts
Taxpayers Who Previously Adopted 419, 412i, Captive Insurance or Section 79 Plans are in Big Trouble - HGExperts.com
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| by Lance Wallach |
In recent years, the IRS has identified many of these arrangements as abusive devices to funnel tax deductible dollars to shareholders and classified these arrangements as listed transactions." Insurance agents, financial planners, accountants and attorneys seeking large life insurance commissions sold these plans.
In general, taxpayers who engage in a “listed transaction” must report such transaction to the IRS on Form 8886 every year that they “participate” in the transaction, and you do not necessarily have to make a contribution or claim a tax deduction to participate. Section 6707A of the Code imposes severe penalties for failure to file Form 8886 with respect to a listed transaction. But you are also in trouble if you file incorrectly. I have received numerous phone calls from business owners who filed and still got fined. Not only do you have to file Form 8886, but it also has to be prepared correctly. I only know of two people in the U.S. who have filed these forms properly for clients. They tell me that was after hundreds of hours of research and over 50 phones calls to various IRS personnel. The filing instructions for Form 8886 presume a timely filling. Most people file late and follow the directions for currently preparing the forms. Then the IRS fines the business owner. The tax court does not have jurisdiction to abate or lower such penalties imposed by the IRS.
"Many taxpayers who are no longer taking current tax deductions for these plans continue to enjoy the benefit of previous tax deductions by continuing the deferral of income from contributions and deductions taken in prior years."
"Many taxpayers who are no longer taking current tax deductions for these plans continue to enjoy the benefit of previous tax deductions by continuing the deferral of income from contributions and deductions taken in prior years."
IRS and Captive
With the October 15 filing deadline quickly approaching, the Internal Revenue Service today encouraged taxpayers to consult an independent tax advisor if they participated in a micro-captive insurance transaction.
The IRS encourages any taxpayer who has continued to engage in an abusive micro-captive insurance transaction to not anticipate being able to settle its transaction with the IRS or Chief Counsel on terms more favorable than previously announced settlement offers and that any potential future settlement initiative that the IRS may consider will require additional concessions by the taxpayer.
With this in mind, the IRS encourages taxpayers to consult an independent tax advisor if they participated in a micro-captive insurance transaction. These taxpayers should seriously consider exiting the transaction and not claiming deductions associated with abusive micro-captive insurance transactions, just like many other taxpayers did who were contacted by the IRS in March and July 2020.
For those taxpayers that do not exit the transaction and continue taking such deductions, the IRS will disallow tax benefits from transactions that are determined to be abusive and may also require domestic captives to include premium payments in income and assert a withholding liability related to foreign captives. The IRS Office of Chief Counsel will continue to litigate these abusive transactions in Tax Court.
Any future settlement terms will only get worse, not better. The IRS has never been better positioned in its quest to eradicate abusive transactions following the stand-up of a dedicated promoter office, a new Fraud Enforcement Office, enhanced service-wide coordination with Criminal Investigation and the Office of Professional Responsibility, and our advanced data analytics and mining capabilities. Taxpayers are strongly encouraged to use this opportunity to put this behind them and get into compliance.
Abusive micro-captives have been a concern to the IRS for several years. The transactions first appeared on the IRS "Dirty Dozen" list of tax scams in 2014 and remain a priority enforcement issue for the IRS. In 2016, the Department of Treasury, which identified certain micro-captive transactions as having the potential for tax avoidance and evasion. In March and July 2020, IRS issued letters to taxpayers who participated in a Notice 2016-66 transaction alerting them that IRS enforcement activity in this area will be expanding significantly and providing them with the opportunity to tell the IRS if they've discontinued their participation in this transaction before the IRS initiates examinations. Early responses indicate that a significant number of taxpayers who participated in these transactions have exited the transaction.
This summer, the IRS issued a new round of section 6112 letters to material advisors who filed with the IRS pursuant to Notice 2016-66. In addition, the IRS has deployed 12 newly formed micro-captive examination teams to substantially increase the examinations of ongoing abusive micro-captive insurance transactions.
Also, as part of IRS's continued focus in this area, the IRS has become aware of variations of the abusive micro-captive insurance transactions. Examples of these variations include certain Puerto Rico and offshore captive insurance arrangements that do not involve section 831(b) elections.
These variations appear to be designed and marketed with the express intent of avoiding reporting under Notice 2016-66 and yet perpetuating in some cases the same or similar abusive elements as abusive micro-captive insurance transactions. The IRS is aware of these abusive transactions and is actively working to counter their proliferation. The IRS cautions taxpayers that, to the extent they engage in variations of abusive micro-captive transactions that are substantially similar to Notice 2016-66, they must be disclosed. Otherwise, the IRS will impose penalties for the failure to disclose.
Captive Insurance: Conservation Easement Cases: Enrolled Agents Journ...
Captive Insurance: Conservation Easement Cases: Enrolled Agents Journ...: Conservation Easement Cases: Enrolled Agents Journal : Enrolled Agents Journal ...
About Lance – Captive Insurance Audit Support
While the IRS has been cracking down on syndicated conservation easements for over ten years, earlier this year Chuck Rettig, the Commissioner of the
While the IRS has been cracking down on syndicated conservation easements for over ten years, earlier this year Chuck Rettig, the Commissioner of the IRS, announced several campaign areas upon which the IRS would heighten focus in the coming year. Following through on this promise, on Nov. 12, 2019, the IRS announced a significant increase in enforcement actions for syndicated conservation easements in Issue Number IR-2019-182.
What is a Syndicated Conservation Easement?
Generally, a charitable deduction is not allowed for a gift of property that is less than the donor’s entire interest in the property. However, Internal Revenue Code sections 170(h)(1) through (h)(5) and Treasury Regulations section 1.170A-14 provide for an exception for a qualified conservation contribution. A qualified conservation contribution is a contribution of a qualified real property interest that includes a restriction, granted in perpetuity, on the use of the real property. The contribution must be exclusively used for conservation purposes. A charitable contribution deduction is allowed for the fair market value of the conservation easement donated to certain charitable organizations.
The concept supporting a charitable deduction for the donation of a conservation easement is fairly simple.However, in practice, taxpayers often run into limitations on the amount of the charitable deduction they can actually take.Rather than allow this limitation to prevent full use of a potential tax deduction, promoters and advisors set up syndications to purchase land for the purpose of then applying conservation easements.These structures often involve pass-through and tiered entities that hold or acquire real property to allow several investors to share in the charitable deduction, utilizing the deduction more fully so no taxpayer is likely to reach the 50 percent limitation on the contribution.Generally, the deductions claimed by investors in these transactions significantly exceed their amounts invested.In many cases, after acquisition by the syndication, property valuations and appraisals greatly inflate the value of the easement based on unreasonable conclusions about the development potential of the real estate.Then, the pass-through entity donates an easement encumbering the property to a tax-exempt entity, claiming a holding period of more than one year.
The IRS is Now Throwing Significant Resources Behind the Hunt for These Transactions
In 2016, the IRS labeled these transactions as “Listed Transactions” in Notice 2017-10.The Notice applies to certain transactions where promotional materials suggest to potential investors that they may be entitled to a share of a charitable contribution deduction that equals or exceeds two and a half times the amount invested.Per the Notice, individuals entering into these and substantially similar transactions must disclose them to the IRS via a disclosure statement on a Form 8886 as prescribed by Treasury Regulations section 1.6011-4(d).In addition, the Notice created disclosure and list maintenance obligations for material advisors to those transactions.
In 2018, these types of investments were added to the list of the Large Business and International Division’s compliance campaigns. The IRS moved these transactions from entity- and individual-based audits to issue-based treatment, handling these audits with highly trained revenue agents. The Conservation Easement Audit Techniques Guide includes almost 100 pages of instructions for examinations of charitable contributions of conservation easements.
These transactions are also included in the IRS’s 2019 “Dirty Dozen” list of scams to avoid. The IRS stated that syndicated conservation easements “start with a legitimate tax-planning tool that is improperly distorted … by a promoter to produce benefits that are too good to be true.”
In the IRS’s most recent publication, IR-2019-182, the IRS warned that “[c]oordinated examinations are being conducted across the IRS in the Small Business and Self-Employed Division, Large Business and International Division and Tax Exempt and Government Entities Division. Separately, investigations have been initiated by the IRS’s Criminal Investigation division. These audits and investigations cover billions of dollars of potentially inflated deductions as well as hundreds of partnerships and thousands of investors.”
The IRS also stated it is using “innovation labs” to develop new, more extensive enforcement tools that employ advanced technologies to discover additional abusive syndicated conservation easement transactions.
The Time to Consult a Tax Professional is Now
The IRS announced that it “will not stop” in its pursuit of “everyone involved in the creation, marketing, promotion and wrongful acquisition of artificial, highly inflated deductions based on these aggressive transactions.”The Service further stated that “every available enforcement option will be considered” including both civil penalties and criminal investigations.
With enhanced enforcement efforts at the IRS level, and over 80 cases currently pending in the Tax Court, taxpayers engaged in any syndicated conservation easement transaction should immediately consult with a competent tax attorney to determine the best course of action.The IRS is not only searching for those who took deductions, but also promoters, appraisers, tax return preparers, and all others involved in the transactions.
Taxpayers should heed Commissioner Rettig’s warning and take steps to get back into compliance before they hear from the IRS. Taxpayers with questions regarding how to get into compliance and whether they may be vulnerable to civil or criminal investigation or penalties should contact
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