Taxpayers must report certain transactions to the IRS under Section 6707A

Lance Wallach

Taxpayers must report certain transactions to the IRS under Section 6707A of the Tax Code, which was enacted in 2004 to help detect, deter, and shut down abusive tax shelter activities. For example, reportable transactions may include being in a 419,412i, or other insurance plans sold by insurance agents for tax deduction purposes. Other abusive transactions could include captive insurance and section 79 plans, which are usually sold by insurance agents for tax deductions. Taxpayers must disclose their participation in these and other transactions by filing a Reportable Transactions Disclosure Statement (Form 8886) with their income tax returns. People that sell these plans are called material advisors and must also file 8918 forms properly. Failure to report the transactions could result in monetary penalties in excess of $10,000. Accountants who sign tax returns, which have these deductions, can also be called material advisors and should also file forms 8918 properly.
The IRS has fined hundreds of taxpayers who did file under 6707A. They said that they did not fill out the forms properly, or did not file correctly. The plan administrator or a 412i advised over 200 of his clients how to file. They were then all fined by the IRS for filling out the forms wrong. The fines averaged about $500,000 per taxpayer.

 A report, by the Treasury Inspector General for Tax Administration found that the procedures for documenting and assessing the Section 6707A penalty were not sufficient or formalized, and cases often are not fully developed.
TIGTA evaluated the IRS’s effectiveness in identifying, developing, and applying the Section 6707A penalty. Based on its review of 114 assessed Section 6707A penalties, TIGTA determined that many of these files were incomplete or did not contain sufficient audit evidence. TIGTA also found a need for better coordination between the IRS’s Office of Tax Shelter Analysis and other functions.
“As penalties are meant to encourage voluntary taxpayer compliance, it is important that IRS procedures for documenting and assessing them be well developed and fully documented,” said TIGTA Inspector General J. Russell George in a statement. “Any failure to do so raises the risk that taxpayers will not receive consistent and fair treatment under the law, and could further reduce their willingness to comply voluntarily.”
The Section 6707A penalty is a stand-alone penalty and does not require an associated income tax examination; therefore, it applies regardless of whether the reportable transaction results in an understatement of tax. TIGTA determined that, in most cases, the Section 6707A penalty was substantially higher than additional tax assessments taxpayers received from the audit of underlying tax returns. I have had phone calls from taxpayers that contributed less than $100.000 to a listed transaction and were fined over $500,000. I have had phone calls from taxpayers that went into 419, or 412i plans but made no contributions and were fined a large amount of money for being in a listed transaction and not properly filing forms under IRC section 6707A. The IRS claims that the fines are non appeasable.
On July 7, 2009, at the request of Congress, the IRS agreed to suspend collection enforcement actions. However, this did not preclude the issuance of notices of assessment that are required by law and adjustment notices, which inform the taxpayer of any account activity. In addition, taxpayers continued to receive balance due and final notices of intent to levy and pay Section 6707A penalties.
TIGTA recommended that the IRS fully develop, document, and properly process Section 6707A penalties. The IRS agreed with TIGTA’s recommendation and plans to take appropriate corrective actions. I think as a result of this many taxpayers who have not yet been fined will shortly receive the fines. Unless a taxpayer files properly there is no statute of limitations. The IRS has, and will continue to go back many years and fine people that are in listed, reportable or similar to transactions.
If you are, or were in a 412i, 419, captive insurance or section 79 plans you should immediately file under 6707A protectively. If you have already filed you should find someone who knows what he is doing to review the forms. I only know of two people who know how to properly file. The IRS instructions are vague. If a taxpayer files wrong, or fills out the forms wrong he still gets the fine. I have had hundreds of phone calls from people in that situation.

Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, abusive tax shelters, financial, international tax, and estate planning.  He writes about 412(i), 419, Section79, FBAR and captive insurance plans. He speaks at more than ten conventions annually, writes for more than 50 publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public Radio’s “All Things Considered” and others. Lance has written numerous books including “Protecting Clients from Fraud, Incompetence and Scams,” published by John Wiley and Sons, Bisk Education’s “CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation,” as well as the AICPA best-selling books, including “Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots.” He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, or visit
The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.



    How to Avoid IRS Fines for You and Your Clients
    OCTOBER 26, 2010 • REPRINTS
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    Beware: The IRS is cracking down on small-business owners who participate in tax-reduction insurance plans sold by insurance agents, including defined benefit retirement plans, IRAs, and even 401(k) plans with life insurance. In these cases, the business owner is motivated by a large tax deduction; the insurance agent is motivated by a substantial commission.

    A few years ago, I testified as an expert witness in a case in which a physician was in an abusive 401(k) plan with life insurance. It had a so-called "springing cash value policy" in it. The IRS calls plans with these types of policies "lis

    As an expert witness in many of cases involving the 412(i) and 419, I can attest that they often do not go well for the agents, accountants, plan promoters, insurance companies, and other involved parties.

    Here is one example: Pursuant to a settlement with the IRS, a 412(i) plan was converted into a traditional defined benefit plan. All of the contributions to the 412(i) plan would have been allowable if they had initially adopted a traditional defined benefit plan. Based on negotiations with the IRS agent, the audit of the plan resulted in no income and minimal excise taxes due.

    Toward the end of the audit, the business owner received a notice from the IRS. The IRS had assessed a $400,000 penalty for the client under Section 6707A, because the client allegedly participated in a listed transaction and failed to file Form 8886 in a timely manner.

    The IRS may call you a material advisor for selling one of these plans and fine you $200,000.00. The IRS may fine your clients over a million dollars for being in a retirement plan, 419 plan, etc. Anything that the Service deems, at its sole discretion, a "listed transaction" is fair game. As you read this article, hundreds of unfortunate people are having their lives ruined by these fines. You may need to take action immediately.

    Lance Wallach speaks and writes about benefit plans, tax reductions strategies, and financial plans. He can be reached at 516-938-5007 or

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    Business Owners in 419, 412i, Section 79 and Captive Insurance Plans Will Probably Be Fined by the IRS Under Section 6707A
    Posted on December 27, 2011, in Uncategorized, with 4 Comments
    Business Owners in 419, 412i, Section 79 and Captive Insurance Plans Will Probably Be Fined by the IRS Under Section 6707A

    by Lance Wallach

    Taxpayers who previously adopted 419, 412i, captive insurance or Section 79 plans are in big trouble. 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.” These plans were sold by insurance agents, financial planners, accountants and attorneys seeking large life insurance c

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  3. 419 Plan Administrator Permanently Enjoined from Doing Business

    How quickly we forget the tax avoidance plans that went down in flames when the IRS turned its scrutinous eye on it. One of the biggest ones in our industry’s history is the 419 welfare benefit plan.

    419 plans (more properly known as 419A(f)6 multiple employer plans or more recently known as 419(e)3 single employer plans) were the industry darlings back in the late 1990s and early 2000s. They were “employee benefit plans” that allowed business owners to take tax deductions through their company to buy life insurance inside the 419 plan.

    The policies were allowed to grow tax free and, ultimately, when the owners hit retirement, they would terminate their involvement in the plan; and the policies would be distributed to the owners who would then own them individually and borrow from them tax free in retirement.

    419 plans were sold as the tax-deductible purchase of life insurance and became the favorite of many insurance agents looking to sell $100,000+ annual premium cases.

    Of course, when a large segment of an industry starts incorrectly marketing a plan as the tax-deductible purchase of life insurance, the IRS starts taking a close look; and that’s certainly what happened with 419 plans.

    The IRS went after them with a vengeance and got Congress to act to curb what the IRS saw as abuses. It didn’t matter much if you put a plan in place that was “done right.” There were so many non-compliant/bogus plans out there that the IRS/Congress basically killed all of them.

    One prominent promoter/TPA of 419 plans was Tracy Sunderlage out of the Chicago area.

    Final Judgment and Permanent Injunction—the Tax Division of the U.S. Department of Justice was after Mr. Sunderlage and his companies.

    On February 28, 2012, John Darrah, U.S. District Judge, signed a final order and permanent injunction with the agreement and approval of Mr. Sunderlage. The injunction is what’s really interesting. It bars Mr. Sunderlage from promoting, selling, acting as trustee or administrator for, or otherwise organizing, administering, or implementing:

    -the PBT Multiple Employer 419 Plan and/or the Maven Structure described in the complaint.

    -any plan or arrangement that is similar to the PBT Multiple Employer 419 Plan and/or the Maven Structure, including any plan or arrangement that claims to be a welfare benefit plan or to allow an employer to make a deductible contribution to a welfare benefit fund under I.R.C. Section 419 and/or I.R.C Section 419A.

    -any plan that assists others to violate or attempt to violate the internal revenue laws or unlawfully evading the assessment or collection of one’s federal tax liabilities.

    The above are just three of the restrictions that Mr. Sunderlage agreed to. There are three more; but for the sake of brevity, I’ve listed the above which should get my point across.

    Complaint below:

    What can we learn from the crashing and burning of 419 plans?

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