Every year, many accountants sign returns in which their client claims a deduction for a welfare benefit plan. The IRS often considers these plans, created by section 419 of the Internal Revenue Code, to be listed transactions. In addition to the normal tax return disclosures, listed transactions must also be reported on Form 8886. Failure to properly file can lead to penalties of $100,000 for individuals and $200,000 for entities. Those penalties are per year!
Accountants must be certain they fully understand what transactions the IRS considers abusive. These transactions include certain 401(k) accelerated deductions, collectively bargained welfare benefit funds (sec. 419a(f)(5)), certain trust arrangements under section 419 and deductions for certain defined benefit plans (sec. 4129i)). It is important to remember that the IRS defines listed transactions to include any transaction that is substantially similar to one of the above.
Accountants can also get caught up in the penalty web if they were a material advisor. If you sign a return taking a deduction for one of these listed plans or if you sold the plan, you could find yourself facing significant penalties of $200,000 or more. (Material advisors must file IRS form 8918.)
Unscrupulous promoters often package their plans with legal opinion letters suggesting that their particular plan is not an abusive tax shelter and that the taxpayer need not comply with the Form 8886 filing requirement. Don't rely on those opinions. A third party opinion is no substitute for proper due diligence and review.
A second trap for unwary accountants is the civil liability they face. Financial planners and promoters market many of these plans. Often they are marketed through seminars. Some promoters offer commissions to lawyers and accountants who refer their clients. Earn a commission or opine on the tax deductibility of the plan and you may find yourself as a defendant in a lawsuit.
Many of these plans not only fail to deliver the promised tax benefits, they are complete scams or are constructed in such a way that taxpayers can't get their money back if circumstances change. When that happens, these same taxpayers will seek any deep pocket they can find. Often that is the accountant.
If a client has already made a contribution and purchased a plan, think long and hard as to whether you should sign the return without a thorough review and all required disclosures. It may be worthwhile to suggest the taxpayer find tax counsel. There is a risk of losing the client, of course, but is the risk worth the potential civil liability and penalties if the plan does not pass IRS muster?
This is interesting accurate article. I have received numerous phone calls from participants in these plans and the IRS is auditing. For the most up to date information contact Lance Wallach at lancewallach.com or call 516-935-7346