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The Internal Revenue Service has recently been auditing 412(i) defined-benefit pension plans.

They
are seeking substantial taxes and penalties from what they characterize
as “abusive plans,” but they do not regard all 412(i) plans as
necessarily abusive. A properly structured and administered 412(i) plan
can be an invaluable tax reduction tool for a business, but care must
be taken.

In addition, the IRS is stepping up its examinations of
companies’ retirement plans this year, aiming to catch those that are
cheating their workers or the government, and to ensure that the plans
meet federal regulations. The offerings to be examined include
traditional pensions, 401(k)s and profit-sharing plans.

A few
years ago, when I spoke at the national convention of the American
Society of Pension Professionals and Actuaries about VEBAs, the IRS
spoke about their 412(i) concerns. Since then, they have escalated
their challenges to “abusive” 412(i) plans. In fact, certain plans are
on the IRS list of abusive tax transactions.

Taxpayers who
participate in “listed transactions” are required to report them to the
IRS or face substantial penalties ($100,000 in the case of individuals,
and $200,000 in the case of entities). In addition, “material advisors”
to these plans are required to maintain certain records and turn them
over to the IRS on demand.

When I addressed the 2005 annual
convention of the National Society of Public Accountants, the IRS spoke
about Circular 230. My impression was that if an accountant signed a
tax return that disclosed involvement in a listed and/or abusive tax
transaction, there could be Circular 230 implications.

Most
accountants are not familiar with 412(i) plans. They are a type of
defined-benefit pension plan that allows a large contribution. The
funding vehicles are usually fixed annuities and fixed life insurance.
They are traditionally sold by life insurance professionals and
financial planners. However, in recent years, they have gained in
popularity.

Given the substantial taxes and penalties that may be
assessed if the IRS concludes that a 412(i) plan has not been properly
structured or administered,
The IRS is aiming to catch companies that are cheating their workers or the government.

especially if it concludes that the plan is a listed transaction, it is important that the taxpayer know the rules.

The
accountant should also be aware of them. The fact that a plan is being
sold by an insurance company does not make it safer. Recently the IRS
has taken action against plans sold by insurance companies.