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IRS Commissioner Provides Relief to 412i Clients

By Tim Berry, JD - Email Editor

Date : July 9, 2009

Dear Valued Reader,

On July 6th, IRS Commissioner Douglas Shulman sent a letter to Rep. John Lewis D-GA saying the IRS , “will not undertake any collection enforcement through September 30, 2009, on cases where the annual tax benefit from the transaction is less than $100,000 for individuals or $200,000 for other taxpayers.”

Keep your eye closely on the ball. The penalty wasn’t for engaging in the transaction, rather it was for not reporting to the IRS involvement in the tax shelter.

Also in 2004, the IRS came out with a revenue ruling saying that certain 412i plans would be considered a “listed transaction.” Since the IRS considered the 412i plans listed transactions, if the participants did not report to the IRS they had utilized a 412i, the new section 6707A came into play and the IRS could assess the taxpayers hundreds of thousands of dollars a year in penalties for not filing the proper return notifying the IRS of the taxpayer’s involvement in the 412i plan.

Pretty complicated isn’t it?

Bottom line is 6707A was a great tool for the IRS to charge people hundreds of thousands of dollars in penalties a year.

That was back in 2004. Fast forward to 2009 and some very high profile taxpayers who make large campaign contributions are being hit with the 6707A penalties and it is hurting their pocketbook.

A few weeks back I read where a few senators and members of the House asked the IRS commissioner to not enforce the 6707A penalties as they were too high. I thought this was ironic as some of these same members of the Congress were the ones pushing for the big fines.

Well, low and behold, on July 6th the IRS commissioner came out and said the IRS will enforce collection on these penalties through September 9 of this year. The reason for the date limitation of September 9th is the members of Congress have assured the IRS commissioner that there is support in Congress, and Congress will be passing a law to modify the 6707A penalties.

Having said that, the commissioner’s letter did not say they were going to stop auditing the plans, just that they would stop enforcement of the 6707A penalties. Also not mentioned is a cessation of enforcement of other sections of the tax code, in particular section 4965, Excise tax on certain tax-exempt entities entering into prohibited tax shelter transactions, which provides for some pretty hefty penalties as well.

A couple points in closing. Presumably, if you have already been assessed these taxes, and paid, the future legislation will allow for refunds of the payments. If not there will probably be some good arguments in equity for you to get your money back. Also, I know a number of the readers are financial professionals. If you are trying to show CPAs and their clients that you really know your stuff, you should share this information with them immediately. In the last month I’ve been approached by a number of CPAs and a tax attorney looking for a solution from these confiscatory taxes, they now have a solution.

Until next time,

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