Blogging Employee Benefits

January 14, 2006

Last Chance for Tax Abuse Settlement

Filed under: IRS — Fuguerre @ 4:44 pm

[T]axpayers should not expect to receive a better offer in Appeals than the [settlement] initiative terms and they may, in fact, see a less favorable outcome.

The IRS is reminding taxpayers that January 23, 2006, is the deadline for electing participation in the agency’s tax abuse settlement program. The deadline will not be extended. [IR-2006-13]

Details of the settlement initiative are given in Announcement 2005-80 and Fact Sheet FS-2005-17. See also Announcement 2005-80 Transaction-Specific Settlement Provisions and FAQs published by the IRS regarding on the Announcement 2005-80 Settlement Initiative. Election to participate in the IRS settlement initiative is made via Form 13750.

Among the 21 transactions covered by the settlement initiative are several in which an employee benefits plan or executive compensation programs may have been involved –

  • Situation involving pension plan failure to satisfy nondiscrimination requirements due to differences in the value of participants’ rights to purchase life insurance contracts from the plan. See Rev.Rul. 2004-21.
  • Situation involving pension plan failure to satisfy IRC 412(i) where amounts accumulated under life insurance contracts and annuities held by the plan exceed benefits payable under plan terms; or where employer contributions to the pension plan are not currently deductible when used to pay premiums on life insurance contracts that provide for death benefits in excess of the participant’s death benefit under the plan terms. See Rev.Rul. 2004-20.
  • Transactions that involve segregating business profits of an ESOP-owned S corporation in a qualified subchapter S subsidiary so that rank-and-file employees do not benefit from participation in the ESOP. See Rev.Rul. 2004-4.
  • Certain arrangements involving transfer of ESOPs that hold stock in an S corporation for the purpose of claiming eligibility for the 409(p) delayed effective date. See Rev.Rul. 2003-6.
  • Certain management S corporation ESOP transactions. See item 21 under section 3 of Announcement 2005-80.
  • Stock compensation corporate tax shelters. See Notice 2000-60.
  • Tax problems raised by certain trust arrangements seeking qualification for exemption from IRC 419. See Notice 95-34.
  • Tax problems raised by certain trust arrangements seeking to qualify for the 419A(f)(5) exception for collectively bargained welfare benefit funds. See Notice 2003-24.
  • “Reimbursements” of employees for salary reduction amounts previously excluded from gross income under IRC 106; or “advance reimbursements” or “loans” without regard to whether an employee has incurred medical expenses. See Rev.Rul. 2002-3.
  • “Reimbursements” for parking expenses previously paid by an employer or previously paid by an employee through salary reduction. See Rev.Rul. 2004-98.

Also included among the transactions covered by the settlement initiative are abusive Roth IRA transactions. See Notice 2004-8.

The IRS points out that the recently enacted Gulf Opportunity Zone Act of 2005 modified the calculation of interest on tax deficiencies, assessing intrest continuously on additional taxes involving abusive tax shelters, from the tax return filing through payment of the taxes. A one-time exception from the additional interest charge is available for transactions brought in through the IRS settlement initiative and subsequently resolved by a closing agreement with the agency. Taxpayers who bypass the settlement initiative and work through Appeals will not qualify for the exception, rather would incur the full interest charge on tax deficiencies.

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