Showing posts with label tax reduction. Show all posts
Showing posts with label tax reduction. Show all posts
Tax Reduction
Every business owner thinks he pays too much in taxes, and in reality, most actually do. These days your accountant has to "play it safe". This is not reducing your tax bill.
Many times a tax preparer's work on a typical return is subject to 'interpretations' of the tax code. New legislation may force preparers who hope to lower a client's tax bill to be less aggressive with respect to these interpretations, or else they may risk substantially increased penalties.
Furthermore, if a tax preparer's client insists on an aggressive deduction, the preparer may include a form explaining the circumstances. This could eliminate the potential preparer penalty, but it is a certain red flag for the IRS.
This should anger taxpayers who feel strongly about particular deductions. What's more, these penalties do not apply to taxpayers preparing their own returns. This could prompt a taxpayer to tell a preparer: "who needs you; I'll do it myself". The remainder of this article explains why your accountant is reluctant to be aggressive anymore, and is less likely to give you the benefit of the doubt on tax deductions.
The new law alters the standard from a "realistic possibility" that a preparer's position will be sustained to a "more likely than not" standard, or more than 50% likelihood.
Instead of paying just $250 if an interpretation is disallowed, the preparer will now be penalized the greater of $1000 or half the income derived by the preparer. Thus, if a preparer charges $500 to do a routine 1040, he or she faces losing the income on two such returns, and if "willful or reckless conduct" is found, the penalty jumps from $1000 to the greater of $5000 or half the income derived by the tax preparer. But if the taxpayer prepares his or her own return, these "crimes" may bring absolutely no penalty.
Another new wrinkle not sitting well with preparers expands these penalties beyond income tax returns to other tax work: estate & gift tax returns, excise tax returns, exempt organization returns, and employment tax returns.
If an accountant allows a taxpayer to deduct what the accountant may think is a listed transaction, the accountant has to file a form with the IRS to alleviate a potential $200,000 penalty to the accountant. This form is likely to get the business owner audited. So what does the business owner do? He can forget about the deduction, prepare his own return, or he can retain an accountant that is not afraid to fight with the IRS. Unfortunately, all of these options are difficult or worse. The tax code is complex and very few accountants understand most of it. And the IRS has recently made the accountant a policeman. Most accountants are honest, knowledgeable and cautious. They try to do what is best for their clients, but the IRS has recently made that almost impossible. Also, every year, the tax laws are changed to one extent or another, and accountants are constantly challenged to remain current, knowledgeable, and proficient.
In light of this, you may want to test your accountant's knowledge. You may want to ask him the following questions:
1) Why haven't I been using a 412(e)(3) plan or a captive insurance company to reduce my taxes and other expenses?
2) Why haven't I been using a VEBA to reduce my health insurance costs?
3) Am I a good candidate for a double K to reduce my taxes and provide security for my retirement?
4) What strategies do you have whereby I can legally deduct the cost of my life insurance?
5) Why haven't you given me a copy of the IRS industry specialization report (which can be obtained free from the IRS) which shows the items that the IRS will be looking at in my industry, both with respect to who will be audited and what will be looked at in an audit, and will provide me with a lot of other useful information?
6) Am I currently using any strategies that the IRS considers abusive?
I would be willing to bet that your accountant has little or no knowledge of the above (6) items.
Lance Wallach is a frequent speaker at national conventions and writes for more than 50 publications. He was the National Society of Accountants Speaker of the Year. Lance welcomes your contact. Email - lawallach@aol.com or call 516-938-5007 for more info.
The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.
Many times a tax preparer's work on a typical return is subject to 'interpretations' of the tax code. New legislation may force preparers who hope to lower a client's tax bill to be less aggressive with respect to these interpretations, or else they may risk substantially increased penalties.
Furthermore, if a tax preparer's client insists on an aggressive deduction, the preparer may include a form explaining the circumstances. This could eliminate the potential preparer penalty, but it is a certain red flag for the IRS.
This should anger taxpayers who feel strongly about particular deductions. What's more, these penalties do not apply to taxpayers preparing their own returns. This could prompt a taxpayer to tell a preparer: "who needs you; I'll do it myself". The remainder of this article explains why your accountant is reluctant to be aggressive anymore, and is less likely to give you the benefit of the doubt on tax deductions.
The new law alters the standard from a "realistic possibility" that a preparer's position will be sustained to a "more likely than not" standard, or more than 50% likelihood.
Instead of paying just $250 if an interpretation is disallowed, the preparer will now be penalized the greater of $1000 or half the income derived by the preparer. Thus, if a preparer charges $500 to do a routine 1040, he or she faces losing the income on two such returns, and if "willful or reckless conduct" is found, the penalty jumps from $1000 to the greater of $5000 or half the income derived by the tax preparer. But if the taxpayer prepares his or her own return, these "crimes" may bring absolutely no penalty.
Another new wrinkle not sitting well with preparers expands these penalties beyond income tax returns to other tax work: estate & gift tax returns, excise tax returns, exempt organization returns, and employment tax returns.
If an accountant allows a taxpayer to deduct what the accountant may think is a listed transaction, the accountant has to file a form with the IRS to alleviate a potential $200,000 penalty to the accountant. This form is likely to get the business owner audited. So what does the business owner do? He can forget about the deduction, prepare his own return, or he can retain an accountant that is not afraid to fight with the IRS. Unfortunately, all of these options are difficult or worse. The tax code is complex and very few accountants understand most of it. And the IRS has recently made the accountant a policeman. Most accountants are honest, knowledgeable and cautious. They try to do what is best for their clients, but the IRS has recently made that almost impossible. Also, every year, the tax laws are changed to one extent or another, and accountants are constantly challenged to remain current, knowledgeable, and proficient.
In light of this, you may want to test your accountant's knowledge. You may want to ask him the following questions:
1) Why haven't I been using a 412(e)(3) plan or a captive insurance company to reduce my taxes and other expenses?
2) Why haven't I been using a VEBA to reduce my health insurance costs?
3) Am I a good candidate for a double K to reduce my taxes and provide security for my retirement?
4) What strategies do you have whereby I can legally deduct the cost of my life insurance?
5) Why haven't you given me a copy of the IRS industry specialization report (which can be obtained free from the IRS) which shows the items that the IRS will be looking at in my industry, both with respect to who will be audited and what will be looked at in an audit, and will provide me with a lot of other useful information?
6) Am I currently using any strategies that the IRS considers abusive?
I would be willing to bet that your accountant has little or no knowledge of the above (6) items.
Lance Wallach is a frequent speaker at national conventions and writes for more than 50 publications. He was the National Society of Accountants Speaker of the Year. Lance welcomes your contact. Email - lawallach@aol.com or call 516-938-5007 for more info.
The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.
Captive Insurance and Other Tax Reduction Strategies – The Good, Bad, and Ugly
Every accountant knows that increased cash flow and cost savings are critical for businesses . What is uncertain is the best path to recommend garnering these benefits.
Over the past decade business owners have been overwhelmed by a plethora of choices designed to reduce the cost of providing employee benefits while increasing their own retirement savings. The solutions ranged from traditional pension and profit sharing plans to more advanced strategies.
Some strategies, such as IRS section 419 and 412(i) plans, used life insurance as vehicles to bring about benefits. Unfortunately, the high life insurance commissions (often 90% of the contribution, or more) fostered an environment that led to aggressive and noncompliant plans.
The result has been thousands of audits and an IRS task force seeking out tax shelter promotion. For unknowing clients, the tax consequences are enormous. For their accountant advisors, the liability may be equally extreme.
Recently, there has been an explosion in the marketing of a financial product called Captive Insurance. These so called “Captives” are typically small insurance companies designed to insure the risks of an individual business under IRS code section 831(b). When properly designed, a business can make tax-deductible premium payments to a related-party insurance company. Depending on circumstances, underwriting profits, if any, can be paid out to the owners as dividends, and profits from liquidation of the company may be taxed as capital gains.
While captives can be a great cost saving tool, they also are expensive to build and manage. Also, captives are allowed to garner tax benefits because they operate as real insurance companies. Advisors and business owners who misuse captives or market them as estate planning tools, asset protection vehicles, tax deferral or other benefits not related to the true business purpose of an insurance company face grave regulatory and tax consequences.
A recent concern is the integration of small captives with life insurance policies. Small captives under section 831(b) have no statutory authority to deduct life premiums. Also, if a small captive uses life insurance as an investment, the cash value of the life policy can be taxable at corporate rates, and then will be taxable again when distributed. The consequence of this double taxation is to devastate the efficacy of the life insurance, and it extends serious liability to any accountant who recommends the plan or even signs the tax return of the business that pays premiums to the captive.
The IRS is aware that several large insurance companies are promoting their life insurance policies as investments with small captives. The outcome looks eerily like that of the 419 and 412(i) plans mentioned above.
Remember, if something looks too good to be true, it usually is. There are safe and conservative ways to use captive insurance structures to lower costs and obtain benefits for businesses. And, some types of captive insurance products do have statutory protection for deducting life insurance premiums (although not 831(b) captives). Learning what works and is safe is the first step an accountant should take in helping his or her clients use these powerful, but highly technical insurance tools.
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 over fifty 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, lawallach@aol.com or visit www.vebaplan.com.
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.
Over the past decade business owners have been overwhelmed by a plethora of choices designed to reduce the cost of providing employee benefits while increasing their own retirement savings. The solutions ranged from traditional pension and profit sharing plans to more advanced strategies.
Some strategies, such as IRS section 419 and 412(i) plans, used life insurance as vehicles to bring about benefits. Unfortunately, the high life insurance commissions (often 90% of the contribution, or more) fostered an environment that led to aggressive and noncompliant plans.
The result has been thousands of audits and an IRS task force seeking out tax shelter promotion. For unknowing clients, the tax consequences are enormous. For their accountant advisors, the liability may be equally extreme.
Recently, there has been an explosion in the marketing of a financial product called Captive Insurance. These so called “Captives” are typically small insurance companies designed to insure the risks of an individual business under IRS code section 831(b). When properly designed, a business can make tax-deductible premium payments to a related-party insurance company. Depending on circumstances, underwriting profits, if any, can be paid out to the owners as dividends, and profits from liquidation of the company may be taxed as capital gains.
While captives can be a great cost saving tool, they also are expensive to build and manage. Also, captives are allowed to garner tax benefits because they operate as real insurance companies. Advisors and business owners who misuse captives or market them as estate planning tools, asset protection vehicles, tax deferral or other benefits not related to the true business purpose of an insurance company face grave regulatory and tax consequences.
A recent concern is the integration of small captives with life insurance policies. Small captives under section 831(b) have no statutory authority to deduct life premiums. Also, if a small captive uses life insurance as an investment, the cash value of the life policy can be taxable at corporate rates, and then will be taxable again when distributed. The consequence of this double taxation is to devastate the efficacy of the life insurance, and it extends serious liability to any accountant who recommends the plan or even signs the tax return of the business that pays premiums to the captive.
The IRS is aware that several large insurance companies are promoting their life insurance policies as investments with small captives. The outcome looks eerily like that of the 419 and 412(i) plans mentioned above.
Remember, if something looks too good to be true, it usually is. There are safe and conservative ways to use captive insurance structures to lower costs and obtain benefits for businesses. And, some types of captive insurance products do have statutory protection for deducting life insurance premiums (although not 831(b) captives). Learning what works and is safe is the first step an accountant should take in helping his or her clients use these powerful, but highly technical insurance tools.
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 over fifty 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, lawallach@aol.com or visit www.vebaplan.com.
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.
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