IRS 412(i) Audit Initiative: Are All the Plans Bad?
In the second case, the plan was funded exclusively with flexible premium annuity contracts – no life insurance of the type the IRS considers “abusive” (i.e., policies with high initial surrender charges). As in the first case, the carrier provided a rider to the contracts conforming them to the requirements of section 412(i). The annuity contracts were applied for in 2003, the first plan year, but were not signed and the first premiums were not paid until March of 2004. The insurance carrier has confirmed that the contract was in effect in 2003, per an oral binder given by the agent to the plan.
After more than 18 months of protracted discussion, provision of voluminous documentation and detailed analyses of the legal authorities and the facts of the case, the IRS has conceded all issues except for one: was the annuity contract in effect for the first year of the plan? We have pointed out that there is nothing in the Code or the regulations that requires that the annuity contract be signed or the premium paid before the end of the first plan year. The Code simply states that the contract must commence with the date the participant enters the plan, and the carrier is prepared to certify that this was the case. The contract commences when the carrier certifies that there is coverage, not upon the signing of the contract or the payment of the premium. Indeed, the 412(i) regulation specifically provides that premiums may be paid any time before lapse of the contract and that a payment made on the first payment date under the contract still meets the requirement even if that date is after the participant enters the plan. Thus, in our view, there is no legal support for the IRS position that the policy must be signed and the premium paid before the last day of the first plan year. Nevertheless, the IRS is proposing to disallow the deduction for the first plan year, and the case is headed to Appeals.
Conclusion Our purpose in presenting these two examples is not to suggest that the IRS is entirely wrong or that it is acting unreasonably in handling this audit initiative. As we noted at the outset, there certainly are plans that fail to comply with the 412(i) requirements and there are others that were abusive. And to its credit, the IRS has developed an approach that will permit most of the audits to be settled in a way that will preserve much of the original tax deductions and plan benefits.
That said, not every case is bad, and it is unfortunate that the IRS has failed to give its agents the discretion to close cases that clearly do not fall within either category.
IRS 412(i) Audit Initiative: Are All the Plans Bad?
ReplyDeleteIn the second case, the plan was funded exclusively with flexible premium annuity contracts – no life insurance of the type the IRS considers “abusive” (i.e., policies with high initial surrender charges). As in the first case, the carrier provided a rider to the contracts conforming them to the requirements of section 412(i). The annuity contracts were applied for in 2003, the first plan year, but were not signed and the first premiums were not paid until March of 2004. The insurance carrier has confirmed that the contract was in effect in 2003, per an oral binder given by the agent to the plan.
After more than 18 months of protracted discussion, provision of voluminous documentation and detailed analyses of the legal authorities and the facts of the case, the IRS has conceded all issues except for one: was the annuity contract in effect for the first year of the plan? We have pointed out that there is nothing in the Code or the regulations that requires that the annuity contract be signed or the premium paid before the end of the first plan year. The Code simply states that the contract must commence with the date the participant enters the plan, and the carrier is prepared to certify that this was the case. The contract commences when the carrier certifies that there is coverage, not upon the signing of the contract or the payment of the premium. Indeed, the 412(i) regulation specifically provides that premiums may be paid any time before lapse of the contract and that a payment made on the first payment date under the contract still meets the requirement even if that date is after the participant enters the plan. Thus, in our view, there is no legal support for the IRS position that the policy must be signed and the premium paid before the last day of the first plan year. Nevertheless, the IRS is proposing to disallow the deduction for the first plan year, and the case is headed to Appeals.
Conclusion
Our purpose in presenting these two examples is not to suggest that the IRS is entirely wrong or that it is acting unreasonably in handling this audit initiative. As we noted at the outset, there certainly are plans that fail to comply with the 412(i) requirements and there are others that were abusive. And to its credit, the IRS has developed an approach that will permit most of the audits to be settled in a way that will preserve much of the original tax deductions and plan benefits.
That said, not every case is bad, and it is unfortunate that the IRS has failed to give its agents the discretion to close cases that clearly do not fall within either category.