Any taxpayer participating in a multiple or single employer 419 plan or a 79 plan using cash value life insurance should consider whether to file IRS Form 8886 with their 2013 tax returns. See IRS Notice 2007-83.
The IRS rules provide that any taxpayer who “participates” in a transaction for a year has an obligation to file IRS Form 8886. If a taxpayer has an obligation to file and fails to file timely, the taxpayer will be subject to a penalty under IRC 6707A that is the greater of 75% of the tax benefit shown on the return and the minimum penalty ($5,000 for individuals and $10,000 for businesses). An owner of an S Corporation would be subject to two penatlies, $10,000 at the S Corporation level and a penalty at the personal level.
Sometimes promoters discourage taxpayers from filing Form 8886 as they fear it will create IRS interest in a promoter audit. Accordingly, taxpayers should seek independent advice as to whether their transaction may be treated as a “listed transaction” and if so, whether they have an obligation to file.
Taxpayers should also consider whether they have an obligation to file Forms 8886 for past years. Although the filing of past-due forms will not eliminate the failure to file penalty, it will start the statute of limitations which otherwise may remain open indefinitely under IRC 6501(c)(10).