Taxpayers who participate in 419A(f)(6) multiple employer plans like the Sea Nine VEBA are often very discouraged to find the IRS applying multiple penalties for the failure to file a form that they had no reason to know was required. The form, IRS Form 8886 is required for all taxpayers who participate in a listed transaction such as a multiple employer welfare benefit plan (or 419 plan). The following example illustrates the penalties that can apply.
Assume we have an S corporation taxpayer who deducted $100,000 to a multiple employer 419 VEBA for years 2008, 2009 and 2010. The IRS audits the taxpayer and disallows the $100,000 deduction. In most cases, the IRS will provide for the adjustment at the individual 1040 level and other than some interest, the taxpayer will be in a position similar to if the transaction had not occurred. If, however, the taxpayer was not told to file Form 8886 for every year of participation and in fact did not file, the IRS asserts the following additional penalties:
- A $10,000 penalty at the S Corporation level for years 2008 – 2010 for the failure to file Form 8886. Total Penalty = $30,000. See Code Section 6707A.
- A penalty at the individual level of 75% of the tax benefit for years 2008-2010 for the failure to file Form 8886. This translates into a penalty of $26,250 for each year. Total Penalty = $78,750. See Code Section 6707A.
- An accuracy related penalty of 30% of the income tax adjustment for years 2008-2010. The worst part of this penalty is that if the taxpayer exercised due diligence and relied on an outside advisor, this penalty would normally be 20% of the tax and could be waived. However, because the Form 8886 was not filed, the penalty is 30% and cannot be waived. Total Penalty = $31,500. See Code Section 6662A.
- Grand Total of all Penalties = $140,250 (nearly 50% of the total investment)!
Taxpayers facing these penalties should seek representation with respect to defending their case before the IRS and considering responsibility for the penalty by other parties. Williams Coulson and Michael Lloyd have represented more than 400 taxpayers in audits before the IRS for participation in single and multiple employer 419 plans such as the Sea Nine VEBA, CJA Titanium and Prepare Plans, Cronin 419 and 79 Plans, Professional Benefit Trust (“PBT”) and Niche Plans. Williams Coulson also helps clients consider the sharing of these onerous penalties with responsible parties.