The Internal Revenue Service is trying to get some users of 412(i) defined benefit pension plans and 20 other tax-cutting vehicles to come to it before it goes after them.
Eligible taxpayers can make peace with the IRS by giving up on what the IRS says are “improperly claimed tax benefits” and, in some cases, paying a penalty, according to Joe Spires, author of the document describing the settlement program, IRS Announcement 2005-80.
Spire predicts in the announcement that the program will affect about 500 taxpayers.
Laurie Lewis, a senior vice president at the American Council of Life Insurers, Washington, says taxpayers who are eligible for the settlement program should talk to experienced tax advisors before deciding to participate.
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The IRS has not obtained court rulings indicating that some the categories of tax-saving vehicles included in the settlement program, such as certain types of 412(i) plans, are necessarily abusive, Lewis says.
In the case of the 412(i) plans affected, before a 2002 ruling came out, “there was never any guidance that [taxpayers] shouldn’t be doing this,” Lewis says.
Lewis says she is not sure whether all of the 412(i) plans whose sponsors would be eligible for the settlement program really have abusive plans.
Most of the categories of tax-saving vehicles included in the settlement program, such as “common trust fund straddle tax shelters,” have no connection with the insurance industry.
But the IRS settlement program announcement does refer to several tax-saving strategies involving use of Roth individual retirement arrangement transactions, charitable remainder trust distributions and employee stock ownership plans.