The Internal Revenue Service has recently been auditing 412(i) defined-benefit pension plans.
They are seeking substantial taxes and penalties from what they characterize as "abusive plans," but they do not regard all 412(i) plans as necessarily abusive. A properly structured and administered 412(i) plan can be an invaluable tax reduction tool for a business, but care must be taken.
In addition, the IRS is stepping up its examinations of companies' retirement plans this year, aiming to catch those that are cheating their workers or the government, and to ensure that the plans meet federal regulations. The offerings to be examined include traditional pensions, 401(k)s and profit-sharing plans.
A few years ago, when I spoke at the national convention of the American Society of Pension Professionals and Actuaries about VEBAs, the IRS spoke about their 412(i) concerns. Since then, they have escalated their challenges to "abusive" 412(i) plans. In fact, certain plans are on the IRS list of abusive tax transactions.
Taxpayers who participate in "listed transactions" are required to report them to the IRS or face substantial penalties ($100,000 in the case of individuals, and $200,000 in the case of entities). In addition, "material advisors" to these plans are required to maintain certain records and turn them over to the IRS on demand.
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