BenistarAbuses.com
Benistar
Benistar 419 Plan
Grist Mill Trust
Nova
Niche
Sea Nine Veba
SADI Trust
Beta 419
Millennium
Bisys
Creative Services Group
Sterling Benefit Plan
Compass 419
Niche 419
CRESP
American Benefits Trust
National Benefit Plan and Trust
ABT
Professional Benefits Trust
Old Mutual
Allmerica Financial
American Heritage Life
Commercial Union Life
National Life of Vermont
Old Line Life
Security Mutual Life
West Coast Life
ECI Pension Services
Pension Professionals of America
ABI
Hartford
AIG
Indy Life
Indianapolis Life
Advantage
Jacksom National
Jefferson-Pilot Life
Lincoln Benefit Life
Lincoln National Life
Manufacturers Life
Massachusetts Mutual
Metropolitan Life
Midland Life
Minnesota Mutual
Principal Life
Reliastar
Security Mutual
USG Annuity & Life
Western Reserve Life Assurance
Old Mutual
Allmerica Financial
American Heritage Life
Commercial Union Life
National Life of Vermont
Old Line Life
Security Mutual Life
West Coast Life
Benistar 419 Plan
Grist Mill Trust
Nova
Niche
Sea Nine Veba
SADI Trust
Beta 419
Millennium
Bisys
Creative Services Group
Sterling Benefit Plan
Compass 419
Niche 419
CRESP
American Benefits Trust
National Benefit Plan and Trust
ABT
Professional Benefits Trust
Old Mutual
Allmerica Financial
American Heritage Life
Commercial Union Life
National Life of Vermont
Old Line Life
Security Mutual Life
West Coast Life
ECI Pension Services
Pension Professionals of America
ABI
Hartford
AIG
Indy Life
Indianapolis Life
Advantage
Jacksom National
Jefferson-Pilot Life
Lincoln Benefit Life
Lincoln National Life
Manufacturers Life
Massachusetts Mutual
Metropolitan Life
Midland Life
Minnesota Mutual
Principal Life
Reliastar
Security Mutual
USG Annuity & Life
Western Reserve Life Assurance
Old Mutual
Allmerica Financial
American Heritage Life
Commercial Union Life
National Life of Vermont
Old Line Life
Security Mutual Life
West Coast Life
For Help With Any of These:
Call 516-938-5007
For more articles on this subject and closely
related topics go to any of these websites:
listedtransactions.com
reportabletransaction.com
section79plan.org
IRS6707Apenalty.com
IRSform8886.com
 |  |  |  |
United States District Court,
District of Massachusetts
IANTOSCA LLC v. STEP
PLAN SERVICES INC 419 LLC
Prejudgement Summary
Court Cases on the Rise
Judicial Review (McGehee)
District of Massachusetts
IANTOSCA LLC v. STEP
PLAN SERVICES INC 419 LLC
Prejudgement Summary
Court Cases on the Rise
Judicial Review (McGehee)
Court Case Research
accountingTODAY The dangers of being "listed" A warning for 419, 412i, Sec.79 and captive insurance Accounting Today: October 25, 2010 By: Lance Wallach Taxpayers who previously adopted 419, 412i, captive insurance or Section 79 plans are in big trouble. In recent years, the IRS has identified many of these arrangements as abusive devices to funnel tax deductible dollars to shareholders and classified these arrangements as "listed transactions." These plans were sold by insurance agents, financial planners, accountants and attorneys seeking large life insurance commissions. In general, taxpayers who engage in a "listed transaction" must report such transaction to the IRS on Form 8886 every year that they "participate" in the transaction, and you do not necessarily have to make a contribution or claim a tax deduction to participate. Section 6707A of the Code imposes severe penalties ($200,000 for a business and $100,000 for an individual) for failure to file Form 8886 with respect to a listed transaction. But you are also in trouble if you file incorrectly. I have received numerous phone calls from business owners who filed and still got fined. Not only do you have to file Form 8886, but it has to be prepared correctly. I only know of two people in the United States who have filed these forms properly for clients. They tell me that was after hundreds of hours of research and over fifty phones calls to various IRS personnel. The filing instructions for Form 8886 presume a timely filing. Most people file late and follow the directions for currently preparing the forms. Then the IRS fines the business owner. The tax court does not have jurisdiction to abate or lower such penalties imposed by the IRS. Many business owners adopted 412i, 419, captive insurance and Section 79 plans based upon representations provided by insurance professionals that the plans were legitimate plans and were not informed that they were engaging in a listed transaction. Upon audit, these taxpayers were shocked when the IRS asserted penalties under Section 6707A of the Code in the hundreds of thousands of dollars. Numerous complaints from these taxpayers caused Congress to impose a moratorium on assessment of Section 6707A penalties. The moratorium on IRS fines expired on June 1, 2010. The IRS immediately started sending out notices proposing the imposition of Section 6707A penalties along with requests for lengthy extensions of the Statute of Limitations for the purpose of assessing tax. Many of these taxpayers stopped taking deductions for contributions to these plans years ago, and are confused and upset by the IRS's inquiry, especially when the taxpayer had previously reached a monetary settlement with the IRS regarding its deductions. Logic and common sense dictate that a penalty should not apply if the taxpayer no longer benefits from the arrangement. Treas. Reg. Sec. 1.6011-4(c)(3)(i) provides that a taxpayer has participated in a listed transaction if the taxpayer's tax return reflects tax consequences or a tax strategy described in the published guidance identifying the transaction as a listed transaction or a transaction that is the same or substantially similar to a listed transaction. Clearly, the primary benefit in the participation of these plans is the large tax deduction generated by such participation. It follows that taxpayers who no longer enjoy the benefit of those large deductions are no longer "participating ' in the listed transaction. But that is not the end of the story. Many taxpayers who are no longer taking current tax deductions for these plans continue to enjoy the benefit of previous tax deductions by continuing the deferral of income from contributions and deductions taken in prior years. While the regulations do not expand on what constitutes "reflecting the tax consequences of the strategy", it could be argued that continued benefit from a tax deferral for a previous tax deduction is within the contemplation of a "tax consequence" of the plan strategy. Also, many taxpayers who no longer make contributions or claim tax deductions continue to pay administrative fees. Sometimes, money is taken from the plan to pay premiums to keep life insurance policies in force. In these ways, it could be argued that these taxpayers are still "contributing", and thus still must file Form 8886. It is clear that the extent to which a taxpayer benefits from the transaction depends on the purpose of a particular transaction as described in the published guidance that caused such transaction to be a listed transaction. Revenue Ruling 2004-20 which classifies 419(e) transactions, appears to be concerned with the employer's contribution/deduction amount rather than the continued deferral of the income in previous years. This language may provide the taxpayer with a solid argument in the event of an audit. Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters. He writes about 412(i), 419, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Pubic Radio's All Things Considered, and others. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education's CPA's Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxaudit419.com or www.listedtransactions.com. The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice. |
IRS Audits Focus on Captive Insurance Plans
April 2011 Edition
By Lance Wallach
The IRS started auditing § 419 plans in the 1990s, and then continued
going after § 412(i) and other plans that they considered abusive, listed, or
reportable transactions, or substantially similar to such transactions. If an
IRS audit disallows the § 419 plan or the § 412(i) plan, not only does the
taxpayer lose the deduction and pay interest and penalties, but then the IRS
comes back under IRC 6707A and imposes large fines for not properly filing.
Insurance agents, financial planners and even accountants sold many of
these plans. The main motivations for buying into one were large tax
deductions. The motivation for the sellers of the plans was the very large life
insurance premiums generated. These plans, which were vetted by the
insurance companies, put lots of insurance on the books. Some of these
plans continue to be sold, even after IRS disallowances and lawsuits against
insurance agents, plan promoters and insurance companies.
In a recent tax court case, Curcio v. Commissioner (TC Memo 2010-115),
the tax court ruled that an investment in an employee welfare benefit plan
marketed under the name “Benistar” was a listed transaction in that the
transaction in question was substantially similar to the transaction described
in IRS Notice 95-34. A subsequent case, McGehee Family Clinic, largely
followed Curcio, though it was technically decided on other grounds. The
parties stipulated to be bound by Curcio on the issue of whether the
amounts paid by McGehee in connection with the Benistar 419 Plan and
Trust were deductible. Curcio did not appear to have been decided yet at
the time McGehee was argued. The McGehee opinion (Case No. 10-102,
United States Tax Court, September 15, 2010) does contain an exhaustive
analysis and discussion of virtually all of the relevant issues.
Taxpayers and their representatives should be aware that the IRS has
disallowed deductions for contributions to these arrangements. The IRS is
cracking down on small business owners who participate in tax reduction
insurance plans and the brokers who sold them. Some of these plans
include defined benefit retirement plans, IRAs, or even 401(k) plans with life
insurance.
In order to fully grasp the severity of the situation, one must have an
understanding of IRS Notice 95-34, which was issued in response to trust
arrangements sold to companies that were designed to provide deductible
benefits such as life insurance, disability and severance pay benefits. The
promoters of these arrangements claimed that all employer contributions
were tax-deductible when paid, by relying on the 10-or-more-employer
exemption from the IRC § 419 limits. It was claimed that permissible tax
deductions were unlimited in amount.
In general, contributions to a welfare benefit fund are not fully deductible
when paid. Sections 419 and 419A impose strict limits on the amount of tax-
deductible prefunding permitted for contributions to a welfare benefit fund.
Section 419A(F)(6) provides an exemption from § 419 and § 419A for
certain “10-or-more employers” welfare benefit funds. In general, for this
exemption to apply, the fund must have more than one contributing
employer, of which no single employer can contribute more than 10 percent
of the total contributions, and the plan must not be experience-rated with
respect to individual employers.
According to the Notice, these arrangements typically involve an investment
in variable life or universal life insurance contracts on the lives of the
covered employees. The problem is that the employer contributions are
large relative to the cost of the amount of term insurance that would be
required to provide the death benefits under the arrangement, and the trust
administrator may obtain cash to pay benefits other than death benefits, by
such means as cashing in or withdrawing the cash value of the insurance
policies. The plans are also often designed so that a particular employer’s
contributions or its employees’ benefits may be determined in a way that
insulates the employer to a significant extent from the experience of other
subscribing employers. In general, the contributions and claimed tax
deductions tend to be disproportionate to the economic realities of the
arrangements.
Benistar advertised that enrollees should expect to obtain the same type of
tax benefits as listed in the transaction described in Notice 95-34. The
benefits of enrollment listed in its advertising packet included:
· Virtually unlimited deductions for the employer;
· Contributions could vary from year to year;
· Benefits could be provided to one or more key executives on a
selective basis;
· No need to provide benefits to rank-and-file employees;
· Contributions to the plan were not limited by qualified plan rules and
would not interfere with pension, profit sharing or 401(k) plans;
· Funds inside the plan would accumulate tax-free;
· Beneficiaries could receive death proceeds free of both income tax
and estate tax;
· The program could be arranged for tax-free distribution at a later date;
· Funds in the plan were secure from the hands of creditors.
The Court said that the Benistar Plan was factually similar to the plans
described in Notice 95-34 at all relevant times.
In rendering its decision the court heavily cited Curcio, in which the court
also ruled in favor of the IRS. As noted in Curcio, the insurance policies,
overwhelmingly variable or universal life policies, required large
contributions relative to the cost of the amount of term insurance that would
be required to provide the death benefits under the arrangement. The
Benistar Plan owned the insurance contracts.
Following Curcio, as the Court has stipulated, the Court held that the
contributions to Benistar were not deductible under § 162(a) because
participants could receive the value reflected in the underlying insurance
policies purchased by Benistar—despite the payment of benefits by
Benistar seeming to be contingent upon an unanticipated event (the death
of the insured while employed). As long as plan participants were willing to
abide by Benistar’s distribution policies, there was no reason ever to forfeit
a policy to the plan. In fact, in estimating life insurance rates, the taxpayers’
expert in Curcio assumed that there would be no forfeitures, even though
he admitted that an insurance company would generally assume a
reasonable rate of policy lapses.
The McGehee Family Clinic had enrolled in the Benistar Plan in May 2001
and claimed deductions for contributions to it in 2002 and 2005. The returns
did not include a Form 8886, Reportable Transaction Disclosure Statement,
or similar disclosure.
The IRS disallowed the latter deduction and adjusted the 2004 return of
shareholder Robert Prosser and his wife to include the $50,000 payment to
the plan. The IRS also assessed tax deficiencies and the enhanced 30
percent penalty totaling almost $21,000 against the clinic and $21,000
against the Prossers. The court ruled that the Prossers failed to prove a
reasonable cause or good faith exception.
Other important facts:
· In recent years, some § 412(i) plans have been funded with life
insurance using face amounts in excess of the maximum death benefit a
qualified plan is permitted to pay. Ideally, the plan should limit the proceeds
that can be paid as a death benefit in the event of a participant’s death.
Excess amounts would revert to the plan. Effective February 13, 2004, the
purchase of excessive life insurance in any plan is considered a listed
transaction if the face amount of the insurance exceeds the amount that can
be issued by $100,000 or more and the employer has deducted the
premiums for the insurance.
· A 412(i) plan in and of itself is not a listed transaction; however, the
IRS has a task force auditing 412(i) plans.
· An employer has not engaged in a listed transaction simply because it
is a 412(i) plan.
· Just because a 412(i) plan was audited and sanctioned for certain
items, does not necessarily mean the plan engaged in a listed transaction.
Some 412(i) plans have been audited and sanctioned for issues not related
to listed transactions.
Companies should carefully evaluate proposed investments in plans such
as the Benistar Plan. The claimed deductions will not be available, and
penalties will be assessed for lack of disclosure if the investment is similar to
the investments described in Notice 95-34. In addition, under IRC 6707A,
IRS fines participants a large amount of money for not properly disclosing
their participation in listed, reportable or similar transactions; an issue that
was not before the tax court in either Curcio or McGehee. The disclosure
needs to be made for every year the participant is in a plan. The forms
need to be properly filed even for years that no contributions are made. I
have received numerous calls from participants who did disclose and still
got fined because the forms were not filled in properly. A plan administrator
told me that he assisted hundreds of his participants with filing forms, and
they still all received very large IRS fines for not properly filling in the forms.
IRS has targeted all 419 welfare benefit plans, many 412(i) retirement plans,
captive insurance plans with life insurance in them and Section 79 plans.
Lance Wallach, National Society of Accountants Speaker of the Year and
member of the American Institute of CPAs faculty of teaching professionals,
is a frequent speaker on retirement plans, financial and estate planning,
and abusive tax shelters. He speaks at more than ten conventions annually
and writes for over fifty publications. Lance has written numerous books
including Protecting Clients from Fraud, Incompetence and Scams
published by John Wiley and Sons, Bisk Education's CPA's Guide to Life
Insurance and Federal Estate and Gift Taxation, as well as AICPA best-
selling books, including Avoiding Circular 230 Malpractice Traps and
Common Abusive Small Business Hot Spots. He does expert witness
testimony and has never lost a case. Mr. Wallach may be reached at
516/938.5007, wallachinc@gmail.com, or at www.taxaudit419.com or www.
lancewallach.com.
The information provided herein is not intended as legal, accounting,
financial or any type of advice for any specific individual or other entity. You
should contact an appropriate professional for any such advice.
California Broker, June 2011
Employee Retirement Plans
By Lance Wallach
412i, 419, Captive Insurance and Section 79
Plans; Buyer Beware
The IRS has been attacking all 419 welfare benefit plans, many 412i
retirement plans, captive insurance plans with life insurance in them,
and Section 79 plans. IRS is aggressively auditing various plans
and calling them “listed transactions,” “abusive tax shelters,” or
“reportable transactions,” participation in any of which must be
disclosed to the Service. The result has been IRS audits,
disallowances, and huge fines for not properly reporting under IRC
6707A. Read More Here.
Employee Retirement Plans
By Lance Wallach
412i, 419, Captive Insurance and Section 79
Plans; Buyer Beware
The IRS has been attacking all 419 welfare benefit plans, many 412i
retirement plans, captive insurance plans with life insurance in them,
and Section 79 plans. IRS is aggressively auditing various plans
and calling them “listed transactions,” “abusive tax shelters,” or
“reportable transactions,” participation in any of which must be
disclosed to the Service. The result has been IRS audits,
disallowances, and huge fines for not properly reporting under IRC
6707A. Read More Here.
Retirement Today Sept 2011
Lance Wallach
Did you get a letter from the IRS threatening to impose this fine? If you haven’t
already, you still may. Consider yourself lucky if you have not because this means
that you have more time to straighten this situation out. Do not wait for this letter to
come from the IRS before you call an expert to help you. Even if you have been
audited already, you could still get the letter and/or fine. One has nothing to do with
the other, and once the fine has been imposed, it is not able to be appealed.
Many businesses that participated in a 412i retirement plan or the IRS is auditing a
419-welfare benefit plan. Many of these plans were not in compliance with the law
and are considered abusive tax shelters. Many business owners are not even
aware that the welfare benefit plan or retirement plan that they are participating in
may be an abusive tax shelter and that they are in serious jeopardy of huge IRS
penalties for each year that they have been in this type of plan.
Insurance companies, CPAs, sellers of these 419 welfare benefit plans or 412i
retirement plans, as well as anyone that gave tax advice or recommended
participation in one or more of these plans, also known as a material advisor, is in
danger of being sued, fined by the IRS, or both.
There is help available if you think you may be involved with one of these 419
welfare benefit plans, 412i retirement plans, or any abusive tax shelter. IRS penalty
abatement is an option if you act now. Feel free to contact me for more information.
www.lancewallach.com
Lance Wallach, National Society of Accountants Speaker of the Year and member
of the AICPA faculty of teaching professionals, is a frequent speaker on retirement
plans, abusive tax shelters, financial, international tax, and estate planning. He
writes about 412(i), 419, Section79, FBAR, and captive insurance plans. He speaks
at more than ten conventions annually, writes for over fifty publications, is quoted
regularly in the press and has been featured on television and radio financial talk
shows including NBC, National Pubic Radio’s All Things Considered, and others.
Lance has written numerous books including Protecting Clients from Fraud,
Incompetence and Scams published by John Wiley and Sons, Bisk Education’s
CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation, as well as the
AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and
Common Abusive Small Business Hot Spots. He does expert witness testimony
and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or
visit www.taxadvisorexpert.com.
The information provided herein is not intended as legal, accounting, financial or
any type of advice for any specific individual or other entity. You should contact an
appropriate professional for any such advice.
Lance Wallach
Did you get a letter from the IRS threatening to impose this fine? If you haven’t
already, you still may. Consider yourself lucky if you have not because this means
that you have more time to straighten this situation out. Do not wait for this letter to
come from the IRS before you call an expert to help you. Even if you have been
audited already, you could still get the letter and/or fine. One has nothing to do with
the other, and once the fine has been imposed, it is not able to be appealed.
Many businesses that participated in a 412i retirement plan or the IRS is auditing a
419-welfare benefit plan. Many of these plans were not in compliance with the law
and are considered abusive tax shelters. Many business owners are not even
aware that the welfare benefit plan or retirement plan that they are participating in
may be an abusive tax shelter and that they are in serious jeopardy of huge IRS
penalties for each year that they have been in this type of plan.
Insurance companies, CPAs, sellers of these 419 welfare benefit plans or 412i
retirement plans, as well as anyone that gave tax advice or recommended
participation in one or more of these plans, also known as a material advisor, is in
danger of being sued, fined by the IRS, or both.
There is help available if you think you may be involved with one of these 419
welfare benefit plans, 412i retirement plans, or any abusive tax shelter. IRS penalty
abatement is an option if you act now. Feel free to contact me for more information.
www.lancewallach.com
Lance Wallach, National Society of Accountants Speaker of the Year and member
of the AICPA faculty of teaching professionals, is a frequent speaker on retirement
plans, abusive tax shelters, financial, international tax, and estate planning. He
writes about 412(i), 419, Section79, FBAR, and captive insurance plans. He speaks
at more than ten conventions annually, writes for over fifty publications, is quoted
regularly in the press and has been featured on television and radio financial talk
shows including NBC, National Pubic Radio’s All Things Considered, and others.
Lance has written numerous books including Protecting Clients from Fraud,
Incompetence and Scams published by John Wiley and Sons, Bisk Education’s
CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation, as well as the
AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and
Common Abusive Small Business Hot Spots. He does expert witness testimony
and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or
visit www.taxadvisorexpert.com.
The information provided herein is not intended as legal, accounting, financial or
any type of advice for any specific individual or other entity. You should contact an
appropriate professional for any such advice.
Abusive Insurance, Welfare Benefit, and Retirement Plans
The A2Z Directory March 2011
Lance Wallach
The IRS has various task forces auditing all section 419, section 412(i), and other
plans that tend to be abusive. Most insurance agents sell these plans. The IRS is
looking to raise money and is not looking to correct plans or help taxpayers. The
IRS calls accountants, attorneys, and insurance agents “material advisors” and
also fines them the same amount, again unless the client’s participation in the
transaction is reported. An accountant is a material advisor if he signs the return or
gives advice and gets paid. More details can be found on http://www.irs.gov and
http://www.vebaplan.com.
Bruce Hink, who has given me written permission to use his name and
circumstances, is a perfect example of what the IRS is doing to unsuspecting
business owners. What follows is a story about how the IRS fines him each year
for being in what they called a listed transaction. Listed transactions can be found
at http://www.irs.gov. Also involved are what the IRS calls abusive plans or what it
refers to as substantially similar. Substantially similar to is very difficult to
understand, but the IRS seems to be saying, “If it looks like some other listed
transaction, the fines apply.” Also, I believe that the accountant who signed the tax
return and the insurance agent who sold the retirement plan will each be fined as
material advisors. We have received many calls for help from accountants,
attorneys, business owners, and insurance agents in similar situations. Don’t
think this will happen to you? It is happening to a lot of accountants and business
owners, because most of theses so-called listed, abusive, or insurance agents are
selling substantially similar plans. Recently I came across the case of Hink, a
small business owner who is facing thousands in IRS penalties for 2004 and 2005
because of his participation in a section 412(i) plan. (The penalties were
assessed under section 6707A.)
In 2002 an insurance agent representing a 100-year-old, well-established
insurance company suggested the owner start a pension plan. The owner was
given a portfolio of information from the insurance company, which was given to the
company’s outside CPA to review and give an opinion on. The CPA gave the plan
the green light and the plan was started. Contributions were made in 2003. The
plan administrator came out with amendments to the plan, based on new IRS
guidelines, in October 2004. The business owner’s insurance agent disappeared
in May 2005, before implementing the new guidelines from the administrator with
the insurance company. The business owner was left with a refund check from the
insurance company, a deduction claim on his 2004 tax return that had not been
applied, and no agent.
It took six months of making calls to the insurance company to get a new insurance
agent assigned. By then, the IRS had started an examination of the pension plan.
Asking advice from the CPA and a local attorney (who had no previous experience
in these cases) made matters worse, with a “big name” law firm being
recommended and additional legal fees being billed in three months. To make a
long story short, the audit stretched on for over 2 ½ years to examine a 2-year-old
pension with four participants and the 8,000 in contributions. During the audit, no
funds went to the insurance company, which was awaiting formal IRS approval on
restructuring the plan as a traditional defined benefit plan, which the administrator
had suggested and the IRS had indicated would be acceptable. In March 2008 the
business owner received a private e-mail apology from the IRS agent who headed
the examination, saying that her hands were tied and that she used to believe she
was correcting problems and helping taxpayers and not hurting people.
Could you or one of your clients be next?
To this point, I have focused, generally, on the horrors of running afoul of the IRS by
participating in a listed transaction, which includes various types of transactions
and the various fines that can be imposed on business owners and their advisors
who participate in, sell, or advice on these transactions. I happened to use, as an
example, someone in a section 412(i) plan, which was deemed to be a listed
transaction, pointing out the truly doleful consequences the person has suffered.
Others who fall into this trap, even unwittingly, can suffer the same fate.
Now let’s go into more detail about section 412(i) plans. This is important because
these defined benefit plans are popular and because few people think of retirement
plans as tax shelters or listed transactions. People therefore may get into serious
trouble in this area unwittingly, out of ignorance of the law, and, for the same
reason, many fail to take necessary and appropriate precautions. The IRS has
warned against the section 412(i) defined benefit pension plans, named for the
former code section governing them. It warned against trust arrangements it
deems abusive, some of which may be regarded as listed transactions. Falling
into that category can result in taxpayers having to disclose the participation under
pain of penalties. Targets also include some retirement plans.
One reason for the harsh treatment of some 412(i) plans is their discrimination in
favor of owners and key, highly compensated employees. Also, the IRS does not
consider the promised tax relief proportionate to the economic realities of the
transactions. In general, IRS auditors divide audited plan into those they consider
noncompliant and other they consider abusive. While the alternatives available to
the sponsor of noncompliant plan are problematic, it is frequently an option to keep
the plan alive in some form while simultaneously hoping to minimize the financial
fallout from penalties.
The sponsor of an abusive plan can expect to be treated more harshly than
participants. Although in some situation something can be salvaged, the
possibility is definitely on the table of having to treat the plan as if it never existed,
which of course triggers the full extent of back taxes, penalties, and interest on all
contributions that were made – not to mention leaving behind no retirement plan
whatsoever. Another plan the IRS is auditing is the section 419 plan. A few listed
transactions concern relatively common employee benefit plans the IRS has
deemed tax avoidance schemes or otherwise abusive. Perhaps some of the most
likely to crop up, especially in small-business returns, are the arrangements
purporting to allow the deductibility of premiums paid for life insurance under a
welfare benefit plan or section 419 plan. These plans have been sold by most
insurance agents and insurance companies.
Lance Wallach, National Society of Accountants Speaker of the Year and member
of the AICPA faculty of teaching professionals, is a frequent speaker on retirement
plans, abusive tax shelters, financial, international tax, and estate planning. He
writes about 412(i), 419, Section79, FBAR, and captive insurance plans. He speaks
at more than ten conventions annually, writes for over fifty publications, is quoted
regularly in the press and has been featured on television and radio financial talk
shows including NBC, National Pubic Radio’s All Things Considered, and others.
Lance has written numerous books including Protecting Clients from Fraud,
Incompetence and Scams published by John Wiley and Sons, Bisk Education’s
CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation, as well as the
AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and
Common Abusive Small Business Hot Spots. He does expert witness testimony
and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or
visit www.taxadvisorexpert.com.
The information provided herein is not intended as legal, accounting, financial or
any type of advice for any specific individual or other entity. You should contact an
appropriate professional for any such advice.
The A2Z Directory March 2011
Lance Wallach
The IRS has various task forces auditing all section 419, section 412(i), and other
plans that tend to be abusive. Most insurance agents sell these plans. The IRS is
looking to raise money and is not looking to correct plans or help taxpayers. The
IRS calls accountants, attorneys, and insurance agents “material advisors” and
also fines them the same amount, again unless the client’s participation in the
transaction is reported. An accountant is a material advisor if he signs the return or
gives advice and gets paid. More details can be found on http://www.irs.gov and
http://www.vebaplan.com.
Bruce Hink, who has given me written permission to use his name and
circumstances, is a perfect example of what the IRS is doing to unsuspecting
business owners. What follows is a story about how the IRS fines him each year
for being in what they called a listed transaction. Listed transactions can be found
at http://www.irs.gov. Also involved are what the IRS calls abusive plans or what it
refers to as substantially similar. Substantially similar to is very difficult to
understand, but the IRS seems to be saying, “If it looks like some other listed
transaction, the fines apply.” Also, I believe that the accountant who signed the tax
return and the insurance agent who sold the retirement plan will each be fined as
material advisors. We have received many calls for help from accountants,
attorneys, business owners, and insurance agents in similar situations. Don’t
think this will happen to you? It is happening to a lot of accountants and business
owners, because most of theses so-called listed, abusive, or insurance agents are
selling substantially similar plans. Recently I came across the case of Hink, a
small business owner who is facing thousands in IRS penalties for 2004 and 2005
because of his participation in a section 412(i) plan. (The penalties were
assessed under section 6707A.)
In 2002 an insurance agent representing a 100-year-old, well-established
insurance company suggested the owner start a pension plan. The owner was
given a portfolio of information from the insurance company, which was given to the
company’s outside CPA to review and give an opinion on. The CPA gave the plan
the green light and the plan was started. Contributions were made in 2003. The
plan administrator came out with amendments to the plan, based on new IRS
guidelines, in October 2004. The business owner’s insurance agent disappeared
in May 2005, before implementing the new guidelines from the administrator with
the insurance company. The business owner was left with a refund check from the
insurance company, a deduction claim on his 2004 tax return that had not been
applied, and no agent.
It took six months of making calls to the insurance company to get a new insurance
agent assigned. By then, the IRS had started an examination of the pension plan.
Asking advice from the CPA and a local attorney (who had no previous experience
in these cases) made matters worse, with a “big name” law firm being
recommended and additional legal fees being billed in three months. To make a
long story short, the audit stretched on for over 2 ½ years to examine a 2-year-old
pension with four participants and the 8,000 in contributions. During the audit, no
funds went to the insurance company, which was awaiting formal IRS approval on
restructuring the plan as a traditional defined benefit plan, which the administrator
had suggested and the IRS had indicated would be acceptable. In March 2008 the
business owner received a private e-mail apology from the IRS agent who headed
the examination, saying that her hands were tied and that she used to believe she
was correcting problems and helping taxpayers and not hurting people.
Could you or one of your clients be next?
To this point, I have focused, generally, on the horrors of running afoul of the IRS by
participating in a listed transaction, which includes various types of transactions
and the various fines that can be imposed on business owners and their advisors
who participate in, sell, or advice on these transactions. I happened to use, as an
example, someone in a section 412(i) plan, which was deemed to be a listed
transaction, pointing out the truly doleful consequences the person has suffered.
Others who fall into this trap, even unwittingly, can suffer the same fate.
Now let’s go into more detail about section 412(i) plans. This is important because
these defined benefit plans are popular and because few people think of retirement
plans as tax shelters or listed transactions. People therefore may get into serious
trouble in this area unwittingly, out of ignorance of the law, and, for the same
reason, many fail to take necessary and appropriate precautions. The IRS has
warned against the section 412(i) defined benefit pension plans, named for the
former code section governing them. It warned against trust arrangements it
deems abusive, some of which may be regarded as listed transactions. Falling
into that category can result in taxpayers having to disclose the participation under
pain of penalties. Targets also include some retirement plans.
One reason for the harsh treatment of some 412(i) plans is their discrimination in
favor of owners and key, highly compensated employees. Also, the IRS does not
consider the promised tax relief proportionate to the economic realities of the
transactions. In general, IRS auditors divide audited plan into those they consider
noncompliant and other they consider abusive. While the alternatives available to
the sponsor of noncompliant plan are problematic, it is frequently an option to keep
the plan alive in some form while simultaneously hoping to minimize the financial
fallout from penalties.
The sponsor of an abusive plan can expect to be treated more harshly than
participants. Although in some situation something can be salvaged, the
possibility is definitely on the table of having to treat the plan as if it never existed,
which of course triggers the full extent of back taxes, penalties, and interest on all
contributions that were made – not to mention leaving behind no retirement plan
whatsoever. Another plan the IRS is auditing is the section 419 plan. A few listed
transactions concern relatively common employee benefit plans the IRS has
deemed tax avoidance schemes or otherwise abusive. Perhaps some of the most
likely to crop up, especially in small-business returns, are the arrangements
purporting to allow the deductibility of premiums paid for life insurance under a
welfare benefit plan or section 419 plan. These plans have been sold by most
insurance agents and insurance companies.
Lance Wallach, National Society of Accountants Speaker of the Year and member
of the AICPA faculty of teaching professionals, is a frequent speaker on retirement
plans, abusive tax shelters, financial, international tax, and estate planning. He
writes about 412(i), 419, Section79, FBAR, and captive insurance plans. He speaks
at more than ten conventions annually, writes for over fifty publications, is quoted
regularly in the press and has been featured on television and radio financial talk
shows including NBC, National Pubic Radio’s All Things Considered, and others.
Lance has written numerous books including Protecting Clients from Fraud,
Incompetence and Scams published by John Wiley and Sons, Bisk Education’s
CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation, as well as the
AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and
Common Abusive Small Business Hot Spots. He does expert witness testimony
and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or
visit www.taxadvisorexpert.com.
The information provided herein is not intended as legal, accounting, financial or
any type of advice for any specific individual or other entity. You should contact an
appropriate professional for any such advice.
Small Business Retirement Plans Fuel
Litigation
Maryland Trial Lawyer
Dolan Media Newswires January
Small businesses facing audits and potentially huge tax penalties over certain types of
retirement plans are filing lawsuits against those who marketed, designed and sold the
plans. The 412(i) and 419(e) plans were marketed in the past several years as a way for
small business owners to set up retirement or welfare benefits plans while leveraging huge
tax savings, but the IRS put them on a list of abusive tax shelters and has more recently
focused audits on them.
The penalties for such transactions are extremely high and can pile up quickly.
There are business owners who owe taxes but have been assessed 2 million in penalties.
The existing cases involve many types of businesses, including doctors’ offices, dental
practices, grocery store owners, mortgage companies and restaurant owners. Some are
trying to negotiate with the IRS. Others are not waiting. A class action has been filed and
cases in several states are ongoing. The business owners claim that they were targeted by
insurance companies; and their agents to purchase the plans without any disclosure that the
IRS viewed the plans as abusive tax shelters. Other defendants include financial advisors
who recommended the plans, accountants who failed to fill out required tax forms and law
firms that drafted opinion letters legitimizing the plans, which were used as marketing tools.
A 412(i) plan is a form of defined benefit pension plan. A 419(e) plan is a similar type of
health and benefits plan. Typically, these were sold to small, privately held businesses with
fewer than 20 employees and several million dollars in gross revenues. What distinguished
a legitimate plan from the plans at issue were the life insurance policies used to fund them.
The employer would make large cash contributions in the form of insurance premiums,
deducting the entire amounts. The insurance policy was designed to have a “springing cash
value,” meaning that for the first 5-7 years it would have a near-zero cash value, and then
spring up in value.
Just before it sprung, the owner would purchase the policy from the trust at the low cash
value, thus making a tax-free transaction. After the cash value shot up, the owner could take
tax-free loans against it. Meanwhile, the insurance agents collected exorbitant commissions
on the premiums – 80 to 110 percent of the first year’s premium, which could exceed million.
Technically, the IRS’s problems with the plans were that the “springing cash” structure
disqualified them from being 412(i) plans and that the premiums, which dwarfed any payout
to a beneficiary, violated incidental death benefit rules.
Under §6707A of the Internal Revenue Code, once the IRS flags something as an abusive tax
shelter, or “listed transaction,” penalties are imposed per year for each failure to disclose it.
Another allegation is that businesses weren’t told that they had to file Form 8886, which
discloses a listed transaction.
According to Lance Wallach of Plainview, N.Y. (516-938-5007), who testifies as an expert in
cases involving the plans, the vast majority of accountants either did not file the forms for
their clients or did not fill them out correctly.
Because the IRS did not begin to focus audits on these types of plans until some years after
they became listed transactions, the penalties have already stacked up by the time of the
audits.
Another reason plaintiffs are going to court is that there are few alternatives – the penalties
are not appeasable and must be paid before filing an administrative claim for a refund.
The suits allege misrepresentation, fraud and other consumer claims. “In street language,
they lied,” said Peter Losavio, a plaintiffs’ attorney in Baton Rouge, La., who is investigating
several cases. So far they have had mixed results. Losavio said that the strength of an
individual case would depend on the disclosures made and what the sellers knew or should
have known about the risks.
In 2004, the IRS issued notices and revenue rulings indicating that the plans were listed
transactions. But plaintiffs’ lawyers allege that there were earlier signs that the plans ran
afoul of the tax laws, evidenced by the fact that the IRS is auditing plans that existed before
2004.
“Insurance companies were aware this was dancing a tightrope,” said William Noll, a tax
attorney in Malvern, Pa. “These plans were being scrutinized by the IRS at the same time
they were being promoted, but there wasn’t any disclosure of the scrutiny to unwitting
customers.”
A defense attorney, who represents benefits professionals in pending lawsuits, said the
main defense is that the plans complied with the regulations at the time and that “nobody can
predict the future.”
An employee benefits attorney who has settled several cases against insurance companies,
said that although the lost tax benefit is not recoverable, other damages include the hefty
commissions – which in one of his cases amounted to 400,000 the first year – as well as the
costs of handling the audit and filing amended tax returns.
Defying the individualized approach an attorney filed a class action in federal court against
four insurance companies claiming that they were aware that since the 1980s the IRS had
been calling the policies potentially abusive and that in 2002 the IRS gave lectures calling
the plans not just abusive but “criminal.” A judge dismissed the case against one of the
insurers that sold 412(i) plans.
The court said that the plaintiffs failed to show the statements made by the insurance
companies were fraudulent at the time they were made, because IRS statements prior to the
revenue rulings indicated that the agency may or may not take the position that the plans
were abusive. The attorney, whose suit also names law firm for its opinion letters approving
the plans, will appeal the dismissal to the 5th Circuit.
In a case that survived a similar motion to dismiss, a small business owner is suing
Hartford Insurance to recover a “seven-figure” sum in penalties and fees paid to the IRS. A
trial is expected in August.
But tax experts say the audits and penalties continue. “There’s a bit of a disconnect between
what members of Congress thought they meant by suspending collection and what is
happening in practice. Clients are still getting bills and threats of liens,” Wallach said.
“Thousands of business owners are being hit with million-dollar-plus fines. … The audits are
continuing and escalating. I just got four calls today,” he said. A bill has been introduced in
Congress to make the penalties less draconian, but nobody is expecting a magic bullet.
“From what we know, Congress is looking to make the penalties more proportionate to the
tax benefit received instead of a fixed amount.”
Lance Wallach can be reached at: WallachInc@gmail.com
For more information, please visit www.taxadvisorexperts.org Lance Wallach, National
Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching
professionals, is a frequent speaker on retirement plans, abusive tax shelters, financial,
international tax, and estate planning. He writes about 412(i), 419, Section79, FBAR, and
captive insurance plans. He speaks at more than ten conventions annually, writes for over
fifty publications, is quoted regularly in the press and has been featured on television and
radio financial talk shows including NBC, National Pubic Radio’s All Things Considered, and
others. Lance has written numerous books including Protecting Clients from Fraud,
Incompetence and Scams published by John Wiley and Sons, Bisk Education’s CPA’s Guide
to Life Insurance and Federal Estate and Gift Taxation, as well as the AICPA best-selling
books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small
Business Hot Spots. He does expert witness testimony and has never lost a case. Contact
him at 516.938.5007, wallachinc@gmail.com or visit www.taxadvisorexperts.com.
Lance Wallach
68 Keswick Lane
Plainview, NY 11803
Ph.: (516)938-5007
Fax: (516)938-6330 www.vebaplan.com
National Society of Accountants Speaker of The Year
The information provided herein is not intended as legal, accounting, financial or any type of
advice for any specific individual or other entity. You should contact an appropriate
professional for any such advice.