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You WILL Be Audited For Your Section 79 Plan Section 79 plans, listed transactions, reportable transactions, 419e, 412i, and captive insurance plans are all targets of IRS Auditors. Do you know the ins and outs of these plans enough to protect yourself or clients? We do, and we can help you too. You WILL be audited. It's just a matter of when. You need help and you need it now. Educate yourself here, then call for assistance. Your finances are at risk if you put off dealing with this problem. Call 516-935-7346 to speak with an expert today. |
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“ Dennis Cunning, Steve Toth, Michael Sonnenberg, Larry Bell, Scott Ridge, Randall Smith, Greg Roper, Tracy Sunderlage,“Grist Mill Trust” “Penn Mont” “Real Veba” “United Financial Group” “Kenny Hartstein” “Millennium Plan” Kenny Hartstein”
“Millennium Plan” “Lance Wallach” “412i litigation” “419 litigation” “tax shelter litigation” “tax shelter litigation expert witness” “investment fraud litigation” “investment fraud litigation expert witness” “abusive retirement plans”“tax shelter fraud” “abusive
welfare benefit plans”“expert witness tax and insurance” “expert witness insurance fraud” “expert witness 6707a” “sue insurance agent” “insurance agent lawsuit"“Bisys lawsuit” “Creative Services Group lawsuit” “Compass 419 lawsuit” “Niche 419 lawsuit”
“Sea Nine Veba”"Heritage Plan""Warren Trust""Joseph Donnelly"
“Millennium Plan” “Lance Wallach” “412i litigation” “419 litigation” “tax shelter litigation” “tax shelter litigation expert witness” “investment fraud litigation” “investment fraud litigation expert witness” “abusive retirement plans”“tax shelter fraud” “abusive
welfare benefit plans”“expert witness tax and insurance” “expert witness insurance fraud” “expert witness 6707a” “sue insurance agent” “insurance agent lawsuit"“Bisys lawsuit” “Creative Services Group lawsuit” “Compass 419 lawsuit” “Niche 419 lawsuit”
“Sea Nine Veba”"Heritage Plan""Warren Trust""Joseph Donnelly"
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Late breaking news: Large 419 plan Millennium files for Bankruptcy. Recent court cases and other developments have highlighted serious problems in plans, popularly know as Benistar, issued by Nova Benefit Plans of Simsbury, Connecticut. Recently unsealed IRS criminal case information now raises concerns with other plans as well. If you have any type plan issued b NOVA Benefit Plans, U.S. Benefits Group, Benefit Plan Advisors, Grist Mill trusts, Rex Insurance Service or Benistar, get help at once. You may be subject to an audit or in some cases, criminal prosecution. On November 17th, 59 pages of search warrant materials were unsealed in the Nova Benefit Plans litigation currently pending in the U.S. District Court for the District of Connecticut. According to these documents, the IRS believes that Nova is involved in a significant criminal conspiracy involving the crimes of Conspiracy to Impede the IRS and Assisting in the Preparation of False Income Tax Returns. Read the rest of the breaking news article here: Large 419 plan files for Bankruptcy |
IRS Audits 419, 412i, Captive Insurance Plans With Life Insurance, and Section 79 Scams
By Lance Wallach June 2011
The IRS started auditing 419 plans in the ‘90s, and then continued going after 412i and other plans that they considered
abusive, listed, or reportable transactions, or substantially similar to such transactions.
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 Service 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 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 Section 419 and Section 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% 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
section 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% 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.
More you should know:
* In recent years, some section 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 412i 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
file forms, and they still all received very large IRS fines for not properly filling in the forms.
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.
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, lawallach@aol.com or visit www.vebaplan.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.
By Lance Wallach June 2011
The IRS started auditing 419 plans in the ‘90s, and then continued going after 412i and other plans that they considered
abusive, listed, or reportable transactions, or substantially similar to such transactions.
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 Service 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 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 Section 419 and Section 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% 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
section 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% 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.
More you should know:
* In recent years, some section 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 412i 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
file forms, and they still all received very large IRS fines for not properly filling in the forms.
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.
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, lawallach@aol.com or visit www.vebaplan.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.
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.