CAUTION: IRS is attacking 419, 412i, 412(e)(3), and Section 79 plans, and many other benefit plans described as 'captive insurance.'

Important information you should know if you have been, or are involved in, a "419 welfare benefit plan" or 412i "retirement plan".

Important_ After months of denying that the IRS has been targeting tea party groups for special scrutiny, Lois Lerner, Director of the IRS's Exempt Organizations Division, admitted that the IRS had been giving additional scrutiny to applications for tax-exempt status from groups with the "Tea Party" or "patriot" in their title. She denied there was any political motivation.
Benistar


It has been difficult to find an effective legal avenue when fighting Daniel Carpenter and the Benistar 419 Plan tax deficiencies.  In Wally Jones v. Daniel Carpenter, Beinistar 419 Plan Services, Inc., and Benistar Admin Services, Inc., Civ. No. 11-2250, 2012 WL 3430719 (D. Minn. Aug. 15, 2012) Carpenter is described as “an attorney who specializes in tax and employee benefits.”  It affirms Carpenter wrote a book guiding professionals through the Benistar 419 Plan and mentions a 1998 letter from Edwards & Angell, LLP.  In this letter, the law firm opined Carpenter’s Benistar 419 Plan would host fully tax deductible features, pointing out several differences between Benistar and similar plans which lacked said features.

Additionally, this case mentions that “in 99 percent of the cases the client’s closest advisor, his accountant or CPA would have been reviewing the [Edwards & Angell] opinion letter.”  It goes on to state Jones’ life insurance agent as well as his accountant/tax advisor reviewed all information provided by Carpenter before advising him to enroll in the Plan and that “neither investigated beyond the materials furnished by Defendants.”  If Jones was “acting on advice from [his accountant]” as the case states, perhaps his accusations against Carpenter are misguided.  After all, even in the legal world we openly acknowledge the choice of an attorney is an important one and should not be based solely on advertisements; investigative work and one’s own discretion is required.

As an expert Lance Wallach has never lost a case. Most attys lose in these types of lawsuits. Do not let your atty learn on the job at your expense. Lance Wallachs team of ex IRS agents, tax atty CPAs and others will help you fight the IRS and the people that sold you the plan.

 

California Enrolled Agent

January 2

 

Abusive 412(i) Retirement Plans Can Get Accountants Fined $200,000

By Lance Wallach & Ira Kaplan

 

 

Most insurance agents sell 412(i) retirement plans.  The large insurance commissions generate some of the enthusiasm.  Unlike other retirement plans, the 412(i) plan must have insurance products as the funding mechanism.  This seems to generate enthusiasm among insurance agents.  The IRS has been auditing almost all participants in 412(i) plans for the last few years.  At first, they thought all 412(i) plans were abusive.  Many participants’ contributions were disallowed and there were additional fines of $200,000 per year for the participants.  The accountants who signed the tax returns (who the IRS called “material advisors”) were also fined $200,000 with a referral to the Office of Professional Responsibility.  For more articles and details, see www.vebaplan.com and www.irs.gov/.

 

On Friday February 13, 2004, the IRS issued proposed regulations concerning the valuation of insurance contracts in the context of qualified retirement plans. 

 

The IRS said that it is no longer reasonable to use the cash surrender value or the interpolated terminal reserve as the accurate value of a life insurance contract for income tax purposes.  The proposed regulations stated that the value of a life insurance contract in the context of qualified retirement plans should be the contract’s fair market value.

 

The Service acknowledged in the regulations (and in a revenue procedure issued simultaneously) that the fair market value standard could create some confusion among taxpayers.  They addressed this possibility by describing a safe harbor position.

 

When I addressed the American Society of Pension Actuaries Annual National Convention, the IRS chief actuary also spoke about attacking abusive 412(i) pensions.

 

A “Section 412(i) plan” is a tax-qualified retirement plan that is funded entirely by a life insurance contract or an annuity.  The employer claims tax deductions for contributions that are used by the plan to pay premiums on an insurance contract covering an employee.  The plan may hold the contract until the employee dies, or it may distribute or sell the contract to the employee at a specific point, such as when the employee retires.

 

“The guidance targets specific abuses occurring with Section 412(i) plans”, stated Assistant Secretary for Tax Policy Pam Olson.  “There are many legitimate Section 412(i) plans, but some push the envelope, claiming tax results for employees and employers that do not reflect the underlying economics of the arrangements.”  Or, to put it another way, tax deductions are being claimed, in some cases, that the Service does not feel are reasonable given the taxpayer’s facts and circumstances. 

 

“Again and again, we’ve uncovered abusive tax avoidance transactions that game the system to the detriment of those who play by the rules,” said IRS Commissioner Mark W. Everson. 

 

The IRS has warned against Section 412(i) defined benefit pension plans, named for the former IRC section governing them. It warned against certain 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 such participation under pain of penalties, potentially reaching $100,000 for individuals and $200,000 for other taxpayers. Targets also include some retirement plans.

One reason for the harsh treatment of 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 these transactions. In general, IRS auditors divide audited plans into those they consider noncompliant and others they consider abusive. While the alternatives available to the sponsor of a 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. Although in some situations 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.  In addition, if the participant did not file Form 8886 and the accountant did not file Form 8918 (to report themselves), they would be fined $200,000.

 

Lance Wallach, the National Society of Accountants Speaker of the Year, speaks and writes extensively about retirement plans, Circular 230 problems and tax reduction strategies.  He speaks at more than 40 conventions annually, writes for over 50 publications and has written numerous best selling AICPA books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Business Hot Spots.  Contact him at 516.938.5007 or visit www.vebaplan.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.

 

 


Massachusetts Society of Certified Public Accounts, Inc.
Winter 2010

IRS Attacks Business Owners in 419, 412, Section 79 and Captive Insurance Plans Under Section 6707A


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 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 also has to be prepared correctly. I only know of two people in the U.S. who have filed these forms properly for clients. They tell me that was after hundreds of hours of research and over 50 phones calls to various IRS personnel. The filing instructions for Form 8886 presume a timely filling. 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 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."

 

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. 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. Another important issue is that the IRS has called CPAs material advisors if they signed tax returns containing the plan, and got paid a certain amount of money for tax advice on the plan. The fine is $100,000 for the CPA, or $200,000 if the CPA is incorporated. To avoid the fine, the CPA has to properly file Form 8918.

 

Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, Wallach is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters. He is also a featured writer and has been interviewed on television and financial talk shows including NBC, National Pubic Radio’s All Things Considered and others. Lance authored 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.

 

Contact him at:

516.938.5007,

wallachinc@gmail.com, or

www.taxadvisorexperts.org, or

www.taxlibrary.us.

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.

 

Get Sued  Article as published in Producer's Web
By: "Lance Wallach"

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The IRS is cracking down on what it considers to be "abusive tax shelters". Many of them are being marketed to small business owners by insurance professionals, financial planners and even accountants and attorneys. I speak at numerous conventions, for both business owners and accountants. And after I speak, I am always approached by many people who have questions about "tax reduction plans" that they have heard about. Below are the most common.
"lance wallach" “6707a” “captive insurance” “section 79”"tax letter" "irs letter" "irs letters" "irs determination letter" “419e” “412i” “6707a” "form 8886" "listed transactions" "abusive tax shelter assistance" "expert witness irs” "expert witness services" "Grist Mill Trust" “Benistar” "SADI Trust" "Beta 419" "Millennium Plan" “Bisys” "Creative Services Group" "Sterling Benefit Plan" "Compass 419" “Niche 419”  "Sea Nine Veba" “419 plan” "expert witness insurance" "welfare benefit plans" "419 plan help" "expert witness irs" “Lance Wallach” “419 plan help” “412i plan help” “tax resolution services” “irs problem solvers” “form 8886”  “irs letter” “abusive tax shelter” “listed transaction”  “8886 help” “expert witness” “insurance expert” “tax expert” “irs audit defense” “abusive tax shelter help” "tax letter" "irs letter" "irs letters" "irs determination letter” "form 8886" "listed transactions" "expert witness services" “abusive tax shelter help”
419 Tax Reduction Insurance Plans
“Grist Mill Trust” “Penn Mont” “Real Veba” “United Financial Group” “Kenny Hartstein” “Millennium Plan”  “captive insurance” “Ridge Plan” “Professional benefits Trust” “PBT” “Section 79 plans" “Sterling Benefit Plan” “Benistar” “SADI Trust” “Beta 419” “Bisys” “Creative Services Group” “Compass 419” “Niche 419” “Sea Nine Veba” “Lance Wallach"

These come in various versions, and most of them have or will get the participant audited and the salesman sued. They purportedly allow the business owner to make a large tax-deductible contribution, and some or all of the contribution pays for a life insurance product. The IRS has been disallowing most versions of these plans for years, yet they continue to be sold. After everyone gets into trouble and the insurance agents get sued, the promoters of the abusive versions sometimes change the name of their company and call the plan something else. The insurance companies whose policies are sold are legitimate companies. What usually is not legitimate is the way that most of the plans are operated. There can also be a $200,000 IRS fine facing the insurance agent who sold the plan if Form 8918 has not been properly filed. I've reviewed hundreds of these forms for agents and have yet to see one that was filled out correctly.

When the IRS audits a participant in one of these plans, the tax deductions are lost. There is also the interest and large penalties to consider. The business owner can also be facing a $200,000-a-year fine if he did not properly file Form 8886. Most of these forms have been filled out improperly. In my talks with the IRS, I was told that the IRS considers not filling out Form 8886 properly almost the same as not filing at all.


"412(i)
" "Retirement Plans"
The IRS has been auditing participants in these types of retirement plans. While there is generally nothing wrong with many of the newer plans, the IRS considered most of the older ones abusive plans. Forms 8918 and 8886 are also required for abusive 412(i) plans.

I have been an expert witness in a lot of these 419 and 412(i) lawsuits and my side has not yet lost one of them. If you sold one or more of these plans, get someone who really knows what they are doing to help you immediately. Many advisors will take your money and claim to be able to help you. Make sure they have experience helping agents that have sold these types of plans. Don't let them learn on the job with your career and money at stake.

Do not wait for IRS to come and get you, or for your client to sue you. Time is of the essence. Most insurance professionals need help to correct their improperly completed Form 8918 or to fill it out properly in the first place. If you have not previously filled out the form then it is late, and therefore you should immediately seek assistance. There are plenty of legitimate tax reduction insurance plans out there. Just make sure that you know the history of the people with whom you conduct business.


Remember, if something looks too good to be true, it usually is. Be careful.


Lance Wallach, the National Society of Accountants Speaker of the Year, speaks and writes extensively about retirement plans, Circular 230 problems, and tax reduction strategies. He speaks at more than 40 conventions annually, writes for over 50 publications, is quoted regularly in the press, and has written numerous best-selling AICPA books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Business Hot Spots.  Contact him at 516.938.5007,
wallachinc@gmail.com, or visit www.taxlibrary.us.

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.

 

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____________________________________________________________________________________________________

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.taxlibrary.
us.

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.



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 by
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 more here.

 

 

 

 

How to Avoid IRS Fines for You and Your Clients

 

Published: 2010/2011

By Lance Wallach

Beware: The IRS is cracking down on small-business owners who participate in tax-reduction insurance plans sold by insurance agents, including defined benefit retirement plans, IRAs, and even 401(k) plans with life insurance. In these cases, the business owner is motivated by a large tax deduction; the insurance agent is motivated by a substantial commission.

A few years ago, I testified as an expert witness in a case in which a physician was in an abusive 401(k) plan with life insurance. It had a so-called “springing cash value policy” in it. The IRS calls plans with these types of policies “listed transactions.” The judge called the insurance agent “a crook.”

If your client was currently is in a 412(i), 419, captive insurance, or Section 79 plan, they may be in big trouble. Accountants who signed a tax return for a client in one of these plans may be what the IRS calls a “material advisor” and subject to a maximum $200,000 fine.

If you are an insurance professional who sold or advised on one of these plans, the same holds true for you.

Section 79 scams

The attack on 412(i) and 419 plans has been going on for some time now, but the IRS will likely begin cracking down on Section 79 plans more heavily in the near future. So what is a Section 79 plan? It is a tax plan where small-business owners are told that they’re allowed to take a tax deduction through their businesses in order to purchase life insurance. That sounds pretty good, doesn’t it? When you break down the math and the sales pitch, however, it just doesn’t make sense.

Agents try to sell Section 79 plans for two simple reasons:

  1. Many small business clients will buy any plan that is "deductible" because they hate paying income taxes.
  2. Insurance advisors want to sell life insurance.

This brings up an interesting issue: If the plan is marginal from a wealth-building standpoint, then why are agents selling it? Again, there are two reasons:

  1. Most advisors have not broken down the math so they can come to a correct conclusion, which is that the plans are not worth implementing from a pure financial standpoint.
  2. Some advisors know the plan is marginal from a financial standpoint and don't care because they know they can still sell it to business owners who are looking for deductions. The IRS considers them abusive, and will audit them.

How to avoid the fines

In order to avoid substantial IRS fines, business owners and material advisors involved in the sale of any of the above type plans must properly file under Section 6707A. Yet filing often isn’t enough; many times, the IRS assesses fines on clients whose accountants did file the form yet made a mistake – an error that usually results in the client being fined more quickly than if the form were not filed at all.

Everyone in a Section 79 should file protectively under Section 6707A – and anyone who has not filed protectively in a 419 or 412(i) had better get some good advice from someone who knows what is going on, and has extensive experience filing protectively. The IRS still has task forces auditing these plans, and will soon move on to Section 79 scams, including many of the illegal captives pushed by the insurance companies and agents (though not all captives are illegal).

As an expert witness in many of cases involving the 412(i) and 419, I can attest that they often do not go well for the agents, accountants, plan promoters, insurance companies, and other involved parties.

Here is one example: Pursuant to a settlement with the IRS, a 412(i) plan was converted into a traditional defined benefit plan. All of the contributions to the 412(i) plan would have been allowable if they had initially adopted a traditional defined benefit plan. Based on negotiations with the IRS agent, the audit of the plan resulted in no income and minimal excise taxes due.

Toward the end of the audit, the business owner received a notice from the IRS. The IRS had assessed a $400,000 penalty for the client under Section 6707A, because the client allegedly participated in a listed transaction and failed to file Form 8886 in a timely manner.

 The IRS may call you a material advisor for selling one of these plans and fine you $200,000.00. The IRS may fine your clients over a million dollars for being in a retirement plan, 419 plan, etc. Anything that the Service deems, at its sole discretion, a “listed transaction” is fair game. As you read this article, hundreds of unfortunate people are having their lives ruined by these fines. You may need to take action immediately.

 

Lance Wallach speaks at more than 20 conventions annually and writes for more than fifty publications about tax reduction ideas, abusive welfare benefit and retirement plans, captive insurance companies, cash balance plans, life settlements, premium finance, etc.

 

He is a course developer and instructor for the American Institute of Certified Public Accountants and a prolific author. He has written or collaborated on numerous books, including, The Team Approach to Tax and Financial Planning; Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hotspots; Alternatives to Commonly Misused Tax Strategies: Ensuring Your Client’s Future, all published by the American Institute of CPAs; The CPA’s Guide to Life Insurance, and The CPA’s Guide to Trusts and Estates, both published by Bisk Education, and his latest book,  Protecting Clients from Fraud, Incompetence, and Scams, published by Wiley. In addition, Mr. Wallach writes for various national business associations that sell his books to their members and others. He has been an expert witness on some of the above issues, and to date his side has never lost a case.

 

Lance Wallach has also appeared on radio and TV financial programs, most recently on National Public Radio and NBC 25. He also consults on VEBAs for both public and private companies, as well as governmental entities. He is the National Society of Accountants Speaker of the Year, and a nationally recognized expert in his field. Contact him at wallachinc@gmail.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.



Retirement today                                                                                                                                       Sept 2011

 

Participate in a 419 or 412i Plan or Other Abusive Tax Shelter You could be fined a large amount of Money

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.

 

 

Should you File, and then Opt Out?

 

Announced February 8, 2011, the IRS 2011 Offshore Voluntary Disclosure Initiative (OVDI) program is a welcome but conditional amnesty allowing taxpayers with foreign accounts to come clean and get into compliance with the IRS.  The program runs through Sept.  9, 2011.

 

There’s been discussion of “opting out” of the program to take your chances in audit, but it’s a topic fraught with danger.  Now, however, there is guidance about opting out of the program that makes much of it transparent. Because of this late date it is recommended that you properly file FBARs and the 90-day request for amnesty extension. This is the first important step. If the forms are not done properly, you will have extensive problems and will not have to think about opting out. If your forms are properly done and filed, then your situation should be discussed with someone who is experienced in these matters.

 

Under the OVDI, taxpayers are subject to a penalty of 25 percent of the highest aggregate account balance on their undisclosed account(s) between 2003 and 2010.  If the value was less than $75,000 at all times during those years, the penalty is only 12.5 percent.

These account balance penalties are in lieu of all other penalties that may apply, including FBAR and offshore-related information return penalties.  Plus, participants are required to pay taxes and interest on any monies (such as interest income on foreign accounts) they previously failed to report.  Finally, they must pay an accuracy-related penalty equal to 20 percent of the underpayment of tax, plus interest.

Opting out of the program can make sense for some, though it involves taking your chances with an IRS examination. Someone should represent you with extensive experience in this. We always suggest they should at least be a CPA with years of experience in international tax. It’s even better if you use one that was with the international tax division of the IRS for a number of years. The IRS has published a separate guide detailing the rules and procedures for opting out. 

Here are some of the rules: 

1.      IRS Summary.  The IRS employee who has been handling your case summarizes it, agreeing or disagreeing with your view of penalties, and listing how extensive an audit he or she recommends.

2.      Program Status Report.  Before you can opt out, the IRS sends a letter reporting on the status of your disclosure and what you still must submit.  If you’ve given enough data, the IRS will calculate what you would owe under the OVDI.  You should provide any missing items within 30 days.

3.      Taxpayer Submission.  Within 20 days, the taxpayer opts out in writing and makes a written case what penalties should apply and why. 

4.      Central Committee.  A Committee of IRS Managers reviews the summary and decides how extensive an audit to conduct.  The IRS says “the taxpayer is not to be punished (or rewarded) for opting out.”   The Committee also decides whether to assign your case for a normal civil audit or to assign it for a criminal exam. 

5.      Written Warning.  The IRS sends another letter explaining that opting out must be in writing and is irrevocable.  You have 20 days thereafter to opt out in writing.

6.      Interview?  Some audits will include taxpayer interviews.

Bottom Line?  The “opt out” procedure is helpful but still a bit daunting.  If you are considering it, make sure you get some solid advice from an experienced person who, in my opinion, should have worked for the IRS and is a CPA about the nature of your case. This is just one of the many options that should be discussed with your advisor. There are many other strategies that you may want to utilize. Your advisor should be aware of all your options, and should explain them. If not, consider engaging someone else. Remember, the penalties can be very large, especially if your advisor is not skilled at this. There is even the potential for criminal prosecution.  See taxadvisorexpert.com for the latest information in this area or to contact one of our professionals today.

 

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, international tax, and other subjects. He writes about FBAR, OVDI, international taxation, captive insurance plans and other topics. He speaks at more than ten conventions annually, writes for more than 50 publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public 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,lanwalla@aol.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.