IRS Tax Shelters & 419 Plans Litigation

419 Life Insurance Plans and Other Scams – Large IRS Fines –

2012-02-09T11:57:00.000-08:00

The IRS Raids Plan Promoter Benistar, and What Does All This Mean To You?

Articlebase

Posted: Dec. 9

By Lance Wallach

Recently IRS raided Benistar, which is also known as the Grist Mill Trust, the promoter and operator of one of the better known and more heavily scrutinized of the Section 419 life insurance plans. IRS attacked the Benistar 419 plan, and one of its tactics was to demand the names of all the clients Benistar worked with — so they could be audited by the IRS, Benistar refused to give the names and actually appealed the decision to turn over the names. The appeal was unsuccessful, but Benistar officials still refused to give up the names. Recently, the IRS raided the Benistar office and took hundreds of boxes of information, which included information on clients who were in their 419 plan. In documents filed by Benistar itself, they stated that 35 to 50 armed IRS agents descended upon their office to seize documents.

IRS has visited, and is still visiting most of the other plans and obtaining names of participants, selling insurance agents, accountants, etc. They have a whole task force devoted to auditing 419, 412i and other abusive plans.

It’s important to understand what could happen to unsuspecting business owners if they get involved in plans that are not above board. Their names could be turned over to the IRS, where audits could ensue, and where the outcome could be the payment of back taxes and significant penalties. Then they would be fined another time under Section 6707A for not properly reporting on themselves.

Most 419 life insurance and 412i defined benefit pension plans were sold to successful business owners as plans with large tax deductions where money would grow tax free until needed in retirement. I would speak at national accounting and other conventions talking about the problems with most of these plans. I would be attacked by some attendees who where making large insurance commissions selling the plans. I would try to warn insurance company home office executives, but they too had their heads in the sand because of all the money these plans brought in. Then the IRS got tough and started fining the unsuspecting business owners hundreds of thousands a year for not reporting on themselves for being in the plan. The agents and insurance companies advise against filing. “This is a good plan. We have approval.” Not only were the business owners fined under IRS Code 6707A, but the insurance agents were also fined $100,000 for not reporting on themselves. Accountants who signed tax returns are even being fined 100,000 by IRS. Then the business owners sue the accountants, insurance agents, etc. I have been following these scenarios for a long time. In fact, I have been an expert witness in many of these cases, and my side has never lost.

Most promoters of 419 plans told clients that their plans complied with the laws and, therefore, were not listed tax transactions. Unfortunately, the IRS doesn’t care what a promoter of a tax-avoidance plan says; it makes its own determination and punishes those who don’t comply.

The McGehee Family Clinic, P.A. was recently hit with back taxes and a penalty under Code Sec. 666A in conjunction with a deduction to the Benistar 419 plan

Dr. McGehee's clinic took a deduction for a 419 plan (the Benistar plan) back in 2005. Eventually, the McGhee Family Clinic was audited. After the audit, the doctor was told that the deduction would be disallowed and that back taxes were due. Additionally, Dr. McGehee was hit with a 20 percent accuracy-related penalty under Code Sec. 6662A. Finally, the tax court sustained the IRS's determination that McGehee was subject to the increased 30 percent penalty, because its return did not include a disclosure statement indicating its participation in the Benistar Trust. I think that in addition to the aforementioned fines, IRS will now fine him, both on a corporate and personal level, another $200,000 or more, under IRC 6707A, for not properly disclosing his participation in a listed transaction. There was a moratorium on those fines until June 2010, pending new legislation to reduce them. The fines had been 200,000 per year on the corporate level and $100,000 per year on the personal level. You got the fine even if you made no contributions for the year. All you had to do was to be in the plan. So Dr. McGehee's fine would be a total of $300,000 per year for every year that he and his corporation were in the plan.

IRS also says the fine is not appealable. His fine would be in the million-dollar range and it would be in addition to the back taxes, interest, and penalties already discussed earlier in this paragraph.

Legislation just passed slightly reducing those fines, but you still have to properly file to start the Statute of Limitations running to avoid the fines. IRS is fining people who report on themselves, but make a mistake on the forms. Now that the moratorium on the fines has passed, and so has the new legislation, IRS has aggressively moved to fine unsuspecting business owners hundreds of thousands. This is usually after they get audited, and sometimes reach agreement with IRS. Then another division or department of the IRS imposes a fine under 6707A. I am receiving a lot of phone calls from business owners who this is happening to. Unfortunately, some of these people already had called me. I warned them to properly file under 6707A. Either they did not believe me - it is unbelievable - or their accountant or tax attorney filed incorrectly. Then they called again after being fined.

If you were involved with one of these abusive plans, there are steps that you can take to minimize IRS problems. With respect to filing under Section 6707A, I know the two best people in the country at filing after the fact, which is what you would be doing at this point, and still somehow avoiding the fine. It is an art that both learned through countless hours of research and numerous conversations with IRS personnel. Both have filed dozens of times for clients, after the fact, without the clients being fined. Either may well still be able to help you.

And the right accountant, one with the proper knowledge, experience, and Service contacts, can help with the other IRS problems as well. I recall a case where a CPA I knew and recommended was able to get $300,000 or so in liabilities reduced to three thousand dollars and change. Do not count on a result like this, but help is available.

It’s not worth it!

Stay away from 419 and similar plans like Section 79 plans. Be very careful with 412i plans. Avoid most captive insurance plans.

It’s getting closer to the end of the year. This is when every scammer known to man/woman comes out of the woodwork to sell some fly-by-night tax-deductible plan to clients. Sometimes they come in the form of an accountant, insurance agent-financial planner, or even an attorney. I see this in all of my expert witness cases and when I speak at conventions. I have seen this since the 1990s. I wanted to remind readers that, if it sounds too good to be true, it probably is.

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.

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

Lance Wallach
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.

IRS Hiring Agents in Abusive Transactions Group

2012-02-01T09:03:00.001-08:00

FAST PITCH NETWORKING

Posted: Dec. 10

By Lance Wallach

Here it is. Here is your proof of my predictions. Perhaps you didn’t believe me when I told you the IRS was coming after what it has deemed “abusive transactions,” but here it is, right from the IRS’s own job posting. If you were involved with a 419e, 412i, listed transaction, abusive tax shelter, Section 79, or captive, and you haven’t yet approached an expert for help with your situation, you had better do it now, before the notices start piling up on your desk.

A portion of the exact announcement from the Department of the Treasury:

Job Title: INTERNAL REVENUE AGENT (ABUSIVE TRANSACTIONS GROUP)

Agency: Internal Revenue Service

Open Period: Monday, October 18, 2010 to Monday, November 01, 2010

Sub Agency: Internal Revenue Service

Job Announcement Number: 11PH1-SBB0058-0512-12/13

Who May Be Considered:

· IRS employees on Career or Career Conditional Appointments in the competitive service

· Treasury Office of Chief Counsel employees on Career or Career Conditional Appointments or with prior competitive status

· IRS employees on Term Appointments with potential conversion to a Career or Career Conditional Appointment in the same line of work

According to the job description, the agents of the Abusive Transactions Group will be conducting examinations of individuals, sole proprietorships, small corporations, partnerships and fiduciaries. They will be examining tax returns and will “determine the correct tax liability, and identify situations with potential for understated taxes.”

These agents will work in the Small Business/Self Employed Business Division (SB/SE) which provides examinations for about 7 million small businesses and upwards of 33 million self-employed and supplemental income taxpayers. This group specifically goes after taxpayers who generally have higher incomes than most taxpayers, need to file more tax forms, and generally need to rely more on paid tax preparers.” Their examinations can contain “special audit features or anticipated accounting, tax law, or investigative issues,” and look to make sure that, for example, specialty returns are filed properly.

The fines are severe. Under IRC 6707A, fines are up to $200,000 annually for not properly disclosing participation in a listed transaction. There was a moratorium on those fines until June 2010, pending new legislation to reduce them, but the new law virtually guarantees you will be fined. The fines had been $200,000 per year on the corporate level and $100,000 per year on the personal level. You got the fine even if you made no contributions for the year. All you had to do was to be in the plan and fail to properly disclose your participation.

You can possibly still avoid all this by properly filing form 8886 IMMEDIATELY with the IRS. Time is especially of the essence now. You MUST file before you are assessed the penalty. For months the Service has been holding off on actually collecting from people that they assessed because they did not know what Congress was going to do. But now they do know, so they are going to move aggressively to collection with people they have already assessed. There is no reason not to now. This is especially true because the new legislation still does not provide for a right of appeal or judicial review. The Service is still judge, jury, and executioner. Its word is absolute as far as determining what is a listed transaction.

So you have to file form 8886 fast, but you also have to file it properly. The Service treats forms that are incorrectly filed as if they were never filed. You get fined for filing incorrectly, or for not filing at all. The Statute of Limitations does not begin unless you properly file. That means IRS can come back to get you any time in the future unless you file properly.

If you don’t want these new IRS Agents, or any other IRS agents for that matter, to be earning their paychecks by coming after you, make sure you have done all you can to ensure that you have filed properly by reaching out for expert help today.

Should you File, and then Opt Out?

2012-01-31T11:27:00.001-08:00

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.

2012-01-23T13:19:00.001-08:00

Offshore International Today

IRS Offshore Voluntary Disclosure Program Reopens

By Lance Wallach, CLU, CHFC

Abusive Tax Shelter, Listed Transaction, Reportable Transaction Expert Witness

Today, the Internal Revenue Service reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes. Additionally, the IRS revealed the collection of more than $4.4 billion so far from the two previous international programs.

The Offshore Voluntary Disclosure Program (OVDP) was reopened following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. This program will remain open indefinitely until otherwise announced.

Lance Wallach and his associates have received thousands of phone calls from concerned clients with questions about the prior programs. Some of Lance’s associates are still very busy helping people with the last program. Not a single person has been audited and most are pleased with the results and are now able to sleep easily without worrying about the IRS. According to Lance, it requires years of experience to obtain a good result from the program.

He suggests using a CPA-certified, ex-IRS agent with lots of international tax experience. While this is not a requirement to file under the program, Lance has heard many horror stories from people who have tried to file by themselves or who have used inexperienced accountants.

“Our focus on offshore tax evasion continues to produce strong, substantial results for the nation’s taxpayers,” said IRS Commissioner Doug Shulman. “We have billions of dollars in hand from our previous efforts, and we have more people wanting to come in and get right with the government. This new program makes good sense for taxpayers still hiding assets overseas and for the nation’s tax system.”

The new program is similar to the 2011 program in many ways, but it has a few key differences. Unlike last year, there is no set deadline for people to apply. However, the terms of the program could change at any time going forward. For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers – or decide to end the program entirely at any point.

“As we've said all along, people need to come in and get right with us before we find you,” Shulman said. “We are following more leads and the risk for people who do not come in continues to increase.”

The third offshore effort accompanies another announcement that Shulman made today, that the IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program. That figure reflects closures of about 95 percent of the cases from the 2009 program. On top of that, the IRS has collected an additional $1 billion from up front payments required under the 2011 program. That number will grow as the IRS processes the 2011 cases.

In all, the IRS has seen 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. Since the 2011 program closed last September, hundreds of taxpayers have come forward to make voluntary disclosures. Those who come in after the closing of the 2011 program will be able to be treated under the provisions of the new OVDP program.

The overall penalty structure for the new program is the same for 2011, except for taxpayers in the highest penalty category.

The new program’s penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or the value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011.

Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.

Participants face a 27.5 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty. Smaller offshore accounts will face a 12.5 percent penalty. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the new OVDP will qualify for this lower rate. As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.

The IRS recognizes that its success in offshore enforcement and in the disclosure programs has raised awareness related to tax filing obligations. This includes awareness by dual citizens and others who may be delinquent in filing, but owe no U.S. tax.

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 other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

Some 419 Insurance Welfare Benefit Plans Continue To Get Accountants Into Trouble

2012-01-18T12:52:00.000-08:00

Popular so-called “419 Insurance Welfare Benefit Plans”, sold by most insurance professionals, are getting accountants and their clients into more and more trouble. A CPA who is approached by a client about one of the abusive arrangements and/or situations to be described and discussed in this article must exercise the utmost degree of caution, not only on behalf of the client, but for his/her own good as well. The penalties noted in this article can also be applied to practitioners who prepare and/or sign returns that fail to properly disclose listed transactions, including those discussed herein.

On October 17, 2007, the IRS issued Notice 2007-83, Notice 2007-84, and Revenue Ruling 2007-65. Notice 2007-83 essentially lists the characteristics of welfare benefit plans that the Service regards as listed transactions. Put simply, to be a listed transaction, a plan cannot rely on the union exception set forth in IRC Section 419A(f)(5),there must be cash value life insurance within the plan and excessive tax deductions for life insurance, in excess of what may be permitted by Sections 419 and 419A, must have been claimed.

In Notice 2007-84, the Service expressed concern with plans that provide all or a substantial portion of benefits to owners and/or key and highly compensated employees. The notice identified numerous specific concerns, among them:

1. The granting of loans to participants
2. Providing deferred compensation
3. Plan terminations that result in the distribution of assets rather than being used post-
retirement, as originally established.
4. Permitting the transfer of life insurance policies to participants.

Alternative tax treatment may well be in the offing for such arrangements, as the IRS intends to re-characterize such arrangements as dividends, non-qualified deferred compensation (under IRC Section 404(a)(5) or Section 409A), split-dollar life insurance arrangements, or disqualified benefits pursuant to Section 4976. Taxpayers participating in these listed transactions should have, in most cases, already disclosed such participation to the Service. Those who have not should do so at the earliest possible moment. Failure to disclose can result in severe penalties – up to $100,000 for
individuals and $200,000 for corporations.

Finally, Revenue Ruling 2007-65 focused on situations where cash value life insurance is purchased on owner employees and other key employees, while only term insurance is offered to the rank and file. These are sold as 419(e), 419A (f)(6), and 419 plans. Life insurance premiums are not inherently tax deductible and authority must be found in Section 79 to justify such a deduction. Section 264(a), in fact, specifically disallows tax deductions for life insurance, at least in some cases. And moreover, the Service declared, interposition of a trust does not change the nature of the transaction.

Lance Wallach, CLU, ChFC, CIMC, speaks and writes extensively about financial planning, retirement plans, and tax reduction strategies. He speaks at more than 70 national conventions annually and writes for more than 50 national publications. For more information and additional articles on these subjects, visit www.taxadvisorexperts.org or call 516-938-5007.

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.

Protecting Clients from Fraud, Incompetence and Scams

2012-01-17T10:56:00.000-08:00

Lance Wallach

Nov 12

Parts of this article are from the book published by John Wiley and Sons, Protecting Clients from Fraud, Incompetence and Scams, authored by Lance Wallach.

Every financial expert out there knows that bad faith and bad planning can take down even the biggest firms, wiping out millions of dollars of value in an instant. Whether it's internal fraud, a scammer, or an incompetent planner that takes your client's cash, the bottom line is: The money is gone and the loss should have been prevented.

Filled with authoritative advice from financial expert Lance Wallach, Protecting Clients from Fraud, Incompetence, and Scams equips you as an accountant, attorney, or financial planner with the weaponry you need to detect bad investments before they happen and protect your clients' wealth - as well as your own.

Sharp and savvy in its frank, often humorous, and authoritative examination of financial fraud and mismanagement, you'll learn about the dysfunctional sectors in the financial industry and:

Protecting your retirement assets
Asset protection basics
Shifting the risk equation: insurance maneuvers
Reevaluating existing insurance
What financial advisors and insurance agents "forget" to tell their clients
The truth about variable annuities
What you must know about life settlements
The smart way to approach college funding

The news for the past two years has been filled with gloom and dangers: Swindles, Bernie Madoff, rip-offs, and the collapse of Bear Stearns and Lehman Brothers. But the party's over, and with that era done, it's more important than ever for you to perform the due diligence on all financial maneuvers affecting the money you oversee and provide your clients with assurance in the form of practical solutions for risk and asset management.

A pragmatic blueprint for identifying trouble spots you can expect and immediately useful solutions, Protecting Clients from Fraud, Incompetence, and Scams equips you with the resources, strategies, and tools you need to effectively protect your clients from frauds and financial scammers.

Herewith is an excerpt from Lance Wallach's book, Protecting Clients from Fraud, Incompetence and Scams:

The IRS has been 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, many people who have questions about tax reduction plans that they have heard about always approach me.

I have been an expert witness in many of these 419 and 412(i) lawsuits and I have not 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. Make sure they have experience helping accountants who signed the tax returns. IRS calls them material advisors and fines them $200,000 if they are incorporated or $100,000 if not. Do not let them learn on the job, with your career and money at stake.

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 or www.taxaudit419.com.

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

2012-01-06T12:39:00.000-08:00

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, 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; speaks at more than ten conventions annually; writes for over fifty publications; is quoted regularly in the press; and has been featured on TV and radio financial talk shows. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams (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.taxadvisorexperts.org 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.

Abusive Insurance, Welfare Benefit, and Retirement Plans

2012-01-05T13:15:00.000-08:00

The IRS has various task forces auditing all section 419, section 412(i), and other
plans that tend to be abusive. These plans are sold by most insurance agents. The IRS
is looking to raise money and is not looking to correct plans or help taxpayers. The
fines for being in a listed, abusive, or similar transaction are up to $200,000 per year
(section 6707A), unless you report on yourself. 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 $200,000 a 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 $200,000 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 substantially
similar plans are being sold by insurance agents.

Recently I came across the case of Hink, a small business owner who is facing $400,000
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 over
$30,000 in 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 $178,000 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. The $90,000 in 2005
contributions was put into the company's retirement bank account along with the 2004
contributions.

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.

The IRS denied any appeal and ruled in October 2008 the $400,000 penalty would stand.
The IRS fine for being in a listed, abusive, or similar transaction is $200,000 per year for
corporations or $100,000 per year for unincorporated entities. The material advisor fine
is $200,000 if you are incorporated or $100,000 if you are not.

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,
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 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.

Some of theses abusive employee benefit plans are represented as satisfying section
419, which sets limits on purposed and balances of "qualified asset accounts" for the
benefits, although the plans purport to offer the deductibility of contributions without
any corresponding income. Others attempt to take advantage of the exceptions to

qualified asset account limits, such as sham union plans that try to exploit the exception
for the separate welfare benefit funds under collective bargaining agreements provided
by section 419A(f)(5). Others try to take advantage of exceptions for plans serving 10
or more employers, once popular under section 419A(f)(6). More recently, one may
encounter plans relying on section 419(e) and, perhaps, defines benefit sections 412(i)
pension plans.

Sections 419 and 419A were added to the code by the Deficit Reduction Act of 1984 in
an attempt to end employers' acceleration of deductions for plan contributions. But it
wasn't long before plan promoters found an end run around the new code sections. An
industry developed in what came to be known as 10-or-more-employer plans.

The IRS steadily added these abusive plans to its designations of listed transactions.
With Revenue Ruling 90-105, it warned against deducting some plan contributions
attributable to compensation earned by plan participants after the end of the tax year.
Purported exceptions to limits of sections 419 and 419A claimed by 10-or-more-
employer benefit funds were likewise prescribed in Notice 95-24 (Doc 95-5046, 95 TNT
98-11). Both positions were designated as listed transactions in 2000.

At that point, where did all those promoters go? Evidence indicates many are now
promoting plans purporting to comply with section 419(e). They are calling a life
insurance plan a welfare benefit plan (or fund), somewhat as they once did, and
promoting the plan as a vehicle to obtain large tax deductions. The only substantial
difference is that theses are now single-employer plans. And again, the IRS has tried
to rein them in, reminding taxpayers that listed transactions include those substantially
similar to any that are specifically described and so designated.

On October 17, 2007, the IRS issues Notices 2007-83 (Doc 2007-23225, 2007 TNT 202-
6) and 2007-84 (Doc 2007-23220, 2007 TNT 202-5). In the former, the IRS identified
some trust arrangements involving cash value life insurance policies, and substantially
similar arrangements, as listed transactions. The latter similarly warned against some
postretirement medical and life insurance benefit arrangements, saying they might be
subject to "alternative tax treatment." The IRS at the same time issued related Rev.
Rul. 2007-65 (Doc 2007-23226, 2007 TNT 202-7) to address situations in which an
arrangement is considered a welfare benefit fund but the employer's deduction for its
contributions to the fund id denied in whole or in part for premiums paid by the trust on
cash value life insurance policies. It states that a welfare benefit fund's qualified direct
cost under section 419 does not include premium amounts paid by the fund for cash value
life insurance policies if the fund is directly or indirectly a beneficiary under the policy,
as determined under sections264(a).

Notice 2007-83 targets promoted arrangements under which the fund trustee purchases

cash value insurance policies on the lives of a business's employee/owners, and
sometimes key employees, while purchasing term insurance policies on the lives of other
employees covered under the plan.

These plans anticipate being terminated and anticipate that the cash value policies will
be distributed to the owners or key employees, with little distributed to other employees.
The promoters claim that the insurance premiums are currently deductible by the business
and that the distributed insurance policies are virtually tax free to the owners. The ruling
makes it clear that, going forward, a business under most circumstances cannot deduct
the cost of premiums paid through a welfare benefit plan for cash value life insurance on
the lives of its employees.

Should a client approach you with one of these plans, be especially cautious, for both
of you. Advise your client to check out the promoter very carefully. Make it clear that
the government has the names of all former section 419A(f)(6) promoters and, therefore,
will be scrutinizing the promoter carefully if the promoter was once active in that area, as
many current section 419(e) (welfare benefit fund or plan) promoters were. This makes
an audit of your client more likely and far riskier.

It is worth noting that listed transactions are subject to a regulatory scheme applicable
only to them, entirely separate from Circular 230 requirements, regulations, and
sanctions. Participation in such a transaction must be disclosed on a tax return, and the
penalties for failure to disclose are severe – up to $100,000 for individuals and $200,000
for corporations. The penalties apply to both taxpayers and practitioners. And the
problem with disclosure, of course, is that it is apt to trigger an audit, in which case even
if the listed transaction was to pass muster, something else may not.

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/TaxHelp.html and www.taxlibrary.us

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.

Be Fined by the IRS Under Section 6707A Business Owners in 419, 412i, Section 79 and Captive Insurance Plans Will Probably

2012-01-04T10:20:00.000-08:00

NCCPAP

November Newsletter

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 the taxpayer does not necessarily have to make a contribution or claim a tax deduction to be deemed 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 a taxpayer can also be in trouble if they file incorrectly. I have received numerous phone calls from business owners who filed and still got fined. Not only does
the taxpayer 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 told me that the form was prepared 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
they 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 the deductions
taken in prior years. 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; speaks at more than ten conventions annually; writes for over fifty publications; is quoted regularly in the press; and has been featured on TV and radio financial talk shows. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams (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.taxadvisorexperts.org 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.

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.

No Shelter Here, Backlash on too-good-to-be-true insurance plan

2012-01-03T08:12:00.001-08:00

Remodeling Hanley / Wood

September 2011

By: Lance Wallach

During the past few years, the Internal Revenue Service (IRS) has fined many business owners hundreds of thousands of dollars for participating in several particular types of insurance plans.
The 412(i), 419, captive insurance, and section 79 plans were marketed as a way for small-business owners to set up retirement, welfare benefit plans, or other tax-deductible programs while leveraging huge tax savings, but the IRS put most of them on a list of abusive tax shelters, listed transactions, or similar transactions, etc., and has more recently focused audits on them. Many accountants are unaware of the issues surrounding these plans, and many big-name insurance companies are still encouraging participation in them.

Seems Attractive

The plans are costly up-front, but your money builds over time, and there’s a large payout if the money is removed before death. While many business owners have retirement plans, they also must care for their employees. With one of these plans, business owners are not required to give their workers anything.

Gotcha

Although small business has taken a recessionary hit and owners may not be spending big sums on insurance now, an IRS task force is auditing people who bought these as early as 2004. There is no statute of limitations.
The IRS also requires participants to file Form 8886 informing the IRS of participation in this “abusive transaction.” Failure to file or to file incorrectly will cost the business owner interest and penalties. Plus, you’ll pay back whatever you claimed for a deduction, and there are additional fines — possibly 70% of the tax benefit you claim in a year. And, if your accountant does not confidentially inform on you, he or she will get fined $100,000 by the IRS. Further, the IRS can freeze assets if you don’t pay and can fine you on a corporate and a personal level despite the type of business entity you have.

Legal Wrangling

Currently, small businesses facing audits and potentially huge tax penalties over these plans are filing lawsuits against those who marketed, designed, and sold the plans. Find out promptly if you have one of these plans and seek advice from a knowledgeable accountant to help you properly file Form 8886.

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.taxaudit419.com, www.vebaplan.org, www.section79.plan

This article is for informational purposes only and should not be construed as specific legal or financial advice.

Small Business Retirement Plans Fuel Litigation

2011-12-29T11:10:00.001-08:00

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.

Don't Become A Material Advisor

2011-12-28T11:11:00.001-08:00

Accounting Today

JULY 1, 2011

BY LANCE WALLACH

Accountants, insurance professionals and others need to be careful that they don’t become
what the IRS calls material advisors.
If they sell or give advice, or sign tax returns for abusive, listed or similar plans; they risk a
minimum $100,000 fine. Their client will then probably sue them after having dealt with the
IRS.

In 2010, the IRS raided the offices of Benistar in Simsbury, Conn., and seized the retirement
benefit plan administration firm’s files and records. In McGehee Family Clinic, the Tax Court
ruled that a clinic and shareholder’s investment in an employee benefit plan marketed
under the name “Benistar” was a listed transaction because it was substantially similar to
the transaction described in Notice 95-34 (1995-1 C.B. 309). This is at least the second
case in which the court has ruled against the Benistar welfare benefit plan, by denominating
it a listed transaction.

The McGehee Family Clinic 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 assessed tax deficiencies and the enhanced 30 percent penalty under Section
6662A, 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.

In rendering its decision, the court cited Curcio v. Commissioner, in which the court also
ruled in favor of the IRS. As noted in Curcio, the insurance policies, which were
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. The excessive
cost of providing death benefits was a reason for the court’s finding in Curcio that tax
deductions had been properly disallowed.

As in Curcio, the McGehee court held that the contributions to Benistar were not deductible
under Section 162(a) because the 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 lapse.

Companies should carefully evaluate their proposed investments in plans such as the
Benistar Plan. The claimed deductions will be disallowed, and penalties will be assessed for
lack of disclosure if the investment is similar to the investments described in Notice 95-34,
that is, if the transaction is a listed transaction and Form 8886 is either not filed at all or is
not properly filed. The penalties, though perhaps not as severe, are also imposed for
reportable transactions, which are defined as transactions having the potential for tax
avoidance or evasion.

Insurance agents have been selling such abusive plans since the 1990's. They started as
419A(F)(6) plans and abusive 412i plans. The IRS went after them. They then evolved to
single-employer 419(e) plans, which the IRS also went after. The latest scams may be the
so-called captive insurance plan and the so-called Section 79 plan.

While captive insurance plans are legitimate for large corporations, they are usually not
legitimate for small business owners as a way to obtain a tax deduction. I have not yet seen
a legitimate Section 79 plan. Recently, I have sent some of the plan promoters’ materials
over to my IRS contacts who were very interested in receiving them. Some of my associates
are already trying to help defend some unsuspecting business owners who are being
audited by the IRS with respect to these plans.

Similar, though perhaps not as abusive, plans fail after the IRS goes after them. Niche was
one example. The company first marketed a 419A(F)(6) plan that the IRS audited. They
then marketed a 419(e) plan that the IRS audited. Niche, insurance companies, agents, and
many accountants were then sued after their clients lost their deductions, paid fines,
interest, and penalties, and then paid huge fines for failure to file properly under 6707A.
Niche then went out of business.

Millennium sold 419 plans through insurance companies. They stupidly filed for a private
letter ruling to the effect that they were not a listed transaction. They got exactly the
opposite: a private letter ruling saying that they were a listed transaction. Then many
participants were audited. The IRS disallowed the deductions, imposed penalties and
interest, and then assessed large fines for not filing properly under Section 6707A. The
result was lawsuits against agents, insurance companies and accountants. Millennium
sought bankruptcy protection after a lot of lawsuits.

I have been an expert witness in a lot of the lawsuits in these 419 plans, 412i plans, and the
like, and my side has never lost a case. I have received thousands of phone calls over the
years from business owners, accountants, angry plan promoters, insurance agents, and
other various professionals. In the 1990's, when I started writing for the AICPA and other
publications warning about these abusive plans, most people laughed at me, especially the
plan promoters.

In 2002, when I spoke at the annual national convention of the American Society of Pension
Actuaries in Washington, people took notice. The IRS chief actuary Jim Holland also held a
meeting similar to mine on abusive 412i plans. Many IRS agents attended my meeting. I was
also invited to IRS headquarters, at the request of the acting IRS commissioner, to meet
with high-level IRS officials and Treasury officials to discuss 419 issues in depth, which I did
after the meeting.

The IRS then set up task forces and started going after 419 and 412i plans. I have been
profusely warning accountants to properly file under 6707A to avoid the large fines, but
most do not. Even if they file, if they make a mistake on the forms, the IRS will fine them.
Very few accountants have had experience filing the forms, and the IRS instructions are
complicated and therefore difficult to follow. I only know of two people who have been
successful in properly filing the forms, especially after the fact. If the forms are filled out
incorrectly, they should be amended and corrected Most accountants call me a few years
later when they and their clients get the large fines, either after improperly filling out the
forms or failing to fill them out at all. Unfortunately, by then it is too late. If they don’t call me
then, then they call me when their clients sue them.

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.

The dangers of being "listed" : A warning for 419, 412i, Sec.79 and captive insurance

2011-12-27T10:19:00.000-08:00

Accounting Today 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 also 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 Limitation

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.

The information provided herein is not intended as legal, accounting, financial or any
other type of advice for any specific individual or other entity. You should contact an

appropriate professional for any such advice.

IRS Audits Focus on Captive Insurance Plans

2011-12-19T11:50:00.001-08:00

April 2011 Edition

By Lance Wallach

The IRS started auditing § 419 plans in the 1990s, and then continued going after § 412(i) and other plans that they considered abusive, listed, or reportable transactions, or substantially similar to such transactions. If an IRS audit disallows the § 419 plan or the § 412(i) plan, not only does the taxpayer lose the deduction and pay interest and penalties, but then the IRS comes back under IRC 6707A and imposes large fines for not properly filing.

Insurance agents, financial planners and even accountants sold many of these plans. The main motivations for buying into one were large tax deductions. The motivation for the sellers of the plans was the very large life insurance premiums generated. These plans, which were vetted by the insurance companies, put lots of insurance on the books. Some of these plans continue to be sold, even after IRS disallowances and lawsuits against insurance agents, plan promoters and insurance companies.

In a recent tax court case, Curcio v. Commissioner (TC Memo 2010-115), the tax court ruled that an investment in an employee welfare benefit plan marketed under the name “Benistar” was a listed transaction in that the transaction in question was substantially similar to the transaction described in IRS Notice 95-34. A subsequent case, McGehee Family Clinic, largely followed Curcio, though it was technically decided on other grounds. The parties stipulated to be bound by Curcio on the issue of whether the amounts paid by McGehee in connection with the Benistar 419 Plan and Trust were deductible. Curcio did not appear to have been decided yet at the time McGehee was argued. The McGehee opinion (Case No. 10-102, United States Tax Court, September 15, 2010) does contain an exhaustive analysis and discussion of virtually all of the relevant issues.

Taxpayers and their representatives should be aware that the IRS has disallowed deductions for contributions to these arrangements. The IRS is cracking down on small business owners who participate in tax reduction insurance plans and the brokers who sold them. Some of these plans include defined benefit retirement plans, IRAs, or even 401(k) plans with life insurance.

In order to fully grasp the severity of the situation, one must have an understanding of IRS Notice 95-34, which was issued in response to trust arrangements sold to companies that were designed to provide deductible benefits such as life insurance, disability and severance pay benefits. The promoters of these arrangements claimed that all employer contributions were tax-deductible when paid, by relying on the 10-or-more-employer exemption from the IRC § 419 limits. It was claimed that permissible tax deductions were unlimited in amount.

In general, contributions to a welfare benefit fund are not fully deductible when paid. Sections 419 and 419A impose strict limits on the amount of tax-deductible prefunding permitted for contributions to a welfare benefit fund. Section 419A(F)(6) provides an exemption from § 419 and § 419A for certain “10-or-more employers” welfare benefit funds. In general, for this exemption to apply, the fund must have more than one contributing employer, of which no single employer can contribute more than 10 percent of the total contributions, and the plan must not be experience-rated with respect to individual employers.

According to the Notice, these arrangements typically involve an investment in variable life or universal life insurance contracts on the lives of the covered employees. The problem is that the employer contributions are large relative to the cost of the amount of term insurance that would be required to provide the death benefits under the arrangement, and the trust administrator may obtain cash to pay benefits other than death benefits, by such means as cashing in or withdrawing the cash value of the insurance policies. The plans are also often designed so that a particular employer’s contributions or its employees’ benefits may be determined in a way that insulates the employer to a significant extent from the experience of other subscribing employers. In general, the contributions and claimed tax deductions tend to be disproportionate to the economic realities of the arrangements.

Benistar advertised that enrollees should expect to obtain the same type of tax benefits as listed in the transaction described in Notice 95-34. The benefits of enrollment listed in its advertising packet included:

Virtually unlimited deductions for the employer;
Contributions could vary from year to year;
Benefits could be provided to one or more key executives on a selective basis;
No need to provide benefits to rank-and-file employees;
Contributions to the plan were not limited by qualified plan rules and would not interfere with pension, profit sharing or 401(k) plans;
Funds inside the plan would accumulate tax-free;
Beneficiaries could receive death proceeds free of both income tax and estate tax;
The program could be arranged for tax-free distribution at a later date;
Funds in the plan were secure from the hands of creditors.

The Court said that the Benistar Plan was factually similar to the plans described in Notice 95-34 at all relevant times.

In rendering its decision the court heavily cited Curcio, in which the court also ruled in favor of the IRS. As noted in Curcio, the insurance policies, overwhelmingly variable or universal life policies, required large contributions relative to the cost of the amount of term insurance that would be required to provide the death benefits under the arrangement. The Benistar Plan owned the insurance contracts.

Following Curcio, as the Court has stipulated, the Court held that the contributions to Benistar were not deductible under § 162(a) because participants could receive the value reflected in the underlying insurance policies purchased by Benistar—despite the payment of benefits by Benistar seeming to be contingent upon an unanticipated event (the death of the insured while employed). As long as plan participants were willing to abide by Benistar’s distribution policies, there was no reason ever to forfeit a policy to the plan. In fact, in estimating life insurance rates, the taxpayers’ expert in Curcio assumed that there would be no forfeitures, even though he admitted that an insurance company would generally assume a reasonable rate of policy lapses.

The McGehee Family Clinic had enrolled in the Benistar Plan in May 2001 and claimed deductions for contributions to it in 2002 and 2005. The returns did not include a Form 8886, Reportable Transaction Disclosure Statement, or similar disclosure.

The IRS disallowed the latter deduction and adjusted the 2004 return of shareholder Robert Prosser and his wife to include the $50,000 payment to the plan. The IRS also assessed tax deficiencies and the enhanced 30 percent penalty totaling almost $21,000 against the clinic and $21,000 against the Prossers. The court ruled that the Prossers failed to prove a reasonable cause or good faith exception.

Other important facts:

In recent years, some § 412(i) plans have been funded with life insurance using face amounts in excess of the maximum death benefit a qualified plan is permitted to pay. Ideally, the plan should limit the proceeds that can be paid as a death benefit in the event of a participant’s death. Excess amounts would revert to the plan. Effective February 13, 2004, the purchase of excessive life insurance in any plan is considered a listed transaction if the face amount of the insurance exceeds the amount that can be issued by $100,000 or more and the employer has deducted the premiums for the insurance.
A 412(i) plan in and of itself is not a listed transaction; however, the IRS has a task force auditing 412(i) plans.
An employer has not engaged in a listed transaction simply because it is a 412(i) plan.
Just because a 412(i) plan was audited and sanctioned for certain items, does not necessarily mean the plan engaged in a listed transaction. Some 412(i) plans have been audited and sanctioned for issues not related to listed transactions.

Companies should carefully evaluate proposed investments in plans such as the Benistar Plan. The claimed deductions will not be available, and penalties will be assessed for lack of disclosure if the investment is similar to the investments described in Notice 95-34. In addition, under IRC 6707A, IRS fines participants a large amount of money for not properly disclosing their participation in listed, reportable or similar transactions; an issue that was not before the tax court in either Curcio or McGehee. The disclosure needs to be made for every year the participant is in a plan. The forms need to be properly filed even for years that no contributions are made. I have received numerous calls from participants who did disclose and still got fined because the forms were not filled in properly. A plan administrator told me that he assisted hundreds of his participants with filing forms, and they still all received very large IRS fines for not properly filling in the forms.

IRS has targeted all 419 welfare benefit plans, many 412(i) retirement plans, captive insurance plans with life insurance in them and Section 79 plans.

Lance Wallach, National Society of Accountants Speaker of the Year and member of the American Institute of CPAs faculty of teaching professionals, is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters. He speaks at more than ten conventions annually and writes for over fifty publications. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education's CPA's Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Mr. Wallach may be reached at 516/938.5007, wallachinc@gmail.com, or at www.taxaudit419.com or www.lancewallach.com.

Don’t Become a ‘Material Advisor’

2011-12-13T13:22:00.001-08:00

Accounting Today

July 1, 2011

By Lance Wallach

Accountants, insurance professionals and others need to be careful that they don’t become what the IRS calls material advisors.

If they sell or give advice, or sign tax returns for abusive, listed or similar plans; they risk a minimum $100,000 fine. They will then probably be sued by their client, when the IRS finishes with their client
In 2010, the IRS raided the offices of Benistar in Simsbury, Conn., and seized the retirement benefit plan administration firm’s files and records. In McGehee Family Clinic, the Tax Court ruled that a clinic and shareholder’s investment in an employee benefit plan marketed under the name “Benistar” was a listed transaction because it was substantially similar to the transaction described in Notice 95-34 (1995-1 C.B. 309). This is at least the second case in which the court has ruled against the Benistar welfare benefit plan, by denominating it a listed transaction.
The McGehee Family Clinic 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 assessed tax deficiencies and the enhanced 30 percent penalty under Section 6662A, 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.
In rendering its decision, the court cited Curcio v. Commissioner, in which the court also ruled in favor of the IRS. As noted in Curcio, the insurance policies, which were 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. The excessive cost of providing death benefits was a reason for the court’s finding in Curcio that tax deductions had been properly disallowed.
As in Curcio, the McGehee court held that the contributions to Benistar were not deductible under Section 162(a) because the 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 lapse.
Companies should carefully evaluate their proposed investments in plans such as the Benistar Plan. The claimed deductions will be disallowed, and penalties will be assessed for lack of disclosure if the investment is similar to the investments described in Notice 95-34, that is, if the transaction is a listed transaction and Form 8886 is either not filed at all or is not properly filed. The penalties, though perhaps not as severe, are also imposed for reportable transactions, which are defined as transactions having the potential for tax avoidance or evasion.
Insurance agents have been selling such abusive plans since the 1990's. They started as 419A(F)(6) plans and abusive 412i plans. The IRS went after them. They then evolved to single-employer 419(e) plans, which the IRS also went after. The latest scams may be the so-called captive insurance plan and the so called Section 79 plan.
While captive insurance plans are legitimate for large corporations, they are usually not legitimate for small business owners as a way to obtain a tax deduction. I have not yet seen a legitimate Section 79 plan. Recently, I have sent some of the plan promoters’ materials over to my IRS contacts, who were very interested in receiving them. Some of my associates are already trying to help defend some unsuspecting business owners who are being audited by the IRS with respect to these plans.
Similar, though perhaps not as abusive, plans fail after the IRS goes after them. Niche was one example. The company first marketed a 419A(F)(6) plan that the IRS audited. They then marketed a 419(e) plan that the IRS audited. Niche, insurance companies, agents, and many accountants were then sued after their clients lost their deductions, paid fines, interest, and penalties, and then paid huge fines for failure to file properly under 6707A. Niche then went out of business.
Millennium sold 419A(F)(6) plans and then 419(e) plans through insurance companies. They stupidly filed for a private letter ruling to the effect that they were not a listed transaction. They got exactly the opposite: a private letter ruling saying that they were a listed transaction. Then many participants were audited. The IRS disallowed the deductions, imposed penalties and interest, and then assessed large fines for not filing properly under Section 6707A. The result was lawsuits against agents, insurance companies and accountants. Millennium sought bankruptcy protection after a lot of lawsuits.
I have been an expert witness in a lot of the lawsuits in these 419, 412i, etc., plans, and my side has never lost a case. I have received thousands of phone calls over the years from business owners, accountants, angry plan promoters, insurance agents, etc. In the 1990's, when I started writing for the AICPA and other publications warning about these abusive plans, most people laughed at me, especially the plan promoters.
In 2002, when I spoke at the annual national convention of the American Society of Pension Actuaries in Washington, people took notice. The IRS chief actuary Jim Holland also held a meeting, similar to mine on abusive 412i plans. Many IRS agents attended my meeting. I was also invited to IRS headquarters, at the request of the acting IRS commissioner, to meet with high-level IRS officials and Treasury officials to discuss 419 issues in depth, which I did after the meeting.
The IRS then set up task forces and started going after 419 and 412i plans. I have been warning accontants to properly file under 6707A to avoid the large fines, but most do not. Even if they file, if they make a mistake on the forms the IRS fines. Very few accountants have had experience filing the forms, and the IRS instructions are difficult to follow. I only know of two people who have been successful in properly filing the forms, especially after the fact. If the forms are filled out wrong they should be amended and corrected Most accountants call me a few years later when they and their clients get the large fines, either after improperly filling out the forms or not doing them at all, but then it is too late. If they don’t call me then, then they call me when their clients sue them.

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.

Re-entering The Tax System

2011-08-25T11:57:00.000-07:00

Taxlanta.org July 2011

by Lance Wallach

Taxpayers who have failed to file federal tax returns for three years or more and owe more than $75,000 in tax should find this section particularly interesting. (i.e., pure tax ― no interest, no penalties).

Rule No. 1:

Under no circumstances should you attempt to re-enter the tax system on your own. Tax evasion, failing to file a timely tax return, and perjury are very serious tax crimes, and one mistake can send you to federal prison for a very long time. Your voluntary admission of a tax crime is similar to Pandora’s box; once the lid has been opened there is nothing you can do to get it closed again. The biggest mistake that most people make is hiring advisors that do not specialize in failure-to-file cases and have little or no knowledge of the IRS/Criminal Investigation Division (IRS/CID) procedures and criminal-tax violations.

Rule No. 2

Under no circumstance should you assume that the IRS/CID and the U.S. Attorney’s Office (USAO) will grant you immunity from prosecution simply because you volunteered to come forward, bare your soul, and beg for forgiveness. The IRS terminated its guaranteed non-prosecution policy for voluntary disclosure of tax crimes in 1961. If you have not filed federal tax returns for three years or more and owe more than $75,000 in back taxes, then you will likely receive a visit from the IRS/CID six to eighteen months after you file your delinquent tax returns. The “reward” you get for filing true and correct delinquent tax returns is that you may be able to avoid additional perjury charges. But you will still have to pay a very large tax liability, which will include interest and a whopping 75% civil tax fraud penalty. Your full disclosure will be appreciated, and under current IRS guidelines you “may” avoid criminal prosecution only if you pay the entire amount due.

Call our office today for a free 3-5 minute consultation with Lance Wallach, the nation’s foremost tax expert, or visit www.experttaxadvisors.org.

Rule No. 3

You must hire the best tax advisors that money can buy. Preferably you will want someone with at least 23 years experience handling failure-to-file cases before the IRS, and preferably this same person will have experience as a former IRS Special Agent. That’s where we come in.

Last year I received over a thousand phone calls from business owners, accountants and other professionals who were in trouble with the IRS over a recent large fine. If you were in what the IRS considers an abusive, listed or similar to transaction, you face a hundred thousand dollar IRS fine under IRS code 6707A. The IRS is attacking thousands of people for either being in, selling, or advising about, various types of plans, which are primarily marketed by insurance professionals.

If you are or were in a 412i, 419, captive insurance, or section 79 plan, you should immediately file under 6707A protectively. If you have already filed you should find someone who knows what he is doing to review the forms. I only know of two people who know how to properly file. The IRS instructions are vague. If a taxpayer files wrong, or fills out the forms wrong he still gets the fine. I have had hundreds of phone calls from people in that situation.

Bad Broker or Bad Luck?

2011-08-22T09:22:00.000-07:00

Legal.com July 2011

By Lance Wallach

You’ve lost money in the market—maybe a substantial amount. Money you thought could be used to plan your future or maybe put your kids through school is now gone. You’re hurt, you’re angry, and we understand. Can you sue your broker, fund manager, or financial advisor? It depends.

The Big Question: Were You a Victim of Fraud or the Market? The big question is whether your broker did anything illegal. You can only sue if what your broker did was beyond just “bad” in the sense of “unfortunate” or even “awful.” Instead, there must have been actual wrongdoing.

Losing money in today’s bad market does not in and of itself give you the right to sue. Sometimes it is just bad luck. After all, investing — even in blue chip investments – carries risks, and the main risk is that the value of your investment could decline. What if your broker gave you bad advice? Again, it will depend on “how bad” the advice was. If your broker recommended investments that were in line with your investor profile and those recommendations were reasonable based on everything your broker knew or should have known, then no – you cannot sue. Well, what kind of bad behavior does leave them liable, you ask? Basically, there are four kinds of bad behavior that may give you the right to sue:

1. Lying or misrepresenting claims;
2. Your broker acting in his interests, not yours, by means of, among others, misrepresentation, churning, unsuitability, and lack of diversification;
3. Not following instructions including claims of unsuitability, lack of diversification, and breach of contract; and,
4. Unreasonable carelessness, like claims of breach of duty and negligence.

Call our office today for a free 3-5 minute consultation with Lance Wallach, the nation’s foremost expert on financial advising, or visit www.financeexperts.org.

There are a number of different claims that can come out of these types of bad behavior, but fundamentally, if your broker didn’t do one or more of these things, there is no claim. To put it another way: if your broker followed your instructions, was always honest with you, and was reasonably careful, then you cannot sue him – even if his advice or your investments went horribly wrong.

So before suing or filing the paperwork for arbitration, take a deep breath and ask yourself if your broker lied, ignored instructions, or was unreasonably careless by putting his own needs and interests instead of yours. If you find yourself answering no to more than a few of these questions, then, sadly, your broker probably acted with the best intentions, and based on what he reasonably knew at the time, there is no liability.

You will notice that we did not answer the question, “What if my broker stole or embezzled money from my account?” That is because the answer is simple – sue them and report them to law enforcement. Theft is theft, whether it’s by your broker, a guy on a street corner with a gun, or that cousin you never really trusted. For example, two common criminal schemes involving investments and securities are the Ponzi scheme and the pyrimad scheme, though these tend to be complex and hidden. Sometimes theft is simpler. But the short answer is that theft is always actionable. For help with this or if you are still not sure, contact our offices today. As an expert witness, my side has never lost a case. I work with attorneys who will usually take these cases on a contingent basis, and who, more importantly, often obtain great results.

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.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.

IRS Auditing 412i, 419e

2011-08-16T12:34:00.000-07:00

Plan Administrator Frustrated With IRS Attacks on 412i, 412e Plans

IRS Auditing 412(i) Plans

The Team Approach to Tax, Financial and Estate Planning

2011-08-12T09:13:00.000-07:00

by Lance Wallach

CPAs are the best and most qualified professionals when it comes to serving their clients needs, but they need to know when and how to coordinate with other experts.

Over the last twenty years we have worked with thousands of practitioners who have decided to add financial services to their practices. They do it for a variety of reasons, but the most common are as follows:

*They don’t want to refer their client elsewhere when they request financial services.

* They want to remain competitive.

*They want to diversify and increase their revenue as opposed to depending solely on tax and accounting revenue.

While helping these professionals add planning and investment services to their core offerings, we have found that they achieve four main benefits after doing so:

1. They are more satisfied with their work.

2. Their clients are more satisfied because they can work with someone they trust to meet financial goals.

3. Their clients give them more referrals.

4. Their incomes increase.

We believe that CPAs are the most appropriate--and perhaps the only--professionals who can provide comprehensive financial services to clients because they understand their clients' tax and financial situations. Their clients trust these practitioners to provide professional advice that is in their best interest. In fact, we believe that tax professionals have an obligation and responsibility to advise their clients, and clients expect their professionals to advise them in these important areas.

With a combination of never-ending tax reform, the Tax Code's significant and complex changes, and the market volatility we've experienced over the past few years, clients need guidance more than ever. Practitioners who provide financial planning and investment advisory services are in a position to advise and assist their clients with these issues.

Practitioners just starting out in this arena may not possess the myriad skill sets and substantive knowledge required to embark on new business ventures.

CPAs who don't have all of the necessary talent in-house may find it easier to associate themselves with strategic "partners" who can provide the proper skill sets, training, technology, support and turnkey solutions in their specialized disciplines and niches, to help identify and meet their clients' financial goals.

Adapted from "The Team Approach to Tax, Financial & Estate Planning," edited by Lance Wallach, with chapters by Katharine Gratwick Baker, Fredda Herz Brown, Dr. Stanly J. Feldman, Ira Kaplan, Joseph W. Maczuga, Roger E. Nauheimer, Roger C. Ochs, Matthew J. O'Connor, Richard Preston, Steve Riley, Carl Lloyd Sheeler, Peter Spero, Paul J. Williams, and Roger M. Winsby. Product 017235.

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 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.

Don't Become A Material Advisor

2011-07-08T08:25:00.000-07:00

Accountants, insurance professionals and others need to be careful that they don’t become what the IRS calls material advisors.

If they sell or give advice, or sign tax returns for abusive, listed or similar plans; they risk a minimum $100,000 fine. Their client will then probably sue them after having dealt with the
IRS.

In 2010, the IRS raided the offices of Benistar in Simsbury, Conn., and seized the retirement benefit plan administration firm’s files and records. In McGehee Family Clinic, the Tax Court ruled that a clinic and shareholder’s investment in an employee benefit plan marketed under the name “Benistar” was a listed transaction because it was substantially similar to the transaction described in Notice 95-34 (1995-1 C.B. 309). This is at least the second case in which the court has ruled against the Benistar welfare benefit plan, by denominating it a listed transaction.

The McGehee Family Clinic 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 assessed tax deficiencies and the enhanced 30 percent penalty under Section
6662A, 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.

In rendering its decision, the court cited Curcio v. Commissioner, in which the court also ruled in favor of the IRS. As noted in Curcio, the insurance policies, which were 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. The excessive cost of providing death benefits was a reason for the court’s finding in Curcio that tax deductions had been properly disallowed.

As in Curcio, the McGehee court held that the contributions to Benistar were not deductible under Section 162(a) because the 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 lapse.

Companies should carefully evaluate their proposed investments in plans such as the
Benistar Plan. The claimed deductions will be disallowed, and penalties will be assessed for lack of disclosure if the investment is similar to the investments described in Notice 95-34, that is, if the transaction is a listed transaction and Form 8886 is either not filed at all or is not properly filed. The penalties, though perhaps not as severe, are also imposed for reportable transactions, which are defined as transactions having the potential for tax avoidance or evasion.

Insurance agents have been selling such abusive plans since the 1990's. They started as 419A(F)(6) plans and abusive 412i plans. The IRS went after them. They then evolved to single-employer 419(e) plans, which the IRS also went after. The latest scams may be the so-called captive insurance plan and the so-called Section 79 plan.

While captive insurance plans are legitimate for large corporations, they are usually not legitimate for small business owners as a way to obtain a tax deduction. I have not yet seen a legitimate Section 79 plan. Recently, I have sent some of the plan promoters’ materials over to my IRS contacts who were very interested in receiving them. Some of my associates are already trying to help defend some unsuspecting business owners who are being audited by the IRS with respect to these plans.

Similar, though perhaps not as abusive, plans fail after the IRS goes after them. Niche was one example. The company first marketed a 419A(F)(6) plan that the IRS audited. They then marketed a 419(e) plan that the IRS audited. Niche, insurance companies, agents, and many accountants were then sued after their clients lost their deductions, paid fines, interest, and penalties, and then paid huge fines for failure to file properly under 6707A. Niche then went out of business.

Millennium sold 419 plans through insurance companies. They stupidly filed for a private letter ruling to the effect that they were not a listed transaction. They got exactly the opposite: a private letter ruling saying that they were a listed transaction. Then many participants were audited. The IRS disallowed the deductions, imposed penalties and interest, and then assessed large fines for not filing properly under Section 6707A. The result was lawsuits against agents, insurance companies and accountants. Millennium sought bankruptcy protection after a lot of lawsuits.

I have been an expert witness in a lot of the lawsuits in these 419 plans, 412i plans, and the like, and my side has never lost a case. I have received thousands of phone calls over the years from business owners, accountants, angry plan promoters, insurance agents, and other various professionals. In the 1990's, when I started writing for the AICPA and other publications warning about these abusive plans, most people laughed at me, especially the plan promoters.

In 2002, when I spoke at the annual national convention of the American Society of Pension Actuaries in Washington, people took notice. The IRS chief actuary Jim Holland also held a meeting similar to mine on abusive 412i plans. Many IRS agents attended my meeting. I was also invited to IRS headquarters, at the request of the acting IRS commissioner, to meet with high-level IRS officials and Treasury officials to discuss 419 issues in depth, which I did after the meeting.

The IRS then set up task forces and started going after 419 and 412i plans. I have been profusely warning accountants to properly file under 6707A to avoid the large fines, but most do not. Even if they file, if they make a mistake on the forms, the IRS will fine them. Very few accountants have had experience filing the forms, and the IRS instructions are complicated and therefore difficult to follow. I only know of two people who have been successful in properly filing the forms, especially after the fact. If the forms are filled out incorrectly, they should be amended and corrected.

Most accountants call me a few years later when they and their clients get the large fines, either after improperly filling out the forms or failing to fill them out at all. Unfortunately, by then it is too late. If they don’t call me then, then they call me when their clients sue them.

Lance Wallach is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters, and writes about 412(i), 419 and captive insurance plans. He can be reached at (516) 938-5007, wallachinc@gmail.com, or visit www.vebaplan.com. Don’t Become a ‘Material Advisor’

Get Sued

2011-06-30T12:44:00.000-07:00

June 2011

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 419 tax reduction insurance plans.

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 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 I have not 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 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 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.

Late Breaking News: Large 419 plan Millennium files for Bankruptcy

2011-05-23T09:51:00.000-07:00

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.

Earlier this year, 70 armed IRS Criminal Division special agents raided the offices of Nova
Benefit Plans in Connecticut. The IRS has taken other recent criminal enforcement actions
in other locations including Nebraska and Milwaukee, Wisconsin. The IRS has told the
court that it believes Nova is promoting abusive "Section 419" welfare benefit plans.

The IRS claims that a cooperating witness and several undercover agents "penetrated"
Nova to ascertain its internal operations. They say Nova helped its clients violate tax laws
by claiming the most minor injuries as permanent disabilities to qualify for special tax
treatment. In other words, they would assist clients in claiming that a minor scrape was a
disabling and disfiguring permanent injury.

The IRS also claims that Nova assisted clients in backdating documents filed with the IRS.

How does the phony welfare benefit plan scam work? A taxpayer can contribute money tax
free to the plan on behalf of the beneficiary. At a later date, and with the assistance of
Nova, the beneficiary can claim the money (again tax free) because of a disability.
According to the IRS, Nova's plan was a scam because Nova helped taxpayers claim false
disabilities. The Internal Revenue Code says disability payments are tax free if there is a
permanent loss of a bodily part or function. A small scrape is a far cry from the loss of an
eye.

In one recorded conversation, a representative of Nova said, "We've never denied a
claim... I recently, I don't want to say the client's name, but he went through a minor
surgery, had a little--had a mole removed off his elbow I think and left a little scar the size
of a pencil eraser, and, you know, that--that qualified."

When discussing the "independent plan trustee" that must approve the claims, the Nova
representative said, "I, I'm gonna put this very simply for you, we control the trustee, okay,
and I, I don't mean that in a bad way. He's independent but he's part of the family and we
control the stuff that happens, we have ways to make stuff happen...It's best for us to pay
out as much claims so when it times for us to fight this in tax court, we can play and sing
the welfare benefit song."

Nova is not alone in the scam. According to the IRS affidavit, Nova and its principals have
also done business as U.S. Benefits Group, Benefit Plan Advisors, Grist Mill trusts, Rex
Insurance Service and Benistar.

Anyone who has purchased a plan from Nova or the related entities should immediately
seek competent counsel. If the IRS is correct and these plans are not legitimate, the tax
consequences to participants could be very severe. In some cases, if clients entered these
plans with knowledge of Nova's history or promises to evade taxes, the consequences
could involve criminal prosecution and perhaps prison.

As a result of the raid and a cooperating witness (we call these people informants), the IRS
is believed to have the client lists of Nova, Grist Mill and the others. Generally, as a matter
of policy, the IRS will not criminally prosecute a taxpayer who comes forward voluntarily and
agrees to come into compliance. If the IRS knocks on your door first, however, all bets are
off and prosecution is much more likely.

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.

IRS Audits Focus on Captive Insurance Plans

2011-04-29T13:41:00.000-07:00

IRS Audits Focus on Captive Insurance Plans
April 2011 Edition

By Lance Wallach

The IRS started auditing § 419 plans in the 1990s, and then continued going after § 412(i) and other plans that they considered abusive, listed, or reportable transactions, or substantially similar to such transactions. If an IRS audit disallows the § 419 plan or the § 412(i) plan, not only does the taxpayer lose the deduction and pay interest and penalties, but then the IRS comes back under IRC 6707A and imposes large fines for not properly filing.

Insurance agents, financial planners and even accountants sold many of these plans. The main motivations for buying into one were large tax deductions. The motivation for the sellers of the plans was the very large life insurance premiums generated. These plans, which were vetted by the insurance companies, put lots of insurance on the books. Some of these plans continue to be sold, even after IRS disallowances and lawsuits against insurance agents, plan promoters and insurance companies.

In a recent tax court case, Curcio v. Commissioner (TC Memo 2010-115), the tax court ruled that an investment in an employee welfare benefit plan marketed under the name “Benistar” was a listed transaction in that the transaction in question was substantially similar to the transaction described in IRS Notice 95-34. A subsequent case, McGehee Family Clinic, largely followed Curcio, though it was technically decided on other grounds. The parties stipulated to be bound by Curcio on the issue of whether the amounts paid by McGehee in connection with the Benistar 419 Plan and Trust were deductible. Curcio did not appear to have been decided yet at the time McGehee was argued. The McGehee opinion (Case No. 10-102, United States Tax Court, September 15, 2010) does contain an exhaustive analysis and discussion of virtually all of the relevant issues.

Taxpayers and their representatives should be aware that the IRS has disallowed deductions for contributions to these arrangements. The IRS is cracking down on small business owners who participate in tax reduction insurance plans and the brokers who sold them. Some of these plans include defined benefit retirement plans, IRAs, or even 401(k) plans with life insurance.

In order to fully grasp the severity of the situation, one must have an understanding of IRS Notice 95-34, which was issued in response to trust arrangements sold to companies that were designed to provide deductible benefits such as life insurance, disability and severance pay benefits. The promoters of these arrangements claimed that all employer contributions were tax-deductible when paid, by relying on the 10-or-more-employer exemption from the IRC § 419 limits. It was claimed that permissible tax deductions were unlimited in amount.

In general, contributions to a welfare benefit fund are not fully deductible when paid. Sections 419 and 419A impose strict limits on the amount of tax-deductible prefunding permitted for contributions to a welfare benefit fund. Section 419A(F)(6) provides an exemption from § 419 and § 419A for certain “10-or-more employers” welfare benefit funds. In general, for this exemption to apply, the fund must have more than one contributing employer, of which no single employer can contribute more than 10 percent of the total contributions, and the plan must not be experience-rated with respect to individual employers.

According to the Notice, these arrangements typically involve an investment in variable life or universal life insurance contracts on the lives of the covered employees. The problem is that the employer contributions are large relative to the cost of the amount of term insurance that would be required to provide the death benefits under the arrangement, and the trust administrator may obtain cash to pay benefits other than death benefits, by such means as cashing in or withdrawing the cash value of the insurance policies. The plans are also often designed so that a particular employer’s contributions or its employees’ benefits may be determined in a way that insulates the employer to a significant extent from the experience of other subscribing employers. In general, the contributions and claimed tax deductions tend to be disproportionate to the economic realities of the arrangements.

Benistar advertised that enrollees should expect to obtain the same type of tax benefits as listed in the transaction described in Notice 95-34. The benefits of enrollment listed in its advertising packet included:
· Virtually unlimited deductions for the employer;
· Contributions could vary from year to year;
· Benefits could be provided to one or more key executives on a selective basis;
· No need to provide benefits to rank-and-file employees;
· Contributions to the plan were not limited by qualified plan rules and would not interfere with pension, profit sharing or 401(k) plans;
· Funds inside the plan would accumulate tax-free;
· Beneficiaries could receive death proceeds free of both income tax and estate tax;
· The program could be arranged for tax-free distribution at a later date;
· Funds in the plan were secure from the hands of creditors.

The Court said that the Benistar Plan was factually similar to the plans described in Notice 95-34 at all relevant times.

In rendering its decision the court heavily cited Curcio, in which the court also ruled in favor of the IRS. As noted in Curcio, the insurance policies, overwhelmingly variable or universal life policies, required large contributions relative to the cost of the amount of term insurance that would be required to provide the death benefits under the arrangement. The Benistar Plan owned the insurance contracts.

Following Curcio, as the Court has stipulated, the Court held that the contributions to Benistar were not deductible under § 162(a) because participants could receive the value reflected in the underlying insurance policies purchased by Benistar—despite the payment of benefits by Benistar seeming to be contingent upon an unanticipated event (the death of the insured while employed). As long as plan participants were willing to abide by Benistar’s distribution policies, there was no reason ever to forfeit a policy to the plan. In fact, in estimating life insurance rates, the taxpayers’ expert in Curcio assumed that there would be no forfeitures, even though he admitted that an insurance company would generally assume a reasonable rate of policy lapses.

The McGehee Family Clinic had enrolled in the Benistar Plan in May 2001 and claimed deductions for contributions to it in 2002 and 2005. The returns did not include a Form 8886, Reportable Transaction Disclosure Statement, or similar disclosure.

The IRS disallowed the latter deduction and adjusted the 2004 return of shareholder Robert Prosser and his wife to include the $50,000 payment to the plan. The IRS also assessed tax deficiencies and the enhanced 30 percent penalty totaling almost $21,000 against the clinic and $21,000 against the Prossers. The court ruled that the Prossers failed to prove a reasonable cause or good faith exception.

Other important facts:

· In recent years, some § 412(i) plans have been funded with life insurance using face amounts in excess of the maximum death benefit a qualified plan is permitted to pay. Ideally, the plan should limit the proceeds that can be paid as a death benefit in the event of a participant’s death. Excess amounts would revert to the plan. Effective February 13, 2004, the purchase of excessive life insurance in any plan is considered a listed transaction if the face amount of the insurance exceeds the amount that can be issued by $100,000 or more and the employer has deducted the premiums for the insurance.
· A 412(i) plan in and of itself is not a listed transaction; however, the IRS has a task force auditing 412(i) plans.
· An employer has not engaged in a listed transaction simply because it is a 412(i) plan.
· Just because a 412(i) plan was audited and sanctioned for certain items, does not necessarily mean the plan engaged in a listed transaction. Some 412(i) plans have been audited and sanctioned for issues not related to listed transactions.

Companies should carefully evaluate proposed investments in plans such as the Benistar Plan. The claimed deductions will not be available, and penalties will be assessed for lack of disclosure if the investment is similar to the investments described in Notice 95-34. In addition, under IRC 6707A, IRS fines participants a large amount of money for not properly disclosing their participation in listed, reportable or similar transactions; an issue that was not before the tax court in either Curcio or McGehee. The disclosure needs to be made for every year the participant is in a plan. The forms need to be properly filed even for years that no contributions are made. I have received numerous calls from participants who did disclose and still got fined because the forms were not filled in properly. A plan administrator told me that he assisted hundreds of his participants with filing forms, and they still all received very large IRS fines for not properly filling in the forms.

IRS has targeted all 419 welfare benefit plans, many 412(i) retirement plans, captive insurance plans with life insurance in them and Section 79 plans.

Lance Wallach, National Society of Accountants Speaker of the Year and member of the American Institute of CPAs faculty of teaching professionals, is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters. He speaks at more than ten conventions annually and writes for over fifty publications. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education's CPA's Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Mr. Wallach may be reached at 516/938.5007, wallachinc@gmail.com, or at www.taxaudit419.com or www.lancewallach.com.

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

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

2011-01-20T09:18:00.000-08:00

Massachusetts Society of Certified Public Accountants, Inc.
Winter 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 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.

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

2011-01-11T12:47:00.000-08:00

Published in Tax Practice: Tax Notes

March 2, 2009

By Lance Wallach

The IRS has various task forces auditing all section 419, section 412(i), and other plans that tend to be abusive. These plans are sold by most insurance agents. The IRS is looking to raise money and is not looking to correct plans or help taxpayers. The fines for being in a listed, abusive, or similar transaction are up to $200,000 per year (section 6707A), unless you report on yourself. 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 $200,000 a 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 $200,000 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 substantially similar plans are being sold by insurance agents.

Recently I came across the case of Hink, a small business owner who is facing $400,000 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 over $30,000 in 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 $178,000 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. The $90,000 in 2005 contributions was put into the company’s retirement bank account along with the 2004 contributions.

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.

The IRS denied any appeal and ruled in October 2008 the $400,000 penalty would stand. The IRS fine for being in a listed, abusive, or similar transaction is $200,000 per year for corporations or $100,000 per year for unincorporated entities. The material advisor fine is $200,000 if you are incorporated or $100,000 if you are not.

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, 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 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.

Some of theses abusive employee benefit plans are represented as satisfying section 419, which sets limits on purposed and balances of “qualified asset accounts” for the benefits, although the plans purport to offer the deductibility of contributions without any corresponding income. Others attempt to take advantage of the exceptions to qualified asset account limits, such as sham union plans that try to exploit the exception for the separate welfare benefit funds under collective bargaining agreements provided by section 419A(f)(5). Others try to take advantage of exceptions for plans serving 10 or more employers, once popular under section 419A(f)(6). More recently, one may encounter plans relying on section 419(e) and, perhaps, defines benefit sections 412(i) pension plans.

Sections 419 and 419A were added to the code by the Deficit Reduction Act of 1984 in an attempt to end employers’ acceleration of deductions for plan contributions. But it wasn’t long before plan promoters found an end run around the new code sections. An industry developed in what came to be known as 10-or-more-employer plans.

The IRS steadily added these abusive plans to its designations of listed transactions. With Revenue Ruling 90-105, it warned against deducting some plan contributions attributable to compensation earned by plan participants after the end of the tax year. Purported exceptions to limits of sections 419 and 419A claimed by 10-or-more-employer benefit funds were likewise prescribed in Notice 95-24 (Doc 95-5046, 95 TNT 98-11). Both positions were designated as listed transactions in 2000.

At that point, where did all those promoters go? Evidence indicates many are now promoting plans purporting to comply with section 419(e). They are calling a life insurance plan a welfare benefit plan (or fund), somewhat as they once did, and promoting the plan as a vehicle to obtain large tax deductions. The only substantial difference is that theses are now single-employer plans. And again, the IRS has tried to rein them in, reminding taxpayers that listed transactions include those substantially similar to any that are specifically described and so designated.

On October 17, 2007, the IRS issues Notices 2007-83 (Doc 2007-23225, 2007 TNT 202-6) and 2007-84 (Doc 2007-23220, 2007 TNT 202-5). In the former, the IRS identified some trust arrangements involving cash value life insurance policies, and substantially similar arrangements, as listed transactions. The latter similarly warned against some postretirement medical and life insurance benefit arrangements, saying they might be subject to “alternative tax treatment.” The IRS at the same time issued related Rev. Rul. 2007-65 (Doc 2007-23226, 2007 TNT 202-7) to address situations in which an arrangement is considered a welfare benefit fund but the employer’s deduction for its contributions to the fund id denied in whole or in part for premiums paid by the trust on cash value life insurance policies. It states that a welfare benefit fund’s qualified direct cost under section 419 does not include premium amounts paid by the fund for cash value life insurance policies if the fund is directly or indirectly a beneficiary under the policy, as determined under sections264(a).

Notice 2007-83 targets promoted arrangements under which the fund trustee purchases cash value insurance policies on the lives of a business’s employee/owners, and sometimes key employees, while purchasing term insurance policies on the lives of other employees covered under the plan.

These plans anticipate being terminated and anticipate that the cash value policies will be distributed to the owners or key employees, with little distributed to other employees. The promoters claim that the insurance premiums are currently deductible by the business and that the distributed insurance policies are virtually tax free to the owners. The ruling makes it clear that, going forward, a business under most circumstances cannot deduct the cost of premiums paid through a welfare benefit plan for cash value life insurance on the lives of its employees.

Should a client approach you with one of these plans, be especially cautious, for both of you. Advise your client to check out the promoter very carefully. Make it clear that the government has the names of all former section 419A(f)(6) promoters and, therefore, will be scrutinizing the promoter carefully if the promoter was once active in that area, as many current section 419(e) (welfare benefit fund or plan) promoters were. This makes an audit of your client more likely and far riskier.

It is worth noting that listed transactions are subject to a regulatory scheme applicable only to them, entirely separate from Circular 230 requirements, regulations, and sanctions. Participation in such a transaction must be disclosed on a tax return, and the penalties for failure to disclose are severe – up to $100,000 for individuals and $200,000 for corporations. The penalties apply to both taxpayers and practitioners. And the problem with disclosure, of course, is that it is apt to trigger an audit, in which case even if the listed transaction was to pass muster, something else may not.

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/TaxHelp.html and www.taxlibrary.us

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.

Why You Should Not Own Mutual Funds

2011-01-04T13:14:00.000-08:00

CoatingsPro - Money Matters

March 2010

Why You Should Not Own Mutual Funds

By Lance Wallach

Taxes take a large bite out of taxable mutual funds. Recent tax-break laws will end in 2010 and it would be smart for mutual fund investors to keep an eye on one of the main drags on performance: taxes.

One key reason why mutual funds paid out such hefty taxable distributions in recent years is because they can no longer carry forward the steep losses incurred during the 2000-2002 bear market, which had been used to offset gains in recent years.

The estimated taxes paid by taxable mutual fund (MF) investors increased 42 percent from those paid in 2006. Buy-and-hold taxable MF holders surrendered a record-setting $33.8 billion in taxes to the government, surpassing 2000’s record amount of $31.3 billion!

Over the past 20 years, the average investor in a taxable stock fund gave up the equivalent of between 17 percent and 44 percent of their returns to taxes. In 2006, the tax bite amounted to a hefty 1.3 percent of assets, which surpasses the average stock fund expense ratio of 1.2 percent.

Mutual funds probably have no place in high-net-worth client portfolios. There are many strong reasons in favor of this position but most immediately – you have probably noticed that every year you receive mutual funds statements with end-of-year form 1099s in the mailbox and discover that a sizeable amount of your hard-earned cash is going to Uncle Sam.

If you were to subtract 50 percent (93 million plus) of mutual fund holders who hold stock fund assets in tax-free accounts (such as 401(k) plans and IRAs), and a small number in institutional and trust funds that make a few investors tax-exempt, this would leave around 48 percent of the nation’s mutual fund investors in taxable funds.

The SEC says the average mutual fund investor in this taxable group loses 2.5 percent of annual returns to taxes each year, while other research puts it at 3 percent. Throughout your lifetime you can see that capital gains taxes will reduce investable income substantially when you retire.

You know the figures. Sure, during the 1980’s and 1990’s, people made money by selectively investing in mutual funds. Even today, it still can be done; however, more than 90 percent of mutual funds have underperformed the stock market as a whole for the past five years. You can get better odds at the horse track.

It works like this: Mutual funds with higher trading costs and built-in high tax limitations create a post-tax return that potentially delivers fewer returns than a similar separate account.

Mutual funds kill their potential for becoming performance superstars by their high volume of trading and killer fee structure. Too much trading causes increased taxes, while high fees reduce performance return on investment (ROI) – period.

If you own your stocks, you are in control. With mutual funds there is: no control over which securities fund managers buy and sell; no purchases of one particular type pf stock to balance out a portfolio; and no opt-out of any particular asset class or company.

On the other hand, if you put yourself in a separate account, you are the boss. Having a separate account means you are in charge. You set the strategy and decide what stocks or bonds make up the portfolio. You also have access to top money managers and can even change a manager if you wish.

The mix-and-match of separately managed accounts (SMAs) makes them attractive to the new breed of investor who wants more control and input into their portfolio. Don’t you want more control after the Madoff escapade and the Wall Street blowup?

With mutual funds, you should be advised early that you do not own the stocks in the portfolio, but merely have shares of stocks along with a large pool of people. So what do you give up when investing in mutual funds? Control.

The individual in control of mutual funds is the fund manager. Too often, this manager is tasked with dozens or even hundreds of stocks residing in one fund. This is exactly the situation in many of the 8,000 or more funds out there on the market- span, or lack of control.

In addition, you are tied to the whims of fund managers, who are often known to depend on “style drift” (buying securities that have no relationship to fund objectives), excessive trading (to pump up a fund’s value as a means of boosting commissions), and other nefarious actions – first uncovered by the Attorney General of New York State in 1993 and reoccurring ever since.

The mutual fund companies are good at cloaking information and spinning their marketing pitches to prevent investors from figuring out exactly what they are paying to own a mutual fund.

Space limits us to expand on all the fees you pay for the privilege of owning mutual funds, but management fees, distribution or service fees (12b-1), expense ratios, trading costs, commissions, purchase fees, exchange fees, load charges (load funds), account feed, custodial expenses, and so on, are a part of the mix that the mutual fund companies utilize to nickel and dime you to death without most of them ever knowing the billing score.

The SEC wants every investor to be fully equipped to make informed decisions before they hand over their hard-earned cash. The SEC requires all corporations to disclosure any and all information impacting their financial positions so investors can make prudent decisions. Transparency is most important due to the recurring events of the last 18 months.

Mutual fund companies provide notoriously slow reporting. It’s most difficult to find out about all the real nuts and bolts (specific equities, bonds, or cash holdings) of a mutual fund. A mutual fund gives you data twice annually – sometimes quarterly – so the data is out-of-date long before you receive it. Most investors do not read their prospectus reports and fund companies know this fact. Even with the introduction of the Internet, which has sped up the tracking for securities immensely, the major fund companies have been painfully slow to keep investors current as to what stocks the investors hold, and if and when those stocks are being traded.

Nowhere is the lack of transparency more apparent among fund companies than in costs and fees. Most investors are aware of management fees and commissions, but other fund fees like the 12b-1 and trading fees are sublimated. Other fees are hidden and, therefore, keep investors completely in the dark as to what they are paying.

With mutual funds, companies are slow on reporting results; the investor seldom knows in real time what socks are in his account and companies are known to hype performance results.

Unless Congress steps up and puts mutual funds on a level playing field with other investment strategies, taxable mutual fund investors will have to fend for themselves.

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.

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.

Business Meals and Entertainment Expenses

2011-01-03T13:46:00.000-08:00

Excerpt from FCICA Presents Tax, Insurance, and Cost Reduction Strategies for Small Business by Lance Wallach and Dr. Bart Basi

Summer ‘08

The 1993 tax law changed the amount allowable as a deduction for business meals and entertainment expenses incurred after. In addition, some special rules were enacted into the tax law. The limitation for deducting such expenses incurred after December 31, 1993 is 50%. Accordingly, after the general rules and exceptions are applied to meals and entertainment expenses incurred and the total dollar amount is determined, the 50% rule must then be applied. Business people must keep current with such rules or face the wrath of the IRS. The purpose of this chapter is to explain the general rule, the exceptions, and the special rules that are in effect for all business meals and entertainment expenses.

The General Rule

For purposes of the application of the 50% rule, it should be remembered that generally the entertainment or meal expenses are first determined, and then 50% of such expenses are subtracted prior to the expenses actually being deducted by either the employer or the employee. For example: $100 expense is incurred for meals, tips included (it must first be determined that the expense is a legitimated entertainment expense).
$100 – 50% = $50 which is the deductible portion resulting from the application of the 50% rule.
If an individual is traveling away from home on business, 50% of the cost of his meals is allowed as a deduction. However, if any portion of the meal expenses incurred while away from home is considered to be lavish or extravagant, then this amount must be subtracted first and is not applicable to the deduction. Lavish or extravagant is based upon the circumstances and conditions existing at the time the expenses are incurred.
It is important to note that the deduction is allowable only in the case that the taxpayer or employee of the taxpayer is present at the furnishing of such food or beverages.
The above illustration is a general application of the 50% rule. However, there are numerous exceptions that apply to this rule. Following is a discussion of the exception (It should be noted that the exceptions will either increase or decrease the total amount deductible from the general rule which allows 50% of the expenses to be deducted.)

Exceptions to the 50% Rule

1. If an employer reimburses employees 100% for the cost of meals and entertainment, the employer can deduct the entire 100% of the reimbursement as long as the employer considers the additional 50% as added compensation, subject to withholding taxes. In this case, the employer must add the additional 50% to the W-2 Form provided to the employees.

2. If an employer provides samples or promotional food items to the general public, the employer can take a 100% deduction and not be limited by the 50% rule for such food items provided to employees as well as the general public.

3. If there is a bona fide sale of goods to employees, then the employer is also allowed to deduct 100% of the expense. This is automatic since a sale is said to have taken place.

4. If the employer incur meal expenses as a result of social or recreational activities for the benefit of the employees, the meal expenses would be 100% deductible. For example, this would be true if the employer provided a Christmas party or a summer picnic for its employees each year. The 50% rule does not apply to these traditional social activities that benefit all employees and their families.

5. If food and beverage expenses are provided to employees and are so small as to overshadow the costs involved in record keeping, the employer can deduct 100% of such expenses without charging the employee for the fair market value of the food and beverages. This would be true, for example, if the employer provided coffee and donuts for the employees on a daily basis. The cost of allocation of such expenses would be grater that the benefit derived from the record keeping.

6. If an employer obtains tickets to a sporting activity that was organized to benefit a tax-exempt organization and volunteer substantially performed all of the work during the event, then 100% of the cost of such tickets would be deductible. This rule, however, does not apply to any athletic activities where the referees or coaches receive compensation. Consequently, high school or college football games do not come under this rule and are subject to the 50% rule.

7. Fees paid for what is referred to as “sky boxes” at sports arenas are subject to a special rule. The deductible amount of the cost of a skybox is disallowed to the extent that it exceeds the cost of the highest priced non luxury box. The 50% rule then applies to the remaining amount of the expense; which results in a deduction that is less than 50% of the total expense incurred.

8. If meals provided to employees by the employer on the employee’s premises are for the convenience of the employer, then the cost is considered a ‘de minimis’ fringe benefit. Therefore, the cost is 100% deductible to the employer and excluded from the employee’s wages.

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.

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.

Is Your Insurance Company Going Out of Business?

2010-12-22T14:08:00.000-08:00

By Lance Wallach

Do your clients have life insurance or annuity policies? If so, they - and you - may be in trouble.

The plummeting financial markets are dragging down the life insurance industry, which is an important component of the U.S. economy. Continuously escalating losses weaken the companies' capital and eat away at investor confidence.

More than a dozen life insurers have been awaiting action on applications for aid from the government's $700 billion Troubled Asset Relief Program - and thus far, the government hasn't stated whether or not insurers qualify for the program.

Life insurers have undoubtedly been taking a beating. At the time of this article, the Dow Jones Wilshire U.S. Life Insurance Index had fallen 82 percent since its May 2007 all-time high.

Among several of the hardest-hit companies are century-old names that insure the lives of millions of Americans. Shares of Hartford Financial Services Group had been down at one time some 93 percent from their 2008 high. Both MetLife and Prudential Financial are suffering as the value of their vast investment portfolios declines.
As the economy weakens, analysts say that many insurers face losses that can eat away at the capital cushions that regulators require them to maintain.

In addition, experts say that the industry is going through its most chaotic period in recent history, and that it's a pretty scary situation right now.

Ratings agencies and stock investors are beginning to grow concerned about how long the industry can avoid reckoning with the distressed assets on its books. Rating agencies Moody's Investors Service, Standard & Poor's and A.M. Best have cut the ratings of more than a dozen insurers in recent weeks.

The consequences of a weakened life-insurance industry for the economy are significant, because life insurers are among the biggest holders of the nation's corporate debt. For example, if life insurers stop buying bonds, the markets may not fully recover. Their buying activity has already declined.

Any sign of susceptibility among life insurers could further erode confidence and make nervous consumers hesitant to buy insurance products.

Wall Street analysts say that another problem for some life insurers is obligations for variable annuities, a retirement-income product that often guarantees minimum withdrawals or investment returns. As markets plunge to new lows, life insurers need to set aside additional funds to show regulators that they can meet their obligations, further crimping sparse capital.

One stumbling block to receiving TARP funds is that the industry is overseen by state regulators, not by a single federal agency. That means there's no group of federal officials responsible for it or with a deep understanding of its challenges.

Insurers' woes have come largely from investment-grade corporate bonds, commercial real estate and mortgages, regulatory filings show. Many insurers ended 2008 with high levels of losses that, due to accounting rules, they haven't had to record on their bottom lines.

Hartford Financial had $14.6 billion in unrealized losses at year's end. Prudential, the second-largest insurer by assets, had nearly $11.3 billion in unrealized losses, up $5.4 billion in the fourth quarter from the previous quarter.

For additional advice and articles on this specific subject, you may want to have a look at www.irs.gov, www.taxlibrary.us and www.financeexperts.org. Your clients - and you! - had better review policies and keep track of what's going on.

Apply to join FinanceExperts.org, the leading organization for accounting, legal, insurance, finance, and other experts in related fields. If approved by our board,you will be allowed to co author articles written by our experts which appear in 51 national publications, be quoted in best selling books that our experts author and much much more.. In addition, business owners and high income people are referred to our experts by zip code. No more than 1000 experts are accepted as members, and no more than one expert per zip code.There are currently 17 openings. You do not have to be a member to use the financeExperts.org message forum. Email your bio to lanwalla@aol.com. If approved you will be notified.All the experts share the cost of running the organization, which is about $97 per member per year. That cost will go down for renewals, as the sponsors start paying more.

Good luck.

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.

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.

419 (welfare benefit) plans in jeopardy; severe agent penalties. Have recent IRS rulings killed the welfare benefit plan?

2008-12-18T12:26:00.000-08:00

Click on link below to view this powerpoint presentation:

http://029b212.netsolhost.com/images/419plans-in-jepoardy.ppt

Keep a watchful eye: Tax avoidance can lurk in employee benefit plans

2008-11-21T07:14:00.000-08:00

Virginia Society of Certified Public Accountants
Nov./Dec. 2008

By Lance Wallach, CLU, ChFC

As the Internal Revenue Service (IRS) continues to crack down on abusive retirement and employee benefit plans, many accountants will almost certainly, though inadvertently, land their clients and themselves in trouble.

Two particular types of arrangements top the IRS list of abusive plans: the so-called 419 insurance welfare benefit plan and the 412(i) defined benefit retirement plan. These popular plans, while ostensibly for the benefit of employees, are popular with employers mainly because they can offer large tax deductions. The IRS believes those deductions are often disproportionate to the economic realities of these transactions. Both plans are usually sold by insurance agents who are motivated principally by the large commissions that flow from the sale of the insurance policies within these plans.

Some of these plans have been designated as listed transactions by the IRS. Of particular interest is a spurt of IRS regulation in late 2007 that severely affected welfare benefit plans. Any participant in a listed transaction must file Form 8886 with the IRS to disclose participation in such a transaction. Failure to file can result in penalties of up to $100,000 for individuals and $200,000 for corporations. "Material advisors" to participants in such transactions, whom many CPAs are, must file Form 8918 to disclose their role. Failure to file leads to the same penalties that apply to taxpayer participants.

Other plans attempt to take advantage of exceptions to qualified asset account limits, such as sham union plans that try to exploit the exception for separate welfare benefit funds under collective-bargaining agreements provided by IRC § 419A(f)(5). Others try to take advantage of exceptions for plans serving 10 or more employers, once popular under section 419A(f)(6). More recently, one may encounter plans relying on section 419(e) and, perhaps, defined benefit pension plans established pursuant to the former section 412(i).

Promoters and their best laid plans

Sections 419 and 419A were added to the Code by the Deficit Reduction Act of 1984 in an attempt to end employers’ acceleration of deductions for plan contributions. But it wasn’t long before plan promoters found an end run around the new Code sections. An industry developed in what came to be known as “10 or more employer plans.” The promoters of these plans, in conjunction with life insurance companies that just wanted premiums on the books, would sell people on the idea of tax-deductible life insurance and other benefits, and especially large tax deductions.

It was almost, “How much can I deduct?,” with the reply, “How much do you want to?” Adverse court decisions (there were a few) and other laws to the contrary were either glossed over or explained away.

The IRS steadily added these abusive plans to its designations of listed transactions. Revenue Ruling 90-105 warned against deducting certain plan contributions attributable to compensation earned by plan participants after the end of the taxable year. Purported exceptions to limits of sections 419 and 419A claimed by 10 or more multiple-employer benefit funds were likewise proscribed in Notice 95-34. Both positions were designated listed transactions in 2000.

At that point, where did all those promoters go? Evidence indicates many are now promoting plans purporting to comply with section 419(e). They are calling a life insurance plan a welfare benefit plan (or fund), somewhat as they once did, and promoting the plan as a vehicle to obtain

large tax deductions. The only substantial difference is that these are now single-employer plans. And again, the IRS has tried to rein them in, reminding that listed transactions include those substantially similar to any that are specifically described and so designated.

On October 17, 2007, the IRS issued notices 2007-83 and 2007-84. In the former, the IRS identified certain trust arrangements involving cash-value life insurance policies, and substantially similar arrangements, as listed transactions. The latter similarly warned against certain post-retirement medical and life insurance benefit arrangements, saying they might be subject to “alternative tax treatment.”

At the same time, the IRS issued related Revenue Ruling 2007-65 to address situations where an arrangement is considered a welfare benefit fund but the employer’s deduction for its contributions to the fund is denied in whole or part for premiums paid by the trust on cash-value life insurance policies. The Ruling states that a welfare benefit fund’s qualified direct cost under section 419 does not include premium amounts paid by the fund for cash-value life insurance policies if the fund is directly or indirectly a beneficiary under the policy, as determined under section 264(a).

Notice 2007-83 is aimed at promoted arrangements under which the fund trustee purchases cash-value insurance policies on the lives of a business’s employee/owners, and sometimes key employees, while purchasing term insurance policies on the lives of other employees covered under the plan. These plans anticipate being terminated and that the cash-value policies will be distributed to the owners or key employees, with very little distributed to other employees. The promoters claim that the insurance premiums are currently deductible by the business, and that the distributed insurance policies are virtually tax-free to the owners.

The Ruling makes it clear that going forward a business, under most circumstances, cannot deduct the cost of premiums paid through a welfare benefit plan for cash-value life insurance on the lives of its employees. The IRS may challenge the claimed tax benefits of these arrangements for various reasons:

· Some or all of the benefits or distributions provided to or for the benefit of owner-employees or key employees may be disqualified benefits for purposes of the 100 percent excise tax under section 4976.
· The IRS stated in Notice 2007-84 that whenever the property distributed from a trust has not been properly valued by the taxpayer, the IRS will challenge its value, including life insurance policies.
· Under the tax benefit rule, some or all of an employer’s deductions in an earlier year may have to be included in income in a later year if an event occurs that is fundamentally inconsistent with the premise on which the deduction was based.
· An employer’s deductions for contributions to an arrangement that is properly characterized as a welfare benefit fund are subject to the limitations and requirements of the rules in sections 419 and 419A, including reasonable actuarial assumptions and nondiscrimination. Further, a taxpayer cannot obtain a deduction for reserves for post-retirement medical or life benefits unless the employer intends to use the contributions for that purpose.
· The arrangement may be subject to the rules for split-dollar arrangements, depending on the facts and circumstances.

· Contributions on behalf of an owner-employee may be characterized as dividends or as nonqualified deferred compensation subject to Section 404(a)(5), Section 409A or both, depending on the facts and circumstances.

My firm has received many calls for help from CPAs whose clients are being audited for deducting 419 or 412(i) plans. The CPAs were not aware that anything was wrong, and they are being accused of being material advisors and subject to a $200,000 IRS fine.

Lance Wallach, CLU, ChFC, is the author of the American Institute of CPAs (AICPA) “The Team Approach to Tax, Financial and Estate Planning” and other AICPA books. He speaks at numerous AICPA conferences and other national conventions and writes for financial publications.He can be reached at lawallach@aol.com, (516) 938-5007 or www.vebaplan.com.

Disclaimer: The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice. Lance Wallach adapted parts of this article from the American Institute of CPAs (AICPA) CPE self-study course he wrote, “Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots,” by Sid Kess, as well as his September 2008 Journal of Accountancy article.

Reprinted with permission from the Virginia Society of CPAs.

How Much Have You Lost Today?

2008-10-29T12:39:00.000-07:00

How Much Have You Lost Today?

Auto Care Forum
November 2008

By Lance Wallach

How much have you lost this month? Is your insurance company,bank, etc. still in business? How much do you have left in your retirement plan? Are you still listening to your insurance agent, your financial planner, your stockbroker, your accountant, and your friends? They have probably lost more than you. None of my clients lost anything in 2008. All of my retirement plans, etc. went up in value every quarter in 2008. Put Lance Wallach into any search engine like Google and see what I have done. Now put your advisors' names into Google.

Who do you think knows more about what is going on? Without serious knowledge of things like finances, taxes, tax audits, and retirement plans, it's hard to keep a shop open for business and to ensure that your future is in good hands. Especially now, as the economy begins to change, it is smart to look into different ways to secure your future and money. Recent well documented events have made it increasingly important to educate yourself on how to handle such endeavors correctly. Thousands of businesses have closed as a result of bankruptcy, corrupt policies, lowered sales, and other factors, often because issues that seemingly, in hindsight, should have been obvious were overlooked. In this environment, more than ever, you simply cannot afford mistakes or omissions with respect to your finances. Simply being aware of the amount of debt that you are carrying, for example, is an important aspect of watching your money. Web sites such as IRS.gov, FinanceExperts.org, and TaxLibrary.us are resources that can help make sure that there are ZERO unpleasant surprises in your numbers. Additionally, keeping accurate records and constantly double checking your numbers are two obvious, yet often neglected, things that you should do. So the question stands: how knowledgeable are you about your own finances?

Many of you have received information about the current state of your investments in the past few months. Sticker shock would be an understatement. Thousands have been lost as a direct result of the fiascoes constantly occurring as of this writing. Savings that would not only brighten your futures, but in many cases investments that you planned to use for your children's educations, are gone. The downward spiral will continue, as the shrapnel from these events moves throughout our failing economy. It won't stop in the foreseeable future, and it will entail more than just monetary losses. The watchdog agencies that will now have to redeem themselves for failing to perform their regulatory functions, leading at least in part to all of these failures, will respond with increased scrutiny of American citizens and businesses in every manner imaginable. Trust me, no stone will be left unturned, including that of increased IRS audits for the express purpose of raising money, which in fact has already started. All of which is why treading water in the tide of an ebbing economy is not a solution.

It would appear that the seemingly indestructible giants of Wall Street have begun to crumble. Lehman Brothers is no more, Merrill Lynch has been taken down a peg or two, and now, disaster is apparently looming over Morgan Stanley. To say nothing of the looming threat to the consumer banking industry. As industry insiders, we've seen the writing on the wall for quite some time. Now, everybody else can see it, too.

The veil has been pulled back on the stock market's heavy hitters. Consumers now know there is indeed no "wizard" behind the curtain, just a few individuals in designer suits pulling down astronomical sums of money for the advice they send down from on high. Who can forget the images of the Lehman Brothers employees in New York City, emptying their offices into boxes and carrying them down Seventh Avenue? As sad as it was to see, it was a day we all had the feeling was coming, right? But now that it's here, why don't we feel any better?
The hopes of many investors in the stock market have been shaken to the core, but we cannot forget about the morose consumers and business owners. A number of individuals are suffering the potentially substantial loss (or potential loss) of their hard-earned money in a volatile market. Consumers need advisors who can guide them toward a safe harbor. As previously mentioned, financeexperts.org can give you the help you need in this failing economy. The leading authorities are members, and will most likely give helpful feedback. Consumers are fearful, and if they say they aren't, they probably are not being honest . For most Americans today, a stress free retirement is looking more and more impossible, and the difficulties looming between ourselves and that goal seem insurmountable. But things do not have to look and seem so bleak.

In a sense of the word, we feel compassion. We hate to have an "I told you so" attitude, but at times it is hard to avoid. However, rather than dwell on this compassion, why not capitalize on it? Often unforeseen opportunities arise from the ashes of situations such as these. In fact, many such opportunities are available as I write this. They will be taken advantage of by those with the imagination and talent to position themselves to do so.

By reading this, you may be off to a good start. There are many ideas you will get from our leading finance experts to better run your business, reduce taxes and insurance costs, and much more. You will learn how to avoid audits, which are already up fifty (50) percent and are expected to increase further still, and turn your accountant into your protector instead of a tax collector. You will learn from Lance Wallach, who, as an American Institute of CPAs instructor and course developer, teaches CPAs. Lance also draws upon the knowledge and expertise of his associates, who are the leading finance experts in the United States. None of them work for any of the firms that were affected by the recent and ongoing financial fiascoes. Many of them perceived the arrival of these problems, and only their clients benefited because most other business people were too busy buying products from stockbrokers, insurance agents, and so-called financial planners who did not know what was going on. In Lance's spare time, between speaking at conventions, writing and helping a select few business owners, he often serves as an expert witness.

In fact, for two days in September 2008, Lance testified as an expert witness in Federal Court for a business owner that was sold a faulty financial product by a combination of his accountant and a so-called retirement plan expert. After Lance completed his testimony, the judge called the retirement plan salesman a "crook" and said that he should settle with the plaintiff. He did not, and the jury awarded the business owner TWICE what he had sued for. As a side note, Lance had advised the lawyer that this was a so-called "ERISA case" and instead of the $400,000 that the business owner was suing for, $800,000 (double damages, as is possible in "ERISA" cases), could be awarded if the jury felt that was appropriate.

The point is that, under no circumstances, should you be forced to lay down and take the abuse and malpractice that most salespeople pin on you. Get your financial and business affairs in order, and, if necessary, take some action! Take some serious action! Lance Wallach is a frequent speaker at national conventions and writes for more than 50 publications. He was the National Society of Accountants Speaker of the Year. He welcomes your contact. E-mail him at lawallach@aol.com or call (516) 938-5007. Also, visit his web site Vebaplan.com for further information. The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or entity. You should contact an appropriate professional for any such advice.

Abusive Insurance and Retirement Plans

2008-10-23T08:06:00.000-07:00

Journal of Accountancy
September 2008

Abusive Insurance and Retirement Plans
Single-employer section 419 welfare benefit plans are the latest incarnation in insurance deductions the IRS deems abusive.

By Lance Wallach
Parts of this article are from the AICPA CPE self-study course Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots, by Sid Kess, authored by Lance Wallach.

Many of the listed transactions that can get your clients into trouble with the IRS are exotic shelters that relatively few practitioners ever encounter. When was the last time you saw someone file a return as a Guamanian trust (Notice 2000-61)? On the other hand, 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 arrangements purporting to allow deductibility of premiums paid for life insurance under a welfare benefit plan.

Some of these abusive employee benefit plans are represented as satisfying section 419 of the Code, which sets limits on purposes and balances of “qualified asset accounts” for such benefits, but purport to offer deductibility of contributions without any corresponding income. Others attempt to take advantage of exceptions to qualified asset account limits, such as sham union plans that try to exploit the exception for separate welfare benefit funds under collective-bargaining agreements provided by IRC § 419A(f)(5). Others try to take advantage of exceptions for plans serving 10 or more employers, once popular under section 419A(f)(6). More recently, one may encounter plans relying on section 419(e) and, perhaps, defined-benefit pension plans established pursuant to the former section 412(i) (still so-called, even though the subsection has since been redesignated section 412(e)(3). See sidebar “Defined-Benefit 412(i) Plans Under Fire”).

Promoters and Their Best-Laid Plans
Sections 419 and 419A were added to the Code in 1984 by the Deficit Reduction Act of 1984 in an attempt to end employers’ acceleration of deductions for plan contributions. But it wasn’t long before plan promoters found an end run around the new Code sections. An industry developed in what came to be known as “10 or more employer plans.” The promoters of these plans, in conjunction with life insurance companies who just wanted premiums on the books, would sell people on the idea of tax-deductible life insurance and other benefits, and especially large tax deductions. It was almost, “How much can I deduct?” with the reply, “How much do you want to?” Adverse court decisions (there were a few) and other law to the contrary were either glossed over or explained away.

The IRS steadily added these abusive plans to its designations of listed transactions. With Revenue Ruling 90-105, it warned against deducting certain plan contributions attributable to compensation earned by plan participants after the end of the taxable year. Purported exceptions to limits of sections 419 and 419A claimed by 10 or more multiple-employer benefit funds were likewise proscribed in Notice 95-34. Both positions were designated listed transactions in 2000.

At that point, where did all those promoters go? Evidence indicates many are now promoting plans purporting to comply with section 419(e). They are calling a life insurance plan a welfare benefit plan (or fund), somewhat as they once did, and promoting the plan as a vehicle to obtain large tax deductions. The only substantial difference is that these are now single-employer plans. And again, the IRS has tried to rein them in, reminding that listed transactions include those substantially similar to any that are specifically described and so designated.

On Oct. 17, 2007, the IRS issued notices 2007-83 and 2007-84. In the former, the IRS identified certain trust arrangements involving cash-value life insurance policies, and substantially similar arrangements, as listed transactions. The latter similarly warned against certain post-retirement medical and life insurance benefit arrangements, saying they might be subject to “alternative tax treatment.” The IRS at the same time issued related Revenue Ruling 2007-65 to address situations where an arrangement is considered a welfare benefit fund but the employer’s deduction for its contributions to the fund is denied in whole or part for premiums paid by the trust on cash-value life insurance policies. It states that a welfare benefit fund’s qualified direct cost under section 419 does not include premium amounts paid by the fund for cash-value life insurance policies if the fund is directly or indirectly a beneficiary under the policy, as determined under section 264(a).

Notice 2007-83 is aimed at promoted arrangements under which the fund trustee purchases cash-value insurance policies on the lives of a business’s employee/owners, and sometimes key employees, while purchasing term insurance policies on the lives of other employees covered under the plan. These plans anticipate being terminated and that the cash-value policies will be distributed to the owners or key employees, with very little distributed to other employees. The promoters claim that the insurance premiums are currently deductible by the business, and that the distributed insurance policies are virtually tax-free to the owners. The ruling makes it clear that, going forward, a business under most circumstances cannot deduct the cost of premiums paid through a welfare benefit plan for cash-value life insurance on the lives of its employees.

The IRS may challenge the claimed tax benefits of these arrangements for various reasons:
■ Some or all of the benefits or distributions provided to or for the benefit of owner-employees or key employees may be disqualified benefits for purposes of the 100% excise tax under section 4976.
■ Whenever the property distributed from a trust has not been properly valued by the taxpayer, the IRS said in Notice 2007-84 that it intends to challenge the value of the distributed property, including life insurance policies.
■ Under the tax benefit rule, some or all of an employer’s deductions in an earlier year may have to be included in income in a later year if an event occurs that is fundamentally inconsistent with the premise on which the deduction was based.
■ An employer’s deductions for contributions to an arrangement that is properly characterized as a welfare benefit fund are subject to the limitations and requirements of the rules in sections 419 and 419A, including reasonable actuarial assumptions and nondiscrimination. Further, a taxpayer cannot obtain a deduction for reserves for post-retirement medical or life benefits unless the employer intends to use the contributions for that purpose.
■ The arrangement may be subject to the rules for split-dollar arrangements, depending on the facts and circumstances.
■ Contributions on behalf of an owner-employee may be characterized as dividends or as nonqualified deferred compensation subject to section 404(a)(5), section 409A or both, depending on the facts and circumstances.

Higher Risks for Practitioners Under New Penalties
The updated Circular 230 regulations and the new law (IRC § 6694, preparer penalties) make it more important for CPAs to understand what their clients are deducting on tax returns. A CPA may not prepare a tax return unless he or she has a reasonable belief that the tax treatment of every position on the return would more likely than not be sustained on its merits. Proposed regulations issued in June 2008 spell out many new implications of these changes introduced by the Small Business and Work Opportunity Act of 2007.

The CPA should study all the facts and, based on that study, conclude that there is more than a 50% likelihood (“more likely than not”) that, if the IRS challenges the tax treatment, it will be upheld. As an alternative, there must be a reasonable basis for each position on the tax return, and each position needs to be adequately disclosed to the IRS. The reasonable-basis standard is not satisfied by an arguable claim. A CPA may not take into account the possibility that a return will not be audited by the IRS, or that an issue will not be raised if there is an audit.

It is worth noting that listed transactions are subject to a regulatory scheme applicable only to them, entirely separate from Circular 230 requirements, regulations and sanctions. Participation in such a transaction must be disclosed on a tax return, and the penalties for failure to disclose are severe—up to $100,000 for individuals and $200,000 for corporations. The penalties apply to both taxpayers and practitioners. And the problem with disclosure, of course, is that it is apt to trigger an audit, in which case even if the listed transaction were to pass muster, something else may not.

Need for Caution
Should a client approach you with one of these plans, be especially cautious, for both of you. Advise your client to check out the promoter very carefully. Make it clear that the government has the names of all former 419A(f)(6) promoters and therefore will be scrutinizing the promoter carefully if the promoter was once active in that area, as many current 419(e) (welfare benefit fund or plan) promoters were. This makes an audit of your client far riskier and more likely.

Defined-Benefit 412(i) Plans Under Fire
The IRS has warned against so-called 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.

EXECUTIVE SUMMARY
■ Some of the listed transactions CPA tax practitioners are most likely to encounter are employee benefit insurance plans that the IRS has deemed abusive. Many of these plans have been sold by promoters in conjunction with life insurance companies.
■ As long ago as 1984, with the addition of IRC §§ 419 and 419A, Congress and the IRS took aim at unduly accelerated deductions and other perceived abuses. More recently, with guidance and a ruling issued in fall 2007, the Service declared as abusive certain trust arrangements involving cash-value life insurance and providing post-retirement medical and life insurance benefits.
■ The new “more likely than not” penalty standard for tax preparers under IRC § 6694 raises the stakes for CPAs whose clients may have maintained or participated in such a plan. Failure to disclose a listed transaction carries particularly severe potential penalties.
___________________________________________________________________

Lance Wallach, CLU, ChFC, CIMC, is the author of the AICPA’s The Team Approach to Tax, Financial and Estate Planning. He can be reached at lawallach@aol.com or on the Web at www.vebaplan.com or at (516) 938-5007. The information in this article is not intended as accounting, legal, financial or any other type of advice for any specific individual or other entity. You should consult an appropriate professional for such advice.

AICPA RESOURCES
CPE
■ Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots, by Sid Kess, a CPE self-study course (#733720)
■ Sid Kess’ Practical Alternatives to Commonly Misused and Abused Small Business Tax Strategies: Insuring Your Client’s Future, a CPE self-study course (#733730)

For more information or to place an order, go to www.cpa2biz.com or call the Institute at 888-777-7077.
AICPA PFP Center and PFS CredentialThe AICPA Personal Financial Planning (PFP) Center provides a range of valuable resources that CPAs need for professional and ethical financial planning. The center also contains information about the AICPA Personal Financial Specialist (PFS) credential and PFP section membership. For more information go to http://pfp.aicpa.org.

OTHER RESOURCES
Law, rulings and guidance
■ Internal Revenue Code §§ 264, 419, 419A, 6111 and 6112
■ News Releases IR 2007-170 and IR 2004-21
■ Revenue Ruling 2007-65
■ Notices 2007-83 and 2007-84

Retirement Plans being audited by IRS in 2008

2008-08-21T10:02:00.000-07:00

NEW JERSEY ASSOCIATION OF PUBLIC ACCOUNTANTS
AUGUST 2008

Retirement Plans being audited by IRS in 2008. The Internal Revenue Service has recently been conducting a campaign by way of auditing Section 412(i) defined benefit pension plans. They are seeking substantial taxes and penalties from plans that they conclude are "abusive", although they are not approaching each plan with that mindset. But some of those that have been deemed abusive have also been regarded as listed transactions, and falling into that category leads to the disastrous result that taxpayers participating in them must disclose such participation under pain of penalties for nondisclosure potentially reaching as high as $100,000 for individuals and $200,000 for other taxpayers.

There is also increased audit activity in the general area of retirement plans, aiming to catch those companies cheating their workers or the Government. Targets include traditional pensions, 401(k) plans, and profit sharing plans. Part of the reason for the harsh treatment of 412(i) plans is discrimination in favor of owners and/or key, highly compensated employees, as well as the general feeling that the promised tax relief is not proportionate to the economic realities of these transactions. In general, IRS auditors divide the audited plans into non-compliant plans and abusive plans. While the alternatives available to the plan sponsor of a non-compliant plan are problematical, keeping the plan alive in some form, while simultaneously hoping to minimize the financial fallout from penalties, etc., is frequently an option.
The plan sponsor of an abusive plan can expect to be treated more harshly. Although it may not be the rule in all cases, there possibly being situations where something can be salvaged, the possibility is definitely on the table of having to treat the plan as if it never existed, which ofcourse triggers, to the fullest extent possible, back taxes, penalties and interest on all contributions that were made, not to mention leaving behind no retirement plan whatsoever.

Perhaps the largest issue in making sure that a qualified plan satisfies nondiscrimination testing and remains compliant is the inclusion of all “related employers” as joint sponsors of the plan. That’s because many small business owners may indeed own or control more than one enterprise. It is tempting to adopt a 412(i) plan to benefit one group of employees, and not cover all the related employees, but this may not be possible under current pension law as a plan must meet specific coverage and participation rules. [IRC §410(b) and §401(a)(26)] Generally, all the employees of businesses under common control are aggregated for nondiscriminationtesting vesting and top-heavy rules. Also the 415(a) contribution and 415(b) benefit limits willaggregate as if all the employees worked in one single employer. [IRC §414(b)] Presented here are definitions of the “controlled” and “affiliated” service groups that the professional advisor must consider before recommending adoption of any qualified retirement plan.

The Pension Protection Act, which became law in August of 2006, has altered the landscape in some ways. There is the favorable treatment accorded cash balance plans; this encouragement has made them almost ubiquitous. There is also a provision requiring that all defined benefit plans, except for 412(i) plans, be fully funded. This means that one hundred percent of the present value of the future promised liability must be funded. As for the consequences of failing to fully fund, if funding is below sixty (60) percent, the Pension Benefit Guaranty Corporation is legally authorized to simply terminate the plan. Other plans that are not as seriously under funded are considered "at risk", and are subject to a wide range of sanctions.

The traditional 401(k) defined contribution plan has also become somewhat of an audit target recently. Government auditors are trained to look for failure to adhere to the terms of the plan document as well as the improper exclusion of employees, both of which could lead to the disqualification of the plan.

To avoid such a disaster, the Service recommends that employers work in conjunction with plan administrators so that both parties are knowledgeable with respect to the particulars of the plan, and that plan administrators be timely provided with the necessary information to properly determine whether each employee should be included or excluded. All parties should also be mindful of the limitations imposed by Section 415. This section limits the amount of contributions that a participant can receive in a defined contribution plan as well as the amount of benefits that a participant can accrue in a defined benefit plan. Failure to adhere to Section 415 limitations most frequently occurs in situations where the employer or third party administrator does not monitor the amount of contributions allocated or the amount of benefits that are accrued by participants.

Lance Wallach is a frequent speaker at national conventions and writes for more than 50 publications. He was the National Society of Accountants Speaker of the Year. Lance welcomes your contact. Email - lawallach@aol.com or call 516-938-5007 for more info.

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.

Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots, by Sid Kess

2008-07-31T10:02:00.000-07:00

New and Bestselling AICPA CPE Self-Study Courses
Best Sellers – March 2008

Author/Moderator: Lance Wallach, CLU, CHFC
Publisher: AICPA

This course will enable the practitioner to better understand many of the abusive insurance and annuity-based products being marketed to your clients and how you can alleviate exposure to IRS scrutiny.

Objectives:
Identify potentially abusive deductions claimed on your client’s tax return
Enable the practitioner to advise his clients so they can avoid IRS penalties and deduction disallowances.

Learn the pros and cons of the current strategies being employed by financial professionals in developing comprehensive financial plans for individuals and businesses.

Learn to avoid financial exposure to yourself and your clients for aggressive insurance, retirement and financial planning strategies being marketed today.

Prerequisite: None
Accepted for CFP® credit.
Text
Product# 733720
Availability:In Stock
Regular:$150.00
AICPA Member:$120.00
Your Price:$150.00

Sid Kess’ Practical Alternatives to Commonly Misused and Abused Small Business Tax Strategies: Insuring Your Client’s Future

2008-07-31T08:04:00.000-07:00

What's new in CPE self-study for April 2008

New and Bestselling AICPA CPE Self-Study Courses
At the AICPA Store you'll find more than 200 titles in a variety of formats to best meet your needs. Get practical guidance. Stay up-to-date on hot topics. Train your staff. Meet CPE reporting deadlines. Get real-time exam results with online grading. Check out this month's picks below. Turn to the AICPA for quality, value and convenience in CPE self-study products. Order today.

Author/Moderator: Lance Wallach, CLU, CHFC, CIMC
Publisher: AICPA
Availability: In Stock

A perfect follow-up to “Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots,” this course was created by the renowned Sid Kess. Learn the best strategies for reducing taxes and building, conserving and passing wealth to the next generation while at the same time avoiding abusive strategies.

Objectives:
Identify practical alternatives to abusive tax shelters
Understand how to integrate financial products as part of a retirement plan
Discover how to use innovative retirement and financial programs to improve business and personal financial wealth of your clients
Optimize your value in the planning process between your clients and their financial advisors
Prerequisite: None
Accepted for CFP® credit.

Chapter 1 - Planning for Business Owners
Learning Objectives
Introduction
Building the Perfect Retirement Plan
SEP IRA: The Good
SEP IRA: The Bad
SEP IRA: The Ugly
The K
The Double K
Defined Benefit Plans
Adding Survivor Benefits
412(i) Defined Benefit Plan
Cash Balance Plans
VEBAs and 419 Plans
Taxability of Trust Net Income
Taxability of Excess Benefits
Group-Term Life Insurance Plan
Post-Retirement Medical Benefit
Voluntary Employees Beneficiary Association (VEBA) - Commentary
New Development - Welfare Benefit Plans under Section 419(e)
Executive Carve Out Long-Term Care
What Is Long-Term Care?
How Much Does It Cost
Benefits of Long-Term Care Insurance to Employees
Benefits of Long-Term Care Insurance to Employers
Executive Carve Out Long-Term Care
Taxability
Long-Term Care Insurance Premium Deductibility
2007 Eligible Long-Term Care Insurance Premiums Age-Based Deduction Limits

Chapter 2 - Personal Financial Planning
Learning Objectives
Introduction
IRA Planning
RMDs
Stretch IRA
Stretch IRA Example
Stretch IRA Pitfalls
Other Beneficiary Pitfalls
Important Questions Your Client Should Ask Their IRA Custodian
When a Stretch IRA Might Not Make Sense
Taxable Estate
Company Stock
What Investments Should be In Your Client's IRA?
Estate Planning
What Makes a Good Estate Plan?
Minimizing Taxes
Gift Taxes
Generation Skipping Tax (GST)
Estate Division
Insurance Trusts
Pay Estate Taxes at a Discount
Estate Planning Mistakes of the Rich and Famous
Unintended Heirs
Estate Tax Problems
Incapacity
Leaving Money Outright to Children
Pension Plan Beneficiary Problems
Premium Financing as a Tool to Pay Life Insurance Premiums
The Benefits of Premium Financing
Type of Premium Financing Arrangements
Collateral
Interest Rate Risk
General Account Universal Life
Variable Life Insurance
Single Index Life
Multiple Index Life
Premium Financing Components
Loan Options
Process
Repaying Premium Loans
Income Tax Considerations
Gift Tax Considerations
Estate Tax Considerations
Premium Finance Due Diligence
Life Settlements
Life Settlement History
The Life Settlement Market
Life Settlement Case Studies
The Insurance Swapout Process(TM)
Reasons for Using an ISP
Why You Would Not Want to Use an ISP
Important Considerations
Annuities
Types of Annuities
Non-Qualified Funds in a Tax Deferred Annuity
Surrender Charges
Tax Rules
Sales Abuses
Risks
Annuity Checklist

Chapter 3 - Advanced Planning
Learning Objectives
Introduction
Hedge Funds
Availability
Hedge Fund Risks and Disadvantages
Hedge Fund Advantages
Hedge Fund Investing Styles
Relative Value
Event Driven
Long/Short
Tactical Trading
Due Diligence
Returns
Risks
Diversification
Hedge Fund of Funds
Mutual Funds That Follow Hedge Fund Strategies
Tax Implications
Private Placement Variable Universal Life Insurance
Why High Net Worth Investors Use Hedge Funds
Taxation of Life Insurance
PPVUL
Prospect Profile
Practitioner Beware
Conclusion
International Mortgages
How it Works
Loan Features
Other Considerations
Costs
Risks
Frequently Asked Questions

Chapter 4 - Health Insurance Planning
Learning Objectives
Introduction
Health Insurance Basics
Health Savings Accounts
Health Reimbursement Arrangements
Other Health Insurance Arrangements
Self-Funded Plans and Stop-Loss
Limited Coverage and Supplemental Plans

Conclusion
Appendix A - Qualified Medical Expenses - Distributions from an HSA
Appendix B - Health Savings Accounts - Preventive Care, Safe Harbor
Appendix C - Sample Sections of an Actual Health Reimbursement Arrangement Summary Plan Document

Chapter 5 - Ethics Focus: Taxation
Ethics Overview
Recent Developments
Spotlight on Independence in Tax Services
Key Ethical Dilemmas and Judgment Calls
Addressing Ethical Dilemmas
Available Resources

Chapter 6 - Latest Developments
733730

Captive Insurance and Other Tax Reduction Strategies – The Good, Bad, and Ugly

2008-07-28T09:20:00.000-07:00

National Society of Accountants

NSA: Member Link
Your link to accounting, tax and practice management ideas, tools, news and information.

Captive Insurance and Other Tax Reduction Strategies – The Good, Bad, and Ugly

By Lance Wallach

May 14, 2008

Every accountant knows that increased cash flow and cost savings are critical for businesses in 2008. What is uncertain is the best path to recommend to garner these benefits.

Over the past decade business owners have been overwhelmed by a plethora of choices designed to reduce the cost of providing employee benefits while increasing their own retirement savings. The solutions ranged from traditional pension and profit sharing plans to more advanced strategies.

Some strategies, such as IRS section 419 and 412(i) plans, used life insurance as vehicles to bring about benefits. Unfortunately, the high life insurance commissions (often 90% of the contribution, or more) fostered an environment that led to aggressive and noncompliant plans.

The result has been thousands of audits and an IRS task force seeking out tax shelter promotion. For unknowing clients, the tax consequences are enormous. For their accountant advisors, the liability may be equally extreme.

Recently, there has been an explosion in the marketing of a financial product called Captive Insurance. These so called “Captives” are typically small insurance companies designed to insure the risks of an individual business under IRS code section 831(b). When properly designed, a business can make tax-deductible premium payments to a related-party insurance company. Depending on circumstances, underwriting profits, if any, can be paid out to the owners as dividends, and profits from liquidation of the company may be taxed as capital gains.

While captives can be a great cost saving tool, they also are expensive to build and manage. Also, captives are allowed to garner tax benefits because they operate as real insurance companies. Advisors and business owners who misuse captives or market them as estate planning tools, asset protection vehicles, tax deferral or other benefits not related to the true business purpose of an insurance company face grave regulatory and tax consequences.

A recent concern is the integration of small captives with life insurance policies. Small captives under section 831(b) have no statutory authority to deduct life premiums. Also, if a small captive uses life insurance as an investment, the cash value of the life policy can be taxable at corporate rates, and then will be taxable again when distributed. The consequence of this double taxation is to devastate the efficacy of the life insurance, and it extends serious liability to any accountant who recommends the plan or even signs the tax return of the business that pays premiums to the captive.

The IRS is aware that several large insurance companies are promoting their life insurance policies as investments with small captives. The outcome looks eerily like that of the 419 and 412(i) plans mentioned above. Remember, if something looks too good to be true, it usually is. There are safe and conservative ways to use captive insurance structures to lower costs and obtain benefits for businesses. And, some types of captive insurance products do have statutory protection for deducting life insurance premiums (although not 831(b) captives). Learning what works and is safe is the first step an accountant should take in helping his or her clients use these powerful, but highly technical insurance tools.

Lance Wallach speaks and writes extensively about VEBAs, retirement plans, and tax reduction strategies. He speaks at more than 70 conventions annually, writes for 50 publications, and was the National Society of Accountants Speaker of the Year. Contact him at 516.938.5007 or visit http://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.

National Society of Accountants

ABUSIVE INSURANCE PLANS GET RED FLAG

2008-07-24T09:50:00.000-07:00

Journal of Accountancy January 2008
Prepared by Lance Wallach, CLU, ChFC, CIMC, of Plainview, N.Y.

The IRS in Notice 2007-83 identified as listed transactions certain trust arrangements involving cash-value life insurance policies. Revenue Ruling 2007-65, issued simultaneously, addressed situations where the tax deduction has been disallowed, in part or in whole, for premiums paid on such cash-value life insurance policies. Also simultaneously issued was Notice 2007-84, which disallows tax deductions and imposes severe penalties for welfare benefit plans that primarily and impermissibly benefit shareholders and highly compensated employees.

Taxpayers participating in these listed transactions must disclose such participation to the Service by January 15. Failure to disclose can result in severe penalties--- up to $100,000 for individuals and $200,000 for corporations.

Ruling 2007-65 aims at situations where cash-value life insurance is purchased on owner/employees and other key employees, while only term insurance is offered to the rank and file. These are sold as 419(e), 419(f) (6), and 419 plans. Other arrangements described by the ruling may also be listed transactions. A business in such an arrangement cannot deduct premiums paid for cash-value life insurance.

A CPA who is approached by a client about one of these arrangements must exercise the utmost degree of caution, and not only on behalf of the client. The severe penalties noted above can also be applied to the preparers of returns that fail to properly disclose listed transactions.

Prepared by Lance Wallach, CLU, ChFC, CIMC, of Plainview, N.Y.,
516-938-5007, a writer and speaker on voluntary employee’s beneficiary associations and other employee benefits. www.vebaplan.com

IRS Clarifies Legality of 419(e) Plans

2008-07-24T09:29:00.000-07:00

The Trusted Professional
The Newspaper of the New York State Society of Certified Public Accountants

July 15, 2007

By Lance Wallach, CLU, ChFC, CIMC
and Ronald H. Snyder, JD, MAAA, EA

Following the U.S. Congress’ lead, on April 10 the IRS issued final regulations under Section 409A of the Internal Revenue Code. If the rules seemed unclear before, they are crystal clear now: Most of the so-called “419(e)” plans as well as the remaining 419A(f)(6) plans are in violation of the law and subject to hefty penalties.

A 419(e) plan is a benefit plans that generally seeks to make the purchase of life insurance tax-deductible to employers. While the concept is appealing, most of the existing arrangements have permitted the plans to transfer the insurance policies to the participants upon retirement.

The Purpose of 409A
Code Section 409A was enacted into law on Oct.10, 2004, to provide some uniformity and to impose several requirements upon nonqualified deferred compensation plans and similar arrangements. The new rules imposed include a required written plan agreement; a limit of payments to death, disability, or retirement; a substantial risk of forfeiture to avoid immediate taxation to the employee; and timing limitations on benefit distributions. Congress drafted Section 409A broadly to include any payment to an employee after the year for which it was paid or after termination of employment, unless the payment falls under one of the named exceptions. Exceptions include payments within 75 days, COBRA benefits, de minimis cash-outs paid in the year of termination of employment, etc.

409A Applicability to Welfare Benefits
Section 409A does not apply to welfare benefits. In fact, several forms of welfare benefits are specifically excluded under 409A. However, such excluded arrangements do not permit transfer of property to the participant except for death, disability, and payments made upon retirement in accordance with the 409A rules.
Most of the existing 419(e) and 419A(f)(6) welfare benefit plans do not comply with the 409A rules relative to transfers of insurance policies or cash payments other than upon death.

Compliance and Effective Dates
Significant penalties apply for noncompliance with section 409A. In addition to having compensation included in income, tax penalties equal to the IRS underpayment rate plus 1 percent from the time the compensation should have been included in income, plus 20 percent of the compensation amount, apply. Additional penalties may apply for failure to report the arrangement appropriately.

When Section 409A was added, employers and consultants scrambled to comply because the rules were effective for years beginning after 2004 for all arrangements entered into after Oct. 3, 2004. Existing arrangements were given until the end of 2005 to comply. However, IRS granted an extension for compliance for employers who made a “good-faith” effort to comply with the rules. Under the Final Regulations, plans have until Dec. 31, 2007 to be in full compliance.

Effect on CPAs, Plan Sponsors and Others
Under Circular 230 standards a CPA or attorney who advises his or her client about participating in a noncompliant welfare benefit plan may be liable for fines and other sanctions. The authors expect that opinion letters relative to such welfare benefit plans have either been withdrawn or will be shortly, and we admonish professionals to review carefully all communications with clients relative to such plans. The IRS has recently been successful in imposing huge fines on several law firms for blessing questionable transactions.

Sponsors of 419 plans have two choices: totally eliminate distributions from their plans (except medical reimbursement or death benefits), or comply with Code Section 409A and the regulations thereunder.

Employers have until Dec. 31 to be in compliance. Employers who have adopted 419 plans must choose immediately whether to remain in their current 419 plan, cancel their participation in such arrangement and have their benefits distributed by Dec. 31, or transfer to a plan that is fully compliant with the new rules.

Lance Wallach, CLU, ChFC, CIMC, can be reached at 516-938-5007 or lawallach@aol.com. Ron Snyder, JD, is an enrolled actuary.

Information contained in this article is not intended as legal, accounting, financial or any other type of advice for any specific individual or entity. You should contact an appropriate professional for appropriate guidance with respect to tax matters.

ABUSIVE WELFARE BENEFIT AND RETIREMENT PLANS CAN LEAD TO SEVERE PENALTIES FOR ACCOUNTANTS

2008-07-24T09:16:00.000-07:00

Published in the "National Society of Accountants"
April 30, 2008
By Lance Wallach

Accountants who are unaware of recent developments are likely to encounter a nightmarish scenario that may play out something like this: you sign a client’s tax return that claims a tax deduction for participation in a “welfare benefit plan”. A few years pass, and nothing happens. Then, on audit, the deductions are disallowed and your client is hit with back taxes, penalties, and interest. He discovers that he may be looking at a large penalty for not disclosing his participation in the plan to the IRS.

Naturally, at this point, your client wants out of the plan. But he discovers that he cannot get the money that he has contributed out of the plan. He finds that the money is being used by the plan sponsor to fight the IRS; his money is being used to defend a plan that he no longer wants to be in. This is claimed to be legal. Or he may even find that the money is simply gone, that it has been stolen or otherwise misappropriated.

And now you find that you are a “material advisor” with respect to your client’s participation in the plan. Like your client, you were supposed to disclose your role here; in your case, as a “material advisor”. You also may be looking at a large penalty for failing to disclose.
If you think this could never happen to you, think again.

Welfare benefit plans are a creation of and are sanctioned by Section 419 of the Internal Revenue Code. There are single employer plans and multiple employer plans; the latter rely mostly on IRC Section 419A (f) (6) (in the most common cases where there are ten or more employers as part of the same plan). The 419A(f)(6) plans are, and perhaps always were, generally regarded as abusive, and were substantially curtailed in recent years by harsh IRS regulation. Amazingly, however, they refuse to totally die, and are still being marketed. These plans are called listed transactions (more on that later).

While the principle purpose of this article is to discuss the current state of the welfare benefit plan, and everything outside of this paragraph will do just that, it is perhaps worth noting that welfare benefit plans are not the only subject of current IRS scrutiny and/or regulation. The Section 412(i) defined benefit plan, for example, is such a target that a task force has been formed internally solely to audit 412(i) plans. Many of them are being deemed listed transactions, many of the plans are being involuntarily terminated, and back taxes, penalties, and interest are being assessed. Not surprisingly, all of this has resulted in considerable litigation.
Single employer welfare benefit plans are now more popular than multiple employer plans. All welfare benefit plans tend to share certain characteristics, however. They tend to be marketed most frequently by insurance agents and financial planners, and sometimes by accountants and attorneys. Prospects tend to be professionals and profitable small businesses. The most attractive selling point is the ability to claim large tax deductions and remove money tax free. Life insurance tends to be the funding vehicle. Often cheap term insurance is purchased for rank and file workers and some form of permanent coverage (universal life, variable life, etc., for the owners and key employees. But many times workers are completely left out of the plan. For businesses looking to do as little as possible for workers, a selling point is that the great majority of benefits, in most cases, eventually go to the owners. This type of discrimination was recently addressed by IRS Notice 2007-84, which disallowed tax deductions and penalties with respect to welfare benefit plans that discriminate. If done correctly, the plans can accomplish things like facilitating estate planning, business succession, and asset protection. But the promised tax deduction is usually the sizzle that sells the steak.

In October of 2007, welfare benefit plans were affected by IRS rulings. The two most important developments were Revenue Ruling 2007-65, which declared, in essence, that premiums paid inside of a welfare benefit plan for cash value life insurance were not tax deductible, and Notice 2007-83, which identified the trust within welfare benefit plans involving cash value life insurance policies, AND substantially similar arrangements, as listed transactions. In other words, in essence, not only are premiums paid for cash value life insurance policies in welfare benefit plans not tax deductible, but, and far more importantly, the plans themselves are now listed transactions. This, in turn, means that most welfare benefit plans are now listed transactions, because most feature cash value life insurance. This designation creates disclosure obligations with absurdly harsh penalties both for failure to disclose or incorrectly or incompletely disclosing, as we shall soon see.

A listed transaction, basically, is any transaction identified as such by specific IRS guidance OR any transaction substantially similar to the specifically identified transaction. Participants in listed transaction must file Form 8886 with both the Service and the Office of Tax Shelter Analysis. Failure to timely and completely file leads to penalties of $100,000 for individuals and $200,000 for corporate taxpayers.

The practitioner has filing requirements, also, which can lead to equally severe penalties, if the practitioner qualifies as a “material advisor” with respect to one of these transactions. What is a material advisor? Basically, someone who gives advice, sells, or otherwise plays a significant part in the promotion, sale, or paperwork with respect to a taxpayer’s participation in a listed transaction. Put simply, from an accountant’s standpoint, you must give advice, the client must do it, and you must satisfy a certain income threshold with respect to the transaction, usually $10,000. The accountant who signs a return taking a tax deduction with respect to the transaction is surely a material advisor, if the income threshold is met.

A problem is that many accountants are not even aware of these plans. Often it is discovered when preparing the client’s tax return, at which point the client expects you to allow the deduction and sign the return, since the client was sold a tax deduction. Or worse yet, the deduction may already have been disallowed on audit. The point is that, far too frequently, the practitioner does not even discover a client’s involvement in a listed transaction until too much damage has already been done. This is often the case if the contribution has already been made, as it usually has, and irretrievably so if the deductions have already been disallowed on audit. And added to all of this is the distaste that most professionals must have for all of these policing types of duties, to say nothing of the difficulties that are created with clients and, probably, the loss of some clients.

The material advisor must file Form 8918 describing her exact role in the client’s participation in the transaction. Failure to file can lead to penalties imposed on the advisor that are as severe as those imposed on taxpayers ($100,000 for individuals and $200,000 for corporations) who fail to file Form 8886. The accountant may escape material advisor status by not meeting the $10,000 income threshold. A problem, however, is the accountant who is paid $10,000 in the aggregate by the client, but not that much specifically with respect to the listed transaction. Does such a person satisfy the income threshold? The author and his associates have discussed this point, among others, directly with IRS personnel who actually wrote published guidance in this area. The best we have been able to get is a declaration that any test that would be applied to the determination of any of these issues would have to consider all surrounding facts and circumstances. This would be unlikely to yield any general rules, for each situation has its own facts and circumstances.

Another section that the practitioner, or at least the prudent one, should be aware of, largely apart from what has been discussed so far in this article, is Section 6701, entitled “penalties for aiding and abetting understatement of tax liability.” This penalty is imposed upon those who assist in, procure, or advise while knowing or having reason to believe that the subject matter will be used in connection with any material matter arising under the tax laws and who know that the use thereof would result in the understatement of another person’s tax liability. The penalty may be applied separately to each occurrence, and it is $1,000 if an individual is the taxpayer and $10,000 for a corporate taxpayer.

Three (3) definitions are now in order, which will hopefully help to clarify any confusion that may exist in the reader’s mind. A “material advisor” is any person who provides any material aid, assistance, or advice with respect to organizing, managing, promoting, selling, implementing, insuring, or carrying out any reportable transaction, and who directly or indirectly derives gross income in excess of a certain threshold amount. More on threshold soon, but the most common one is $10,000 for listed transactions. A “reportable transaction”, basically, is any transaction which has been deemed to have a potential for tax avoidance or evasion. That is pretty broad, and the reader should consult the regulations under section 6011 for more on this. Finally, a “listed transaction” is a reportable transaction which is identical or substantially similar to a transaction specifically identified as a tax avoidance transaction.

As for threshold amounts, in the case of reportable transactions, it is $50,000, if substantially all tax benefits are provided to natural persons, and $250,000 in other cases. Natural person is construed most broadly, generally ignoring trusts, corporations, and other such entities. For listed transactions, the numbers are $10,000 (previously discussed) and $25,000.
Lance Wallach speaks and writes about benefit plans, and has authored numerous books for the AICPA, Bisk Total tape, and others. He can be reached at (516) 938-5007 or lawallach@aol.com. For more articles on this or other subjects, feel free to visit his website at http://www.vebaplan.com/.
The information contained in this article is not intended as legal, accounting, financial or any other type of advice for any specific individual or entity. You should seek such advice from an appropriate professional.

NSA ConnectED: Your Connection to Quality Education Right on Your Desktop NSA ConnectED webinars provide a very cost-effective way for you to get CPE anywhere you have a computer, a high speed internet connection, and a phone. The NSA member discount rate is just $35 for 1 webinar—Special Introductory Offer for NSA Members: Sign up for 3 Webinars & Get the 4th FREE! For more information, click here: NSA ConnectED Webinars.

Ethics: Insider Secrets to Avoid Malpractice and Huge Penalties Thursday, May 22, 2008 2:00-4:00pm Eastern Daylight Savings Time (11:00am Pacific) Recommended for CPE Credit: 2 Hours Ethics Click Here to Register Now This webinar will help you navigate some of the current ethical minefields inherent in practice today, especially under Circular 230. - Understand many of the abusive insurance and annuity based products being marketed to your clients and how to alleviate IRS scrutiny. - Identify potentially abusive deductions claimed on tax returns, which include many popular retirement and welfare benefit plans. ? Learn about various disclosure requirements and how to avoid large penalties, both to yourself and your client. - Protect your senior clients from abusive life settlements, reverse mortgages, annuities and more. - Discover opportunities available under the Pension Protection Act and new regulations, and how to use them correctly.

This webinar will give you expertise in tax shelters, listed transactions, captive insurance, 419 and 412i plans, premium finance, and other potentially abusive products and strategies.
Presented by Lance Wallach, CLU, CHFC, CIMC, a frequent speaker on pensions, VEBAs, financial and estate planning, practice management, and tax-oriented strategies at accounting and financial planning.

Retirement plans come under new IRS scrutiny

2008-07-24T08:43:00.000-07:00

Long Island Business News, June 15, 2007

By Lance Wallach

Businesses should be aware that the Internal Revenue Service is increasing its examinations of companies’ retirement plans, hoping to catch cheating their workers or the government, or both.

Pensions, profit-sharing plans and 401(k)s are all on the agenda.

The IRS intends to do about 9,000 of these focused examinations on companies of all sizes over the next nine months. Smaller businesses have more to fear; they are more likely to be out of compliance since they normally outsource set-up and administration.

Corporate pension plans have long been a target, but now the IRS appears to want to uncover more noncompliant and fraudulent plans. Knowing that smaller plans are more likely to be out of compliance, there has simply been a change in methodology. The agency no longer appears to look at all aspects of a given plan.

Instead, IRS agents now focus more on plan documents and internal controls (plan documents are examined to make sure they are current). Agents then focus on whether employers are properly handling various duties, including notifying workers of eligibility, matching employee contributions [in the case of 401(k) plans], calculating traditional benefits, investing, vesting workers and distributing benefits. By utilizing this somewhat streamlined approach, the IRS hopes to audit about 25 percent more plans this year than last.

Depending on circumstances and magnitude, those companies that are not in compliance could face sanctions ranging from fines up to closure.

Businesses should get an expert to review their retirement plans. This may also result in large cost savings, and recent changes in the law make more options available. Since the passage of the Pension Protection Act, for instance, cash balance plans have now been legitimized; these allow substantial contribution for owners and key executives while minimizing rank-and-file employee costs. In some cases, contributions can exceed salary for the key people.

Businesses should also consider a welfare benefit plan, which can yield large tax deductions and facilitate solutions to business succession and estate tax problems, among other things. Such plans often make items that are not normally deductible, such as life insurance premiums, tax deductible, and an employer can maintain a welfare benefit plan and a retirement plan simultaneously.

Lance Wallach is a frequent speaker at national conventions and writes for more than 50 national publications. Visit http://www.vebaplan.com/ or call 516-938-5007.

The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

IRS Tax Shelters & 419 Plans Litigation

419 Life Insurance Plans and Other Scams – Large IRS Fines –

Articlebase

Posted: Dec. 9

IRS Hiring Agents in Abusive Transactions Group

FAST PITCH NETWORKING

Posted: Dec. 10

By Lance Wallach

A portion of the exact announcement from the Department of the Treasury:

Job Title: INTERNAL REVENUE AGENT (ABUSIVE TRANSACTIONS GROUP)

Agency: Internal Revenue Service

Open Period: Monday, October 18, 2010 to Monday, November 01, 2010

Sub Agency: Internal Revenue Service

Job Announcement Number: 11PH1-SBB0058-0512-12/13

Who May Be Considered:

· IRS employees on Career or Career Conditional Appointments in the competitive service

· Treasury Office of Chief Counsel employees on Career or Career Conditional Appointments or with prior competitive status

· IRS employees on Term Appointments with potential conversion to a Career or Career Conditional Appointment in the same line of work

If you don’t want these new IRS Agents, or any other IRS agents for that matter, to be earning their paychecks by coming after you, make sure you have done all you can to ensure that you have filed properly by reaching out for expert help today.

Should you File, and then Opt Out?

Some 419 Insurance Welfare Benefit Plans Continue To Get Accountants Into Trouble

Protecting Clients from Fraud, Incompetence and Scams

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

By Lance Wallach

Abusive Insurance, Welfare Benefit, and Retirement Plans

Be Fined by the IRS Under Section 6707A Business Owners in 419, 412i, Section 79 and Captive Insurance Plans Will Probably

No Shelter Here, Backlash on too-good-to-be-true insurance plan

Remodeling Hanley / Wood

September 2011

Seems Attractive

Gotcha

Legal Wrangling

Small Business Retirement Plans Fuel Litigation

Maryland Trial Lawyer

Don't Become A Material Advisor

The dangers of being "listed" : A warning for 419, 412i, Sec.79 and captive insurance

IRS Audits Focus on Captive Insurance Plans

April 2011 Edition

Don’t Become a ‘Material Advisor’

Accounting Today

Re-entering The Tax System

Taxlanta.org July 2011

Bad Broker or Bad Luck?

IRS Auditing 412i, 419e

The Team Approach to Tax, Financial and Estate Planning

Don't Become A Material Advisor

Get Sued

Late Breaking News: Large 419 plan Millennium files for Bankruptcy

IRS Audits Focus on Captive Insurance Plans

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

Abusive Insurance, Welfare Benefit, and Retirement Plans

Why You Should Not Own Mutual Funds

Business Meals and Entertainment Expenses

Is Your Insurance Company Going Out of Business?

419 (welfare benefit) plans in jeopardy; severe agent penalties. Have recent IRS rulings killed the welfare benefit plan?

Keep a watchful eye: Tax avoidance can lurk in employee benefit plans

How Much Have You Lost Today?

Abusive Insurance and Retirement Plans

Retirement Plans being audited by IRS in 2008

Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots, by Sid Kess

Sid Kess’ Practical Alternatives to Commonly Misused and Abused Small Business Tax Strategies: Insuring Your Client’s Future

Captive Insurance and Other Tax Reduction Strategies – The Good, Bad, and Ugly

More Problems for 419 Plans

ABUSIVE INSURANCE PLANS GET RED FLAG

IRS Clarifies Legality of 419(e) Plans

ABUSIVE WELFARE BENEFIT AND RETIREMENT PLANS CAN LEAD TO SEVERE PENALTIES FOR ACCOUNTANTS

Retirement plans come under new IRS scrutiny