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

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 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 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.

4 comments:

  1. Lance Wallach
    Shared publicly - Feb 17, 2014
    #IRS


    Think the section 79 salesmen are still smiling with their big commissions from the section 79 sales?

    From: LAWALLACH@aol.com[mailto:LAWALLACH@aol.com]
    Sent: Saturday, June 18, 2011 1:11 PM
    To: Itzkowitz Ronald R
    Cc: LAWALLACH@aol.com
    Subject: Fwd: I would appreciate your help

    A few weeks ago I had sent you information about abusive tax shelters being sold to pass up the line of IRS people. Attached is an email I received from a compliance officer at a brokerage firm. She is concerned about the sale of so called section 79 plans whereby the promoter says that the contribution is all tax deductible. Only the term cost is according to IRS regs. and my reading of the code. On the surface this plan looks semi legal. But just like the 419 and 419 af6 plans the salesmen tell the taxpayers that they can deduct everything. This type of abusive tax deduction plan is now being sold by many of the same promoters that sold abusive 412i and 419 plans before the IRS stopped the abuse.



    I am running into the promoters of so called section 79 plans all over the U.S. Many of them tell me they have spoken to IRS and they have approval, which I do not believe. I have written many articles warning of this problem, and attorneys for the promoters threaten to sue me.



    I told the lady that I would pass this information and her note over to the IRS. Feel free to contact me or her, and good luck.

    Lance Wallach
    68 Keswick Lane
    Plainview, NY 11803
    Ph.: (516)938-5007
    Fax: (516)938-6330 www.vebaplan.com





    From: Ronald.R.Itzkowitz@irs.
    To: LAWALLACH@aol.com
    Sent: 6/20/2011 8:18:10 A.M. Eastern Daylight Time
    Subj: RE: I would appreciate your help

    ReplyDelete
  2. eBenefits BrokersCore/groupVoluntaryConsumer DrivenSales StrategiesRegulatoryEnrollmentExecutiveBenefits ManagersRetirement AdvisorsFreeERISA

    How to get fined $100,000 by the IRS and lose your license
    BY LANCE WALLACH
    December 17, 2008 • Reprints
    Over the past decade, business owners have been overwhelmed by a plethora of arrangements designed to reduce the cost of providing employee benefits and taxes, while simultaneously 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 percent or more) fostered an environment that led to the marketing and selling of aggressive and noncompliant plans.

    The result has been thousands of audits and an IRS task force seeking out tax shelter promotion. In addition, the IRS has been auditing most 412(i) defined benefit retirement plans and all 419 welfare benefit plans. These plans are sold by many insurance agents. For unknowing clients, the tax consequences are enormous. For their accountant advisors, the liability may be extreme. If an accountant signs a tax return with one of these plans on it, and if the IRS considers the plan an abusive, listed transaction or substantially similar to such a transaction, the accountant may be called a "material advisor." The fine for a material advisor is $200,000 if the accountant is incorporated or $100,000 if the accountant is not incorporated. There is also an IRS referral to the Office of Professional Responsibility. We have received hundreds of phone calls recently from accountants who are in this predicament. It is very difficult to help them after the fact. When I speak at national accounting conventions or AICPA events about these topics, most accountants in the audience do not understand what I am talking about, because they have never had this problem and are not aware of recent IRS enforcement activities. Unfortunately, within a few weeks after I speak at a convention, attendees will call me after reviewing their clients' tax returns. They often find one of these abusive plans on the return (these plans are very popular). If the plan is discovered before the IRS audit, many steps can be taken. If the IRS discovers the plan on audit, the results can be disastrous, both for your client and for you. The client gets fined $200,000 per year. For more information on this, see www.vebaplan.com and www.irs.gov.

    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 savings tool, they also are expensive to build a

    ReplyDelete
  3. California Enrolled Agent
    January 2, 2009


    How to Get Fined $100,000 by the IRS and Lose Your License


    By Lance Wallach, CLU, ChFC and Ira Kaplan, Esq., CPA, MBA


    Over the past decade, business owners have been overwhelmed by a plethora of arrangements designed to reduce the cost of providing employee benefits and taxes, while simultaneously 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 the marketing and selling of aggressive and noncompliant plans.

    The result has been thousands of audits and an IRS task force seeking out tax shelter promotion. In addition, the IRS has been auditing most 412(i) defined benefit retirement plans and all 419 welfare benefit plans. These plans are sold by many insurance agents. For unknowing clients, the tax consequences are enormous. For their accountant advisors, the liability may be equally extreme. If an accountant signs a tax return with one of these plans on it, and if the IRS considers the plan an abusive, listed transaction or substantially similar to such a transaction, the accountant may be called a “material advisor”. The fine for a material advisor is $200,000 if the accountant is incorporated or $100,000 if the accountant is not incorporated. There is also an IRS referral to the Office of Professional Responsibility. We have received hundreds of phone calls recently from accountants, who are in this predicament. It is very difficult to help them after the fact. When I speak at national accounting conventions or AICPA events about these

    ReplyDelete
  4. nnounced that today it filed a class action lawsuit against Chicago-based CJA and Associates and Kansas City, Missouri-based Fidelity Security Life Insurance Company (FSL). The lawsuit alleges that CJA and FSL breached fiduciary duties in duping small business owners into investing millions of dollars of employee retirement benefit money in FSL annuities when up to 95% of the initial money invested was being siphoned off in commissions and fees. The so-called Section 412 (e)(3) plans are under attack from the IRS as illegitimate attempts to avoid federal taxes. The lawsuit alleges that by advising investment in these plans CJA and FSL breached federal laws governing advice given to employee benefit plans.

    Purchasers of CJA or FSL Section 412 (e)(3) plans are encouraged to contact

    ReplyDelete