412i, 419, Lawsuits, IRS Audits. Lance Wallach, expert witness.

419, 412i, plans are being audited by the IRS. Lawsuits are the result. 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 - $100,000 per individual and $200,000 per entity per tax year for each failure to disclose the transaction - often exceeding the disallowed taxes.

There are business owners who owe $6,000 in taxes but have been assessed $1.2 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 advisers 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 $1 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 appealable 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 $860,000 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.

Last July, in response to a letter from members of Congress, the IRS put a moratorium on collection of §6707A penalties, but only in cases where the tax benefits were less than $100,000 per year for individuals and $200,000 for entities. That moratorium was recently extended until March 1, 2010.

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."

Dolan Media Newswires 01/22
Small Business Retirement Plans Fuel Litigation

As an expert witness Lance Wallach's side has never lost a case. People need to be careful of 419 Welfare Benefit Plans, 412i plans, Section 79 plans and Captive Insurance Plans. Most of these plans are sold by insurance agents. If you are in an abusive, listed or similar transaction plan you need to file under IRS 6707a. The participant files form 8886, and the salesmen or accountant who signs the tax returns files form 8918 if they got paid over $10,000. They are called Material Advisors and face a minimum $100,000 fine. Some plans are offshore which could involve FBAR or OVDI filings. If you have money overseas you probably need to file for IRS tax amnesty. If you want to reduce the tax we suggest that you first file and then opt out. For more information Google Lance Wallach.

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

8 comments:

  1. Lance Wallach Life Insurance

    Thursday, February 27, 2014
    Captive Insurance Buyer Beware
    Hg Experts
    Legal Experts Directory


    Captive Insurance Buyer Beware
    By Lance Wallach, CLU, CHFC Abusive Tax Shelter, Listed Transaction, Reportable Transaction Expert Witness

    Is a captive insurance cell the way to go? - Accounting Today - Captive Insurance: Achieve large tax and cost reductions by renting a “CAPTIVE”. Most accountants and small business owners are unfamiliar with a great way to reduce taxes and expenses. By either creating or sharing “a captive insurance company”, substantial tax and cost savings will benefit the small business owner.

    Over 80% of Fortune 500 companies take advantage of some kind of captive insurance company arrangement. They set up their own insurance companies to provide coverage when they think outside insurers are charging too much, or coverage is simply unavailable. The parent company creates a captive so that it has a self-financing option for buying insurance. The captive then either retains the risk of providing insurance or pays reinsurers (companies that reinsure insurers) to take the risk.

    If you buy insurance from a standard insurance company, your money buys a service, but the money is spent and gone forever. When you utilize or “rent a captive”, your money buys a service but it is invested with a good possibility of a return.

    In the event of a claim, the company pays claims from its captive or from its reinsurer. To keep costs down, captives are often based in places where there is favorable tax treatment and less onerous regulation (i.e. Vermont, South Carolina, and Bermuda).

    Optimum utilization of a captive by a small business, medical practice, or professional.

    The best way for a small business, medical practice, etc., to take advantage of captive benefits is to share or rent a large captive. You can significantly decrease your costs of insurance and obtain tax deductions at the same time. There are, as well, significant tax advantages to renting a large captive as opposed to owning a captive.

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  2. HOME PAGE
    IRS ATTACKS BENEFIT PLAN
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    Federal Court in Illinois Shuts Down Nationwide “Employee Benefit Plan” Tax Scheme


    Department of Justice

    Office of Public Affairs
    FOR IMMEDIATE RELEASE

    Tuesday, March 6, 2012

    A federal court has permanently barred Tracy L. Sunderlage, Linda Sunderlage and four companies from operating an alleged scheme to help high-income individuals attempt to avoid income taxes by funneling money through purported employee benefit plans, the Justice Department announced today. Judge John W. Darrah of the U.S. District Court for the Northern District of Illinois entered the permanent injunction orders, to which the defendants consented, against the Sunderlages, SRG International Ltd., of Nevis, West Indies, and three Illinois companies - SRG International U.S. LLC, Maven U.S. LLC and Randall Administration LLC.

    To Read More Click Link Below:
    http://gettracysunderlagehelp.blogspot.com/





    Massachusetts Society of Certified Public Accounts, Inc.
    Winter 2010
    IRS Attacks Business Owners in 419, 412, Section 79 and Captive Insurance Plans Under Section 6707A

    Scheme

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  3. Post a Comment On: Captive Insurance & 419 Plans Litigation

    "Captive Insurance"
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    Blogger Lance Wallach said...
    HomeAboutServicesBlogVideosBooksArticlesContact
    IRS Audits Focus on Captive Insurance Plans
    18 August 2011
    Guest Post 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 planne

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

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

    ReplyDelete
  5. IN THE UNITED STATES DISTRICT COURT
    FOR THE EASTERN DISTRICT OF PENNSYLVANIA
    PENN-MONT BENEFIT SERVICES, INC. :
    Plaintiff : CIVIL ACTION
    : NO. 02-1980
    v. :
    :
    THOMAS W. CROSSWHITE, ET AL., :
    Defendants :
    MEMORANDUM
    RUFE, J. January 29, 2003
    This case is just one of numerous suits involving these parties and their disputes over a
    troubled business relationship. Before the Court is Defendants’ Motion to Dismiss for Failure to
    State a Claim. For the reasons set forth below, Defendants’ Motion is granted, and the Amended
    Complaint is dismissed.
    I. BACKGROUND
    As the Court noted in its December 18, 2002 Memorandum, which the Court incorporates
    herein, the tenor and strain of this case can only be understood by a full explication of the parties’
    litigious relationship. As it is related below, the factual background of the instant dispute is
    taken mostly from Plaintiff’s Amended Complaint, as the Court on a motion to dismiss must
    accept as true the factual allegations therein.
    When it was originally filed in April 2002, Defendants in this case included four Oregon
    corporations: The Corben Institute (“Corben”); Cascade Marketing Agency, Inc. (“Cascade”);
    MJT Marketing, Inc. (“MJT”); Jontiff, Inc. (“Jontiff”); and Welfare Benefit Services, LLC
    (“WBS”). The other three defendants were all individual citizens of Oregon: Thomas W.
    Crosswhite (“Crosswhite”); his wife, Barbara J. Crosswhite; and Arnie A. Rigoni (“Rigoni”). 1 Plaintiff’s pleadings are replete with puffery regarding Mr. Koresko’s expert abilities.
    This Court has no occasion to express any opinion as to Mr. Koresko’s skill in the VEBA arena,
    and neither this nor any other opinion of this Court should be read as an endorsement or
    recognition of Mr. Koresko’s alleged VEBA expertise.
    -2-
    Crosswhite is the CEO of Corben, President of MJT, and principa

    ReplyDelete
  6. CJA And Associates - PRESIDENT
    by Anonymous Jul 05, 2013 9 comments Review #: 426316
    1 of 2 Cja And Associates Reviews Next →
    Company CJA And Associates
    Product / Service Insurance Fraud Negligence
    Location Naples, Florida
    Category Financial Scams and Schemes
    Views 67

    CJA SOLD US DEFECTIVE EMPLOYEE BENEFIT PLANS COSTING US HUNDREDS
    OF THOUSANDS OF DOLLARS AND IRS AUDITS AND PENALTIES
    ALL WHILE CJA WALKED AWAY WITH HUNDREDS OF THOUSANDS OF OUR DOLLARS IN COMMISSIONS
    ALSO THE INSURANCE COMPANY FIDELITY SECURITY LIFE INSURANCE IS PART OF THIS SCHEME TO DEFRAUD COMPANIES OUT OF MILLIONS OF DOLLARS
    THE IRS GOT LIST OF ALL OF CJA CUSTOMERS AND CAME AFTER THEM WITH AUDITS AND HUGE FINES, CJA HAS DONE NOTHING TO RECTIFY THEIR MISTAKE AND REFUSES TO GIVE BACK ANY MONEY OR ANY OF THE COMMISSIONS THEY TOOK AT THEIR CUSTOMERS EXPENSE AND EXPOSURE TO HUNDREDES OF THOUSANDS OF IRS PENALTIES 38366ca

    ReplyDelete
  7. LLC announced 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
  8. LLC announced 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