Niche, Nova, Millennium, Benestar, Grist Mill trust, scams audited by IRS complaints
Niche, Nova, Millennium, Benestar, Grist Mill trust, scams audited by IRS – 419 welfare benefit plans audited.
How to Avoid IRS Fines for You and Your Clients Published: 9/29/10 By Lance Wallach Beware: The IRS is cracking down on small-business owners who participate in tax-reduction insurance plans sold by insurance agents, including defined benefit retirement plans, IRAs, and even 401(k) plans with life insurance. In these cases, the business owner is motivated by a large tax deduction; the insurance agent is motivated by a substantial commission. A few years ago, I testified as an expert witness in a case in which a physician was in an abusive 401(k) plot with life insurance. It had a so-called “springing MONEY value policy” in it. The IRS calls plans with these types of policies “listed transactions.” The judge called the insurance agent “a crook.” If your client was currently is in a 412(i), 419, captive insurance, or Section 79 plot, they may be in huge distress. Accountants who signed a tax return for a client in one of these plans may be what the IRS calls a “material advisor” and subject to a maximum $200, 000 fine. If you are an insurance professional who sold or advised on one of these plans, the same holds right for you. Section 79 scams The attack on 412(i) and 419 plans has been going on for some time now, but the IRS will likely start cracking down on Section 79 plans more heavily in the near future. So what is a Section 79 plot? It is a tax plot where small-business owners are told that they’re allowed to take a tax deduction through their businesses in order to buy life insurance. That sounds pretty excellent, doesn’t it? When you break down the math and the sales pitch, but, it just doesn’t make sense. Agents try to sell Section 79 plans for two simple reasons: 1. Many small business clients will buy any plot that is "deductible" because they despise paying income taxes. 2. Insurance advisors want to sell life insurance. This brings up an fascinating issue: If the plot is marginal from a wealth-building standpoint, then why are agents selling it? Again, there are two reasons: 1. Most advisors have not broken down the math so they can come to a right conclusion, which is that the plans are not worth implementing from a pure financial standpoint. 2. Some advisors know the plot is marginal from a financial standpoint and don't care because they know they can still sell it to business owners who are looking for deductions. The IRS considers them abusive, and will audit them. How to avoid the fines In order to avoid substantial IRS fines, business owners and material advisors involved in the sale of any of the above type plans must properly file under Section 6707A. Yet filing often isn’t enough; many times, the IRS assesses fines on clients whose accountants did file the form yet made a mistake – an error that usually results in the client being fined more quickly than if the form were not filed at all. Everyone in a Section 79 should file protectively under Section 6707A – and anyone who has not filed protectively in a 419 or 412(i) had superior get some excellent advice from someone who knows what is going on, and has extensive experience filing protectively. The IRS still has task forces auditing these plans, and will soon go on to Section 79 scams, including many of the illegal captives pushed by the insurance companies and agents (though not all captives are illegal). As an expert witness in many of cases involving the 412(i) and 419, I can attest that they often do not go well for the agents, accountants, plot promoters, insurance companies, and other involved parties. Here is one example: Pursuant to a settlement with the IRS, a 412(i) plot was converted into a traditional defined benefit plot. All of the contributions to the 412(i) plot would have been allowable if they had initially adopted a traditional defined benefit plot. Based on negotiations with the IRS agent, the audit of the plot resulted in no income and minimal excise taxes due. Toward the end of the audit, the business owner received a notice from the IRS. The IRS had assessed a $400, 000 penalty for the client under Section 6707A, because the client allegedly participated in a listed transaction and failed to file Form 8886 in a timely manner. The IRS may call you a material advisor for selling one of these plans and fine you $200, 000.00. The IRS may fine your clients over a million DOLLARS for being in a retirement plot, 419 plot, etc. Anything that the Service deems, at its sole discretion, a “listed transaction” is honest game. As you read this article, hundreds of unfortunate people are having their lives ruined by these fines. You may need to take action immediately. Lance Wallach speaks at more than 20 conventions annually and writes for more than fifty publications about tax reduction thoughts, abusive welfare benefit and retirement plans, captive insurance companies, MONEY balance plans, life settlements, pr
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Niche, Nova, Millennium, Benestar, Grist Mill trust, scams audited by IRS
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Advisers staring at a new ‘slew’ of litigation from small-business clients
Five-year-old change in tax has left some small businesses and certain benefit plans subject to IRS fines; the advisers who sold these plans may pay the price
By Jessica Toonkel Marquez
October 14, 2009
Financial advisers who have sold certain types of retirement and other benefit plans to small businesses might soon be facing a wave of lawsuits — unless Congress decides to take action soon.
For years, advisers and insurance brokers have sold the 412(i) plan, a type of defined-benefit pension plan, and the 419 plan, a health and welfare plan, to small businesses as a way of providing such benefits to their employees, while also receiving a tax break.
However, in 2004, Congress changed the law to require that companies file with the Internal Revenue Service if they had these plans in place. The law change was intended to address tax shelters, particularly those set up by large companies.
Many companies and financial advisers didn’t realize that this was a cause for concern, however, and now employers are receiving a great deal of scrutiny from the federal government, according to experts.
The IRS has been aggressive in auditing these plans. The fines for failing to notify the agency about them are $200,000 per business per year the plan has been in place and $100,000 per individual.
So advisers who sold these plans to small business are now slowly starting to become the target of litigation from employers who are subject to these fines.
“There is a slew of litigation already against advisers that sold these plans,” said Lance Wallach, an expert on 412(i) and 419 plans. “I get calls from lawyers every week asking me to be an expert witness on these cases.”
Mr. Wallach declined to cite any specific suits. But one adviser who has been selling 412(i) plans for years said his firm is already facing six lawsuits over the sale of such plans and has another two pending.
“My legal and accounting bills last year were $864,000,” said the adviser, who asked not to be identified. “And if this doesn’t get fixed, everyone and their uncle will sue us.”
Currently, the IRS has instituted a moratorium on collecting these fines until the end of the year in the hope that Congress will address the issue.
In a Sept. 24 letter to Sens. Max Baucus, D-Mont., Charles Boustany Jr., R-La., and Charles Grassley, R-Iowa, IRS Commissioner Douglas H. Shulman wrote: “I understand that Congress is still considering this issue and that a bipartisan, bicameral bill may be in the works … To give Congress time to address the issue, I am writing to extend the suspension of collection enforcement action through Dec. 31.”
But with so much of Congress’ attention on health care reform at the moment, experts are worried that the issue may go unresolved indefinitely.
“If Congress doesn’t amend the statute, and clients find themselves having to pay these fines, they will absolutely go after the advisers that sold these plans to them,” .
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