Showing posts with label IRS. Show all posts
Showing posts with label IRS. Show all posts
IRS Facts and Issues
Facts
There is no such thing as a hopeless tax case. Citizens really have so many rights, if you know just a few of them you will never pay taxes, interest or IRS penalties you don't owe."
If you are presently embroiled in IRS conflict and need word of encouragement, then read the following...
FACT ONE:
Last year the IRS cancelled 4.9 million penalties, saving taxpayers $11.13 billion in penalties they didn't owe..
FACT TWO:
When properly challenged, the IRS cancels 60 cents of every dollar assessed in employment tax penalties.
FACT THREE:
There are four IRS approved programs of tax debt forgiveness.
FACT FOUR:
The IRS settles delinquent tax debt for between 10 to 20 cents on the dollar when a proper request is made for tax debt forgiveness.
FACT FIVE:
By asserting the right to a correspondence audit, the average tax audit bill was reduced by as much as 58%.
FACT SIX:
Last year, millions of citizens won installment agreements, thus avoiding wage and bank levies and property seizures.
FACT SEVEN:
IRS auditors have NO POWER to change your tax liability without YOUR approval.
IRS ISSUES
Much has been made of recent restructuring legislation pointed at ending IRS errors and abuse. Historically, such legislation has had little impact on the agency. The reason is the IRS simply does not tell the truth about taxpayers' rights. Consequently, if you do not understand your rights in a given situation, you cannot expect the IRS to explain them. For example, when was the last time you received a kind letter from the IRS explaining that you paid too much in taxes or overlooked certain rights that might cut your bill? Such letters are rare indeed!
On the other hand, millions of citizen are confronted by the agency for alleged legal failings. Each year the IRS...
- issues some one hundred million computer notices affecting nearly $200 billion in accounts;
- issues over thirty-four million penalties against individuals and businesses;
- executes over four million wage and bank levies;
- files about four million general tax liens;
- seizes tens of thousands of businesses, autos, homes, and other property, and audits nearly 2 million business and personal income tax returns.
Nearly everybody has gone through some kind of IRS enforcement difficulty and we all know somebody who is going through it now. But few have effective solutions. Too often, professional advice from tax accountants is, "well, it's the IRS. You just have to pay." Unfortunately, precious few take the time to understand that there are solutions to every IRS problem. Indeed, there is no such thing as a hopeless tax case. There is always a way to solve the problem.
For many people, this Problem Solver provides an immediate solution to a pressing IRS problem. Simple solutions are provided to problems such as wage and bank levies, IRS computer notices and penalty assessments. In other cases, this Problem Solver serves as a guide to what you must do to ultimately solve your problem. And even if you owe taxes, penalties and interest you cannot pay, you can be forgiven of all or part of your debt.
Because the IRS resists directing you to solutions to most tax problems (especially the problem of excessive tax debt) this IRS Common Problems Solver is designed to fill that void. It describes numerous taxpayer rights and remedies and shows you the steps to take to determine which solution best suits your situation. In addition, you will be introduced to an array of affordable, effective self-help materials and services to help you end your problem.
Too often, the biggest IRS problem for millions of people is the fact that it costs more to fight the agency than it does to just pay the tax. For those who cannot pay the tax or afford professional help, they live only with the promise of life-long indebtedness to the IRS--a hopeless situation. Now there is a solution.
Now, at last, the price of tax freedom is not out of reach for anyone. However, the IRS is always working to close the door to freedom that we have worked so hard to open and expose. The IRS is always working behind the scenes to limit your rights thereby ensuring you are always a slave to tax debt. Therefore, if you have a tax problem, now is the time to address it. It only gets worse as time goes on. As you read this Problem Solver, draw encouragement from the testimonials found throughout the text and act now to solve your problem once and for all.
You may have read about how the IRS gives problems to political organizations. That is nothing compared to the honest hard working people that the IRS will, or has already harmed. To read more, click the link below.
Or contact Lance Wallach for more information at a convenient time for you at 5169385007 or at vebaplan@gmail.com
Keep a watchful eye, Tax avoidance can lurk in employee benefit plans. Lance Wallach, Expert Witness.
Keep a
watchful eye
Tax avoidance can lurk in employee benefit plans
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.
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.
Retirement Plan & 419 Welfare Benefit Plan Abusive Tax-Shelter Litigation
14
D. 412(i) Retirement Plan & 419 Welfare Benefit Plan Abusive Tax-Shelter Litigation
There has been much litigation arising out of insureds‘ and their employers‘ participation in defined benefit pension plans intended to meet the requirements of former Section 412(i) of the Internal Revenue Code (the ―Code‖) and welfare benefit plans intended to meet the requirements of Section 419A(f)(6) of the Code (for multiple employer plans) and Section 419(e) of the Code (for single employer plans). In many cases, life insurance policies were the funding vehicle, in whole or in part, for the 412(i) and 419 plans. From approximately 2002-2007, the IRS issued guidance regarding issues related to 412(i) and 419 plans and, since then, the IRS has focused increased scrutiny on the plans, concluding in many cases that the plans did not comply with the relevant Code sections, disallowing deductions taken by the employers and levying harsh penalties. As a result, insureds and their employers have filed lawsuits under various theories against the plan designers and the insurance companies claiming that they were misled regarding the tax benefits of the plans and the compliance of the plans with the Code.
1. Omni Home Fin., Inc. v. Hartford Life & Annuity Ins. Co., 2008 U.S. Dist. LEXIS 35259, 2008 WL 1925248, *5 (S.D. Cal. Apr. 29, 2008) (“Omni I”); Omni Home Fin., Inc. v. Hartford Life & Annuity Ins. Co., 2008 U.S. Dist. LEXIS 85581, 2008 WL 4616796, **3-4 (S.D. Cal. Aug. 1, 2008)(“Omni II”)
In many of the documents used to construct the 412 or 419 plans, the participant agrees that he is not relying on the insurance company‘s representations regarding the validity of the plan or its tax benefits, and the participant represents that he is relying on his own independent tax advisor in deciding to participate in the plan. For instance, in Omni I, the Southern District of California held that a disclosure statement provided to the Plaintiffs precluded claims for fraud and negligent misrepresentation because the plaintiffs could not establish reasonable reliance as a matter of law. Contrary to the language agreed upon in the disclaimer provision, the plaintiffs alleged that Hartford, among others, misrepresented to them the tax consequences of their contributions to a 412(i) plan. After an IRS audit found that the plaintiffs‘ plans did not comply with several requirements for the qualified plans, the plaintiffs filed suit. Despite the fact that the plaintiffs claimed that they did not read the disclaimers they signed, the Omni court held that the receipt of the disclosure statements by plaintiffs precluded a finding of reasonable reliance, and granted summary judgment in favor of Hartford on the plaintiffs‘ claims.
In Omni II, the plaintiffs‘ motion for reconsideration was denied as the court noted that ―the material disclosures were in short documents easily intelligible to plaintiffs, who were reasonably sophisticated businesspeople‖ and furthermore, that such contracts did not violate public policy, nor were they contracts of adhesion as ―it is objectively unreasonable for a sophisticated contracting party to fail to read short, readily comprehensible documents he or she signs.‖ However, the court in Berry v. Indianapolis Life Insurance Co. (discussed in Section II.D.3., supra) denied the insurers motions for summary judgment based on disclosures similar to the disclosures at issue in Omni I and Omni II. Most notably, the court denied summary judgment for the plaintiffs whose claims were governed by Texas law and Wisconsin law. Thus,
15
the success of the ―disclaimer of reliance‖ argument may differ may from court to court and will depend on which state‘s law applies.
2. Berry v. Indianapolis Life Ins. Co., 600 F.Supp. 2d 805 (N.D. Tex. 2009)(“Berry I”); Berry v. Indianapolis Life Ins. Co., 638 F.Supp. 2d 732 (N.D. Tex. 2009)(“Berry II”); Berry v. Indianapolis Life Ins. Co., 2010 WL 3422873 (N.D. Tex. Aug. 26, 2010)(“Berry III”)
In this class action lawsuit, the plaintiffs, a nation-wide class consisting of doctors, dentists, and construction company owners, and the companies they operate, filed suit, alleging that the defendants sold life insurance policies to fund defined benefit plans in compliance with section 412(i) of the Internal Revenue Code, but were later deemed abusive tax-shelters by the IRS. Plaintiffs allege that four insurance companies (Indianapolis Life, Hartford, American General, and Pacific Life) knew or should have known that the plans would be scrutinized and found to be illegal by the IRS. Plaintiffs also allege that many of the defendants, including the four insurance companies, conspired to market these plans and made fraudulent or negligent misrepresentations about the tax benefits of these plans without disclosing any risk that the IRS would find the plans to be illegal. Ultimately, many of these claims were dismissed for failure to state a claim for relief. Because the alleged misrepresentations were made prior to the IRS pronouncements calling into question the tax benefits of various plans, they were either not false when made or predictions and opinion that are not actionable.
In Berry I, the court dismissed plaintiffs‘ fraud theory holding that there was no apparent reason why the alleged misrepresentations were false when they were made in 2001 and 2002. The rational behind the court‘s ruling was that the IRS had not made any definitive statement about the legality of the 412(i) plan at the time the plaintiffs enrolled in the plan and purchased life insurance policies to fund the plan. The court noted that the plaintiffs could not use the rulings and rulemakings by the IRS in 2004 and 2005 ―to retroactively demonstrate that representations made by [the insurer‘s] alleged agents in 2001-02 were false when made.‖ Moreover, the court held that, as a matter of law, representations regarding the validity and likely tax treatment of the plaintiffs‘ 412(i) plans were ―forward looking‖ statements or ―opinions‖ as to how the IRS would treat 412(i) plans after plaintiffs funded them with insurance policies. The court found that it was ―inherently unreasonable for any person to rely on a prediction of future IRS enactment, enforcement, or non-enforcement of the law by someone unaffiliated with the federal government.‖ The court concluded that, ―[a]s a matter of law, any representation or prediction by any alleged [insurance company] agent as to how the IRS would treat the 412(i) plans, and the funding thereof, in the future is either an unactionable opinion or was unjustifiably relied upon.‖
Subsequently, the Northern District of Texas allowed the plaintiffs an opportunity to re-plead, and it then reaffirmed its prior ruling and dismissed the Berry plaintiffs‘ fraud-based claims with prejudice. The claims against the other insurance company defendants in Berry have been dismissed for the same reasons but the court has not yet decided whether the plaintiffs will be allowed to re-plead. As of November 2010, the third amended complaint was filed, to which Pacific Life filed a reply. Hartford and Pacific Life filed responses to the synopsis of the third amended complaint.
16
3. Zarrella v. Pacific Life Insurance Company, No. 10-60754-CIV, 755 F.Supp.2d 1231 (S.D. Fla. 2011)
In March of 2003, Plaintiffs purchased nine individual policies from Pacific Life for use in Zarrella Construction‘s 412(i) plan. It was not until February of 2004 when the IRS issued a declaration, naming such policies as abusive tax-shelters. Plaintiffs contend that Pacific Life ―marketed and expressly touted the Policies by highlighting these ‗special‘ benefits and/or incentives that – they knew or should have known – violated the IRS Code and presented substantial tax risks to Plaintiffs.‖ On May 10, 2010, Plaintiffs brought a class action against Pacific Life. Following Pacific Life‘s first motion to dismiss being partially granted, Plaintiffs filed their Amended Class Action Complaint in December of 2010. The Plaintiffs asserted the following claims: breach of contract, equitable fraud, negligence, and a violation of California Business and Professions Code § 17200, et seq. Plaintiff‘s alleged that there was a breach of contract ―because the Policies when used to fund 412(i), did not and could not satisfy the requirements of Section 412(i). The court countered by explaining that ―in the written contract, Pacific Life specifically did not guarantee any future tax or legal consequences.‖ Additionally, the court noted that Plaintiff‘s negligence claim failed because they failed to allege the existence of a legal duty.‖
Similarly, the court dismissed the class action fraud allegations against Pacific Life because the plaintiffs failed to explain why the defendants‘ alleged statements were false when made in 2003. The court also noted that fraud must be based on material facts, not a promise or prediction of future events and that the insurance company‘s alleged representations were just ―statements of opinion regarding future events.‖ Thus, once again, Pacific Life‘s 12(b)(6) motion was granted and the amended complaint was dismissed without prejudice on all counts. Accordingly, a second amended complaint was filed by Plaintiff‘s on April 12, 2011. The court has set the trial date for October 24, 2011 and the parties‘ response and reply to Pacific Life‘s motion to dismiss the second amended complaint are before the court.
4. Chau v. Aviva Life and Annuity, No. 3:09-cv-2305-B, 2011 WL 1990446 (N.D. Tex. May 20, 2011)
Doctors and dentists alleged that Indianapolis Life Insurance Company advertised, marketed, and consummated fraudulent business transactions, resulting in damages. Plaintiffs originally filed their complaint in April of 2009 in Washington state court and after Aviva removed the case to federal district court, the MDL Panel ordered the case transferred to the Northern District of Texas. Prior to the case being transferred, Plaintiffs filed their second amended complaint and subsequently, Aviva filed its motion to dismiss Plaintiff‘s second amended complaint on February 5, 2010. Plaintiffs allege that the insurer knew that the IRS had looked askance at the legality of similar tax-shelter arrangements (welfare benefit trusts) and indicated that these arrangements may be deemed abusive tax shelters, yet continued to market its § 419 Plan as a tax-avoidance plan.
Plaintiffs‘ motion for a suggestion of remand to the Judicial Panel of Multidistrict Litigation was filed on March 3, 2011 and was subsequently denied by the district court.
17
However, the court noted that plaintiffs may motion again, should there be further developments in the case. Aviva‘s motion to dismiss the second amended complaint was granted in part and denied in part on May 20, 2011. In its motion, Aviva claimed that Plaintiffs‘ common law fraud/negligent misrepresentation claim did not meet the heightened pleading requirements of Rule 9(b), in addition to failing to state a claim, and the court agreed. However, on the breach of contract claim, the court found that under the applicable law governing the contract, plaintiff‘s claim was not due to be dismissed. The court elaborated on its reasoning, noting that allegations concerning oral representations made about the policies, specifically, their ability to obtain substantial tax savings with the 419 Plan. Plaintiffs asserted in their second amended complaint that those representations were false and resulted in ―substantial tax penalties and interest‖ due to an IRS audit. Thus, the court found that such allegations, accepted as true, state a claim for a breach of contract under Washington state law.
D. 412(i) Retirement Plan & 419 Welfare Benefit Plan Abusive Tax-Shelter Litigation
There has been much litigation arising out of insureds‘ and their employers‘ participation in defined benefit pension plans intended to meet the requirements of former Section 412(i) of the Internal Revenue Code (the ―Code‖) and welfare benefit plans intended to meet the requirements of Section 419A(f)(6) of the Code (for multiple employer plans) and Section 419(e) of the Code (for single employer plans). In many cases, life insurance policies were the funding vehicle, in whole or in part, for the 412(i) and 419 plans. From approximately 2002-2007, the IRS issued guidance regarding issues related to 412(i) and 419 plans and, since then, the IRS has focused increased scrutiny on the plans, concluding in many cases that the plans did not comply with the relevant Code sections, disallowing deductions taken by the employers and levying harsh penalties. As a result, insureds and their employers have filed lawsuits under various theories against the plan designers and the insurance companies claiming that they were misled regarding the tax benefits of the plans and the compliance of the plans with the Code.
1. Omni Home Fin., Inc. v. Hartford Life & Annuity Ins. Co., 2008 U.S. Dist. LEXIS 35259, 2008 WL 1925248, *5 (S.D. Cal. Apr. 29, 2008) (“Omni I”); Omni Home Fin., Inc. v. Hartford Life & Annuity Ins. Co., 2008 U.S. Dist. LEXIS 85581, 2008 WL 4616796, **3-4 (S.D. Cal. Aug. 1, 2008)(“Omni II”)
In many of the documents used to construct the 412 or 419 plans, the participant agrees that he is not relying on the insurance company‘s representations regarding the validity of the plan or its tax benefits, and the participant represents that he is relying on his own independent tax advisor in deciding to participate in the plan. For instance, in Omni I, the Southern District of California held that a disclosure statement provided to the Plaintiffs precluded claims for fraud and negligent misrepresentation because the plaintiffs could not establish reasonable reliance as a matter of law. Contrary to the language agreed upon in the disclaimer provision, the plaintiffs alleged that Hartford, among others, misrepresented to them the tax consequences of their contributions to a 412(i) plan. After an IRS audit found that the plaintiffs‘ plans did not comply with several requirements for the qualified plans, the plaintiffs filed suit. Despite the fact that the plaintiffs claimed that they did not read the disclaimers they signed, the Omni court held that the receipt of the disclosure statements by plaintiffs precluded a finding of reasonable reliance, and granted summary judgment in favor of Hartford on the plaintiffs‘ claims.
In Omni II, the plaintiffs‘ motion for reconsideration was denied as the court noted that ―the material disclosures were in short documents easily intelligible to plaintiffs, who were reasonably sophisticated businesspeople‖ and furthermore, that such contracts did not violate public policy, nor were they contracts of adhesion as ―it is objectively unreasonable for a sophisticated contracting party to fail to read short, readily comprehensible documents he or she signs.‖ However, the court in Berry v. Indianapolis Life Insurance Co. (discussed in Section II.D.3., supra) denied the insurers motions for summary judgment based on disclosures similar to the disclosures at issue in Omni I and Omni II. Most notably, the court denied summary judgment for the plaintiffs whose claims were governed by Texas law and Wisconsin law. Thus,
15
the success of the ―disclaimer of reliance‖ argument may differ may from court to court and will depend on which state‘s law applies.
2. Berry v. Indianapolis Life Ins. Co., 600 F.Supp. 2d 805 (N.D. Tex. 2009)(“Berry I”); Berry v. Indianapolis Life Ins. Co., 638 F.Supp. 2d 732 (N.D. Tex. 2009)(“Berry II”); Berry v. Indianapolis Life Ins. Co., 2010 WL 3422873 (N.D. Tex. Aug. 26, 2010)(“Berry III”)
In this class action lawsuit, the plaintiffs, a nation-wide class consisting of doctors, dentists, and construction company owners, and the companies they operate, filed suit, alleging that the defendants sold life insurance policies to fund defined benefit plans in compliance with section 412(i) of the Internal Revenue Code, but were later deemed abusive tax-shelters by the IRS. Plaintiffs allege that four insurance companies (Indianapolis Life, Hartford, American General, and Pacific Life) knew or should have known that the plans would be scrutinized and found to be illegal by the IRS. Plaintiffs also allege that many of the defendants, including the four insurance companies, conspired to market these plans and made fraudulent or negligent misrepresentations about the tax benefits of these plans without disclosing any risk that the IRS would find the plans to be illegal. Ultimately, many of these claims were dismissed for failure to state a claim for relief. Because the alleged misrepresentations were made prior to the IRS pronouncements calling into question the tax benefits of various plans, they were either not false when made or predictions and opinion that are not actionable.
In Berry I, the court dismissed plaintiffs‘ fraud theory holding that there was no apparent reason why the alleged misrepresentations were false when they were made in 2001 and 2002. The rational behind the court‘s ruling was that the IRS had not made any definitive statement about the legality of the 412(i) plan at the time the plaintiffs enrolled in the plan and purchased life insurance policies to fund the plan. The court noted that the plaintiffs could not use the rulings and rulemakings by the IRS in 2004 and 2005 ―to retroactively demonstrate that representations made by [the insurer‘s] alleged agents in 2001-02 were false when made.‖ Moreover, the court held that, as a matter of law, representations regarding the validity and likely tax treatment of the plaintiffs‘ 412(i) plans were ―forward looking‖ statements or ―opinions‖ as to how the IRS would treat 412(i) plans after plaintiffs funded them with insurance policies. The court found that it was ―inherently unreasonable for any person to rely on a prediction of future IRS enactment, enforcement, or non-enforcement of the law by someone unaffiliated with the federal government.‖ The court concluded that, ―[a]s a matter of law, any representation or prediction by any alleged [insurance company] agent as to how the IRS would treat the 412(i) plans, and the funding thereof, in the future is either an unactionable opinion or was unjustifiably relied upon.‖
Subsequently, the Northern District of Texas allowed the plaintiffs an opportunity to re-plead, and it then reaffirmed its prior ruling and dismissed the Berry plaintiffs‘ fraud-based claims with prejudice. The claims against the other insurance company defendants in Berry have been dismissed for the same reasons but the court has not yet decided whether the plaintiffs will be allowed to re-plead. As of November 2010, the third amended complaint was filed, to which Pacific Life filed a reply. Hartford and Pacific Life filed responses to the synopsis of the third amended complaint.
16
3. Zarrella v. Pacific Life Insurance Company, No. 10-60754-CIV, 755 F.Supp.2d 1231 (S.D. Fla. 2011)
In March of 2003, Plaintiffs purchased nine individual policies from Pacific Life for use in Zarrella Construction‘s 412(i) plan. It was not until February of 2004 when the IRS issued a declaration, naming such policies as abusive tax-shelters. Plaintiffs contend that Pacific Life ―marketed and expressly touted the Policies by highlighting these ‗special‘ benefits and/or incentives that – they knew or should have known – violated the IRS Code and presented substantial tax risks to Plaintiffs.‖ On May 10, 2010, Plaintiffs brought a class action against Pacific Life. Following Pacific Life‘s first motion to dismiss being partially granted, Plaintiffs filed their Amended Class Action Complaint in December of 2010. The Plaintiffs asserted the following claims: breach of contract, equitable fraud, negligence, and a violation of California Business and Professions Code § 17200, et seq. Plaintiff‘s alleged that there was a breach of contract ―because the Policies when used to fund 412(i), did not and could not satisfy the requirements of Section 412(i). The court countered by explaining that ―in the written contract, Pacific Life specifically did not guarantee any future tax or legal consequences.‖ Additionally, the court noted that Plaintiff‘s negligence claim failed because they failed to allege the existence of a legal duty.‖
Similarly, the court dismissed the class action fraud allegations against Pacific Life because the plaintiffs failed to explain why the defendants‘ alleged statements were false when made in 2003. The court also noted that fraud must be based on material facts, not a promise or prediction of future events and that the insurance company‘s alleged representations were just ―statements of opinion regarding future events.‖ Thus, once again, Pacific Life‘s 12(b)(6) motion was granted and the amended complaint was dismissed without prejudice on all counts. Accordingly, a second amended complaint was filed by Plaintiff‘s on April 12, 2011. The court has set the trial date for October 24, 2011 and the parties‘ response and reply to Pacific Life‘s motion to dismiss the second amended complaint are before the court.
4. Chau v. Aviva Life and Annuity, No. 3:09-cv-2305-B, 2011 WL 1990446 (N.D. Tex. May 20, 2011)
Doctors and dentists alleged that Indianapolis Life Insurance Company advertised, marketed, and consummated fraudulent business transactions, resulting in damages. Plaintiffs originally filed their complaint in April of 2009 in Washington state court and after Aviva removed the case to federal district court, the MDL Panel ordered the case transferred to the Northern District of Texas. Prior to the case being transferred, Plaintiffs filed their second amended complaint and subsequently, Aviva filed its motion to dismiss Plaintiff‘s second amended complaint on February 5, 2010. Plaintiffs allege that the insurer knew that the IRS had looked askance at the legality of similar tax-shelter arrangements (welfare benefit trusts) and indicated that these arrangements may be deemed abusive tax shelters, yet continued to market its § 419 Plan as a tax-avoidance plan.
Plaintiffs‘ motion for a suggestion of remand to the Judicial Panel of Multidistrict Litigation was filed on March 3, 2011 and was subsequently denied by the district court.
17
However, the court noted that plaintiffs may motion again, should there be further developments in the case. Aviva‘s motion to dismiss the second amended complaint was granted in part and denied in part on May 20, 2011. In its motion, Aviva claimed that Plaintiffs‘ common law fraud/negligent misrepresentation claim did not meet the heightened pleading requirements of Rule 9(b), in addition to failing to state a claim, and the court agreed. However, on the breach of contract claim, the court found that under the applicable law governing the contract, plaintiff‘s claim was not due to be dismissed. The court elaborated on its reasoning, noting that allegations concerning oral representations made about the policies, specifically, their ability to obtain substantial tax savings with the 419 Plan. Plaintiffs asserted in their second amended complaint that those representations were false and resulted in ―substantial tax penalties and interest‖ due to an IRS audit. Thus, the court found that such allegations, accepted as true, state a claim for a breach of contract under Washington state law.
IRS Issues Final Regulations for Material Advisors, Accountants, Attorneys and Insurance Agents - HG.org
IRS Issues Final Regulations for Material Advisors, Accountants, Attorneys and Insurance Agents - HG.org
If you sold, advised on or had anything to do with a listed transaction you will be fined by the IRS. For those that bought listed transactions like, 419 welfare benefit plans or 412i plans, you have been or will also be fined.
On July 30, 2014, the Internal Revenue Service issued final regulations regarding the imposition of penalties under Internal Revenue Code section 6707 against material advisors who fail to file true, complete or timely disclosure returns with respect to reportable or listed transactions. The effective date of the final regulations is July 31, 2014.
Understanding IRC Sections 419(e) and 419A(f)(6) Plans
IRC Sections 419(e) and 419A(f)(6) Plans
For years life insurance agents and others have been selling ways to deduct life insurance in welfare benefit plans. For years the IRS has been disallowing most of these plans on audit.
In Notice 2007-83, the IRS identified certain trust arrangements involving cash value life insurance policies, and substantially similar arrangements, as listed transactions. The IRS also 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 in part for premiums paid by the trust on cash value life insurance policies.
More Problems for 419 Plans
For years, life insurance companies and agents have tried to find ways of making life insurance premiums paid by business owners tax deductible. This would allow them to sell policies at a "discount."
The problem became acute a few years ago with outlandish claims about how §§419A(f)(5) and (6) of the Internal Revenue Code (IRC) exempted employers from any tax deduction limitations. Other inaccurate assertions were made as well, until the Internal Revenue Service (IRS) finally put a stop to such egregious misrepresentations in 2002 by issuing regulations and naming such plans as "potentially abusive tax shelters" (or "listed transactions") that needed to be registered and disclosed to the IRS.This appeared to put an end to the scourge of scurrilous promoters, as many such plans disappeared from the landscape.
And what happened to the providers that were peddling §§419A(f)(5) and (6) life insurance plans a few years ago? We recently found the answer: Most of them found a new life as promoters of so-called "419(e)" welfare benefit plans.
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Captive Insurance - Buyers Beware!
Parts of this article are from the book by John Wiley and Sons, Protecting Clients from Fraud, Incompetence and Scams, authored by Lance Wallach.
September 24, 2010
Herol Graham has turned defensive boxing into a poetic art. Trouble is, nobody ever got knocked out by a poem.
—Eddie Shaw
Every accountant knows that increased cash flow and cost savings are critical for businesses in 2009. 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 range 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 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. Small companies have been copying a method to control insurance costs and reduce taxes that used to be the domain of large businesses: setting up their own insurance companies to provide coverage when they think that outside insurers are charging too much. A captive insurance company would be an insurance subsidiary that is owned by its parent business(es). There are now nearly 5,000 captive insurers worldwide. More than 80 percent of Fortune 500 companies take advantage of some sort of captive insurance company arrangement. Now small companies can, too.
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. Single-parent captives allow an organization to cover any risk they wish to fund, and generally eliminate the commission-price component from the premiums. Jurisdictions in the United States and in certain parts of the world have adopted a series of laws and regulations that allow small non–life insurance companies, taxed under IRC Section 831(b), or as 831(b) companies.
Captives can be a great cost-saving tool, but they can also be 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 or tax deferral vehicles, 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 within 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. 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, 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 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 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 Plans Get Red Flag
Tax Briefs - 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.
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.
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.
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.
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.
Captive Insurance and Other Tax Reduction Strategies – The Good, Bad, and Ugly
Every accountant knows that increased cash flow and cost savings are critical for businesses . What is uncertain is the best path to recommend garnering 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, 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.vebaplan.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.
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, 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.vebaplan.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 and 412 Plan Fraud
You think you know what you are getting when you buy an insurance plan, but what do you do when you find out that your plan does not work they way you thought?
If you have been misled by your insurance broker, you may have been the victim of fraud. We protect the rights of the victims of 419 and 412 plan fraud.
· Have you purchased an IRC 419 Employee Welfare Benefit Plan after being told the contributions were fully deductible from federal and state income taxes, only to find out that this was not the case?
· Did you purchase a trust you may not have needed, funded with substantial amounts of life insurance because you were told you could build up cash value tax-free and then have use of the funds tax-free?
If you have been misled about information regarding your employee welfare benefits, you may have been the victim of 419 and 412 plan fraud.
When consumers are misled and given false information by insurance brokers, they have the right to sue the fraudulent agents and insurance company that sold the plan.
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.
ABOUT THE AUTHOR: Lance Wallach
Lance Wallach, CLU, ChFC, CIMC, speaks and writes extensively about financial planning, retirement plans, and tax reduction strategies. He is an American Institute of CPA’s course developer and instructor and has authored numerous best selling books about abusive tax shelters, IRS crackdowns and attacks and other tax matters. He speaks at more than 20 national conventions annually and writes for more than 50 national publications.
Copyright Lance Wallach, CLU, CHFC
More information about Lance Wallach, CLU, CHFC
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.
· Have you purchased an IRC 419 Employee Welfare Benefit Plan after being told the contributions were fully deductible from federal and state income taxes, only to find out that this was not the case?
· Did you purchase a trust you may not have needed, funded with substantial amounts of life insurance because you were told you could build up cash value tax-free and then have use of the funds tax-free?
If you have been misled about information regarding your employee welfare benefits, you may have been the victim of 419 and 412 plan fraud.
When consumers are misled and given false information by insurance brokers, they have the right to sue the fraudulent agents and insurance company that sold the plan.
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.
ABOUT THE AUTHOR: Lance Wallach
Lance Wallach, CLU, ChFC, CIMC, speaks and writes extensively about financial planning, retirement plans, and tax reduction strategies. He is an American Institute of CPA’s course developer and instructor and has authored numerous best selling books about abusive tax shelters, IRS crackdowns and attacks and other tax matters. He speaks at more than 20 national conventions annually and writes for more than 50 national publications.
Copyright Lance Wallach, CLU, CHFC
More information about Lance Wallach, CLU, CHFC
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.
HAVE YOU BEEN THE VICTIM OF THE SALE OF ABUSIVE LIFE INSURANCE AND ANNUITY PRODUCTS SOLD AS PART OF A PENSION PLAN OR RETIREMENT PLAN?
Abusive Tax Shelters, Insurance and Annuity Product Fraud Lawsuit
RECOVER YOUR LOSSES FROM LIFE INSURANCE 412 (i) AND ANNUITY PRODUCTS SOLD AS PART OF A PENSION PLAN OR RETIREMENT PLAN
Insurance and Annuity Product Fraud Lawsuit
Life Insurance Companies and their Agents have been selling abusive life insurance and annuity products. Many pension plans have been promoted as legitimate retirement plans which contain various life insurance products and annuities. Unfortunately the Internal Revenue Service (“IRS”) has now attacked many of these pension and retirement plans and is conducting audits to demand payment for taxes, penalties and interest and attempting to disqualify many plans.
If you are an accountant, business owner, corporate officer, dentist, doctor, professional athlete, professional or corporation of high net worth, you were unscrupulously targeted by life insurance companies and their agents to purchase a 412i defined benefit pension plan. You were chosen to purchase a 412i plan because you have the net worth to pay for it.
Our investigation has disclosed that many life insurance companies, promoters, attorneys,
and accountants promoted and sold these plans, including but not limited to the following:
• American General Life Insurance Company
• Guardian Life Insurance Company
• Hartford Life and Annuity Insurance Company
• Indianapolis Life Insurance Company
• Pacific Life Insurance Company
• Pension Services, LLC
• Many Other Life Insurance Companies and Agents
• Guardian Life Insurance Company
• Hartford Life and Annuity Insurance Company
• Indianapolis Life Insurance Company
• Pacific Life Insurance Company
• Pension Services, LLC
• Many Other Life Insurance Companies and Agents
The individuals and groups above devised a scheme to sell abusive tax shelters under the auspices of Section 412(i) of the tax code. A 412(i) is a defined benefit pension plan. It provides specific retirement benefits to participants once they reach retirement and must contain assets sufficient to pay those benefits. A 412(i) plan differs from other defined benefit pension plans in that it must be funded exclusively by the purchase of individual life insurance products. To create a 412(i) plan, there must
be a trust to hold the assets. The employer funds the plan by making cash contributions to the trust, and the Code allows the employer to take a tax deduction in the amount of the contributions, i.e. the entire amount.
The trust uses the contributed funds to purchase some combination of life insurance products (insurance or annuities) for the plan. As the plan participants retire, the trust will usually sell the policies for their present cash value and purchase annuities with the proceeds. The revenue stream from the annuities pays the specified retirement benefit to plan participants.
These defendants (with the aid and knowledge of the insurance companies) used the traditional structure and sold life insurance policies with excessively high premiums. The trust then uses the large cash contributions to pay high insurance premiums and the employer takes a deduction for the sum of those large contributions. As you might expect, these policies were designed with excessively high fees or “loads” which provided exorbitant commissions to the insurance companies and the agents who sold the products.
The policies that were sold were termed Springing Cash Value Policies. They had little or no cash value for the first 5-7 years, after which they had significant cash value. Under this scheme, after 5-7 years, and just before the cash value sprung, the participant typically purchases the policy from the trust for the policy’s surrender value. In theory, you have a tax free transaction.
The IRS does not recognize the tax benefit of such a plan and has repeatedly issued announcements indicating that such plans are contrary to federal tax laws and regulations.
Have you received a letter from the IRS either (1) informing you of an upcoming audit of your plan or (2) demanding payment for substantial tax “penalties and interest”? The “tax free” benefit pension plan you purchased might be a scam, a fraud. Please allow us to speak with you and review your documentation to help you to determine your best course of action. Your communications will be treated with the strictest attorney-client confidence.
If you were a victim of such a sale of a 412i or 419 plan, we encourage you to contact us immediately . You may also receive a free initial consultation by telephone at 516 9357346 If you desire a free initial phone consultation please leave a specific time or time period within which to contact you.
Since you have already expanded a substantial amount of money in your pension plan and believed it was a legitimate retirement plan, you are obviously shocked to now learn that major life insurance companies and their agents may have sold you improper retirement plans simply to generate enormous commissions on life insurance and annuities. www.taxaudit419 and www.vebaplan.com have more information.
We also help with abusive tax shelters like 419 welfare benefit plans. In 2002 Lance Wallach wrote to Hartford and other insurance companies telling them that IRS will be increasing 419 audits and law firms would be suing them. What did Hartford do? They sent out some emails to others including their compliance department and continued to sell 419 plans. Give us a call if you want a copy of this.
Tax Reduction
Every business owner thinks he pays too much in taxes, and in reality, most actually do. These days your accountant has to "play it safe". This is not reducing your tax bill.
Many times a tax preparer's work on a typical return is subject to 'interpretations' of the tax code. New legislation may force preparers who hope to lower a client's tax bill to be less aggressive with respect to these interpretations, or else they may risk substantially increased penalties.
Furthermore, if a tax preparer's client insists on an aggressive deduction, the preparer may include a form explaining the circumstances. This could eliminate the potential preparer penalty, but it is a certain red flag for the IRS.
This should anger taxpayers who feel strongly about particular deductions. What's more, these penalties do not apply to taxpayers preparing their own returns. This could prompt a taxpayer to tell a preparer: "who needs you; I'll do it myself". The remainder of this article explains why your accountant is reluctant to be aggressive anymore, and is less likely to give you the benefit of the doubt on tax deductions.
The new law alters the standard from a "realistic possibility" that a preparer's position will be sustained to a "more likely than not" standard, or more than 50% likelihood.
Instead of paying just $250 if an interpretation is disallowed, the preparer will now be penalized the greater of $1000 or half the income derived by the preparer. Thus, if a preparer charges $500 to do a routine 1040, he or she faces losing the income on two such returns, and if "willful or reckless conduct" is found, the penalty jumps from $1000 to the greater of $5000 or half the income derived by the tax preparer. But if the taxpayer prepares his or her own return, these "crimes" may bring absolutely no penalty.
Another new wrinkle not sitting well with preparers expands these penalties beyond income tax returns to other tax work: estate & gift tax returns, excise tax returns, exempt organization returns, and employment tax returns.
If an accountant allows a taxpayer to deduct what the accountant may think is a listed transaction, the accountant has to file a form with the IRS to alleviate a potential $200,000 penalty to the accountant. This form is likely to get the business owner audited. So what does the business owner do? He can forget about the deduction, prepare his own return, or he can retain an accountant that is not afraid to fight with the IRS. Unfortunately, all of these options are difficult or worse. The tax code is complex and very few accountants understand most of it. And the IRS has recently made the accountant a policeman. Most accountants are honest, knowledgeable and cautious. They try to do what is best for their clients, but the IRS has recently made that almost impossible. Also, every year, the tax laws are changed to one extent or another, and accountants are constantly challenged to remain current, knowledgeable, and proficient.
In light of this, you may want to test your accountant's knowledge. You may want to ask him the following questions:
1) Why haven't I been using a 412(e)(3) plan or a captive insurance company to reduce my taxes and other expenses?
2) Why haven't I been using a VEBA to reduce my health insurance costs?
3) Am I a good candidate for a double K to reduce my taxes and provide security for my retirement?
4) What strategies do you have whereby I can legally deduct the cost of my life insurance?
5) Why haven't you given me a copy of the IRS industry specialization report (which can be obtained free from the IRS) which shows the items that the IRS will be looking at in my industry, both with respect to who will be audited and what will be looked at in an audit, and will provide me with a lot of other useful information?
6) Am I currently using any strategies that the IRS considers abusive?
I would be willing to bet that your accountant has little or no knowledge of the above (6) items.
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.
Many times a tax preparer's work on a typical return is subject to 'interpretations' of the tax code. New legislation may force preparers who hope to lower a client's tax bill to be less aggressive with respect to these interpretations, or else they may risk substantially increased penalties.
Furthermore, if a tax preparer's client insists on an aggressive deduction, the preparer may include a form explaining the circumstances. This could eliminate the potential preparer penalty, but it is a certain red flag for the IRS.
This should anger taxpayers who feel strongly about particular deductions. What's more, these penalties do not apply to taxpayers preparing their own returns. This could prompt a taxpayer to tell a preparer: "who needs you; I'll do it myself". The remainder of this article explains why your accountant is reluctant to be aggressive anymore, and is less likely to give you the benefit of the doubt on tax deductions.
The new law alters the standard from a "realistic possibility" that a preparer's position will be sustained to a "more likely than not" standard, or more than 50% likelihood.
Instead of paying just $250 if an interpretation is disallowed, the preparer will now be penalized the greater of $1000 or half the income derived by the preparer. Thus, if a preparer charges $500 to do a routine 1040, he or she faces losing the income on two such returns, and if "willful or reckless conduct" is found, the penalty jumps from $1000 to the greater of $5000 or half the income derived by the tax preparer. But if the taxpayer prepares his or her own return, these "crimes" may bring absolutely no penalty.
Another new wrinkle not sitting well with preparers expands these penalties beyond income tax returns to other tax work: estate & gift tax returns, excise tax returns, exempt organization returns, and employment tax returns.
If an accountant allows a taxpayer to deduct what the accountant may think is a listed transaction, the accountant has to file a form with the IRS to alleviate a potential $200,000 penalty to the accountant. This form is likely to get the business owner audited. So what does the business owner do? He can forget about the deduction, prepare his own return, or he can retain an accountant that is not afraid to fight with the IRS. Unfortunately, all of these options are difficult or worse. The tax code is complex and very few accountants understand most of it. And the IRS has recently made the accountant a policeman. Most accountants are honest, knowledgeable and cautious. They try to do what is best for their clients, but the IRS has recently made that almost impossible. Also, every year, the tax laws are changed to one extent or another, and accountants are constantly challenged to remain current, knowledgeable, and proficient.
In light of this, you may want to test your accountant's knowledge. You may want to ask him the following questions:
1) Why haven't I been using a 412(e)(3) plan or a captive insurance company to reduce my taxes and other expenses?
2) Why haven't I been using a VEBA to reduce my health insurance costs?
3) Am I a good candidate for a double K to reduce my taxes and provide security for my retirement?
4) What strategies do you have whereby I can legally deduct the cost of my life insurance?
5) Why haven't you given me a copy of the IRS industry specialization report (which can be obtained free from the IRS) which shows the items that the IRS will be looking at in my industry, both with respect to who will be audited and what will be looked at in an audit, and will provide me with a lot of other useful information?
6) Am I currently using any strategies that the IRS considers abusive?
I would be willing to bet that your accountant has little or no knowledge of the above (6) items.
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.
IRS Attacks Benefit Plan
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The IRS has various task forces auditing all section 419, section 412(i), and other plans that tend to be abusive. Most insurance agents sell these plans. The IRS is looking to raise money and is not looking to correct plans or help taxpayers. 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 www.irs.gov and vebaplan.org.
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 each year for being in what they called a listed transaction. Listed transactions can be found at 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 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 insurance agents are selling substantially similar plans. Recently I came across the case of Hink, a small business owner who is facing thousands 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 ,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 8,000 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.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.
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. 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.
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
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.
Learn How To Protect Yours Here
5 1 6 - 9 3 8 - 5 0 0 7
Nationwide Assistance
WallachInc@gmail.com
The IRS has various task forces auditing all section 419, section 412(i), and other plans that tend to be abusive. Most insurance agents sell these plans. The IRS is looking to raise money and is not looking to correct plans or help taxpayers. 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 www.irs.gov and vebaplan.org.
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 each year for being in what they called a listed transaction. Listed transactions can be found at 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 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 insurance agents are selling substantially similar plans. Recently I came across the case of Hink, a small business owner who is facing thousands 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 ,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 8,000 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.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.
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. 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.
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
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 tax relief firm, Lance Wallach, speaking: How to Avoid IRS Fines for You and Your Clients
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