Abusive Insurance, Welfare Benefit, and Retirement Plans



The A2Z Directory                                                                                      March 2011
Lance Wallach

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 http://www.irs.gov and http://www.vebaplan.com.
Bruce Hink, who has given me written permission to use his name and circumstances, is a perfect example of what the IRS is doing to unsuspecting business owners.  What follows is a story about how the IRS fines him each year for being in what they called a listed transaction.  Listed transactions can be found at http://www.irs.gov.  Also involved are what the IRS calls abusive plans or what it refers to as substantially similar.  Substantially similar to is very difficult to understand, but the IRS seems to be saying, “If it looks like some other listed transaction, the fines apply.”  Also, I believe that the accountant who signed the tax return and the insurance agent who sold the retirement plan will each be fined 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 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.

3 comments:

  1. lance wallach has never lost why not use the lance wallach advantage 419 412i 412e3 section 79 plan captive insuarnce lawsuits and IRS audits sue insuarnce cos
    google and see lance wallach has never lost even the IRS listens to lance wallach who has spoken at many of the IRS branded conventions www.taxaudit419.com for help 419 412e3 412i section 79 captive insurance lance wallach emailed hartford insurance in 2002 and they knew then IRS and lawsuits would follow the 419 plans



    200K Report Update-

    419, 412i, Sect 79, Captive Insurance

    March 14,2013

    Lance Wallach
    516-938-5007



    LANCE WALLACH HELPS IRS


    Lance Wallach even tries to help the IRS go after the sellers of abusive 419, 412i, captive insurance and section 79 plans. He has also spoken at conventions partially sponsored by the IRS, met with IRS officials at their headquarters in Washington D.C. and has received phone calls from the IRS on point.
    Lance Wallach does NOT give the IRS the names of people that RETAIN him to help them. Lance does not give the IRS the names of people that he refers to others for help.

    To: Itzkowitz Ronald R
    Subject: Lance Wallach
    Hope all is well with you. I never heard from your contact about the abusive shelter information that you sent to him. This stuff on section 79 and captive is not all over the net and is sold by the same promoters that used to sell the 412i and 419 scams??????
    Also please see attached two articles that mention section 79 and captives. When I speak at accounting conventions, or write articles about them I am sometimes attacked by promoters of the plans. The articles are not 100% correct, as the publications sometimes change content without checking with the authors.


    To: Itzkowitz Ronald R
    Subject: Re: Lance Wallach AAACPA
    Thanks and please stay in touch. I hope my published articles were of help to someone at IRS. If you want I will continue to send them as I write them.
    From: Itzkowitz Ronald R
    Sent: Monday, November 28, 2011 3:36 PM
    To: Havicon Jon S
    Cc: 'LAWALLACH@aol.com'
    Subject: RE: Lance Wallach
    Hi, Jon,
    Would you please follow-up with your contact.
    Thank,
    Ron
    Ronald R. Itzkowitz
    National EP Customer Partnership Analyst
    Internal Revenue Service - Employee Plans
    Lance Wallach
    From: Ronald.R.Itzkowitz@irs.gov
    To: LAWALLACH@aol.com
    Subj: RE: Lance Wallach AAACPA
    Happy New Year Mr. Wallach and thanks for the article.
    Ron
    Ronald R. Itzkowitz
    From: Ronald.R.Itzkowitz@irs.gov
    To: LAWALLACH@aol.com
    Good Morning Mr. Wallach,
    Here is the reply I got. xxxxxxxxxxxxxxxxxxxx
    Ronald R. Itzkowitz
    Lance Wallach
    68 Keswick Lane
    To: Itzkowitz Ronald R
    Subject: Re: Lance Wallach AAACPA
    Thanks and please stay in touch. I hope my published articles were of help to someone at IRS. If you want I will continue to send them as I write them.
    From: Ronald.R.Itzkowitz@irs.gov
    To: LAWALLACH@aol.com
    Subj: RE: Lance Wallach AAACPA
    I did pass the articles along, and do continue to send them
    Ronald.R.Itzkowitz@irs.gov
    CC: LAWALLACH@aol.com
    Subj: RE: Lance Wallach
    I forwarded this to Pam xxxxxxxxxx, who is an LDC contact.
    .
    From: LAWALLACH@aol.com [mailto:LAWALLACH@aol.com]
    Sent: Monday, November 28, 2011 2:01 PM
    To: Itzkowitz Ronald R
    Subject: Lance Wallach
    Hope all is well with you. I xxxxxxxxxxxxxxxxxx. This stuff on section 79 and captive is all over the net and is sold by the same promoters that used to sell the 412i and 419 scams??????
    Also please see attached two articles that mention section 79 and captives. xxxxxxxxx

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  2. Section 79 Plans

    lancesvids.blogspot.com/‎
    by Lance Wallach - in 48 Google+ circles
    6 days ago - A Section 79 plan offers employers an opportunity to purchase life ... retirement income and how they offer a limited funding commitment.
    You shared this on Google+
    Section 79 & 419 Plans Litigation
    section79expert.blogspot.com/‎
    Jan 17, 2012 - 412i, 419, Captive Insurance and Section 79 Plans; Buyer Beware ... Some of these plans include defined benefit retirement plans, IRAs, ...
    You shared this on Google+

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  3. IRS Audits Focus on Captive Insurance Plans April 2011 Edition

    By Lance Wallach

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

    412i, 419, Captive Insurance and Section 79 Plans; Buyer Beware

    California Broker, June 2011

    Employee Retirement Plans
    By Lance Wallach Radio’s All Things Considered, and others. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education’s CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation, as well as the AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxadvisorexpert.com.
    The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

    ReplyDelete

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