 Posted: Mon Jan 31, 2011 1:33 pm Post subject: how to get sued |
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419 Life Insurance Plans and Other Scams – Large IRS Fines –
The IRS Raids Plan Promoter Benistar, and What Does All This Mean To You?
October 13, 2010
Recently IRS raided Benistar, which is also known as the Grist Mill Trust, the promoter and operator of one of the better known and more heavily scrutinized of the Section 419 life insurance plans. IRS attacked the Benistar 419 plan, and one of its tactics was to demand the names of all the clients Benistar worked with — so they could be audited by the IRS, Benistar refused to give the names and actually appealed the decision to turn over the names. The appeal was unsuccessful, but Benistar officials still refused to give up the names. Recently, the IRS raided the Benistar office and took hundreds of boxes of information, which included information on clients who were in their 419 plan. In documents filed by Benistar itself, they stated that 35 to 50 armed IRS agents descended upon their office to seize documents.
IRS has visited, and is still visiting most of the other plans and obtaining names of participants, selling insurance agents, accountants, etc. They have a whole task force devoted to auditing 419, 412i and other abusive plans.
It’s important to understand what could happen to unsuspecting business owners if they get involved in plans that are not above board. Their names could be turned over to the IRS, where audits could ensue, and where the outcome could be the payment of back taxes and significant penalties. Then they would be fined another time under Section 6707A for not properly reporting on themselves.
Most 419 life insurance and 412i defined benefit pension plans were sold to successful business owners as plans with large tax deductions where money would grow tax free until needed in retirement. I would speak at national accounting and other conventions talking about the problems with most of these plans. I would be attacked by some attendees who where making large insurance commissions selling the plans. I would try to warn insurance company home office executives, but they too had their heads in the sand because of all the money these plans brought in. Then the IRS got tough and started fining the unsuspecting business owners hundreds of thousands a year for not reporting on themselves for being in the plan. The agents and insurance companies advise against filing. “This is a good plan. We have approval.” Not only were the business owners fined under IRS Code 6707A, but the insurance agents were also fined $100,000 for not reporting on themselves. Accountants who signed tax returns are even being fined 100,000 by IRS. Then the business owners sue the accountants, insurance agents, etc. I have been following these scenarios for a long time. In fact, I have been an expert witness in many of these cases, and my side has never lost.
Most promoters of 419 plans told clients that their plans complied with the laws and, therefore, were not listed tax transactions. Unfortunately, the IRS doesn’t care what a promoter of a tax-avoidance plan says; it makes its own determination and punishes those who don’t comply.
The McGehee Family Clinic, P.A. was recently hit with back taxes and a penalty under Code Sec. 666A in conjunction with a deduction to the Benistar 419 plan
Dr. McGehee's clinic took a deduction for a 419 plan (the Benistar plan) back in 2005. Eventually, the McGhee Family Clinic was audited. After the audit, the doctor was told that the deduction would be disallowed and that back taxes were due. Additionally, Dr. McGehee was hit with a 20 percent accuracy-related penalty under Code Sec. 6662A. Finally, the tax court sustained the IRS's determination that McGehee was subject to the increased 30 percent penalty, because its return did not include a disclosure statement indicating its participation in the Benistar Trust. I think that in addition to the aforementioned fines, IRS will now fine him, both on a corporate and personal level, another $200,000 or more, under IRC 6707A, for not properly disclosing his participation in a listed transaction. There was a moratorium on those fines until June 2010, pending new legislation to reduce them. The fines had been 200,000 per year on the corporate level and $100,000 per year on the personal level. You got the fine even if you made no contributions for the year. All you had to do was to be in the plan. So Dr. McGehee's fine would be a total of $300,000 per year for every year that he and his corporation were in the plan. IRS also says the fine is not appealable. His fine would be in the million-dollar range and it would be in addition to the back taxes, interest, and penalties already discussed earlier in this paragraph.
Legislation just passed slightly reducing those fines, but you still have to properly file to start the Statute of Limitations running to avoid the fines. IRS is fining people who report on themselves, but make a mistake on the forms. Now that the moratorium on the fines has passed, and so has the new legislation, IRS has aggressively moved to fine unsuspecting business owners hundreds of thousands. This is usually after they get audited, and sometimes reach agreement with IRS. Then another division or department of the IRS imposes a fine under 6707A. I am receiving a lot of phone calls from business owners who this is happening to. Unfortunately, some of these people already had called me. I warned them to properly file under 6707A. Either they did not believe me - it is unbelievable - or their accountant or tax attorney filed incorrectly. Then they called again after being fined.
If you were involved with one of these abusive plans, there are steps that you can take to minimize IRS problems. With respect to filing under Section 6707A, I know the two best people in the country at filing after the fact, which is what you would be doing at this point, and still somehow avoiding the fine. It is an art that both learned through countless hours of research and numerous conversations with IRS personnel. Both have filed dozens of times for clients, after the fact, without the clients being fined. Either may well still be able to help you.
And the right accountant, one with the proper knowledge, experience, and Service contacts, can help with the other IRS problems as well. I recall a case where a CPA I knew and recommended was able to get $300,000 or so in liabilities reduced to three thousand dollars and change. Do not count on a result like this, but help is available.
It’s not worth it!
Stay away from 419 and similar plans like Section 79 plans. Be very careful with 412i plans. Avoid most captive insurance plans.
It’s getting closer to the end of the year. This is when every scammer known to man/woman comes out of the woodwork to sell some fly-by-night tax-deductible plan to clients. Sometimes they come in the form of an accountant, insurance agent-financial planner, or even an attorney. I see this in all of my expert witness cases and when I speak at conventions. I have seen this since the 1990s. I wanted to remind readers that, if it sounds too good to be true, it probably is.
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.
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lance1
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| Posted: Tue Feb 08, 2011 4:30 pm Post subject: |
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ABUSIVE WELFARE BENEFIT AND RETIREMENT PLANS CAN LEAD TO SEVERE PENALTIES FOR ACCOUNTANTS
By
Lance Wallach
Recently, penalties for tax return preparers have increased, and so have the legal standards which failing to meet may trigger the penalties. For example, in the case of an undisclosed position on a tax return, there must now be a reasonable belief that the tax treatment of the position would more likely than not be sustained on its merits. This replaces the former “realistic possibility” standard, which was generally interpreted as “one chance in three”. For disclosed positions, there must now be a reasonable basis for the tax treatment. Essentially, 33% has now become 51%.
The practitioner who wants more detailed knowledge in this area would probably do well to start by familiarizing himself with Notice 2008-13. But the principal problem with all of this, from the practical viewpoint of the on the line practitioner, is that there are just so many situations where it is difficult, if not impossible, to place numbers or percentages on the likelihood of what might happen, as now seems to be required. Many factual and legal issues that the practitioner is likely to encounter simply do not lend themselves to analysis by employing “more likely than not” or some similar slogan.
It may also be that referrals to the Office of Professional Responsibility will be seen, which office could add to the misery of fines by imposing penalties under Circular 230. Not to mention that adverse action by the Office of Professional Responsibility may well, in turn, lead to sanctions at the state level. In short, possible penalties are not just monetary. There is at least a potential threat to your license to practice. All of which is going to make even the bravest tax preparer hesitate to advocate any position that is any way questionable, even if there exists a good faith belief in it.
Perhaps the saddest possible effect of all this is the de facto, by means of these veiled threats, conversion of the practitioner, at least to some extent, into a deputy revenue agent as opposed to an advocate to his taxpayer clients. And this is only one area where this disturbing trend is being seen. Another example, as the reader will now see, is the panoply of penalties now surrounding what are known as “listed transactions”.
Welfare benefit plans are a creation of and are sanctioned by Section 419 of the Internal Revenue Code. There are single employer plans and multiple employer plans; the latter rely mostly on IRC Section 419A (f) (6) (in the most common cases where there are ten or more employers as part of the same plan). The 419A(f)(6) plans are, and perhaps always were, generally regarded as abusive, and were substantially curtailed in recent years by harsh IRS regulation. Amazingly, however, they refuse to totally die, and are still being marketed. These plans are called listed transactions (more on that later).
Single employer welfare benefit plans are now more popular than multiple employer plans. All welfare benefit plans tend to share certain characteristics, however. They tend to be marketed most frequently by insurance agents and financial planners, and sometimes by accountants and attorneys. Prospects tend to be professionals and profitable small businesses. The most attractive selling point is the ability to claim large tax deductions and remove money tax free. Life insurance tends to be the funding vehicle. Often cheap term insurance is purchased for rank and file workers and some form of permanent coverage (universal life, variable life, etc., for the owners and key employees. But many times workers are completely left out of the plan. For businesses looking to do as little as possible for workers, a selling point is that the great majority of benefits, in most cases, eventually go to the owners. This type of discrimination was recently addressed by IRS Notice 2007-84, which disallowed tax deductions and penalties with respect to welfare benefit plans that discriminate. If done correctly, the plans can accomplish things like facilitating estate planning, business succession, and asset protection. But the promised tax deduction is usually the sizzle that sells the steak.
In October of 2007, welfare benefit plans were affected by IRS rulings. The two most important developments were Revenue Ruling 2007-65, which declared, in essence, that premiums paid inside of a welfare benefit plan for cash value life insurance were not tax deductible, and Notice 2007-83, which identified the trust within welfare benefit plans involving cash value life insurance policies, AND substantially similar arrangements, as listed transactions. In other words, in essence, not only are premiums paid for cash value life insurance policies in welfare benefit plans not tax deductible, but, and far more importantly, the plans themselves are now listed transactions. This, in turn, means that most welfare benefit plans are now listed transactions, because most feature cash value life insurance, although at least one promoter has taken the position that his plan, which does feature cash value life insurance, is not a listed transaction, and has ably defended the plan in a series of memoranda to his plans participants. And ultimately, of course, the courts, not the Service, will decide the law as to what is or is not a listed transaction. Be all this as it may, the listed transaction designation creates disclosure obligations with absurdly harsh penalties both for failure to disclose or incorrectly or incompletely disclosing, as we shall soon see.
Any practitioner who has clients in these plans must proceed with utmost caution, both for the client’s sake and his own. A listed transaction, basically, is any transaction identified as such by specific IRS guidance, OR any transaction substantially similar to the specifically identified transaction. Participants in listed transactions must file Form 8886 with both the Service and the Office of Tax Shelter Analysis. Failure to timely and completely file leads to penalties of $100,000 for individuals and $200,000 for corporate tax-payers. It is also worth noting that incomplete or incorrect filings can be treated as harshly by the Service as a complete failure to file. And we should also note that virtually every Form 8886 that we have been asked to review has been defective to one extent or another.
The practitioner has filing requirements, also, which can lead to equally severe penalties, if the practitioner qualifies as a “material advisor” with respect to one of these transactions. What is a material advisor? Basically, someone who gives advice, sells, or otherwise plays a significant part in the promotion, sale, or paperwork with respect to a taxpayer’s participation in a listed transaction. Put simply, from an accountant’s standpoint, you must give advice, the client must do it, and you must satisfy a certain income threshold with respect to the transaction, usually $10,000. The accountant who signs a return taking a tax deduction with respect to the transaction is surely a material advisor, if the income threshold is met. And we also note, as we did with respect to Form 8886 in the preceding paragraph, that virtually every Form 8918 that we have been asked to review has been defective to one extent or another.
The material advisor must file Form 8918 describing her exact role in the client’s participation in the transaction. Failure to file can lead to penalties imposed on the advisor that are as severe as those imposed on taxpayers ($100,000 for individuals and $200,000 for corporations) who fail to file Form 8886. The accountant may escape material advisor status by not meeting the $10,000 income threshold. A problem, however, is the accountant who is paid $10,000 in the aggregate by the client, but not that much specifically with respect to the listed transaction. Does such a person satisfy the income threshold? The author and his associates have discussed this point, among others, directly with IRS personnel who actually wrote published guidance in this area. The best we have been able to get is a declaration that any test that would be applied to the determination of any of these issues would have to consider all surrounding facts and circumstances. This would be unlikely to yield any general rules, for each situation has its own facts and circumstances.
Lance Wallach speaks and writes about benefit plans, and has authored numerous books for the AICPA, Bisk Total tape, and others. He can be reached at (516) 938-5007 or l
The information contained in this article is not intended as legal, accounting, financial or any other type of advice for any specific individual or entity. You should seek such advice from an appropriate professional.
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