Do  You  Know  If  Your "419 or       412  Plan  Is  Compliant?

The  IRS  is  Issuing  Fines  Against  Them  Right Now!

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The  "Tax  Resolution  Servicesof  "Lance  Wallach"

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CAUTION:

IRS is attacking 419 plans, 419, 412i, 412(e)(3), Section 79, Captive Insurance, many other benefit plans, and plans having life insurance.






           Taxadvisorexperts.com


 

Don't Write That HUGE Check to the IRS for the Fines and Penalties They Are Demanding Until You Speak to One of Our Experts.

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f you participated in, or sold, a "419" welfare benefit plan" or "412i retirement plan" you could be liable for "IRS fines" up to or greater than $200,000!

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Law360 has implemented a new privacy policy. 
US Says Benefit Plan Scheme Costs Millions In Taxes

Law360, New York (October 11, 2013, 2:38 PM ET) -- The U.S. government sued an insurance program marketer in California federal court Wednesday in an effort to shut down a purported scheme pushing small businesses to buy into employee benefits programs it claims are structured to cheat the government out of millions of dollars in taxes.

The government’s complaint accuses KAE Insurance Services Inc. and affiliated entities of hawking voluntary employee beneficiary association plans on the misleading promise that the participating businesses can legally write off plan contributions as federal income tax deductions while still recouping the full value of those contributions down the road, according to the complaint.

The defendants have long been well aware, however, that the plans as structured violate the Internal Revenue Code and regulations promulgated by the U.S. Department of the Treasury, and their activities must be halted via a court injunction, the government argues.

“Defendants have continued to falsely claim that the VEBA plans in fact comply with the tax laws, and manage and promote them to this day despite their documented knowledge of the illegality of the plans,” the government said. “The result is significant amounts of lost tax revenue to the treasury based on erroneously claimed tax deductions.”

The complaint alleges that named defendant and California resident Kenneth Elliott has since 2001 used a network of businesses, independent certified public accountants and financial planners to sell companies on the VEBA plans on the promise they can provide “a lucrative and tax-advantaged method to accrue wealth.”

Promotion of those plans has led participating companies across the country to deduct millions in contributions, despite the fact that the IRS decided more than a decade ago — in a determination repeatedly upheld by federal courts — that massive tax write-offs under such plans are at odds with federal law, according to the complaint.

The government said one audit of some 41 customers who participated in the plans marketed by the defendants revealed a total tax deficiency of nearly $14 million, and further estimated the potential total loss to date to be over $70 million.

Elliot and his co-defendants are said to push the VEBA plans on wealthy customers with closely-held businesses such as medical practices, pitching the programs as a legal and tax-free means of providing medical or death benefits to employees, according to the complaint.

VEBA contributions are placed into a trust used to purchase insurance contracts, the premiums for which would otherwise be included as part of that employee’s gross income if purchased directly. Because such plans have in the past been used as tax shelters, federal law tightly regulates the ways in which plan contributions may be deducted, the government said.

The complaint noted that one common example of how such plans have been used as “vehicles for rampant tax abuse” involves paying excessive contributions to obtain cash value insurance policies set aside for future benefits to company owners that do not actually provide welfare benefits to employees but instead are a means of distributing excess corporate profits and softening current federal tax obligations.

The involvement of Sea Nine Associates Inc. — which sponsors the VEBA plans promoted by the instant suit defendants and is itself a named defendant — in a suit over those plans more than a decade ago serves as evidence that the defendants are well aware of the potential illegality of their enterprise, the government said.

“The core purpose and effect of the participation in a Sea Nine VEBA plan is to provide participants with a mechanism to accumulate wealth for their personal benefit, unlawfully protecting that income from federal taxation by treating it as a welfare benefit when it was that in name only,” the complaint said.

Representatives for the parties were not immediately available for comment Friday.

Counsel information for the defendants was not immediately available.

The case is United States of America v. Kenneth Elliott et al, case number 8:13-cv-01582 in the U.S. District Court for the Central District of California
 


Questions to ask yourself:

"lance wallach" “abusive tax shelter audit” "tax letter" "irs letter" "irs letters" "irs determination letter" 419e 412i 6707a "form 8886" "listed transactions" "abusive tax shelter assistance" "irs penalty abatement" "expert witness irs" veba "expert witness services" "expert witness irs help" "pension audit" "Grist Mill Trust" Benistar "SADI Trust" "Beta 419" "Millennium Plan" Bisys "Creative Services Group" "Sterling Benefit Plan" "Compass 419" Niche  "Sea Nine Veba" 419 412i 419e "expert witness insurance" "welfare benefit plans" "419 plan help" "expert witness irs" “Lance Wallach” “419 plan help” “412i plan help” “tax resolution services” “irs problem solvers” “form 8886” 6707a “irs letter” “abusive tax shelters” “abusive tax shelter” “listed transactions” “listed transaction” “8886 help” “expert witness” “insurance expert” “tax expert” “irs audit defense” “abusive tax shelter help” "tax letter" "irs letter" "irs letters" "irs determination letter" 419e 412i 6707a "form 8886" "listed transactions" "abusive tax shelter assistance" "irs penalty abatement" "expert witness irs" veba "expert witness services" "expert witness irs help" "pension audit" “abusive tax shelter help” “abusive tax shelter assistance”
  • Did you get a letter from the IRS saying you will be audited?
  • Does your business have a 419(e) or 412i defined benefit plan?

  • Are You Certain You Filed Properly for a Listed or Reportable Transaction?
  • Did you sell a 412(i) or a 419(e) plan to a client? 
  • Were you the accountant for a small business who has a 419(e) plan, a 419(A)(F)(6) plan,or a 412(i)?

  • Are you certain that even if your transactions were not "listed" that they were not "reportable" transactions?
"lance wallach" 6707a “captive insurance” “section 79”"tax letter" "irs letter" "irs letters" "irs determination letter" 419e 412i 6707a "form 8886" "listed transactions" "abusive tax shelter assistance" "expert witness irs" veba "expert witness services" "Grist Mill Trust" Benistar "SADI Trust" "Beta 419" "Millennium Plan" Bisys "Creative Services Group" "Sterling Benefit Plan" "Compass 419" “Niche 419”  "Sea Nine Veba" “419 plan” 412i 419e "expert witness insurance" "welfare benefit plans" "419 plan help" "expert witness irs" “Lance Wallach” “419 plan help” “412i plan help” “tax resolution services” “irs problem solvers” “form 8886” 6707a “irs letter” “abusive tax shelters” “abusive tax shelter” “listed transactions” “listed transaction” “8886 help” “expert witness” “insurance expert” “tax expert” “irs audit defense” “abusive tax shelter help” "tax letter" "irs letter" "irs letters" "irs determination letter" 419e 412i 6707a "form 8886" "listed transactions" veba "expert witness services" “abusive tax shelter help”
If you said yes to any of those questions
,
you may be liable for fines up to $200,000 for what the IRS calls "listed transactions".

Explanation of the Problem:

"abusive transaction" "listed transaction" "6707A" "419e" "412i" "8886" "Veba" "Section 79"  "captive insurance"
"tax shelter help" "tax shelter" "welfare benefit plan" "failure to file" "IRC 6707A" "IRS tax notice"

Many taxpayers previously adopted certain welfare plan arrangements under Section "419" of the Internal Revenue Code (the “Code”). 

In recent years, the IRS has identified these arrangements as abusive devices to funnel tax-deductible dollars to shareholders and classified these arrangements as “listed transactions.”  In general, taxpayers who engage in a listed transaction must report such transaction to the IRS on "Form 8886" every year that they “participate” in the transaction.  Section "6707A" of the Code imposes severe penalties ($200,000 for a business and $100,000 for an individual) for failure to file Form 8886 with respect to a listed transaction. 

The tax court does not have jurisdiction to abate or lower such penalties imposed by the IRS.  Upon audit, these taxpayers were shocked when the IRS asserted penalties under Section 6707A of the Code in the hundreds of thousands of dollars.   Vociferous complaints from these taxpayers caused Congress to impose a moratorium on collection of Section 6707A penalties.  However, upon the expiration of the moratorium on June 1, 2010, the IRS immediately sent out notices proposing the imposition of Section 6707A penalties along with requests for lengthy extensions of the Statute of Limitations for the purpose of assessing tax. 

Many of these taxpayers stopped taking deductions for contributions to "419 welfare trusts" well before 2007, and are confused and upset by the IRS’s inquiry, especially when the taxpayer had previously reached a monetary settlement with the IRS regarding its deductions.  Logic and common sense dictate that a penalty should not apply if the taxpayer no longer benefits from the arrangement.  The remaining question is whether that logic is supported by the Treasury Regulations and court decisions.  Many taxpayers who are no longer taking current tax deductions for 419(e) welfare trust contributions continue to enjoy the benefit of previous tax deductions by continuing the deferral of income from contributions and deductions taken in prior years. 

While the regulations do not expand on what constitutes "reflecting the tax consequences of the strategy”, it could be argued that continued benefit from a tax deferral for a previous tax deduction is within the contemplation of a “tax consequence” of the 419(e) welfare trust strategy.

It is abundantly clear that taxpayers who receive notices from the IRS regarding Section 6707A penalties should take these letters extremely seriously.  These notices do not lend themselves to “do-it-yourself eye surgery”.

“captive insurance” “section 79”"tax letter" "irs letter" "irs letters" "irs determination letter" 419e 412i 6707a "form 8886" "listed transactions" "abusive tax shelter assistance" "expert witness irs" veba "expert witness services" "Grist Mill Trust" Benistar "SADI Trust" "Beta 419" "Millennium Plan" Bisys "Creative Services Group" "Sterling Benefit Plan" "Compass 419" “Niche 419”  "Sea Nine Veba" “419 plan” 412i 419e "expert witness insurance" "welfare benefit plans" "419 plan help" "expert witness irs" ““419 plan help” “412i plan help” “tax resolution services” “irs problem solvers” “form 8886” 6707a “irs letter” “abusive tax shelters” “abusive tax shelter” “listed transactions” “listed transaction” “8886 help” “expert witness” “insurance expert” “tax expert” “irs audit defense” “abusive tax shelter help” "tax letter" "irs letter" "irs letters" "irs determination letter" "form 8886"

THE STATUTE OF LIMITATIONS IS NOT RUNNING.  This means that the IRS can fine you at any time in the future for anything regarding past or present participation in the plan.  I urge you to take immediate action!

This means that the IRS can fine you at any time in the future for anything regarding past or present participation in the plan.I urge you to take immediate action!

“abusive tax shelter help” "tax letter" "irs letter" "irs letters" "irs determination letter" 419e 412i 6707a "form 8886" "listed transactions" "abusive tax shelter assistance" "irs penalty abatement" "expert witness irs" veba "expert witness services" "expert witness irs help" "pension audit" "Grist Mill Trust" Benistar "SADI Trust" "Beta 419" "Millennium Plan" Bisys "Creative Services Group" "Sterling Benefit Plan" "Compass 419" Niche  "Sea Nine Veba" 419 412i 419e "expert witness insurance" "welfare benefit plans" "419 plan help" "expert witness irs" “abusive tax shelter help” “irs appeal” “tax resolution services” “insurance expert witnesses” “pension plan audit” “tax preparer penalties” “tax audit defense” “business tax audit” “tax penalty abatement” “irs tax problems” “circular 230” “retirement tax shelters” “health insurance fraud” “employer insurance fraud” “irs trouble” “unfiled tax returns” “unfiled taxes” 419 412i "listed transactions" "form 8886" 6707A "tax shelters" "IRS audit defense" "expert witness irs help" "welfare benefit plan help" "419 plan help" "irs penalty abatement"  "fight the irs" "412i retirement plans" "tax resolution services" "irs problem solvers" "how to avoid irs audit" "abusive tax shelter help"

Don't get caught off guard by a surprise letter from the IRS. Remedy your  "419e", "419 Trust", "412i", "419(A)(F)(6)" plans,  "Multiple Employer Plan," VEBA, or "welfare benefit plan" before they fine you at least $200,000 for every year you have in the plan!


Contact this team of "tax resolution" experts today and have peace of mind tomorrow!

516-938-5007

Call for a FREE 5 minute telephone
consultation the nation's leading IRS 419e 412i plans expert!

                           

Our tax resolution offices have received calls regarding the following companies or plans: CJA, CJA and Associates



I have a CPA and an Attorney. Why do I need you?

FACT - "The Federal Tax Code is composed of 45,662 pages that require taxpayers to choose from 703 different forms. The Internal Revenue Code has grown to almost 1.4 million words today and is now 500,000 words longer than the Bible."

There is another unequivocal fact that every small businessperson should know - "small privately held businesses pay a considerably higher percentage of their earnings to taxes than do large corporations in America."

Why? Well, two reasons are on the payrolls of most small businesses. Though competent and qualified, the attorneys and accountants serving the small business community are not tax specialist. They are general practitioners. Small business attorneys focus mainly on legal matters such as contracts, entity formation and debt collections. Small business accountants wear many hats, such as: handling the books, interacting with the state and federal revenue services, reconciling bank records, preparing quarterly wage reports, etc. They simply don't have the time to spend 50 hours a week, 52 weeks a year, learning the intricacies of the ever changing tax code and applying the tax saving opportunities that lie within it.

When it comes to taxes, we have consistently found that most small businesses are merely doing year-end compliance work. Year-end tax compliance is what the IRS requires of a business. Basically, your accountant subtracts your expenses from your revenues, throws in the standard deductions and tells you how much you owe Uncle Sam. Does this sound familiar?

Small businesses should, like big businesses, properly structure their organizations to take advantage of the tax code. They should learn the tax reducing opportunities afforded to all businesses, both big and small. Tax Law Associates provides tax expertise that enables the small business owner to legally hold on to a considerably higher percentage of his earnings. 

On average, we reduce our clients' tax burdens by 20% to 40%. In fact, if after a complimentary verification of a client's tax disposition, we determine that we cannot reduce his full year tax payout by more than twice our one time fee, we walk away with no obligation to the client. We are so confident in our abilities that we will sign our name to a binding agreement assuring the client those tax savings.

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.

 

 

Late breaking news: Large 419 plan Millennium files for Bankruptcy. 

Recent court cases and other developments have highlighted serious problems in plans, popularly know as Benistar, issued by Nova Benefit Plans of Simsbury, Connecticut. Recently unsealed IRS criminal case information now raises concerns with other plans as well. If you have any type plan issued by NOVA Benefit Plans, U.S. Benefits Group, Benefit Plan Advisors, Grist Mill trusts, Rex Insurance Service or Benistar, get help at once. You may be subject to an audit or in some cases, criminal prosecution.

 

On November 17th, 59 pages of search warrant materials were unsealed in the Nova Benefit Plans litigation currently pending in the U.S. District Court for the District of Connecticut. According to these documents, the IRS believes that Nova is involved in a significant criminal conspiracy involving the crimes of Conspiracy to Impede the IRS and Assisting in the Preparation of False Income Tax Returns.
California Broker June 2011                                                                   Recent Development!

 

Employee Retirement Plans

By Lance Wallach

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

 

The IRS has been attacking all 419 welfare benefit plans, many 412i retirement plans, captive insurance plans with life insurance in them, and Section 79 plans.  IRS is aggressively auditing various plans and calling them “listed transactions,” “abusive tax shelters,” or “reportable transactions,” participation in any of which must be disclosed to the Service.  The result has been IRS audits, disallowances, and huge fines for not properly reporting under IRC 6707A. 

In a recent tax court case, Curico v. Commissioner (TC Memo 2010-115), the Tax Court ruled that an investment in an employee welfare benefit plan marketed under the name “Benistar” was a listed transaction.  It was substantially similar to the transaction described in IRS Notice 95-34.  A subsequent case, McGehee Family Clinic, largely followed Curico, though it was technically decided on other grounds.  The parties stipulated to be bound by CuricoMcGehee in connection with the Benistar 419 Plan and Trust were deductible.  Curico did not appear to have been decided yet at the time McGehee was argued.  The McGehee regarding whether the amounts paid by opinion (Case No. 10-102) (United States Tax Court, September 15, 2010) does contain an exhaustive analysis and discussion of virtually all of the relevant issues. Read more here
IRS Audits 419, 412i, Captive Insurance Plans With Life Insurance, and Section 79 Scams

 

 

By Lance Wallach

 

The IRS started auditing 419 plans in the ‘90s, and then continued going after 412i and other plans that they considered abusive, listed, or reportable transactions, or substantially similar to such transactions.

 

In a recent Tax Court Case, Curcio v. Commissioner (TC Memo 2010-115), the Tax Court ruled that an investment in an employee welfare benefit plan marketed under the name “Benistar” was a listed transaction in that the transaction in question was substantially similar to the transaction described in IRS Notice 95-34. A subsequent case, McGehee Family Clinic, largely followed Curcio, though it was technically decided on other grounds. The parties stipulated to be bound by Curcio on the issue of whether the amounts paid by McGehee in connection with the Benistar 419 Plan and Trust were deductible. Curcio did not appear to have been decided yet at the time McGehee was argued. The McGehee opinion (Case No. 10-102) (United States Tax Court, September 15, 2010) does contain an exhaustive analysis and discussion of virtually all of the relevant issues.  Click here to read more.


Get Sued

June 2011

The IRS is cracking down on what it considers to be abusive tax shelters. Many of them are being marketed to small business owners by insurance professionals, financial planners and even accountants and attorneys. I speak at numerous conventions, for both business owners and accountants. And after I speak, I am always approached by many people who have questions about tax reduction plans that they have heard about. Below are the most common 419 tax reduction insurance plans. 

These come in various versions, and most of them have or will get the participant audited and the salesman sued. They purportedly allow the business owner to make a large tax-deductible contribution, and some or all of the contribution pays for a life insurance product. The IRS has been disallowing most versions of these plans for years, yet they continue to be sold. After everyone gets into trouble and the insurance agents get sued, the promoters of the abusive versions sometimes change the name of their company and call the plan something else. The insurance companies whose policies are sold are legitimate companies. What usually is not legitimate is the way that most of the plans are operated. There can also be a $200,000 IRS fine facing the insurance agent who sold the plan if Form 8918 has not been properly filed. I've reviewed hundreds of these forms for agents and have yet to see one that was filled out correctly. 

 

When the IRS audits a participant in one of these plans, the tax deductions are lost. There is also the interest and large penalties to consider. The business owner can also be facing a $200,000-a-year fine if he did not properly file Form 8886. Most of these forms have been filled out improperly. In my talks with the IRS, I was told that the IRS considers not filling out Form 8886 properly almost the same as not filing at all. 

412(i) retirement plans 

The IRS has been auditing participants in these types of retirement plans. While there is generally nothing wrong with many of the newer plans, the IRS considered most of the older abusive plans. Forms 8918 and 8886 are also required for abusive 412(i) plans. 

I have been an expert witness in a lot of these 419 and 412(i) lawsuits and I have not lost one of them. If you sold one or more of these plans, get someone who really knows what they are doing to help you immediately. Many advisors will take your money and claim to be able to help you. Make sure they have experience helping agents that have sold these types of plans. Don't let them learn on the job, with your career and money at stake.

 

Do not wait for IRS to come and get you, or for your client to sue you. Time is of the essence. Most insurance professionals need help to correct their improperly completed Form 8918 or to fill it out properly in the first place. If you have not previously filled out the form it is late, and therefore you should immediately seek assistance. There are plenty of legitimate tax reduction insurance plans out there. Just make sure that you know the history of the people with whom you conduct business. 

Remember, if something looks too good to be true, it usually is. Be careful. 


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

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


Offshore International Today                                           Aug 2011                                                                              

FBAR Offshore Bank Accounts and Foreign Income Attacked by IRS

By: Lance Wallach

 

You may want to think about participation in the IRS’ offshore tax amnesty program (called the Offshore Voluntary Disclosure Initiative). Do you want to play audit roulette with the IRS?  Some clients think they are too small to be prosecuted. They are wrong.

To the average businessperson, only the guys with tens of millions secretly stashed in Swiss bank accounts get prosecuted. Don't tell that to Michael Schiavo. He was just prosecuted for hiding money in a Swiss account back in 2003. How much money does the IRS say he hid? A whopping $90,000. That’s it.

But wait, there is more to the story. Schiavo attempted to do a quiet disclosure during the 2009 amnesty but instead of filling out the amnesty paperwork, he simply trusted that by coming forward voluntarily he could avoid criminal prosecution. He was wrong on all counts. Nothing is too small for the IRS, and nothing is too old.

“So, to save a whopping $40,624 in taxes, this guy risked a felony conviction and prison time, not to mention steep penalties that could very easily eat up the entire $90,000, and also his criminal and civil defense costs.

 The smart taxpayers are the ones coming forward and not having to look over their shoulders for the next 10 years.

Time is running out. The tax amnesty runs through August but it takes at least days to jump through all the hoops. We will also fight hard to reduce the penalties down even more. Remember, the IRS can go as low as 5%. Don’t want this to happen to you? Visit www.taxadvisorexpert.com today!

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

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



The Team Approach to Tax, Financial and Estate Planning.

 

by Lance Wallach

 

 

CPAs are the best and most qualified professionals when it comes to serving their clients needs, but they need to know when and how to coordinate with other experts.

 

Over the last twenty years we have worked with thousands of practitioners who have decided to add financial services to their practices. They do it for a variety of reasons, but the most common are as follows:

 

 

*They don’t want to refer their client elsewhere when they request financial services.

 

* They want to remain competitive.

 

*They want to diversify and increase their revenue as opposed to depending solely on tax and accounting revenue.

IRS Audits 419, 412i, Captive Insurance Plans With Life Insurance, and Section 79 Scams

By Lance Wallach                                                                                          June 2011

 

 

The IRS started auditing 419 plans in the ‘90s, and then continued going after 412i and other plans that they considered abusive, listed, or reportable transactions, or substantially similar to such transactions.

 

In a recent Tax Court Case, Curcio v. Commissioner (TC Memo 2010-115), the Tax Court ruled that an investment in an employee welfare benefit plan marketed under the name “Benistar” was a listed transaction in that the transaction in question was substantially similar to the transaction described in IRS Notice 95-34. A subsequent case, McGehee Family Clinic, largely followed Curcio, though it was technically decided on other grounds. The parties stipulated to be bound by Curcio on the issue of whether the amounts paid by McGehee in connection with the Benistar 419 Plan and Trust were deductible. Curcio did not appear to have been decided yet at the time McGehee was argued. The McGehee opinion (Case No. 10-102) (United States Tax Court, September 15, 2010) does contain an exhaustive analysis and discussion of virtually all of the relevant issues.

 

Taxpayers and their representatives should be aware that the Service has disallowed deductions for contributions to these arrangements. The IRS is cracking down on small business owners who participate in tax reduction insurance plans and the brokers who sold them. Some of these plans include defined benefit retirement plans, IRAs, or even 401(k) plans with life insurance.

 

In order to fully grasp the severity of the situation, one must have an understanding of Notice 95-34, which was issued in response to trust arrangements sold to companies that were designed to provide deductible benefits such as life insurance, disability and severance pay benefits. The promoters of these arrangements claimed that all employer contributions were tax-deductible when paid, by relying on the 10-or-more-employer exemption from the IRC § 419 limits. It was claimed that permissible tax deductions were unlimited in amount.

 

In general, contributions to a welfare benefit fund are not fully deductible when paid. Sections 419 and 419A impose strict limits on the amount of tax-deductible prefunding permitted for contributions to a welfare benefit fund. Section 419A(F)(6) provides an exemption from Section 419 and Section 419A for certain “10-or-more employers” welfare benefit funds. In general, for this exemption to apply, the fund must have more than one contributing employer, of which no single employer can contribute more than 10% of the total contributions, and the plan must not be experience-rated with respect to individual employers.

 

According to the Notice, these arrangements typically involve an investment in variable life or universal life insurance contracts on the lives of the covered employees. The problem is that the employer contributions are large relative to the cost of the amount of term insurance that would be required to provide the death benefits under the arrangement, and the trust administrator may obtain cash to pay benefits other than death benefits, by such means as cashing in or withdrawing the cash value of the insurance policies. The plans are also often designed so that a particular employer’s contributions or its employees’ benefits may be determined in a way that insulates the employer to a significant extent from the experience of other subscribing employers. In general, the contributions and claimed tax deductions tend to be disproportionate to the economic realities of the arrangements.

 

Benistar advertised that enrollees should expect to obtain the same type of tax benefits as listed in the transaction described in Notice 95-34. The benefits of enrollment listed in its advertising packet included: 

  • Virtually unlimited deductions for the employer;
  • Contributions could vary from year to year;
  • Benefits could be provided to one or more key executives on a selective basis;
  • No need to provide benefits to rank-and-file employees;
  • Contributions to the plan were not limited by qualified plan rules and would not interfere with pension, profit sharing or 401(k) plans;
  • Funds inside the plan would accumulate tax-free;
  • Beneficiaries could receive death proceeds free of both income tax and estate tax;
  • The program could be arranged for tax-free distribution at a later date;
  • Funds in the plan were secure from the hands of creditors.

The Court said that the Benistar Plan was factually similar to the plans described in Notice 95-34 at all relevant times. In rendering its decision the court heavily cited Curcio, in which the court also ruled in favor of the IRS. As noted in Curcio, the insurance policies, overwhelmingly variable or universal life policies, required large contributions relative to the cost of the amount of term insurance that would be required to provide the death benefits under the arrangement. The Benistar Plan owned the insurance contracts.

 

Following Curcio, as the Court has stipulated, the Court held that the contributions to Benistar were not deductible under section 162(a) because participants could receive the value reflected in the underlying insurance policies purchased by Benistar—despite the payment of benefits by Benistar seeming to be contingent upon an unanticipated event (the death of the insured while employed). As long as plan participants were willing to abide by Benistar’s distribution policies, there was no reason ever to forfeit a policy to the plan. In fact, in estimating life insurance rates, the taxpayers’ expert in Curcio assumed that there would be no forfeitures, even though he admitted that an insurance company would generally assume a reasonable rate of policy lapses.

 

The McGehee Family Clinic had enrolled in the Benistar Plan in May 2001 and claimed deductions for contributions to it in 2002 and 2005. The returns did not include a Form 8886,Reportable Transaction Disclosure Statement, or similar disclosure.

 

The IRS disallowed the latter deduction and adjusted the 2004 return of shareholder Robert Prosser and his wife to include the $50,000 payment to the plan. The IRS also assessed tax deficiencies and the enhanced 30% penalty totaling almost $21,000 against the clinic and $21,000 against the Prossers. The court ruled that the Prossers failed to prove a reasonable cause or good faith exception.

 

 

More you should know:

 

  • In recent years, some section 412(i) plans have been funded with life insurance using face amounts in excess of the maximum death benefit a qualified plan is permitted to pay.  Ideally, the plan should limit the proceeds that can be paid as a death benefit in the event of a participant’s death.  Excess amounts would revert to the plan.  Effective February 13, 2004, the purchase of excessive life insurance in any plan is considered a listed transaction if the face amount of the insurance exceeds the amount that can be issued by $100,000 or more and the employer has deducted the premiums for the insurance.
  • A 412(i) plan in and of itself is not a listed transaction; however, the IRS has a task force auditing 412i plans.
  • An employer has not engaged in a listed transaction simply because it is a 412(i) plan.
  • Just because a 412(i) plan was audited and sanctioned for certain items, does not necessarily mean the plan engaged in a listed transaction. Some 412(i) plans have been audited and sanctioned for issues not related to listed transactions.

 

 

Companies should carefully evaluate proposed investments in plans such as the Benistar Plan. The claimed deductions will not be available, and penalties will be assessed for lack of disclosure if the investment is similar to the investments described in Notice 95-34. In addition, under IRC 6707A, IRS fines participants a large amount of money for not properly disclosing their participation in listed, reportable or similar transactions; an issue that was not before the Tax Court in either Curcio or McGehee. The disclosure needs to be made for every year the participant is in a plan. The forms need to be properly filed even for years that no contributions are made. I have received numerous calls from participants who did disclose and still got fined because the forms were not filled in properly. A plan administrator told me that he assisted hundreds of his participants file forms, and they still all received very large IRS fines for not properly filling in the forms.

 

IRS has been attacking all 419 welfare benefit plans, many 412i retirement plans, captive insurance plans with life insurance in them and Section 79 plans.

 

 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, lawallach@aol.com or visit www.vebaplan.com.

 

Lance Wallach
68 Keswick Lane
Plainview, NY 11803
Ph.: (516)938-5007
Fax: (516)938-6330
www.vebaplan.com

National Society of Accountants Speaker of The Year



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.

 


                                                  
                                                   Should you File, and then Opt Out?


 

Announced February 8, 2011, the IRS 2011 Offshore Voluntary Disclosure Initiative (OVDI) program is a welcome but conditional amnesty allowing taxpayers with foreign accounts to come clean and get into compliance with the IRS.  The program runs through Sept.  9, 2011.

 

There’s been discussion of “opting out” of the program to take your chances in audit, but it’s a topic fraught with danger.  Now, however, there is guidance about opting out of the program that makes much of it transparent. Because of this late date it is recommended that you properly file FBARs and the 90-day request for amnesty extension. This is the first important step. If the forms are not done properly, you will have extensive problems and will not have to think about opting out. If your forms are properly done and filed, then your situation should be discussed with someone who is experienced in these matters.

 

Under the OVDI, taxpayers are subject to a penalty of 25 percent of the highest aggregate account balance on their undisclosed account(s) between 2003 and 2010.  If the value was less than $75,000 at all times during those years, the penalty is only 12.5 percent.

These account balance penalties are in lieu of all other penalties that may apply, including FBAR and offshore-related information return penalties.  Plus, participants are required to pay taxes and interest on any monies (such as interest income on foreign accounts) they previously failed to report.  Finally, they must pay an accuracy-related penalty equal to 20 percent of the underpayment of tax, plus interest.

Opting out of the program can make sense for some, though it involves taking your chances with an IRS examination. Someone should represent you with extensive experience in this. We always suggest they should at least be a CPA with years of experience in international tax. It’s even better if you use one that was with the international tax division of the IRS for a number of years. The IRS has published a separate guide detailing the rules and procedures for opting out. 

Here are some of the rules: 

1.      IRS Summary.  The IRS employee who has been handling your case summarizes it, agreeing or disagreeing with your view of penalties, and listing how extensive an audit he or she recommends.

2.      Program Status Report.  Before you can opt out, the IRS sends a letter reporting on the status of your disclosure and what you still must submit.  If you’ve given enough data, the IRS will calculate what you would owe under the OVDI.  You should provide any missing items within 30 days.

3.      Taxpayer Submission.  Within 20 days, the taxpayer opts out in writing and makes a written case what penalties should apply and why. 

4.      Central Committee.  A Committee of IRS Managers reviews the summary and decides how extensive an audit to conduct.  The IRS says “the taxpayer is not to be punished (or rewarded) for opting out.”   The Committee also decides whether to assign your case for a normal civil audit or to assign it for a criminal exam. 

5.      Written Warning.  The IRS sends another letter explaining that opting out must be in writing and is irrevocable.  You have 20 days thereafter to opt out in writing.

6.      Interview?  Some audits will include taxpayer interviews.

Bottom Line?  The “opt out” procedure is helpful but still a bit daunting.  If you are considering it, make sure you get some solid advice from an experienced person who, in my opinion, should have worked for the IRS and is a CPA about the nature of your case. This is just one of the many options that should be discussed with your advisor. There are many other strategies that you may want to utilize. Your advisor should be aware of all your options, and should explain them. If not, consider engaging someone else. Remember, the penalties can be very large, especially if your advisor is not skilled at this. There is even the potential for criminal prosecution.  See taxadvisorexpert.com for the latest information in this area or to contact one of our professionals today.

 

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, international tax, and other subjects. He writes about FBAR, OVDI, international taxation, captive insurance plans and other topics. He speaks at more than ten conventions annually, writes for more than 50 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,lanwalla@aol.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.