IRS Very large Fines


IRS Clarifies Legality of 419(e) Plans


July 15
The Newspaper of the NYSSCPA
Vol. 10, No.13



By Lance Wallach, CLU, ChFC, CIMC, and Ron Snyder, JD, EA

Following the U.S. Congress’ lead, on April 10 the IRS issued final regulations under Section 409A of the Internal Revenue Code. If the rules seemed unclear before, they are crystal clear now: Most of the so-called “419(e)” plans as well as the remaining 419A(f)(6) plans are in violation of the law and subject to hefty penalties.
A 419(e) plan is a benefit plan that generally seeks to make the purchase of life insurance tax-deductible to employers. While the concept is appealing, most of the existing arrangements have permitted the plans to transfer the insurance policies to the participants upon retirement.
The Purpose of 409A
Code Section 409A was enacted into law on Oct. 10, 2004, to provide some uniformity and to impose several requirements upon nonqualified deferred compensation plans and similar arrangements. The new rules imposed include a required written plan agreement; a limit of payments to death, disability or retirement; a substantial risk of forfeiture to avoid immediate taxation to the employee; and timing limitations on benefit distributions.
Congress drafted Section 409A broadly to include any payment to an employee after the year for which it was paid or after termination of employment, unless the payment falls under one of the named exceptions. Exceptions include payments within 75 days, COBRA benefits, de minimis cash-outs paid in the year of termination of employment, etc.
409A Applicability to Welfare Benefits
Section 409A does not apply to welfare benefits. In fact, several forms of welfare benefits are specifically excluded under 409A. However, such excluded arrangements do not permit transfer of property to the participant except for death, disability and payments made upon retirement in accordance with the 409A rules.
Most of the existing 419(e) and 419A(f)(6) welfare benefit plans do not comply with the 409A rules relative to transfers of insurance policies or cash payments other than upon death.
Compliance and Effective Dates
Significant penalties apply for noncompliance with Section 409A. In addition to having compensation included in income, tax penalties equal to the IRS underpayment rate plus 1 percent from the time the compensation should have been included in income, plus 20 percent of the compensation amount, apply. Additional penalties may apply for failure to report the arrangement appropriately.
When Section 409A was added, employers and consultants scrambled to comply because the rules were effective for years beginning after 2004 for all arrangements entered into after Oct. 3, 2004. Existing arrangements were given until the end of 2005 to comply. However, the IRS granted an extension for compliance for employers who made a “good-faith” effort to comply with the rules. Under the Final Regulations, plans have until Dec. 31, 2007, to be in full compliance.
Effect on CPAs, Plan Sponsors and Others
Under Circular 230 standards a CPA or attorney who advises his or her client about participating in a noncompliant welfare benefit plan may be liable for fines and other sanctions. The authors expect that opinion letters relative to such welfare benefit plans have either been withdrawn or will be shortly, and we admonish professionals to review carefully all communications with clients relative to such plans. The IRS has recently been successful in imposing huge fines on several law firms for blessing questionable transactions.
Sponsors of 419 plans have two choices: totally eliminate distributions from their plans (except medical reimbursements or death benefits), or comply with Code Section 409A and the regulations thereunder.
Employers have until Dec. 31 to be in compliance. Employers who have adopted 419 plans must choose immediately whether to remain in their current 419 plan, cancel their participation in such arrangement and have their benefits distributed by Dec. 31, or transfer to a plan that is fully compliant with the new rules.


Lance Wallach, CLU, ChFC, CIMC, can be reached at 516-938-5007 or lawallach@aol.com. Ron Snyder, JD, is an enrolled actuary.




 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 bestselling 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.  For more information and additional articles on these subjects, visit www.vebaplan.com, www.taxlibrary.us, lawyer4audits.com or call 516-938-5007.
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. 



Benistar Audits, Benistar Plan,Nova,Grist Mill,Sadie 419

Benistar Audits, Benistar Plan,Nova,Grist Mill,Sadie 419

Benistar Audits, Benistar Plan,Nova,Grist Mill,Sadie 419

Benistar Audits, Benistar Plan,Nova,Grist Mill,Sadie 419

419 Life Insurance Plans and Other Scams - Large IRS Fines - The IRS Raids Plan Promoter Benistar, and What Does All This Mean To You?

419 Life Insurance Plans and Other Scams - Large IRS Fines - The IRS Raids Plan Promoter Benistar, and What Does All This Mean To You?

More You Should know

More You Should know

Don't Become A Material Advisor



JULY 1, 2011
BY LANCE WALLACH       

Accountants, insurance professionals and others need to be careful that they don’t become
what the IRS calls
material advisors.
If they sell or give advice, or sign tax returns for abusive, listed or similar plans; they risk a
minimum $100,000 fine. Their client will then probably sue them after having dealt with the
IRS.  

In 2010, the IRS raided the offices of
Benistar in Simsbury, Conn., and seized the retirement
benefit plan administration firm’s files and records. In McGehee Family Clinic, the Tax Court
ruled that a clinic and shareholder’s investment in an employee benefit plan marketed
under the name “Benistar” was a
listed transaction because it was substantially similar to
the transaction described in Notice 95-34 (1995-1 C.B. 309). This is at least the second
case in which the court has ruled against the Benistar welfare benefit plan, by denominating
it a listed transaction.

The McGehee Family Clinic 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 assessed tax deficiencies and the enhanced 30 percent penalty under Section
6662A, 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.

In rendering its decision, the court cited Curcio v. Commissioner, in which the court also
ruled in favor of the IRS. As noted in Curcio, the insurance policies, which were
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. The excessive
cost of providing death benefits was a reason for the court’s finding in Curcio that tax
deductions had been properly disallowed.

As in Curcio, the McGehee court held that the contributions to Benistar were not deductible
under Section 162(a) because the 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 lapse.

Companies should carefully evaluate their proposed investments in plans such as the
Benistar Plan. The claimed deductions will be disallowed, and penalties will be assessed for
lack of disclosure if the investment is similar to the investments described in Notice 95-34,
that is, if the transaction is a listed transaction and Form 8886 is either not filed at all or is
not properly filed. The penalties, though perhaps not as severe, are also imposed for
reportable transactions, which are defined as transactions having the potential for tax
avoidance or evasion.

Insurance agents have been selling such abusive plans since the 1990's. They started as
419A(F)(6) plans and abusive 412i plans. The IRS went after them. They then evolved to
single-employer 419(e) plans, which the IRS also went after. The latest scams may be the
so-called captive insurance plan and the so-called Section 79 plan.

While captive insurance plans are legitimate for large corporations, they are usually not
legitimate for small business owners as a way to obtain a tax deduction. I have not yet seen
a legitimate Section 79 plan. Recently, I have sent some of the plan promoters’ materials
over to my IRS contacts who were very interested in receiving them. Some of my associates
are already trying to help defend some unsuspecting business owners who are being
audited by the IRS with respect to these plans.

Similar, though perhaps not as abusive, plans fail after the IRS goes after them. Niche was
one example. The company first marketed a 419A(F)(6) plan that the IRS audited. They
then marketed a 419(e) plan that the IRS audited. Niche, insurance companies, agents, and
many accountants were then sued after their clients lost their deductions, paid fines,
interest, and penalties, and then paid huge fines for failure to file properly under 6707A.
Niche then went out of business.

Millennium sold 419 plans through insurance companies. They stupidly filed for a private
letter ruling to the effect that they were not a listed transaction. They got exactly the
opposite: a private letter ruling saying that they were a listed transaction. Then many
participants were audited. The IRS disallowed the deductions, imposed penalties and
interest, and then assessed large fines for not filing properly under Section 6707A. The
result was lawsuits against agents, insurance companies and accountants. Millennium
sought bankruptcy protection after a lot of lawsuits.

I have been an expert witness in a lot of the lawsuits in these 419 plans, 412i plans, and the
like, and my side has never lost a case. I have received thousands of phone calls over the
years from business owners, accountants, angry plan promoters, insurance agents, and
other various professionals. In the 1990's, when I started writing for the AICPA and other
publications warning about these abusive plans, most people laughed at me, especially the
plan promoters.

In 2002, when I spoke at the annual national convention of the American Society of Pension
Actuaries in Washington, people took notice. The IRS chief actuary Jim Holland also held a
meeting similar to mine on abusive 412i plans. Many IRS agents attended my meeting. I was
also invited to IRS headquarters, at the request of the acting IRS commissioner, to meet
with high-level IRS officials and Treasury officials to discuss 419 issues in depth, which I did
after the meeting.

The IRS then set up task forces and started going after 419 and 412i plans. I have been
profusely warning accountants to properly file under 6707A to avoid the large fines, but
most do not. Even if they file, if they make a mistake on the forms, the IRS will fine them.
Very few accountants have had experience filing the forms, and the IRS instructions are
complicated and therefore difficult to follow. I only know of two people who have been
successful in properly filing the forms, especially after the fact. If the forms are filled out
incorrectly, they should be amended and corrected Most accountants call me a few years
later when they and their clients get the large fines, either after improperly filling out the
forms or failing to fill them out at all. Unfortunately, by then it is too late. If they don’t call me
then, then they call me when their clients sue them.


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.


 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.



401k Tax Help And Resource Guide

401k Tax Help And Resource Guide

412i Lawsuits, 419 lawsuits, IRS Audits, 412i Problems 462 views, 76 likes | Lance Wallach | LinkedIn

412i Lawsuits, 419 lawsuits, IRS Audits, 412i Problems 462 views, 76 likes | Lance Wallach | LinkedIn

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