| Benistar, SADI Trust,Beta 419,Millennium Plan,Bisys,Creative Services Group,Sterling Benefit Plan,Compass 419,Niche 419, CRESP,Sea Nine Veba, American Benefits Trust, National Benefit Plan and Trust, ABT, Professional Benefits Trust Benistar 419 Plan, Millennium 419 Plan,Bisys 419,Creative Services Group 419 Plan,Sterling Benefit 419 Plan,CRESP 419, Sea Nine Veba 419, National Benefit Plan and Trust 419, American Benefits Trust 419,ABT 419,Old Mutual “Grist Mill Trust” “Penn Mont” “Real Veba””Section 79 GEAR” GEAR” “United Financial Group” “Kenny Hartstein” “Millennium Plan” Kenny Hartstein” “Millennium Plan” “captive insurance” cresp “Ridge Plan” “Professional benefits Trust” “PBT “ “Professional Planning Associates” “National Pension Associate” “NPA””Heritage Plan” ”"Insurance fraud"" pension and benefit plan fraud"“insurance company fraud"”ECI Pension Services””Pension Professionals of America””ABI”” Hartford””AIG””Indy Life””Indianapolis Life””Hartford 419, Pacific Life 419, PAC Life 419, AVIVA, 419, Indianpolis Life, Penn Mutual419,Bankers Life 419, John Hancock 419, Security Mutual 419, Transamerica 419,Prudential 419, Kansas City Life 419, Mass Mutual419, Guardian 419, Amerus 419, Wells Fargo 419, Fifth Third Bank 419, Arrow Head Trust 419, U.S. Benefits Group, Benefit Plan Advisors, Rex Insurance Service, Advantage,AIG, Hartford 412, Pacific Life 412, PAC Life 412, AVIVA, 412, Indianpolis Life, Penn Mutual412,Bankers Life 412, John Hancock 412, Security Mutual 412, Transamerica 412, Prudential 412, Kansas City Life 412, Mass Mutual412, Guardian 412, Amerus 412, U.S. Benefits Group, Benefit Plan Advisors, Grist Mill trusts, Rex Insurance Service |
Lance Wallach - Expert At Your Service
Contact Lance at: 516-938-5007 or Email: Wallachinc@gmail.com |
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| For Detailed Information On These Specific Issues, Check Out The Websites Below |
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For Expertise
You Won't Find
Anywhere Else
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You Won't Find
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| All you wanted was a comfortable retirement. What you got was fraud, incompetence, and scams. Fortunately, Lance Wallach and his team are here to help you protect your assets and keep the IRS out of your pockets! |
| Many advisory firms offer financial planning and investment services, but the difference is that Lance Wallach wrote the books on life insurance as well as financial and estate planning that the other consultants learned from! If you want to sleep soundly at night, don't go to the students for your financial solutions, go to the one who teaches them - Lance Wallach! |
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Is Appreciated
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so much for taking the
time to talk to me today
about VEBAs. Any
information you can
send me would be
helpful. Hopefully, we
can work together in
the future as interest in
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Office of the
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Every one of our consulting attorneys, CPAs & ex IRS Agents has more than 25 years of professional experience! |
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and investment services, but the difference is that Lance Wallach wrote the books on life insurance as well as financial and estate planning that the other consultants learned from! |
Late breaking news: Large 419 plan 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. Read more here.
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. Read more here.
IRS Attacks Business Owners in 419, 412, Section 79 and Captive
Insurance Plans Under Section
6707A
By Lance Wallach
Taxpayers who previously adopted 419, 412i, captive
insurance or Section 79 plans are in big trouble.
In recent years, the IRS has identified many of these arrangements as abusive devices to funnel tax deductible dollars to
shareholders and classified these
arrangements as listed transactions." These plans were sold by insurance agents, financial planners, accountants and
attorneys seeking large life insurance
commissions. 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, and you do not necessarily have to make a contribution or claim a tax deduction to participate. Section
6707A of the Code imposes severe penalties
for failure to file Form 8886 with respect to a listed transaction. But you are also in trouble if you file incorrectly. I have
received numerous phone calls from
business owners who filed and still got fined. Not only do you have to file Form 8886, but it also has to be prepared
correctly. I only know of two people in the U.
S. who have filed these forms properly for clients. They tell me that was after hundreds of hours of research and over 50
phones calls to various IRS personnel.
The filing instructions for Form 8886 presume a timely filling. Most people file late and follow the directions for currently
preparing the forms. Then the IRS fines
the business owner. The tax court does not have jurisdiction to abate or lower such penalties imposed by the IRS. Read
more here
Insurance Plans Under Section
6707A
By Lance Wallach
Taxpayers who previously adopted 419, 412i, captive
insurance or Section 79 plans are in big trouble.
In recent years, the IRS has identified many of these arrangements as abusive devices to funnel tax deductible dollars to
shareholders and classified these
arrangements as listed transactions." These plans were sold by insurance agents, financial planners, accountants and
attorneys seeking large life insurance
commissions. 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, and you do not necessarily have to make a contribution or claim a tax deduction to participate. Section
6707A of the Code imposes severe penalties
for failure to file Form 8886 with respect to a listed transaction. But you are also in trouble if you file incorrectly. I have
received numerous phone calls from
business owners who filed and still got fined. Not only do you have to file Form 8886, but it also has to be prepared
correctly. I only know of two people in the U.
S. who have filed these forms properly for clients. They tell me that was after hundreds of hours of research and over 50
phones calls to various IRS personnel.
The filing instructions for Form 8886 presume a timely filling. Most people file late and follow the directions for currently
preparing the forms. Then the IRS fines
the business owner. The tax court does not have jurisdiction to abate or lower such penalties imposed by the IRS. Read
more here
Breaking News: Don't Become A Material Advisor
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. Click here to read
more.
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. Click here to read
more.
Business Meals and Entertainment Expenses
Excerpt from FCICA Presents Tax, Insurance, and Cost Reduction Strategies for
Small Business by Lance Wallach
The 1993 tax law changed the amount allowable as a deduction for business meals
and entertainment expenses incurred after. In addition, some special rules were
enacted into the tax law. The limitation for deducting such expenses incurred after
December 31, 1993 is 50%. Accordingly, after the general rules and exceptions are
applied to meals and entertainment expenses incurred and the total dollar amount is
determined, the 50% rule must then be applied. Business people must keep current
with such rules or face the wrath of the IRS. The purpose of this chapter is to explain
the general rule, the exceptions, and the special rules that are in effect for all
business meals and entertainment expenses. Read more here
Excerpt from FCICA Presents Tax, Insurance, and Cost Reduction Strategies for
Small Business by Lance Wallach
The 1993 tax law changed the amount allowable as a deduction for business meals
and entertainment expenses incurred after. In addition, some special rules were
enacted into the tax law. The limitation for deducting such expenses incurred after
December 31, 1993 is 50%. Accordingly, after the general rules and exceptions are
applied to meals and entertainment expenses incurred and the total dollar amount is
determined, the 50% rule must then be applied. Business people must keep current
with such rules or face the wrath of the IRS. The purpose of this chapter is to explain
the general rule, the exceptions, and the special rules that are in effect for all
business meals and entertainment expenses. Read more here
How to Avoid IRS Fines for You and Your Clients
Published: 9/29/10
By Lance Wallach
Beware: The IRS is cracking down on small-business owners who participate in tax-reduction insurance plans sold by
insurance agents, including defined benefit retirement plans, IRAs, and even 401(k) plans with life insurance. In these
cases, the business owner is motivated by a large tax deduction; the insurance agent is motivated by a substantial
commission.
A few years ago, I testified as an expert witness in a case in which a physician was in an abusive 401(k) plan with life
insurance. It had a so-called “springing cash value policy” in it. The IRS calls plans with these types of policies “listed
transactions.” The judge called the insurance agent “a crook.”
If your client was currently is in a 412(i), 419, captive insurance, or Section 79 plan, they may be in big trouble. Accountants
who signed a tax return for a client in one of these plans may be what the IRS calls a “material advisor” and subject to a
maximum $200,000 fine.
If you are an insurance professional who sold or advised on one of these plans, the same holds true for you. Read more
here!
Published: 9/29/10
By Lance Wallach
Beware: The IRS is cracking down on small-business owners who participate in tax-reduction insurance plans sold by
insurance agents, including defined benefit retirement plans, IRAs, and even 401(k) plans with life insurance. In these
cases, the business owner is motivated by a large tax deduction; the insurance agent is motivated by a substantial
commission.
A few years ago, I testified as an expert witness in a case in which a physician was in an abusive 401(k) plan with life
insurance. It had a so-called “springing cash value policy” in it. The IRS calls plans with these types of policies “listed
transactions.” The judge called the insurance agent “a crook.”
If your client was currently is in a 412(i), 419, captive insurance, or Section 79 plan, they may be in big trouble. Accountants
who signed a tax return for a client in one of these plans may be what the IRS calls a “material advisor” and subject to a
maximum $200,000 fine.
If you are an insurance professional who sold or advised on one of these plans, the same holds true for you. Read more
here!
FBAR Offshore Bank Accounts and Foreign Income Attacked by IRS
Offshore International Today Aug 2011
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 business person, 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 taxadvisorexpert.com today!
Offshore International Today Aug 2011
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 business person, 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 taxadvisorexpert.com today!
Our tax resolution offices have received calls
regarding the following companies or plans: CJA,
CJA and Associates
regarding the following companies or plans: CJA,
CJA and Associates
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.
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.
CAUTION: IRS is attacking 419 plans, 419, 412i, 412(e)(3), Section 79, Captive Insurance,many other benefit plans, and plans having life insurance. |
