Lance Wallach
One day your accountant suggested that she knew a life insurance agent who could help you with your taxes. You met with him, you listened to his pitch about a pension plan, and you asked a lot of questions. He suggested a 412iplan, whatever that is. From the initial description it sounded as if you would have to fund retirement for your rotating staff, which you weren’t interested in doing, but he told you that he could arrange an executive, carve out.
You’ve been hearing that the IRS is after “listed transactions” and you’re worried. Suddenly you’re having a tough time the insurance agent that sold you the plan return your calls. The insurance company whose products fund your plan has taken your calls, but for the fourth time in as many months an agent has promised to get back to you.
You have gone to a new accountant and you learn that the plan was unsuited for you, it was formed improperly, and it’s going to cost you a lot more money than you have to pay the IRS not to mention the accountant and the actuary to sort it all out. Now you are worried that the problems may wipe out your retirement nest egg and keep you working years longer than you intended.
Fortunately, there are ways to provide for your retirement that can afford you tax benefits while creating a solid retirement fund for your future so that you won’t have to be “that doctor”. However, getting there doesn’t necessarily start with cousin Tilly’s insurance agent friend or the “financial planner” you met on the golf course. If you want to avoid problems in your retirement plans, there are some things you should do.
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 best selling
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.
Expert Witness Directorynsurance companies; and their agand that the premiums, which dwarfed any payout to a beneficiary, violated incidental death benefit rules.
ReplyDeleteUnder §6707A of the Internal Revenue Code, once the IRS flags something as an abusive tax shelter, or "listed transaction," penalties are imposed per year for each failure to disclose it. Another allegation is that businesses weren't told that they had to file Form 8886, which discloses a listed transaction.
According to Lance Wallach of Plainview, N.Y. (516-938-5007), who testifies as an expert in cases involving the plans, the vast majority of accountants either did not file the forms for their clients or did not fill them out correctly.
Because the IRS did not begin to focus audits on these types of plans until some years after they became listed transactions, the penalties have already stacked up by the time of the audits.
Another reason plaintiffs are going to court is that there are few alternatives - the penalties are not appealable and must be paid before filing an administrative claim for a refund.
The suits allege misrepresentation, fraud and other consumer claims. "In street language, they lied," said Peter Losavio, a plaintiffs' attorney in Baton Rouge, La., who is investigating several cases. So far they have had mixed results. Losavio said that the strength of an individual case would depend on the disclosures made and what the sellers knew or should have known about the risks.
In 2004, the IRS issued notices and revenue rulings indicating that the plans were listed transactions. But plaintiffs' lawyers allege that there were earlier signs that the plans ran afoul of the tax laws, evidenced by the fact that the IRS is auditing plans that existed before 2004.
"Insurance companies were aware this was dancing a tightrope," said William Noll, a tax attorney in Malvern, Pa. "These plans were being scrutinized by the IRS at the same time they were being promoted, but there wasn't any disclosure of the scrutiny to unwitting customers."
A defense attorney, who represents benefits professionals in pending lawsuits, said the main defense is that the plans complied with the regulations at the time and that "nobody can predict the future."
An employee benefits attorney who has settled several cases against insurance companies, said that although the lost tax benefit is not recoverable, other damages include the hefty commissions - which in one of his cases amounted to $860,000 the first year - as well as the costs of handling the audit and filing amended tax returns.
Defying the individualized approach an attorney filed a class action in federal court against four insurance companies claiming that they were aware that since the 1980s the IRS had been calling the policies potentially abusive and that in 2002 the IRS gave lectures calling the plans not just abusive but "criminal." A judge dismissed the case against one of the insurers that sold 412(i) plans.
The court said that the plaintiffs failed to show the statements made by the insurance companies were fraudulent at the time they were made, because IRS statements prior to the revenue rulings indicated that the agency may or may not take the position that the plans were abusive. The attorney, whose suit also names law firm for its opinion letters approving the plans, will appeal the dismissal to the 5th Circuit.
In a case that survived a similar motion to dismiss, a small business owner is suing Hartford Insurance to recover a "seven-figure" sum in penalties and fees paid to the IRS. A trial is expected in August.
Last July, in response to a letter from members of Congress, the IRS put a moratorium on collection of §6707A penalties, but only in cases where the tax benefits were less than $100,000 per year for individuals and $200,000 for entities. That moratorium was recently extended until March 1, 2010.