Investment News - Lance Wallach - 412i and 419 plan litigatation
- Investment News
Financial advisors who have sold certain types of retirement and other benefit plans to small businesses might soon be facing a wave of lawsuits — unless Congress decides to take action soon.
For years, advisors and insurance brokers have sold the 412(i) plan, a type of defined-benefit pension plan, and the 419 plan, a health and welfare plan, to small businesses as a way of providing such benefits to their employees, while also receiving a tax break.
However, in 2004, Congress changed the law to require that companies file with the Internal Revenue Service if they had these plans in place. The law change was intended to address tax shelters, particularly those set up by large companies.
Many companies and financial advisors didn't realize that this was a cause for concern, however, and now employers are receiving a great deal of scrutiny from the federal government, according to experts.
The IRS has been aggressive in auditing these plans. The fines for failing to notify the agency about them are $200,000 per business per year the plan has been in place and $100,000 per individual.
So advisors who sold these plans to small businesses are now slowly starting to become the target of litigation from employers who are subject to these fines.
“There is a slew of litigation already against advisors that sold these plans,” said Lance Wallach, an expert on 412(i) and 419 plans. “I get calls from lawyers every week asking me to be an expert witness on these cases.”
Mr. Wallach declined to cite any specific suits. But one advisor who has been selling 412(i) plans for years said his firm is already facing six lawsuits over the sale of such plans and has another two pending. “My legal and accounting bills last year were $864,000,” said the advisor, who asked not to be identified. “And if this doesn't get fixed, everyone and their uncle will sue us.”
Currently, the IRS has instituted a moratorium on collecting these fines until the end of the year in the hope that Congress will address the issue.
In a Sept. 24 letter to Sens. Max Baucus, D-Mont., Charles Boustany Jr., R-La., and Charles Grassley, R-Iowa, IRS Commissioner Douglas H. Shulman wrote: “I understand that Congress is still considering this issue and that a bipartisan, bicameral bill may be in the works … To give Congress time to address the issue, I am writing to extend the suspension of collection enforcement action through Dec. 31.”
But with so much of Congress' attention on health care reform at the moment, experts are worried that the issue may go unresolved indefinitely.
If Congress doesn't amend the statute, and clients find themselves having to pay these fines, they will absolutely go after the advisors that sold these plans to them.
Before you buy you should know section 79 Plan history
Section 79 Scams and Captive Insurance HistoryWhen trying to understand how a product becomes a target of government scrutiny it helps to know its history.
In the case of plans that fall under Internal Revenue Code Section 79, that history is complex.
Insurance companies, agents, financial planners, and others have pushed abusive 419 and 412i plans for
years. They claimed business owners could obtain large tax deductions. Insurance companies, agents and
others earned very large life insurance commissions in the process. Eventually, the IRS cracked down on the
unsuspecting business owners. Not only did they lose the tax deductions, but they were also fined, in addition
to being charged penalties and interest. A skilled CPA with extensive IRS experience could usually eliminate
the penalties and reduce the fines. Most accountants, tax attorneys and others have been unsuccessful in
accomplishing this.
After the business owner was assessed the fines and lost his tax deduction, he had another huge, unforeseen
problem. The IRS then came back and fined him a huge amount of money for not telling on himself under IRC
6707A. If you participate in a listed or reportable transaction, you must alert the IRS or face a large fine. In
essence, you must alert the IRS if you were in a transaction that has the possibility of tax avoidance or
evasion. Not only must you file Form 8886 telling on yourself, but the form needs to be filed properly, and
done every year that you are in the plan in any way at all, even if you are no longer making contributions.
According to IRC 6707A Expert Lance Wallach, "I have received hundreds of phone calls from business
owners who filed Form 8886, usually with the help of their accountants or the plan promoter. They got the fine
for either improperly filing, or for making mistakes on the form."
"The IRS directions about preparing the form are vague, especially if the form is filed late. They presume a
timely filing. In addition, many states also require forms to be filed. For example, if you work in New York State
and manage to properly fill out the Federal form, but do not file the State form, you may still get fined," says
Wallach, adding that he only knows of two people that know how to properly prepare and file the forms,
especially forms being filed late. As an expert witness in such cases, Lance Wallach’s side has never lost.
The result of the all of the above was many lawsuits against insurance companies, including Hartford, Pacific
Life, Indianapolis Life, AIG, and Penn Mutual, to name just a few. Agents, accountants, and attorneys were
also successfully sued.
Read the whole thing here
In the case of plans that fall under Internal Revenue Code Section 79, that history is complex.
Insurance companies, agents, financial planners, and others have pushed abusive 419 and 412i plans for
years. They claimed business owners could obtain large tax deductions. Insurance companies, agents and
others earned very large life insurance commissions in the process. Eventually, the IRS cracked down on the
unsuspecting business owners. Not only did they lose the tax deductions, but they were also fined, in addition
to being charged penalties and interest. A skilled CPA with extensive IRS experience could usually eliminate
the penalties and reduce the fines. Most accountants, tax attorneys and others have been unsuccessful in
accomplishing this.
After the business owner was assessed the fines and lost his tax deduction, he had another huge, unforeseen
problem. The IRS then came back and fined him a huge amount of money for not telling on himself under IRC
6707A. If you participate in a listed or reportable transaction, you must alert the IRS or face a large fine. In
essence, you must alert the IRS if you were in a transaction that has the possibility of tax avoidance or
evasion. Not only must you file Form 8886 telling on yourself, but the form needs to be filed properly, and
done every year that you are in the plan in any way at all, even if you are no longer making contributions.
According to IRC 6707A Expert Lance Wallach, "I have received hundreds of phone calls from business
owners who filed Form 8886, usually with the help of their accountants or the plan promoter. They got the fine
for either improperly filing, or for making mistakes on the form."
"The IRS directions about preparing the form are vague, especially if the form is filed late. They presume a
timely filing. In addition, many states also require forms to be filed. For example, if you work in New York State
and manage to properly fill out the Federal form, but do not file the State form, you may still get fined," says
Wallach, adding that he only knows of two people that know how to properly prepare and file the forms,
especially forms being filed late. As an expert witness in such cases, Lance Wallach’s side has never lost.
The result of the all of the above was many lawsuits against insurance companies, including Hartford, Pacific
Life, Indianapolis Life, AIG, and Penn Mutual, to name just a few. Agents, accountants, and attorneys were
also successfully sued.
Read the whole thing here
Insurance Agents: Help for those who sold 419 and 412i plans.
Insurance Agents: Help for those who sold 419 and 412i plans.
Our team of experienced consulting "tax attorneys", CPAs, and "insurance experts" specializing in 412i" and "419 "IRS
audits" that resulted from plans you sold to your clients, mainly "419 plans", "412i plans", "captive insurance" plans
and "Section 79" plans as well as other similar "employee benefit plans" or "welfare benefit plans" that the IRS is
targeting as "abusive tax shelters".
Our firm has been successful in "defending life insurance agents" and "material advisors" who have participated in
the sale of these "benefit plans".
Our team of experienced consulting "tax attorneys", CPAs, and "insurance experts" specializing in 412i" and "419 "IRS
audits" that resulted from plans you sold to your clients, mainly "419 plans", "412i plans", "captive insurance" plans
and "Section 79" plans as well as other similar "employee benefit plans" or "welfare benefit plans" that the IRS is
targeting as "abusive tax shelters".
Our firm has been successful in "defending life insurance agents" and "material advisors" who have participated in
the sale of these "benefit plans".
Abusive Tax Shelters again on the IRS “Dirty Dozen” List of Tax Scams for the 2015 Filing Season
The IRS is committed to stopping complex tax avoidance schemes and the people who create and sell them," said IRS Commissioner John Koskinen. "The vast majority of taxpayers pay their fair share, and we are warning everyone to watch out for people peddling tax shelters that sound too good to be true.”
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.
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.
Servicers for 419, 419e, 412i, Section 79, captive insurance, listed transactions
 | The Offices of Lance Wallach Offer help with the following: Tax penalty abatement | |
| IRS audit appeals | |
| U.S. Tax Court cases | |
| Multinational taxation consulting | |
| Incorporating your business | |
| Recovering losses from insurance | |
| companies & brokerage firms | ||
| Tax shelter analysis | |
| Pension plan reviews & evaluations | |
| 419 & 412 type benefit plan analysis, | |
| remediation | ||
| Offshore tax shelter issues | |
| IRS listed transactions assistance | |
| Expert witness testimony for tax, | |
| insurance & retirement plan cases | ||
| SSI & Disability benefits advocates | |
| Pension & Benefit Plan Fraud | |
| Insurance Company Fraud |
Instructions for Form 8918
www.irs.gov/pub/irs-pdf/i8918.pdf
The link will take you to Instructions for Form 8918, or in other words, a Material Advisor Disclosure Statement.
The link will take you to Instructions for Form 8918, or in other words, a Material Advisor Disclosure Statement.
FBAR Offshore Bank Accounts and Foreign Income Attacked by IRS
You may want to think about participation in the IRS' offshore tax amnestyprogram (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.
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