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| Lance Wallach Managing Director |
| The Offices of Lance Wallach |
516-938-5007 Vebaplan.org
| "America's leading tax representation firm."(TM) |
| Serving clients nationwide Call us today: 516-938-5007 Email us at: LanWalla@aol.com |
The Lance Wallach Network TaxAudit419.com ReportableTransactions Listed Transactions IRS6707Apenalty IRSform8886 TaxAdvisorExperts ExpertTaxAdvisors Taxlibrary.us |
| Every one of our consulting attorneys, CPAs & ex IRS Agents has over 25 years of professional experience! We believe that no firm has more experienced professionals to assist our clients than we do! |
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. Read more here.
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.
Accounting today
July 2011
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.
July 2011
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.
How to Avoid IRS Fines for You and Your Clients
Published: 2010/2011
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.
Published: 2010/2011
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.
Specializing in the following services:
Expert Witness Testimony For:
* Taxes
* Insurance & retirement plan cases
* SSI & Disability Advocates
 | "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"& "412i" benefit plan analysis | |
| "419" & "412i plan" remediation | |
| Offshore tax shelter issues | |
| IRS "listed transactions" assistance |
Expert Witness Testimony For:
* Taxes
* Insurance & retirement plan cases
* SSI & Disability Advocates
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. |
| Our consulting attorneys, CPAs & ex IRS agents have helped our clients save hundreds of thousands of dollars successfully defending them in lawsuits, IRS audits & cutting IRS penalties. |