Articles
"Lance Wallach"  419e  "419 plan help"  412i  412(i)  "listed transactions"  "abusive tax shelters" 6707A "Form 8886"  "Section 6707A"  "welfare benefit plans"  "retirement plan
help"  "tax attorney"  "412 plan help"  "irs help"  "section 6707 penalties" "irs audit defense"

Small businesses facing audits and potentially huge "tax penalties" over certain types of "retirement
plans
" are filing lawsuits against those who marketed, designed and sold the plans. The 412(i) and
419(e) plans were marketed in the past several years as a way for small business owners to set up
retirement or
"welfare benefits plans" while leveraging huge tax savings, but the IRS put them on a
list of
"abusive tax shelters" and has more recently focused audits on them.
"Lance Wallach"  419e  "419 plan help"  412i  412(i)  "listed transactions"  "abusive tax shelters" 6707A "Form 8886"  "Section 6707A"  "welfare benefit plans"  "retirement plan
help"  "tax attorney"  "412 plan help"  "irs help"  "section 6707 penalties" "irs audit defense"
The penalties for such transactions are extremely high and can pile up quickly - $100,000 per
individual and $200,000 per entity per tax year for each failure to disclose the transaction - often
exceeding the disallowed taxes.
"Lance Wallach"  419e  "419 plan help"  412i  412(i)  "listed transactions"  "abusive tax shelters" 6707A "Form 8886"  "Section 6707A"  "welfare benefit plans"  "retirement plan
help"  "tax attorney"  "412 plan help"  "irs help"  "section 6707 penalties" "irs audit defense"
There are business owners who owe $6,000 in taxes but have been assessed $1.2 million in
penalties. The existing cases involve many types of businesses, including doctors' offices, dental
practices, grocery store owners, mortgage companies and restaurant owners. Some are trying to
"negotiate with the IRS". Others are not waiting. A "class action" has been filed and cases in several
states are ongoing. The business owners claim that they were targeted by insurance companies;
and their agents to purchase the plans without any disclosure that the IRS viewed the plans as
"abusive tax shelters". Other defendants include "financial advisors" who recommended the plans,
accountants who failed to fill out required tax forms and law firms that drafted opinion letters
legitimizing the plans, which were used as marketing tools.
"Lance Wallach"  419e  "419 plan help"  412i  412(i)  "listed transactions"  "abusive tax shelters" 6707A "Form 8886"  "Section 6707A"  "welfare benefit plans"  "retirement plan
help"  "tax attorney"  "412 plan help"  "irs help"  "section 6707 penalties" "irs audit defense"
A 412(i) plan is a form of "defined benefit pension plan". A 419(e) plan is a similar type of health
and benefits plan.  Typically, these were sold to small, privately held businesses with fewer than 20
employees and several million dollars in gross revenues. What distinguished a legitimate plan from
the plans at issue were the life insurance policies used to fund them. The employer would make
large cash contributions in the form of insurance premiums, deducting the entire amounts. The
insurance policy was designed to have a "springing cash value," meaning that for the first 5-7 years
it would have a near-zero cash value, and then spring up in value.
"Lance Wallach"  419e  "419 plan help"  412i  412(i)  "listed transactions"  "abusive tax shelters" 6707A "Form 8886"  "Section 6707A"  "welfare benefit plans"  "retirement plan
help"  "tax attorney"  "412 plan help"  "irs help"  "section 6707 penalties" "irs audit defense"
Just before it sprung, the owner would purchase the policy from the trust at the low cash value,
thus making a tax-free transaction. After the cash value shot up, the owner could take tax-free
loans against it. Meanwhile, the insurance agents collected exorbitant commissions on the
premiums - 80 to 110 percent of the first year's premium, which could exceed $1 million.
"Lance Wallach"  419e  "419 plan help"  412i  412(i)  "listed transactions"  "abusive tax shelters" 6707A "Form 8886"  "Section 6707A"  "welfare benefit plans"  "retirement plan
help"  "tax attorney"  "412 plan help"  "irs help"  "section 6707 penalties" "irs audit defense"
Technically, the IRS's problems with the plans were that the "springing cash" structure disqualified
them from being 412(i) plans and that the premiums, which dwarfed any payout to a beneficiary,
violated incidental death benefit rules. Under Section 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.
"Lance Wallach"  419e  "419 plan help"  412i  412(i)  "listed transactions"  "abusive tax shelters" 6707A "Form 8886"  "Section 6707A"  "welfare benefit plans"  "retirement plan
help"  "tax attorney"  "412 plan help"  "irs help"  "section 6707 penalties" "irs audit defense"
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.
"Lance Wallach"  419e  "419 plan help"  412i  412(i)  "listed transactions"  "abusive tax shelters" 6707A "Form 8886"  "Section 6707A"  "welfare benefit plans"  "retirement plan
help"  "tax attorney"  "412 plan help"  "irs help"  "section 6707 penalties" "irs audit defense"
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.
"Lance Wallach"  419e  "419 plan help"  412i  412(i)  "listed transactions"  "abusive tax shelters" 6707A "Form 8886"  "Section 6707A"  "welfare benefit plans"  "retirement plan
help"  "tax attorney"  "412 plan help"  "irs help"  "section 6707 penalties" "irs audit defense"
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.
"Lance Wallach"  419e  "419 plan help"  412i  412(i)  "listed transactions"  "abusive tax shelters" 6707A "Form 8886"  "Section 6707A"  "welfare benefit plans"  "retirement plan
help"  "tax attorney"  "412 plan help"  "irs help"  "section 6707 penalties" "irs audit defense"
"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
"Section 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.

But tax experts say the audits and penalties continue.  "There's a bit of a disconnect between what
members of Congress thought they meant by suspending collection and what is happening in
practice. Clients are still getting bills and threats of liens," Wallach said.

"Thousands of business owners are being hit with million dollar - plus fines. ... The audits are
continuing and escalating. I just got four calls today," he said. A bill has been introduced in
Congress to make the penalties less draconian, but nobody is expecting a magic bullet.

"From what we know, Congress is looking to make the penalties more proportionate to the tax
benefit received instead of a fixed amount."


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Small Business Retirement Plans Fuel Litigation