how to get sued

by Guest » Sun Feb 06, 2011 02:30 pm
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Dolan Media Newswires 01/22/2010
Small Business Retirement Plans Fuel Litigation
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.
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.
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.
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.
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.
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 §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.

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."

Total Comments: 1

Posted: Fri Feb 18, 2011 04:07 pm Post Subject:

419, 412i, Captive Insurance and Section 79 Scams, IRS Large Fines

October 11, 2010
By Lance Wallach

Years ago most successful insurance agents were making big money selling 419 and 412i plans. Most of the plans were sold to successful business owners as plans with large tax deductions where money would grow tax free until needed in retirement. I would speak at national accounting and other conventions talking about the problems with most of these plans. I would be attacked by some attendees who where making large insurance commissions selling the plans. I would try to warn insurance company home office executives but they too had their heads in the sand because of all the money these plans brought in. Then the IRS got tough and started fining the unsuspecting business owners hundreds of thousands a year for not reporting on themselves for being in the plan. The agents and insurance companies would say don’t report, “This is a good plan. We have approval.” Not only were the business owners fined under IRS code 6707A, but the insurance agents were also fined $100,000 for not reporting on themselves. Accountants who signed tax returns are even being fined 100,000 by IRS. Then the business owners sue the accountants, insurance agents, etc. I have been following these scenarios since the 1990s. In fact I have been an expert witness in many of these cases, and my side has never lost.

Let me give you an example:

A 40-year-old doctor with four employees earns, as pre-tax take-home pay, $500,000 a year. So he was told to tax deduct $200,000 a year into a 419 plan. The money would go into the plan, where it would grow in a tax-free manner because it was invested in cash value life insurance. After funding $1 million over five years, the policy would continue to grow tax deferred and, ultimately, would grow to some outrageous amount which would be used by the doctor in retirement.


419 plan participant hit with penalties for not disclosing the use of a listed tax transaction

The IRS notices and revenue rulings that came out against 419 plans stated with clarity that 419 plans using cash value life insurance are listed tax transactions The consequence of which is that, if you use one of these plans, you have to notify the IRS that you are doing so.
Most promoters of 419 plans told clients that their plans complied with the laws and, therefore, did not fall under the listed tax transaction list. Unfortunately, the IRS doesn’t care what a promoter of a tax-avoidance plan says; they make their own determination and punish those who don’t comply.

The McGehee Family Clinic, P.A. was recently hit with back taxes and a penalty under Code Sec. 666A in conjunction with a deduction to the Benistar 419 plan

Dr. McGehee's clinic took a deduction for a 419 plan (the Benistar plan) back in 2005. Eventually, the McGhee Family Clinic was audited. After the audit, the doctor was told that the deduction would be disallowed and that back taxes were due. Additionally, Dr. McGehee was hit with a 20 percent accuracy-related penalty under Code Sec. 6662A. Finally, the tax court sustained the IRS's determination that McGehee was subject to the increased 30 percent penalty, because its return did not include a disclosure statement indicating its participation in the Benistar Trust. I think that in addition to the aforementioned fines, IRS will now fine him, both on a Corporate and personal level another 200,000 or more, under IRC 6707A for not properly disclosing his participation in a listed, reportable, or similar plan. There was a moratorium on those fines until June 2010 pending new legislation to reduce them. The fines had been 200,000 per year on the corporate level and 100,000 per year on the personal level. You got the fine even if you made no contributions for the year. All you had to do was to be in the plan. So Dr McGehee's fine would be a total of 300,000 per year for every year that he and his corporation were in the plan. IRS also says the fine is non appealable. His fine would be in the million-dollar level, in addition to all the other fines.
Legislation just passed slightly reducing those fines, but you still have to properly file to start the statute of limitations running to avoid the fines. IRS is fining people who report on themselves, but make a mistake on the forms. Now that the moratorium on the fines has passed, and so has the new legislation IRS has aggressively moved the fine unsuspecting business owners hundreds of thousand. This is usually after they get audited, and sometimes reach agreement with IRS. Then another section of the IRS fines them under 6707A. I am receiving a lot of phone calls from business owners who this is happening to. Unfortunately, some of these people already had called me. I warned them to properly file under 6707A. Either they did not believe me - it is unbelievable - or their accountant or tax attorney filed wrong. Then they called again after being fined.

Recent raid on the Benistar office included turning over client names to the IRS

Recently IRS raided Benistar. IRS attacked the Benistar 419 plan, one of its tactics was to demand the names of all the clients Benistar worked with — so they could be audited by the IRS, Benistar refused to give the names and actually appealed the decision to turn over the names. The appeal was denied, but Benistar officials still refused to give up the names. Recently, the IRS raided the Benistar office and took hundreds of boxes of information, which included information on clients who were in their 419 plan. In documents filed by Benistar itself, they stated that 35 to 50 armed IRS agents showed up at their office to seize documents.
IRS has visited, and is still visiting most of the other plans and obtaining names of participants, selling insurance agents, accountants etc. They have a whole task force devoted to auditing 419, 412i and other abusive plans.
It’s important to understand what could happen to an unsuspecting business owner if they get involved in plans that are not above board. Their names could be turned over to the IRS, where audits could ensue, and where the outcome could be the repayment of back taxes and significant penalties. Then they would be fined another time under section 6707A for not properly reporting on themselves.
If you were involved with one of these abusive plans there are still steps that you can take to minimize IRS problems. I know of a CPA who left the IRS after more than 37 years to help business owners with these problems. He has successfully, after the fact, filed for clients the delinquent Forms 8886. In addition, he has assisted business owners who were being assessed accuracy-related penalties under 6662a, and they have had these penalties abated or substantially reduced. With some clients he has made large IRS fines become smaller. With some clients he has made large IRS fines become smaller.

It’s not worth it!

Stay away from 419 and similar plans like Section 79 plans. Be very careful with 412i plans. Avoid most captive insurance plans.
It’s getting closer to the end of the year. This is when every scammer known to man/woman comes out of the woodwork to sell some fly-by-night tax-deductible plan to clients. Sometimes they come in the form of an accountant, insurance agent-financial planner, or even an attorney. I see this in all of my expert witness cases and when I speak at conventions. I have seen this since the 1990s. I wanted to remind readers that, if it sounds too good to be true, it probably is.

Lance Wallach speaks at more than 20 conventions annually and writes for more than fifty publications about tax reduction ideas, abusive welfare benefit and retirement plans, captive insurance companies, cash balance plans, life settlements, premium finance, etc.
He is a course developer and instructor for the American Institute of Certified Public Accountants and a prolific author. He has written or collaborated on numerous books, including, The Team Approach to Tax and Financial Planning; Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hotspots; Alternatives to Commonly Misused Tax Strategies: Ensuring Your Client’s Future, all published by the American Institute of CPAs; The CPA’s Guide to Life Insurance, and The CPA’s Guide to Trusts and Estates, both published by Bisk Education, and his latest book, Protecting Clients from Fraud, Incompetence, and Scams, published by Wiley. In addition, Mr. Wallach writes for various national business associations that sell his books to their members and others. He has been an expert witness on some of the above issues, and to date his side has never lost a case.
Lance Wallach has also appeared on radio and TV financial programs, most recently on National Public Radio and NBC 25. He also consults on VEBAs for both public and private companies, as well as governmental entities. He is the National Society of Accountants Speaker of the Year, and a nationally recognized expert in his field.

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

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