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| Lance Wallach Managing Director |
Specializing in the following services:
 | "IRS audit appeals" | |
| U.S. 'Tax Court' cases | |
| Multinational taxation consulting | |
| 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:
- IRS Taxes
- Insurance & retirement plan cases
| 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 |
| 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. |
| 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 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.
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.
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.
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.
| CAUTION: IRS is attacking 419 plans, 419, 412i, 412(e)(3), Section 79, Captive Insurance, many other benefit plans, and plans having life insurance. |