The Office of Lance Wallach
Advisers staring at a new ‘slew' of
litigation from small-business clients
Five-year-old change in tax has left some
small businesses and certain benefit plans subject to
IRS fines; the advisers who sold these plans may pay the price
|"America's leading tax representation firm."(TM)
By Jessica Toonkel Marquez
October 14, 2009
Financial advisers 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
For years, advisers 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 advisers 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
So advisers who sold these plans to small business 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 advisers 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 adviser
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
adviser, 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
If Congress doesn't amend the statute, and clients find
themselves having to pay these fines, they will absolutely go
after the advisers that sold these plans to them.
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