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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
    action soon.

    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
    unresolved indefinitely.

    “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,” said Kathleen

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