Showing posts with label Listed Transactions. Show all posts
Showing posts with label Listed Transactions. Show all posts
Section 79 Plans: Section 79, Captive Insurance, IRS Audits and Lawsuits on 419 and 412i Plans
Section 79 Plans: Section 79, Captive Insurance, IRS Audits and Lawsuits on 419 and 412i Plans (click the link to go to the page)
While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
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By Lance Wallach, CLU, CHFC Abusive Tax Shelter, Listed Transaction, Reportable Transaction Expert Witness
IRS Attacks Business Owners in 419, 412, Section 79 and Captive Insurance Plans Under Section 6707A - By Lance Wallach - Taxpayers who previously adopted 419, 412i, captive insurance or Section 79 plans are in big trouble. In recent years, the IRS has identified many of these arrangements as abusive devices to funnel tax deductible dollars to shareholders and classified these arrangements as listed transactions."
These plans were sold by insurance agents, financial planners, accountants and attorneys seeking large life insurance commissions. In general, taxpayers who engage in a “listed transaction” must report such transaction to the IRS on Form 8886 every year that they “participate” in the transaction, and you do not necessarily have to make a contribution or claim a tax deduction to participate. Section 6707A of the Code imposes severe penalties for failure to file Form 8886 with respect to a listed transaction. But you are also in trouble if you file incorrectly. I have received numerous phone calls from business owners who filed and still got fined. Not only do you have to file Form 8886, but it also has to be prepared correctly. I only know of two people in the U.S. who have filed these forms properly for clients. They tell me that was after hundreds of hours of research and over 50 phones calls to various IRS personnel. The filing instructions for Form 8886 presume a timely filling. Most people file late and follow the directions for currently preparing the forms. Then the IRS fines the business owner. The tax court does not have jurisdiction to abate or lower such penalties imposed by the IRS.
"Many taxpayers who are no longer taking current tax deductions for these plans continue to enjoy the benefit of previous tax deductions by continuing the deferral of income from contributions and deductions taken in prior years."
Many business owners adopted 412i, 419, captive insurance and Section 79 plans based upon representations provided by insurance professionals that the plans were legitimate plans and were not informed that they were engaging in a listed transaction. Upon audit, these taxpayers were shocked when the IRS asserted penalties under Section 6707A of the Code in the hundreds of thousands of dollars. Numerous complaints from these taxpayers caused Congress to impose a moratorium on assessment of Section 6707A penalties.
The moratorium on IRS fines expired on June 1, 2010. The IRS immediately started sending out notices proposing the imposition of Section 6707A penalties along with requests for lengthy extensions of the Statute of Limitations for the purpose of assessing tax. Many of these taxpayers stopped taking deductions for contributions to these plans years ago, and are confused and upset by the IRS’s inquiry, especially when the taxpayer had previously reached a monetary settlement with the IRS regarding its deductions. Logic and common sense dictate that a penalty should not apply if the taxpayer no longer benefits from the arrangement. Treas. Reg. Sec. 1.6011-4(c)(3)(i) provides that a taxpayer has participated in a listed transaction if the taxpayer’s tax return reflects tax consequences or a tax strategy described in the published guidance identifying the transaction as a listed transaction or a transaction that is the same or substantially similar to a listed transaction.
Clearly, the primary benefit in the participation of these plans is the large tax deduction generated by such participation. Many taxpayers who are no longer taking current tax deductions for these plans continue to enjoy the benefit of previous tax deductions by continuing the deferral of income from contributions and deductions taken in prior years. While the regulations do not expand on what constitutes “reflecting the tax consequences of the strategy,” it could be argued that continued benefit from a tax deferral for a previous tax deduction is within the contemplation of a “tax consequence” of the plan strategy. Also, many taxpayers who no longer make contributions or claim tax deductions continue to pay administrative fees. Sometimes, money is taken from the plan to pay premiums to keep life insurance policies in force. In these ways, it could be argued that these taxpayers are still “contributing,” and thus still must file Form 8886.
It is clear that the extent to which a taxpayer benefits from the transaction depends on the purpose of a particular transaction as described in the published guidance that caused such transaction to be a listed transaction. Revenue Ruling 2004-20, which classifies 419(e) transactions, appears to be concerned with the employer’s contribution/deduction amount rather than the continued deferral of the income in previous years. Another important issue is that the IRS has called CPAs material advisors if they signed tax returns containing the plan, and got paid a certain amount of money for tax advice on the plan. The fine is $100,000 for the CPA, or $200,000 if the CPA is incorporated. To avoid the fine, the CPA has to properly file Form 8918.
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 more than 50 publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public 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, wallachinc@gmail.com or visit www.taxadvisorexpert.com.
"Many taxpayers who are no longer taking current tax deductions for these plans continue to enjoy the benefit of previous tax deductions by continuing the deferral of income from contributions and deductions taken in prior years."
Many business owners adopted 412i, 419, captive insurance and Section 79 plans based upon representations provided by insurance professionals that the plans were legitimate plans and were not informed that they were engaging in a listed transaction. Upon audit, these taxpayers were shocked when the IRS asserted penalties under Section 6707A of the Code in the hundreds of thousands of dollars. Numerous complaints from these taxpayers caused Congress to impose a moratorium on assessment of Section 6707A penalties.
The moratorium on IRS fines expired on June 1, 2010. The IRS immediately started sending out notices proposing the imposition of Section 6707A penalties along with requests for lengthy extensions of the Statute of Limitations for the purpose of assessing tax. Many of these taxpayers stopped taking deductions for contributions to these plans years ago, and are confused and upset by the IRS’s inquiry, especially when the taxpayer had previously reached a monetary settlement with the IRS regarding its deductions. Logic and common sense dictate that a penalty should not apply if the taxpayer no longer benefits from the arrangement. Treas. Reg. Sec. 1.6011-4(c)(3)(i) provides that a taxpayer has participated in a listed transaction if the taxpayer’s tax return reflects tax consequences or a tax strategy described in the published guidance identifying the transaction as a listed transaction or a transaction that is the same or substantially similar to a listed transaction.
Clearly, the primary benefit in the participation of these plans is the large tax deduction generated by such participation. Many taxpayers who are no longer taking current tax deductions for these plans continue to enjoy the benefit of previous tax deductions by continuing the deferral of income from contributions and deductions taken in prior years. While the regulations do not expand on what constitutes “reflecting the tax consequences of the strategy,” it could be argued that continued benefit from a tax deferral for a previous tax deduction is within the contemplation of a “tax consequence” of the plan strategy. Also, many taxpayers who no longer make contributions or claim tax deductions continue to pay administrative fees. Sometimes, money is taken from the plan to pay premiums to keep life insurance policies in force. In these ways, it could be argued that these taxpayers are still “contributing,” and thus still must file Form 8886.
It is clear that the extent to which a taxpayer benefits from the transaction depends on the purpose of a particular transaction as described in the published guidance that caused such transaction to be a listed transaction. Revenue Ruling 2004-20, which classifies 419(e) transactions, appears to be concerned with the employer’s contribution/deduction amount rather than the continued deferral of the income in previous years. Another important issue is that the IRS has called CPAs material advisors if they signed tax returns containing the plan, and got paid a certain amount of money for tax advice on the plan. The fine is $100,000 for the CPA, or $200,000 if the CPA is incorporated. To avoid the fine, the CPA has to properly file Form 8918.
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 more than 50 publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public 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, wallachinc@gmail.com or visit www.taxadvisorexpert.com.
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.
While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
How to Beat the IRS: IRS Audits 419, 412i, Captive Insurance Plans With Life Insurance, and Section 79 Scams
How to Beat the IRS: IRS Audits 419, 412i, Captive Insurance Plans With Life Insurance, and Section 79 Scams
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.
IRS tax relief firm, Lance Wallach, speaking: Material Advisors & 419 Plans Litigation: Lance Wa...
IRS tax relief firm, Lance Wallach, speaking: Material Advisors & 419 Plans Litigation: Lance Wa...: Material Advisors & 419 Plans Litigation: Lance Wallach National Society of Accountants Spea... 412i 419 sect 79 lawsuits audits ww...
Help with Common IRS Problems: Listed Transactions & 419 Plans Litigation
Help with Common IRS Problems: Listed Transactions & 419 Plans Litigation: Have ...: Listed Transactions & 419 Plans Litigation: Have You Dealt With Any Of These People? Kenny Ha... : Have You Dealt With Any Of These P...
Abusive Tax Shelter, Listed Transaction, Reportable Transaction Expert Witness
IRS 412(i) Audit Initiative: Are All the Plans Bad?Customer Login
How Hartford Life and Other Insurance Companies Tricked their Agents and Got People in Trouble with the IRS
Agents from Hartford and other insurance companies were shown ways to sell large life insurance policies. This “Welfare Benefit Trust 419 plan or 412i plan should be shown to their profitable small business owners as a cure for paying too much taxes.
A Welfare Benefit Trust 419 plan essentially works like this:
• The business provides a fringe benefit for their employees, such as health insurance and life insurance.
• The benefit is established in the name of a trust and funded with a cash value life insurance policy
• Here is the gravy: the entire amount deposited into the trust (insurance policy) is tax deductible to the company,and
• The owners of the company can withdraw the cash value from the policy in later years tax-free.
Yes, the holy grail of tax avoidance has been achieved: tax deductible up front and tax-free when you withdraw. By the way, if you are not familiar with such investments there is a reason. They are not legal by the tax code. Physician practices, as well as other small and mid-sized businesses, became buyers into these welfare benefit trusts as they were sold as a way for the practice to “protect” a large profit in a certain year from being taxed. They were told it was not uncommon for a single transaction into a welfare benefit trust to be $200,000 to $300,000 dollars or more in a single premium payment, yielding typically a six-figure commission check.
A few years later the gig was up as it became obvious these could not be tax legal. My understanding is that most medical practices that bought these “unrolled” them when the major brokerage firms realized that avarice got the best of them and stopped selling them. In 1995 the IRS warned that they would be coming after these plans. In 2007, the IRS and the Treasury Department issued a formal warning cautioning “about certain Trust Arrangements Sold as Welfare Benefit Funds”. The IRS called these “abusive schemes” and made such a transaction what the IRS lovingly calls a “listed transaction”. Essentially, a listed transaction is a transaction that the IRS has determined to be a tax avoidance transaction. The IRS even keeps these Listed Transactions on their website, listed in chronological order from 1 to 34.
Welfare Benefit Trusts is #33.
Good Welfare Benefit Trusts
First of all, it is important to mention that “there are many legitimate welfare benefit funds that provide benefits” according to the IRS. Internal Revenue Code Sections 419 and 419A spell out the rules allowing employers to make tax-deductible contributions to Welfare Benefit Plans. There is nothing wrong with these plans and no mystery to them. After all, a medical practice or any business for that matter is allowed to deduct the costs of doing business as an expense. This includes employee salary and benefits.
VEBAs (Voluntary Employee Benefits Association) have been around since 1928 and are used by employers to provide health, life, disability, education and other benefits for their employees and are the original Welfare Benefit Trusts. When properly established and executed, a VEBA can be a legitimate employee benefit structure. In 2007 the United Auto Workers, in order to relieve the Big 3 Automakers from carrying the liability for their health plans on their accounting books, formed the world’s largest VEBA with over $45 billion in assets.
Bad Welfare Benefit Trusts
However, the IRS does have a problem with Welfare Benefit Plans or 419 plans that are promoted to small business owners as a scheme to avoid taxes and provide medical and life insurance benefits to key employees that in substance primarily serve the owner(s) of the business. These 419 Welfare Benefit Plan schemes claim that the employer’s contributions are deductible under IRC section 419 as ordinary and necessary business expenses, allowing the business owner to provide a life insurance policy for his favorite employee, himself, and accumulate cash value in a life insurance policy.
Lest there be any confusion or debate, IRC 264(a)(1) states:
(a) General rule
No deduction shall be allowed for -
(1) Premiums on any life insurance policy, or endowment or
annuity contract, if the taxpayer is directly or indirectly a
beneficiary under the policy or contract.
While VEBAs have been used properly, as in the UAW example above, unfortunately they are often a front for an abusive tax shelter. In the 1970’s VEBAs were being used by the wealthy as a popular tool for tax reduction and asset protection. In 1984 Congress passed the Deficit Reduction Act, which limited the use of VEBAs. In the 1990’s however VEBAs were structured to give business owners tax benefits not allowed and got back on the IRS radar. Two state medical societies along with a neonatology group practice became test cases by the IRS that helped close those VEBAs with abusive tax structures and purporting to be employee welfare benefit plans: Southern California Medical Professionals Association VEBA, New Jersey Medical Profession Association VEBA and Neonatology Associates, PA. Although the VEBAs claimed to have favorable determination letters, the actual execution of the plan did not comply with the law, mainly by allowing the employees to hold term policies in the plan that could be converted into universal life policies at the same insurer and use the conversion credit account to spring cash value in the policy. This then allowed policyholders to borrow against the UL policy as a supposedly nontaxable source of retirement income, with the repayment of the loan paid out of the policy’s death benefits. (“Making Welfare Plans Work”, Advisor Today, September 2000 P 110). This of course is not allowed under the tax code.
Those that think that they may be in the clear with their abusive tax shelter because:
1. A large passage of time has occurred since they have owned it
2. They have a favorable determination letter
3. Other honorable businesses/ Medical Societies also have the same tax shelter
4. My insurance agent said it was legal
You may want to read the 98-page ruling by the United States Tax Court filed on July 31, 2000 in the case of the above-mentioned Neonatology and related cases. The long arm of the IRS reached back 9 years to 1991, 1992, 1993 disallowing hundreds of thousands of dollars and assessing deficiencies and huge “accuracy-related” tax penalties. Even the doctors that had died since then were not given a break either; their estates and surviving widows were assessed the deficiencies and penalties.
In 2002 the IRS talked Congress into passing new laws basically killing the use of multiple employer 419 plans. Some TPAs (third party administrators) that had set up the multiple employer plans discovered that they could use single employer 419 welfare benefit trusts and VEBAs because Congress forgot to include them when they passed the negative laws shutting done the multiple employer plans. This forced the IRS to issue notices 2007-83 and 2007-84, Rev. Ruling 2007-65 and make welfare benefit trusts listed tax transactions now on the listed tax transactions list. (“Negative IRS Notices On 419 and VEBA Plans” Roccy M. Defrancesco Nov 1, 2007)
Ugly Welfare Benefit Trusts
I call these “Ugly” because these Welfare Benefit Trusts were sold to small business owners after the 2007 IRS listed transaction warning, and after the multiple IRS notices and revenue rulings. The major brokerage firms by 2004 had stopped selling Welfare Benefit Trusts to protect their own financial interests, realizing these were compliance and lawsuit time bombs. The 2007 IRS listed transaction notice along with multiple other notices however did not seem to stop some smaller broker dealer firms and life insurance agents from promoting these.
I have become aware of the fact that Welfare Benefit Trusts that are in violation of the basics of the tax code (unlimited full deduction of premium, 100% tax free distribution to owner of cash value) are still being sold even today and even affecting existing clients. These Welfare Benefit Trusts go by many different names and the insurance agents selling them are using a number of different insurance companies to fund the plan. These plans involve the sale of an insurance policy usually with a six-digit premium that often pays the insurance agent a six-digit commission, so perhaps I should not be surprised that individuals (physicians?) are still being victimized.
Conversation with IRS Attorney on Welfare Benefit Trusts
I have meet and had many discussions with the IRS about abusive 419 and 412i plans. I discussed with xxxxxx, an IRS attorney that helped draft the listed transaction #33 on the IRS website, on what exactly the IRS considers an abusive Welfare Benefit Plan. She stated that, once you take out the fact that the trust cannot be offering a collective bargaining element which is covered by another IRS code, there were three elements they look for:
1. There has to be a Trust that claims to be providing welfare benefits
2. There is either a cash value policy involved that offers accumulation or a policy in which money is set aside for a future policy in which accumulation occurs, such as a term policy that can then offer a higher accumulated value.
3. The plan cannot deduct in any year more than the benefit provided. For example if the plan just provides a death benefit, the most that can be deducted in a year is only the term cost of that benefit, not the entire premium. If the plan offers medical benefits, then only the cost (what was paid out to the employee) for that benefit can be deducted in that year.
I found it interesting that the IRS is pursuing this broader definition as an abusive plan. xxxxx explained that in the case of a discovered abusive Welfare Benefit Plan, the IRS would disallow the deductions, assert income back to the owner as a distribution of profits, and assess penalties. The courts are clear that you cannot get out of penalties by claiming you are relying on the person that sold you the Welfare Benefit Plan.
What if you currently have a Welfare Benefit Trust for your Practice?
Realizing that someone you trusted has financially devastated you, carelessly misguided you and sold you a bogus tax program in order to pay cash for his new 7 series BMW can be a difficult and rude awakening. After accepting the fact that your Welfare Benefit Plan you have for your practice meets the basic criteria as mentioned in this article as an abusive transaction, I would recommend that you consult an attorney that specializes in pursuing promoters of abusive Welfare Benefit Plans and discuss your options.
You must be proactive. You may be advised to file an IRS form 8886, which is a disclosure form related to prohibited tax shelter transactions. The penalties for failure to file a form 8886 can be stiff. Of course, filing this form will open the Pandora’s Box on your Welfare Benefit Trust to the IRS. Many of these 8886 filings are done incorrectly. An incorrectly filed IRS form is an unfiled IRS form, so please consult a CPA who is experienced in this area. Your attorney that has expertise with Welfare Benefit Trusts will be able to guide you with this. Regarding recourse, most all cases are settled out of court, as the insurance company, the agent, and the agency prefer to avoid the publicity.
AUTHOR: Dathonie Pinto
Copyright Lance Wallach, CLU, CHFC
More information about Lance Wallach, CLU, CHFC
While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author• The business provides a fringe benefit for their employees, such as health insurance and life insurance.
• The benefit is established in the name of a trust and funded with a cash value life insurance policy
• Here is the gravy: the entire amount deposited into the trust (insurance policy) is tax deductible to the company,and
• The owners of the company can withdraw the cash value from the policy in later years tax-free.
Yes, the holy grail of tax avoidance has been achieved: tax deductible up front and tax-free when you withdraw. By the way, if you are not familiar with such investments there is a reason. They are not legal by the tax code. Physician practices, as well as other small and mid-sized businesses, became buyers into these welfare benefit trusts as they were sold as a way for the practice to “protect” a large profit in a certain year from being taxed. They were told it was not uncommon for a single transaction into a welfare benefit trust to be $200,000 to $300,000 dollars or more in a single premium payment, yielding typically a six-figure commission check.
A few years later the gig was up as it became obvious these could not be tax legal. My understanding is that most medical practices that bought these “unrolled” them when the major brokerage firms realized that avarice got the best of them and stopped selling them. In 1995 the IRS warned that they would be coming after these plans. In 2007, the IRS and the Treasury Department issued a formal warning cautioning “about certain Trust Arrangements Sold as Welfare Benefit Funds”. The IRS called these “abusive schemes” and made such a transaction what the IRS lovingly calls a “listed transaction”. Essentially, a listed transaction is a transaction that the IRS has determined to be a tax avoidance transaction. The IRS even keeps these Listed Transactions on their website, listed in chronological order from 1 to 34.
Welfare Benefit Trusts is #33.
Good Welfare Benefit Trusts
First of all, it is important to mention that “there are many legitimate welfare benefit funds that provide benefits” according to the IRS. Internal Revenue Code Sections 419 and 419A spell out the rules allowing employers to make tax-deductible contributions to Welfare Benefit Plans. There is nothing wrong with these plans and no mystery to them. After all, a medical practice or any business for that matter is allowed to deduct the costs of doing business as an expense. This includes employee salary and benefits.
VEBAs (Voluntary Employee Benefits Association) have been around since 1928 and are used by employers to provide health, life, disability, education and other benefits for their employees and are the original Welfare Benefit Trusts. When properly established and executed, a VEBA can be a legitimate employee benefit structure. In 2007 the United Auto Workers, in order to relieve the Big 3 Automakers from carrying the liability for their health plans on their accounting books, formed the world’s largest VEBA with over $45 billion in assets.
Bad Welfare Benefit Trusts
However, the IRS does have a problem with Welfare Benefit Plans or 419 plans that are promoted to small business owners as a scheme to avoid taxes and provide medical and life insurance benefits to key employees that in substance primarily serve the owner(s) of the business. These 419 Welfare Benefit Plan schemes claim that the employer’s contributions are deductible under IRC section 419 as ordinary and necessary business expenses, allowing the business owner to provide a life insurance policy for his favorite employee, himself, and accumulate cash value in a life insurance policy.
Lest there be any confusion or debate, IRC 264(a)(1) states:
(a) General rule
No deduction shall be allowed for -
(1) Premiums on any life insurance policy, or endowment or
annuity contract, if the taxpayer is directly or indirectly a
beneficiary under the policy or contract.
While VEBAs have been used properly, as in the UAW example above, unfortunately they are often a front for an abusive tax shelter. In the 1970’s VEBAs were being used by the wealthy as a popular tool for tax reduction and asset protection. In 1984 Congress passed the Deficit Reduction Act, which limited the use of VEBAs. In the 1990’s however VEBAs were structured to give business owners tax benefits not allowed and got back on the IRS radar. Two state medical societies along with a neonatology group practice became test cases by the IRS that helped close those VEBAs with abusive tax structures and purporting to be employee welfare benefit plans: Southern California Medical Professionals Association VEBA, New Jersey Medical Profession Association VEBA and Neonatology Associates, PA. Although the VEBAs claimed to have favorable determination letters, the actual execution of the plan did not comply with the law, mainly by allowing the employees to hold term policies in the plan that could be converted into universal life policies at the same insurer and use the conversion credit account to spring cash value in the policy. This then allowed policyholders to borrow against the UL policy as a supposedly nontaxable source of retirement income, with the repayment of the loan paid out of the policy’s death benefits. (“Making Welfare Plans Work”, Advisor Today, September 2000 P 110). This of course is not allowed under the tax code.
Those that think that they may be in the clear with their abusive tax shelter because:
1. A large passage of time has occurred since they have owned it
2. They have a favorable determination letter
3. Other honorable businesses/ Medical Societies also have the same tax shelter
4. My insurance agent said it was legal
You may want to read the 98-page ruling by the United States Tax Court filed on July 31, 2000 in the case of the above-mentioned Neonatology and related cases. The long arm of the IRS reached back 9 years to 1991, 1992, 1993 disallowing hundreds of thousands of dollars and assessing deficiencies and huge “accuracy-related” tax penalties. Even the doctors that had died since then were not given a break either; their estates and surviving widows were assessed the deficiencies and penalties.
In 2002 the IRS talked Congress into passing new laws basically killing the use of multiple employer 419 plans. Some TPAs (third party administrators) that had set up the multiple employer plans discovered that they could use single employer 419 welfare benefit trusts and VEBAs because Congress forgot to include them when they passed the negative laws shutting done the multiple employer plans. This forced the IRS to issue notices 2007-83 and 2007-84, Rev. Ruling 2007-65 and make welfare benefit trusts listed tax transactions now on the listed tax transactions list. (“Negative IRS Notices On 419 and VEBA Plans” Roccy M. Defrancesco Nov 1, 2007)
Ugly Welfare Benefit Trusts
I call these “Ugly” because these Welfare Benefit Trusts were sold to small business owners after the 2007 IRS listed transaction warning, and after the multiple IRS notices and revenue rulings. The major brokerage firms by 2004 had stopped selling Welfare Benefit Trusts to protect their own financial interests, realizing these were compliance and lawsuit time bombs. The 2007 IRS listed transaction notice along with multiple other notices however did not seem to stop some smaller broker dealer firms and life insurance agents from promoting these.
I have become aware of the fact that Welfare Benefit Trusts that are in violation of the basics of the tax code (unlimited full deduction of premium, 100% tax free distribution to owner of cash value) are still being sold even today and even affecting existing clients. These Welfare Benefit Trusts go by many different names and the insurance agents selling them are using a number of different insurance companies to fund the plan. These plans involve the sale of an insurance policy usually with a six-digit premium that often pays the insurance agent a six-digit commission, so perhaps I should not be surprised that individuals (physicians?) are still being victimized.
Conversation with IRS Attorney on Welfare Benefit Trusts
I have meet and had many discussions with the IRS about abusive 419 and 412i plans. I discussed with xxxxxx, an IRS attorney that helped draft the listed transaction #33 on the IRS website, on what exactly the IRS considers an abusive Welfare Benefit Plan. She stated that, once you take out the fact that the trust cannot be offering a collective bargaining element which is covered by another IRS code, there were three elements they look for:
1. There has to be a Trust that claims to be providing welfare benefits
2. There is either a cash value policy involved that offers accumulation or a policy in which money is set aside for a future policy in which accumulation occurs, such as a term policy that can then offer a higher accumulated value.
3. The plan cannot deduct in any year more than the benefit provided. For example if the plan just provides a death benefit, the most that can be deducted in a year is only the term cost of that benefit, not the entire premium. If the plan offers medical benefits, then only the cost (what was paid out to the employee) for that benefit can be deducted in that year.
I found it interesting that the IRS is pursuing this broader definition as an abusive plan. xxxxx explained that in the case of a discovered abusive Welfare Benefit Plan, the IRS would disallow the deductions, assert income back to the owner as a distribution of profits, and assess penalties. The courts are clear that you cannot get out of penalties by claiming you are relying on the person that sold you the Welfare Benefit Plan.
What if you currently have a Welfare Benefit Trust for your Practice?
Realizing that someone you trusted has financially devastated you, carelessly misguided you and sold you a bogus tax program in order to pay cash for his new 7 series BMW can be a difficult and rude awakening. After accepting the fact that your Welfare Benefit Plan you have for your practice meets the basic criteria as mentioned in this article as an abusive transaction, I would recommend that you consult an attorney that specializes in pursuing promoters of abusive Welfare Benefit Plans and discuss your options.
You must be proactive. You may be advised to file an IRS form 8886, which is a disclosure form related to prohibited tax shelter transactions. The penalties for failure to file a form 8886 can be stiff. Of course, filing this form will open the Pandora’s Box on your Welfare Benefit Trust to the IRS. Many of these 8886 filings are done incorrectly. An incorrectly filed IRS form is an unfiled IRS form, so please consult a CPA who is experienced in this area. Your attorney that has expertise with Welfare Benefit Trusts will be able to guide you with this. Regarding recourse, most all cases are settled out of court, as the insurance company, the agent, and the agency prefer to avoid the publicity.
AUTHOR: Dathonie Pinto
Copyright Lance Wallach, CLU, CHFC
More information about Lance Wallach, CLU, CHFC
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