The Office of Lance Wallach
"America's leading tax representation firm."(TM)
Serving clients

Call us today:


Email us at:
Every one of our
consulting attorneys,
CPAs & ex IRS Agents
over 25 years of

We believe that no firm
has more experienced
professionals to assist
our clients than we do!!
Lance Wallach
Managing Director

    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

    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."

    Lance Wallach can be reached at: 516-
    938-5007- or

                        Click Here to down load this article

                                             Go back


    Lance Wallach, CLU, ChFC, CIMC, speaks and writes about
    benefit plans, tax reductions strategies, and financial plans.
    He has authored numerous books for the AICPA, Bisk Total
    tape, and others. He can be reached at (516) 938-5007 or For more articles on this or other
    subjects, feel free to visit his website at
    Lance Wallach, the National Society of Accountants Speaker
    of the Year, speaks and writes extensively about retirement
    plans, Circular 230 problems and tax reduction strategies. He
    speaks at more than 40 conventions annually, writes for over
    50 publications, is quoted regularly in the press, and has
    written numerous best-selling AICPA books, including
    Avoiding Circular 230 Malpractice Traps and Common Abusive
    Business Hot Spots. He does extensive expert witness work
    and has never lost a case.  

    Contact Lance at 516.938.5007 or  

    The information provided herein is not intended as legal,
    accounting, financial or any other type of advice for any
    specific individual or other entity.  You should contact an
    appropriate professional for any such advice.

Dolan Media News Wire
Small business retirement plans fuel litigation

The Lance Wallach Network

Follow me on facebook &  twitter

Copyright (C) 2010 - Lance Wallach