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Don’t Become a #MaterialAdvisor

Accountants, insurance professionals and others need to be careful that they don’t become what the IRS calls material advisors. If they sell or give advice, or sign tax returns for abusive, listed or similar plans; they risk a minimum $100,000 fine. Their client will then probably sue them after having dealt with the IRS.

In 2010, the IRS raided the offices of Benistar in Simsbury, Conn., and seized the retirement benefit plan administration firm’s files and records. In McGehee Family Clinic, the Tax Court ruled that a clinic and shareholder’s investment in an employee benefit plan marketed under the name “Benistar” was a listed transaction because it was substantially similar to the transaction described in Notice 95-34 (1995-1 C.B. 309). This is at least the second case in which the court has ruled against the Benistar welfare benefit plan, by denominating it a listed transaction.

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Be Advised – Everything is Not Fine

By Lance Wallach

 

A few years ago, I testified as an expert witness in a case where a physician was in an abusive 401(k) plan with life insurance. It had a so-called “springing cash value” policy in it. The IRS calls plans with these types of policies “listed transactions.” The judge called the insurance broker “a crook.”

 

Keeping that in mind, you should know that 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.

 

Who is involved

 

For the business owner, the motivation is a large tax deduction. For the insurance broker and the insurance carrier, the motivation is a substantial commission. Thus, the IRS is cracking down on accountants, insurance brokers and other.

 

If your client is (or was) in a 412(i), 419, captive insurance, or Section 79 plan, then you may be in big trouble.

 

If you are an accountant and signed a tax return for a client in one of these plans, you are probably what the IRS calls a “material adviser” and subject to a maximum $200,000 fine.

 

If you are an insurance professional that sold or advised on one of these plans, the same holds true for you.

 

What happened

 

Both business owners and brokers need to file properly under Section 6707A or face large IRS fines. In many cases, the accountant filed the appropriate forms, but the IRS still levied the fine because the accountant made a mistake when filling out the form.

 

The improper preparation of these forms usually results in the client being fined more quickly than if the form were not filed at all. My office has reviewed many forms and we have not yet seen one that was filled out properly.

 

The IRS will be soon attacking Section 79 scams as well, I am told. In Section 79 scams, small business owners are told that they can take a tax deduction through their businesses to purchase life insurance. That sounds good, but when you break down the math and sales pitch, it doesn’t make sense.

 

Predictions come true

 

In articles I wrote for the American Institute for Certified Public Accountants back in the ‘90s, I predicted attacks by the IRS on 419s. Those predictions came true.

 

Then I predicted attacks on 412s. They came true too.

 

Now I’m predicting that these Section 79 scams will be attacked.

 

How to act

 

To protects themselves, everyone in these Section 79 plans should file protectively under Section 6707A, and anyone who has not filed protectively in a 419 or 412(i) had better get some good advice from someone who knows what is going on and has extensive experience filing protectively.

 

The IRS has its task forces auditing these plans now; after that they will move on to the Section 79 scams and the brokers who sold them.

 

I have been an expert witness in a lot of cases involving 412(i) and 419 issues. They rarely go well for brokers, accountants, plan promoters, or insurance companies.

 

Watch your back

 

If you are an insurance professional, it’s important to understand that you should not count on your insurance company to back you up.

 

Based on what I have seen, insurance companies are more likely to stab you in the back. In an IRS investigation, the insurance companies settle first, leaving the brokers hanging. Then, in many cases, they fire the brokers.

 

So be careful. If you sold plans, gave tax advice, or signed a tax return and got paid a certain amount of money, you may be a material adviser, and subject to a fine of up to $200,000.

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, financial and estate planning, and abusive tax shelters.  He writes about 412(i), 419, 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 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.taxaudit419.com and www.Experttaxdvisors.org

 

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.

 

Get a $200,000 IRS Fine and Have Your Client Sue You

By Lance Wallach

Over the past decade, business owners have been overwhelmed by a plethora of arrangements designed to reduce the cost of providing employee benefits and taxes while simultaneously increasing their own retirement savings. The solutions ranged from traditional pension and profit sharing plans to more advanced strategies.

Some strategies, such as IRS Section 419 and 412(i) plans, used life insurance as vehicles to bring about benefits. Unfortunately, almost all the plans were noncompliant, even though insurance companies vetted them and encouraged their agents to sell them. This fostered an environment that led to numerous IRS crackdowns, disallowing tax deductions, and spurned clients to sue their insurance agents and others.

The result has been thousands of audits and an IRS task force seeking out tax-shelter promotions. In addition, the IRS has been auditing most 412(i) defined benefit retirement plans and all 419 welfare benefit plans — plans offered by many insurance agents. For unknowing clients, the tax consequences are enormous. Yet for their professional insurance advisors, the liability may be equally extreme. If an insurance professional sells one of these plans, and the client takes a tax deduction on that plan the IRS now considers as abusive, to be a listed transaction or substantially similar to such a transaction, the insurance agent may be called a “material advisor.” The fine for being found a material advisor is $200,000 if incorporated, or $100,000 if unincorporated.

Most insurance agents think that they can avoid the fine by filing Form 8918 with the IRS and informing on their clients. But, all of the Form 8918s we have seen have been filled out improperly. In our discussions with the IRS officials who wrote the regulations, the impression that we received was that if the form is filled out improperly, you are lying to the government. That is almost as bad as not filing the form. This has also been a problem with all the forms that we have reviewed for accountants and insurance agents. We have reviewed hundreds of forms, and not a single one has been filled out properly. One of the reasons for this may be that the promoter of the abusive plan sends the form with instructions to the accountant and insurance agent. These instructions tend to protect the promoter, but do not necessarily protect the insurance agent or accountant. So please be careful with this entire situation. We have received hundreds of phone calls from accountants and insurance professionals recently who are in this predicament. But, it is very difficult to help them after the fact.

Recently, there has been an explosion in the marketing of a financial product called “captive insurance.” These so-called “captives” are typically small insurance companies designed to insure the risks of an individual business under IRS Code Section 831(b). When properly designed, a business can make tax-deductible premium payments to a related party insurance company. Depending on circumstances, underwriting profits, if any, can be paid out to the owners as dividends, and profits from liquidation of the company may be taxed as capital gains.

While captives can be a great cost-saving tool, they also are expensive to build and manage. Also, captives are allowed to garner tax benefits because they operate as real insurance companies. Advisors and business owners who misuse captives or market them as estate planning tools, asset protection vehicles, for tax deferral purposes or to obtain other benefits not related to the true business purpose of an insurance company face grave regulatory and tax consequences.

A recent concern is the integration of small captives with life insurance policies. Small captives, under Section 831(b), have no statutory authority to deduct life premiums. Also, if a small captive uses life insurance as an investment, the cash value of the life policy can be taxable at corporate rates, and then will be taxable again when distributed. The consequence of this double taxation is to devastate the effectiveness of the life insurance, and it extends serious liability to any accountant who recommends the plan or even signs the tax return of the business that pays premiums to the captive.

The IRS is aware that several large insurance companies are promoting their life insurance policies as investments with small captives. The outcome looks eerily like that of the 419 and 412(i) plans mentioned above.

Remember, if something looks too good to be true, it usually is. There are safe and conservative ways to use captive insurance structures to lower costs and obtain benefits for businesses. And, some types of captive insurance products do have statutory protection for deducting life insurance premiums (although not 831(b) captives). Learning what works and is safe is the first step an accountant should take in helping his or her clients use these powerful, but highly technical insurance tools.

*Source: This article was first published in the January 2009 issue of California Broker magazine.

Lance Wallach, a member of the AICPA faculty of teaching professionals and an AICPA course developer, is a frequent and popular speaker on retirement plans, financial and estate planning, reducing health insurance costs and tax-oriented strategies at accounting and financial planning conventions. He does frequent expert witness work and assists insurance professionals, accountants and others in reviewing 8918 forms so they can avoid the IRS $200,000 penalty that applies to material advisors.

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, financial and estate planning, and abusive tax shelters.  He writes about 412(i), 419, 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 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.taxaudit419.com and www.taxlibrary.us

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.