412i Tax Shelter Fraud Litigation - How It Works

Lance Wallach

 

PARTIES:

Typically, these transactions will include an Insurance company, accountant, tax attorney, and a promoter (someone with an insurance background, perhaps an actuary, who knows how to structure the policy itself). These groups will use insurance brokerages and sub-agents (licensed in the various states) to sell the policies themselves. 

INSURANCE COMPANIES

AMERICAN GENERAL LIFE INSURANCE COMPANY® INDIANAPOLIS LIFE INSURANCE COMPANY®

HARTFORD LIFE AND ANNUITY INSURANCE COMPANY® PACIFIC LIFE INSURANCE COMPANY®

 BANKERS LIFE and OTHERS®?

4121iHOW THESE PLANS WORK:

In the late 1990’s, the individuals and groups above devised a scheme to sell abusive tax shelters under the auspices of Section 412(i) of the tax code. A 412(i) is a defined benefit pension plan. It provides specific retirement benefits to participants once they reach retirement and must contain assets sufficient to pay those benefits. A 412(i) plan differs from other defined benefit pension plans in that it must be funded exclusively by the purchase of individual life insurance products. To create a 412(i) plan, there must be a trust to hold the assets. The employer funds the plan by making cash contributions to the trust, and the Code allows the employer to take a tax deduction in the amount of the contributions, i.e. the entire amount.

The trust uses the contributed funds to purchase some combination of life insurance products (insurance or annuities) for the plan. As the plan participants retire, the trust will usually sell the policies for their present cash value and purchase annuities with the proceeds. The revenue stream from the annuities pays the specified retirement benefit to plan participants.

These defendants (with the aid and knowledge of the insurance companies) used the traditional structure and sold life insurance policies with excessively high premiums. The trust then uses the large cash contributions to pay high insurance premiums and the employer takes a deduction for the sum of those large contributions. As you might expect, these policies were designed with excessively high fees or “loads” which provided exorbitant commissions to the insurance companies and the agents who sold the products.

The policies that were sold were termed Springing Cash Value Policies. They had no cash value for the first 5-7 years, after which they had significant cash value. Under this scheme, after 5-7 years, and just before the cash value sprung, the participant purchases the policy from the trust for the policy’s surrender value. In theory, you have a tax free transaction.

The IRS does not recognize the tax benefit of such a plan and has repeatedly issued announcements indicating that such plans are contrary to federal tax laws and regulations.

               

I am not an attorney but I learned some of the above information from attorney’s Mr. Ford’s website.

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 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 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.

Lance Wallach Leading Expert,emloyee benefit plans,tax resolution,IRS Audits

Lance Wallach Leading Expert,emloyee benefit plans,tax resolution,IRS Audits

Insurance companies, agents, financial planners, and others have pushed abusive 419 and 412i plans for years

Section 79 Scams and Captive Insurance History

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     By Lance Wallach, CLU, CHFC 

If you do not properly file Form 8886, there is no Statute of Limitations. That means the IRS can come back and fine you many years later. Anyone that wants to risk an IRS audit by utilizing a captive insurance or Section 79 scam should, at the very least, engage a competent professional to file 8886 forms. By filing protectively and properly, the Statute of Limitations starts running and you avoid the very large IRS penalties under 6707A. But as I have previously stated, I only know two people who I would trust to undertake the preparation of the forms, especially if the forms are not being filed timely.

Due Diligence

• 
  Large IRS Fines Continue For 419, 412i, Captive Insurance and Section79 Plans

Guest Post by Lance Wallach

Taxpayers must report certain transactions to the IRS under Section 6707A of the Tax Code, which was enacted in 2004 to help detect, deter, and shut down abusive tax shelter activities. For example, reportable transactions may include being in a 419,412i, or other insurance plan sold by insurance agents for tax deduction purposes. Other abusive transactions could include captive insurance and section 79 plans, which are usually sold by insurance agents for tax deductions. Taxpayers must disclose their participation in these and other transactions by filing a Reportable Transactions Disclosure Statement (Form 8886) with their income tax returns. People that sell these plans are called material advisors and must also file 8918 forms properly. Failure to report the transactions could result in very large penalties. Accountants who sign tax returns, which have these deductions, can also be called material advisors and should also file forms 8918 properly.

The IRS has fined hundreds of taxpayers who did file under 6707A. They said that they did not fill out the forms properly, or did not file correctly. The plan administrator of a 412i advised over 200 of his clients how to file. They were then all fined by the IRS for filling out the forms wrong. The fines averaged about $500,000 per taxpayer.

A report by the Treasury Inspector General for Tax Administration (TIGTA) found that the procedures for documenting and assessing the Section 6707A penalty were not sufficient or formalized, and cases often are not fully developed.

TIGTA evaluated the IRS’s effectiveness in identifying, developing, and applying the Section 6707A penalty. Based on its review of 114 assessed Section 6707A penalties, TIGTA determined that many of these files were incomplete or did not contain sufficient audit evidence. TIGTA also found a need for better coordination between the IRS’s Office of Tax Shelter Analysis and other functions.

The Section 6707A penalty is a stand-alone penalty and does not require an associated income tax examination; therefore, it applies regardless of whether the reportable transaction results in an understatement of tax. TIGTA determined that, in most cases, the Section 6707A penalty was substantially higher than additional tax assessments taxpayers received from the audit of underlying tax returns. I have had phone calls from taxpayers that contributed less than $100,000 to a listed transaction and were fined over $500,000. I have had phone calls from taxpayers that went into 419, or 412i plans but made no contributions and were fined a large amount of money for being in a listed transaction and not properly filing forms under IRC section 6707A. The IRS claims that the fines are non-appealable.

If you are, or were in a 412i, 419, captive insurance or section 79 plan you should immediately file under 6707A protectively. If you have already filed you should find someone who knows what he is doing to review the forms. I only know of two people who know how to properly file. The IRS instructions are vague. If a taxpayer files wrong, or fills out the forms wrong he still gets the fine. I have had hundreds of phone calls from people in that situation.

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 more than 20 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, BiskEducation’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 his side has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com, or visitLanceWallach.com, www.taxaudit419.com or www.taxlibrary.us.

The information provided by Lance 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.

[Ed. Note: Lance Wallach is the expert witness we use in our welfare benefit plan cases. Frequently the owner (taxpayer) of one of these plans received bad advice from a broker, insurance agent and sometimes an accountant. Many people sell these plans but few fully understand them - if they did you wouldn't be reading this article! If you purchased one of these bad plans, you need representation before the IRS and help in recovering any penalties from the people who sold you the plan. With penalties usually over $100,000, do not attempt this on your own.

Internal Revenue Service, Treasury § 1.79–4T minimum or maximum contribution rate by the employer or the employees.

(Secs. 79(c) and 7805 of the Internal Revenue
Code of 1954 (78 Stat. 36, 26 U.S.C. 79(c); 68A
Stat. 917, 28 U.S.C. 7805))
[T.D. 6888, 31 FR 9203, July 6, 1966, as amended
by T.D. 7623, 44 FR 28800, May 17, 1979;
T.D. 7924, 48 FR 54595, Dec. 6, 1983; T.D. 8273,
54 FR 47979, Nov. 20, 1989; T.D. 8424, 57 FR
33635, July 30, 1992; T.D. 8821, 64 FR 29790,
June 3, 1999]
§ 1.79–4T Questions and answers relating
to the nondiscrimination requirements
for group-term life insurance
(temporary).
Q–1: When does section 79, as amended
by the Tax Reform Act of 1984, become
effective?
A–1: (a) Generally, section 79, as
amended, applies to taxable years (of
the employee receiving insurance coverage)
beginning after December 31,
1983. There are, however, several exceptions
to this effective date where there
is coverage under a group-term life insurance
plan of the employer that was
in existence on January 1, 1984, or a
comparable successor to such a plan
maintained by the employer or a successor
employer.
(b) First, the new rules of section 79
(b) and (e), that require the inclusion
in income of a retired employee of
amounts attributable to the cost of
group-term life insurance in excess of
$50,000 and that include former employees
within the definition of the term
‘‘employee,’’ will not apply to any employee
who retired from employment
on or before January 1, 1984.
(c) Second, in the case of an individual
who retires after January 1,
1984, and before January 1, 1987, the
new rules of section 79 (b) and (e) do
not apply if (1) the individual attained
age 55 on or before January 1, 1984, and
(2) the plan was maintained by the
same employer who employed the individual
during 1983, or by a successor
employer.
(d) Third, in the case of an individual
who retires after December 31, 1986, the
new rules of section 79 (b) and (e) do
not apply if (1) the individual attained
age 55 on or before January 1, 1984, (2)
the plan was maintained by the same
employer who employed the individual
during 1983, or by a successor employer,
and (3) the plan is not, after December
31, 1986, a discriminatory
group-term life insurance plan (not
taking into account any group-term
life insurance coverage provided to employees
who retired before January 1,
1987).
(e) For purposes of determining
whether a plan is, after December 31,
1986, a discriminatory group-term life
insurance plan, there shall be ignored
any insurance coverage provided pursuant
to a state law requirement that an
insurer continue to provide insurance
coverage for a period of time not in excess
of two months following the termination
of a policy.
Q–2: What is meant by a ‘‘group-term
life insurance plan of the employer
that was in existence on January 1,
1984’’?
A–2: A group-term life insurance plan
of the employer was in existence on
January 1, 1984, only if the group policy
or policies providing group-term life
insurance benefits under the plan were
executed on or before January 1, 1984,
and were not terminated prior to such
date. The applicability of section 79, as
amended, to an employee will not be
affected by the transfer of the employee
between employers treated as a
single employer under section 79(d)(7)
if the employee continues, after the
transfer, to be provided with groupterm
life insurance benefits under a
plan that is comparable (determined
under the principles set forth in Q&A 3)
to the plan provided by the former employer.
Q–3: When is a plan of group-term life
insurance a ‘‘comparable successor’’ to
another such plan?
A–3: A plan of group-term life insurance
will be a comparable successor to
another plan of group-term life insurance
(the first plan) only if the plan
does not differ from the first plan in
any significant aspect with respect to
individuals who are potentially eligible
for benefits provided under the grandfather
provisions in Q&A 1. These individuals
consist of those persons who
are covered under a plan of group-term
life insurance of the employer that was
in existence on January 1, 1984, or a
comparable successor to such a plan
maintained by the employer or a successor
employer, and who either retired

Part of the IRS memo on group term as it relates to section 79 which you should read before you proceed.

Section 79

April 8, 2013 By Lance Wallach, CLU, CHFC Call (516) 938-5007 For businesses with 10 or fewer employees, the law prohibits full medical underwriting of the policies that are issued ("group" underwriting is required, which is much more risky for an insurance company). Section 79-Group underwriting for businesses of 10 employees or less Lance Wallach Beginning this article, I wanted to reiterate my comments on implementing plans with fewer than 10 employees. Amazingly, one of the insurance companies offering this plan seemly doesn't have the ability to issue non-medical underwriting policies. This is laughable and pathetic all at the same time, and a plan you'll want to stay far away from. As I briefly alluded to in my previous article, one of the reasons I really do not like Section 79 plans is that they basically force employers and those helping them set up Section 79 plans to lie to the employees when implementing the plan. Non-discrimination Section 79 plans are employee benefits plans. As such, employers are not supposed to discriminate in favor of key employees or business owners. As you know, Section 79 plans are implemented so business owners can take a business deduction for the purchase of an individually owned life insurance policy that the owner can borrow from tax free in retirement. It sounds great until you break down the math and understand that a client would be better off paying taxes on his/her money, taking it home, and funding a good cash value life policy rather than the low cash accumulation Section 79 Plan policy. Notwithstanding the math behind Section 79 plans, let's talk about the benefits for employees. The employee owner is going to buy a "permanent" policy that will carry cash and can be borrowed from tax free in retirement. That same policy must be offered to all employees. If that actually happened in a full-disclosure manner, virtually all the employees would opt for the same permanent policy; and if that happened, the finances of the plan would really go out the window because of the tremendous costs for the employees. How do you "work around" this issue? The work around of this issue is a bit clever and deceptive. The employees will be scared into voluntarily opting for $50,000 of term insurance instead of the full-benefit policy (term or permanent). Why would an employee opt for $50,000 in term instead of a policy with several hundred thousands of dollars or even millions of dollars in death benefits? Because employees who are provided death benefits by an employer in excess of $50,000 are taxed on the additional benefit on an annual basis (and it increases every year). beginning this article, I wanted to reiterate my comments on implementing plans with fewer than 10 employees Group underwriting for businesses of 10 employees or less For businesses with 10 or fewer employees, the law prohibits full medical underwriting of the policies that are issued ("group" underwriting is required, which is much more risky for an insurance company). Amazingly, one of the insurance companies offering this plan seemly doesn't have the ability to issue non-medical underwriting policies. This is laughable and pathetic all at the same time, and a plan you'll want to stay far away from. As I briefly alluded to in my previous article, one of the reasons I really do not like Section 79 plans is that they basically force employers and those helping them set up Section 79 plans to lie to the employees when implementing the plan. Non-discrimination Section 79 plans are employee benefits plans. As such, employers are not supposed to discriminate in favor of key employees or business owners. As you know, Section 79 plans are implemented so business owners can take a business deduction for the purchase of an individually owned life insurance policy that the owner can borrow from tax free in retirement. It sounds great until you break down the math and understand that a client would be better off paying taxes on his/her money, taking it home, and funding a good cash value life policy rather than the low cash accumulation Section 79 Plan policy. Notwithstanding the math behind Section 79 plans, let's talk about the benefits for employees. The employee owner is going to buy a "permanent" policy that will carry cash and can be borrowed from tax free in retirement. That same policy must be offered to all employees. If that actually happened in a full-disclosure manner, virtually all the employees would opt for the same permanent policy; and if that happened, the finances of the plan would really go out the window because of the tremendous costs for the employees. How do you "work around" this issue? The work around of this issue is a bit clever and deceptive. The employees will be scared into voluntarily opting for $50,000 of term insurance instead of the full-benefit policy (term or permanent). Why would an employee opt for $50,000 in term instead of a policy with several hundred thousands of dollars or even millions of dollars in death benefits? Because employees who are provided death benefits by an employer in excess of $50,000 are taxed on the additional benefit on an annual basis (and it increases every year). Roccy is a good man and the author of the above article. I did not copy the entire article. I only copied the first page. Roccy D is a very smart man who is aware of the problems with abusive tax shelters including 412i 419 and the new abusive section 79 plans. It seems that over the years he and I have attacked abusive 419 and 412i plans, while everyone else was selling them. Now he and I are warning about section 79 scams. 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. ABOUT THE AUTHOR: Lance Wallach 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 does expert witness testimony and has never lost a case. Contact him at 516.938.5007 Copyright Lance Wallach, CLU, CHFC More information about Lance Wallach, CLU, CHFC Disclaimer: 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.

Section 79 Plan

Did You Buy a Section 79 Plan

Section 79 Plans are insurance plans sold to small business owner that the IRS considers abusive and will audit. Before you buy into this type of plan, captive insurance or any other type of plan, you should know its history.

Find more help at these websites:

Taxlibrary.us, Irsform8886.com ,  section79plan.org

Lance Wallach, captive insurance and Section 79 plan expert, is the nation's leading authority on resolving IRS tax problems for individuals and businesses.

Mr. Wallach, National Society of Accountants' Speaker of the Year, is a member of the AICPA faculty of teaching professionals and he is a renowned national expert witness in many 419, 412i, and financial abuse cases. To date his side has never lost a case.

Mr. Wallach is often a featured speaker at national conventions for CPAs, attorneys, and business owners and other entrepreneurs, and has over 30 years experience helping people get the most possible money back from the IRS.  He can be contacted at 516-938-5007 or wallachinc@gmail.com, or visit www.taxaudit419.com for more information.

Expert Witness in 419 Plan and other Civil Litigation | 419.Tax

Expert Witness in 419 Plan and other Civil Litigation | 419.Tax