Nobody Likes Paying Taxes
March 8, 2010
In a speech last May, President Obama said, “Nobody likes paying taxes … . And yet, even as most American citizens and businesses meet these responsibilities, there are others who are shirking theirs.” He was referring to offshore tax havens and other loopholes that wealthy Americans often exploit to reduce their tax burden. But it doesn’t take moving money to Switzerland to avoid paying taxes. If history is any guide, 2010 will be a year in which many Americans use a few simple methods to reduce their tax liability, which could potentially cost the government billions of dollars.
This year is the last before the expiration of tax cuts originally put in place by the Bush administration. If Congress allows these tax cuts to expire, as the president supports, in 2011 the top marginal tax rates will increase from 28, 33, and 35 percent to 31, 36, and 39.6 percent.
Although it is not certain that tax rates will go up, many wealthy Americans are looking at 2010 as the end of the party. "Everybody thinks taxes are going up and tax breaks are being eliminated. Everybody’s thinking this, and they’re planning for it," says Lance Wallach, a New York author, lecturer, and financial consultant who advises high net-worth clients, including entertainers and athletes. His phone is ringing off the hook with questions from clients about how they can take advantage of this year’s rates relative to 2011’s.
One of the most popular strategies is moving income from 2011 to this year. Usually, accountants encourage clients to postpone income so there is less income taxed in one year. But in 2010, the incentives have flipped. "This is the exact opposite. Accelerating your income makes 100 percent sense," says Wallach.
Creative maneuvering. This would not be the first year taxpayers have pursued this strategy. In 1992, Bill Clinton was elected president with promises to raisetaxes on wealthy Americans, which Congress did in 1993, boosting the top marginal rate from 31 to 39.6 percent. In late 1992, many taxpayers, expecting rates to be higher the next year because of Clinton’s victory, moved more income onto 1992’s tax return to avoid paying more with the higher rate. Robert Carroll, an economist at a Washington research organization called the Tax Foundation, estimates that about $20 billion was shifted and paid at the 31 percent rate rather than the 39.6 percent—meaning there was about $1.5 billion that the federal government did not collect in revenue.
Something similar could happen this year. “Anyone who has flexibility with income is going to try to shift their income,” says Carroll. An example of flexibility would be a business owner who gives himself or herself a bonus in December 2010 rather than January 2011.
There’s also an incentive to delay tax deductions. For example, state property and income taxes can be deducted from federal income tax returns. Wallach says he is recommending that clients hold off on paying those taxes until next year, so that the deductions can be cashed in at the higher rate.
Some may choose to delay charitable gifts for the same reason—charitable giving is tax deductible, so some taxpayers may decide to hold off on a gift they would make in 2010 and instead give a larger amount in 2011. “What we know from history, if the taxes go up, people will delay their giving,” says Nancy Raybin, chair of the Giving Institute, an association of nonprofit consultants. But Raybin says such delays usually are not significantly damaging to charities because people will often just push a gift forward a few months—from December to January, for example. “If there’s a 12-month delay, it could be a problem. But if a donor is just delaying one month, it’s not a big problem,” she says.
These tax-avoidance strategies will probably be a one-time deal for those who pursue them. A study by economist Austan Goolsbee, currently a member of the Council of Economic Advisers, found that the 1993 drop-off in reported income was temporary. Income bounced back in following years. If tax rates appear to be steady after 2011, accelerating one’s income or delaying deductions is no longer advantageous. But taxpayers will continue to look for ways to reduce their liability—they just need the time and money to find the loopholes. Wallach says most of his clients will adjust to higher tax rates with his help. “For the very sophisticated people, there will always be loopholes,” he says, such as deducting travel and entertainment expenses. “None of my clients pay more in taxes than a schoolteacher.”For issues like these Wallach has various websites including www.taxlibrary.us .
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 visitwww.taxaudit419.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.
When Key Personnel Dies
The Hartford Courant
Business
Life Insurance Policies on Critical Employees Can Ease Succession
As Akamai Technologies workers grieve the death of the company’s co-founder and chief technology officer in the Sept. 11 attacks, the Cambridge, Mass. Internet services firm has something to cushion the financial blow from his loss: a $2 million life insurance policy it maintained on him.
Faced with a leading employee’s sudden death, companies can use money from life insurance policies on their executives to make up for vital lost sales or to help finance the search for a replacement. Called “key man” or “key person” life insurance, these policies have been around for years. But they are attracting new attention from some firms as they draft fresh crisis plans in the aftermath of the terrorist attacks.
Business advisers said the destruction of the World Trade Center jolted clients into thinking hard about their future. And they say key person insurance can be an important ingredient in those plans.
Kathleen F. Bornhorst, head of the wealth preservation practice at Hartford’s Pepe & Hazard law firm, said making a plan in the event of a death in the business now “has a higher priority” among her clients.
Since Sept. 11, Lance H. Wallach, at 516-938-5007, the president of an estate planning firm on Long Island, N.Y., has received as many as eight calls a day inquiring about his business succession-planning seminars.
When clients tap him to help prepare for the sudden loss of a worker, Wallach said, finding out whether they have key person insurance “is one of the first questions” to address.
Akamai’s co-founder, Daniel M. Lewin, 31, was a passenger on American Airlines Flight 11, which hijackers rammed into the north tower of the World Trade Center. Public companies such as Akamai routinely buy key person policies for their top executives and mention them in regulatory filings.
Small firms with few workers have an even more compelling need for the insurance, said Patrick C. Smith, director of advanced marketing for Simsbury’s Hartford Life Inc. When a small company loses one of only a handful of top salespeople or scientists, “it has a proportionately larger impact on earnings, on relationships with existing customers” than at a larger firm, Smith said.
Still, only about one in seven small businesses – those with fewer than 100 workers – holds key person life insurance, according to LIMRA International, an insurance research organization in Windsor.
Smith said small businesses makeup a “woefully underinsured market.” New companies usually focus on selling more products, not on planning for the future, he added. Younger firms usually don’t worry about insurance issues – until the unexpected hits.
It doesn’t take a terrorist assault to trigger a leadership crisis at a company. In 1980, a hotel fire killed 13 top officers at Arrow Electronics, which was then based in Greenwich. Two months later, a corporate jet crash crash killed eight employees of Stamford-based Texasgulf, including the oil and mining firm’s chief executive and its treasurer. A french conglomerate bought Texasgulf the next year.
At some companies, key person insurance can serve not only to soothe pain of losing a major employee, but also to help compensate the employee’s family. West Hartford lawyer Edward F. Rosenthal said that under so-called “split dollar” arrangements, key person insurance can double as a kind of employee benefit, and is gaining popularity.
Of course, a key person policy doesn’t fix all problems and is only one piece of an overall corporate disaster plan.
Businesses afraid that the death of a leading worker will sink them with unpaid debts could be better off buying creditor’s insurance designed to handle the problem. Closely held businesses should devise a buy-out plan to purchase ownership shares from the heirs of a co-owner instead of using money from a key person policy to serve that purpose, Hartford Life’s Smith said.
In light of Sept. 11’s events, shareholders are going to demand more information about such plans from the firms they invest in, said Neil Minow, editor of the Corporate Library.com website on corporate governance issues. Now, because of terrorism, “there are a lot of risks that previously were beyond contemplation, “she said.
Firms, especially those that are publicly traded, could decided to assemble new corporate committees responsible for elements of emergency planning, from life insurance purchases to computer data backup arrangements, Minow added.
“Companies that are smart will not wait for additional (regulatory) requirements, but will start talking to their investors about this now,” she said.
Lance Wallach, CLU, ChFC, speaks and writes about benefit plans, tax reductions strategies, and financial plans. He has authored numerous books for the AICPA books, Bisk Total tapes, Wiley and others.
Lance Wallach, the National Society of Accountants Speaker of the Year also writes about retirement plans, 412(1) and 419 and Captive plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quotes regularly in the press and has written numerous best-selling AICPA books including Common Abusive Business Hot Spots. He does Expert Witness work and has never lost a case. Contact him at 516.938.5007, lawallach@aol.com or visit www.accountantexpert.org www.vebaplan.com or www.taxlibrary.us.
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.
Why You Should Not Own Mutual Funds
CoatingsPro - Money Matters
March 2010
By Lance Wallach
Taxes take a large bite out of taxable mutual funds. Recent tax-break laws will end in 2010 and it would be smart for mutual fund investors to keep an eye on one of the main drags on performance: taxes.
One key reason why mutual funds paid out such hefty taxable distributions in recent years is because they can no longer carry forward the steep losses incurred during the 2000-2002 bear market, which had been used to offset gains in recent years.
The estimated taxes paid by taxable mutual fund (MF) investors increased 42 percent from those paid in 2006. Buy-and-hold taxable MF holders surrendered a record-setting $33.8 billion in taxes to the government, surpassing 2000’s record amount of $31.3 billion!
Over the past 20 years, the average investor in a taxable stock fund gave up the equivalent of between 17 percent and 44 percent of their returns to taxes. In 2006, the tax bite amounted to a hefty 1.3 percent of assets, which surpasses the average stock fund expense ratio of 1.2 percent.
Mutual funds probably have no place in high-net-worth client portfolios. There are many strong reasons in favor of this position but most immediately – you have probably noticed that every year you receive mutual funds statements with end-of-year form 1099s in the mailbox and discover that a sizeable amount of your hard-earned cash is going to Uncle Sam.
If you were to subtract 50 percent (93 million plus) of mutual fund holders who hold stock fund assets in tax-free accounts (such as 401(k) plans and IRAs), and a small number in institutional and trust funds that make a few investors tax-exempt, this would leave around 48 percent of the nation’s mutual fund investors in taxable funds.
The SEC says the average mutual fund investor in this taxable group loses 2.5 percent of annual returns to taxes each year, while other research puts it at 3 percent. Throughout your lifetime you can see that capital gains taxes will reduce investable income substantially when you retire.
You know the figures. Sure, during the 1980’s and 1990’s, people made money by selectively investing in mutual funds. Even today, it still can be done; however, more than 90 percent of mutual funds have underperformed the stock market as a whole for the past five years. You can get better odds at the horse track.
It works like this: Mutual funds with higher trading costs and built-in high tax limitations create a post-tax return that potentially delivers fewer returns than a similar separate account.
Mutual funds kill their potential for becoming performance superstars by their high volume of trading and killer fee structure. Too much trading causes increased taxes, while high fees reduce performance return on investment (ROI) – period.
If you own your stocks, you are in control. With mutual funds there is: no control over which securities fund managers buy and sell; no purchases of one particular type of stock to balance out a portfolio; and no opt-out of any particular asset class or company.
On the other hand, if you put yourself in a separate account, you are the boss. Having a separate account means you are in charge. You set the strategy and decide what stocks or bonds make up the portfolio. You also have access to top money managers and can even change a manager if you wish.
The mix-and-match of separately managed accounts (SMAs) makes them attractive to the new breed of investor who wants more control and input into their portfolio. Don’t you want more control after the Madoff escapade and the Wall Street blowup?
With mutual funds, you should be advised early that you do not own the stocks in the portfolio, but merely have shares of stocks along with a large pool of people. So what do you give up when investing in mutual funds? Control.
The individual in control of mutual funds is the fund manager. Too often, this manager is tasked with dozens or even hundreds of stocks residing in one fund. This is exactly the situation in many of the 8,000 or more funds out there on the market- span, or lack of control.
In addition, you are tied to the whims of fund managers, who are often known to depend on “style drift” (buying securities that have no relationship to fund objectives), excessive trading (to pump up a fund’s value as a means of boosting commissions), and other nefarious actions – first uncovered by the Attorney General of New York State in 1993 and reoccurring ever since.
The mutual fund companies are good at cloaking information and spinning their marketing pitches to prevent investors from figuring out exactly what they are paying to own a mutual fund.
Space limits us to expand on all the fees you pay for the privilege of owning mutual funds, but management fees, distribution or service fees (12b-1), expense ratios, trading costs, commissions, purchase fees, exchange fees, load charges (load funds), account feed, custodial expenses, and so on, are a part of the mix that the mutual fund companies utilize to nickel and dime you to death without most of them ever knowing the billing score.
The SEC wants every investor to be fully equipped to make informed decisions before they hand over their hard-earned cash. The SEC requires all corporations to disclosure any and all information impacting their financial positions so investors can make prudent decisions. Transparency is most important due to the recurring events of the last 18 months.
Mutual fund companies provide notoriously slow reporting. It’s most difficult to find out about all the real nuts and bolts (specific equities, bonds, or cash holdings) of a mutual fund. A mutual fund gives you data twice annually – sometimes quarterly – so the data is out-of-date long before you receive it. Most investors do not read their prospectus reports and fund companies know this fact. Even with the introduction of the Internet, which has sped up the tracking for securities immensely, the major fund companies have been painfully slow to keep investors current as to what stocks the investors hold, and if and when those stocks are being traded.
Nowhere is the lack of transparency more apparent among fund companies than in costs and fees. Most investors are aware of management fees and commissions, but other fund fees like the 12b-1 and trading fees are sublimated. Other fees are hidden and, therefore, keep investors completely in the dark as to what they are paying.
With mutual funds, companies are slow on reporting results; the investor seldom knows in real time what socks are in his account and companies are known to hype performance results.
Unless Congress steps up and puts mutual funds on a level playing field with other investment strategies, taxable mutual fund investors will have to fend for themselves.
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 visitwww.taxaudit419.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.
Small Business Retirement Plans Fuel Litigation
Dolan Media Newswires 01/22/2010
By Lance Wallach
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 transaction.
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, 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 visitwww.taxaudit419.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.
New Laws for Nonqualified Deferred Compensation
Small Business Tax News
November 2009
By Lance Wallach
This regulation is now under Internal Revenue Code Section 409(a). The employees have until December 31s, 2009 to make their elections for compensation to be received in 2010.
In the first year in which a participant is eligible to participate in a plan, they make an election within 30 days after the date of eligibility, but only with respect to compensation earned subsequent to the election.
In addition, in the case of any performance-based compensation covering a period of at least 12 months, a participant may make an election no later than six months before the end of the covered period.
A plan may allow a participant to elect to delay a scheduled distribution from a plan if the new election is made at least 12 months in advance and delays the distribution at least five years. Within the five years, a premature distribution may only be made on account of death, disability or unforeseeable emergency.
A plan may permit the acceleration of payment in only a few circumstances listed below:
- To pay employment taxes imposed on compensation deferred under the plan;
- To comply with a domestic relations order;
- To pay income taxes due upon a vesting event under a plan subject to IRC Section 457(f);
- To comply with a conflict-of-interest divestiture requirement (see IRS Section 1043);
- To reflect inclusion in income under IRC Section 409(a)
- To terminate a participant’s interest in a plan:
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- Where the payment is not greater than the elective deferral limit under IRC Section 402(g)(1)(B) ($15,500 in 2008, $16,500 in 2009);
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- In the 12 months following a change in control event;
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- Where all arrangements of the same type are terminated;
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- Upon a corporate dissolution or bankruptcy;
- To end a deferral election following an unseen emergency.
A nonqualified deferred compensation plan is retroactively taxable to the participant as of the time of the initial deferral. In addition to the normal income tax on the compensation, the participant must pay an additional 20-percent tax, as well as interest at a rate 1 per higher than the normal underpayment rate.
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 visitwww.taxaudit419.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.
Common IRS Problems
There are many problems you can run into with the IRS. The following is an overview and helpful information on some of these confusing issues.
- IRS Penalties
- Unfiled Tax Returns
- IRS Liens
- IRS Audits
- Payroll Tax Problems
- IRS Levies
- IRS Seizures
- Wage Garnishments
IRS Penalties
The penalizes millions of taxpayers each year. They have so many penalties that it’s hard to understand which penalty they are hitting you with.
The most common penalties are Failure to File and Failure to Pay. Both of these penalties can substantially increase the amount you owe the IRS in a very short period of time.
To make matters worse the IRS charges you interest on penalties. Many tax-payers often find out about IRS problems many years after they have occurred. This causes the amount owed the IRS to be substantially greater due to penalties and the accumulated interest on those penalties.
Some IRS penalties can be as high as 75%-100% of the original taxes owed. Often taxpayers can afford to pay the taxes owed, however, the extra penalties make it impossible to pay off the entire balance.
The original goal of the IRS imposing penalties was to punish taxpayers in order to keep them in line. Unfortunately, the penalties have turned into additional sources of income for the IRS. So they are happy to add whatever penalties they can and to pile interest on top of those penalties. Your loss is their gain.
Under certain circumstances the IRS does abate, or forgive, penalties. Therefore before you pay the IRS any penalty amounts, you may want to consider requesting that the IRS abate your penalties.
Unfiled Tax Returns
Many taxpayers fail to file required tax returns for many reasons. What you must understand is that failure to file tax returns may be construed as a criminal act by the IRS. This type of criminal act is punishable by one year in jail for each year not filed.
Needless to say, its one thing to owe the IRS money but another thing to potentially lose your freedom for failure to file a tax return.
The IRS may file “SFR” (Substitute For Return) Tax Returns for you. This is the IRS’s version of an unfiled tax return. Because SFR Tax Returns are filed in the best interest of the government, the only deductions you’ll see are standard deductions and one personal exemption.
You will not get credit for deductions which you may be entitled to, such as exemptions for a spouse or children, interest and taxes on your home, cost of any stock or real estate sales, business expenses, etc.
Regardless of what you have heard, you have the right to file your original tax return, no matter how late its filed.
IRS Liens
The IRS can make your life miserable by filing Federal Tax Liens. Federal Tax Liens are public records that indicate you owe the IRS various taxes. They are filed with the County Clerk in the county from which you or your business operates.
Because they are public records, they will show up on your credit report. This often makes it difficult for a taxpayer to obtain any financing on an automobile or a home. Federal Tax Liens also can tie up your personal property, you cannot sell or transfer that property without a clear title.
Often taxpayers find themselves in a Catch-22 where hey have property that they would like to borrow against, but because of the Federal Tax Lien, they cannot get a loan. We can work toward getting the Tax Lien lifted so that you can borrow money on your property.
IRS Audits
The IRS can audit you by mail, in their offices, or in your office or home. The location of your audit is a good indication of the severity of the audit.
Typically, Correspondence Audits are for missing documents in your tax return that IRS computers have tried to find. These usually include W-2’s and 1099 income items or interest expense items. This type of audit can be handled through the mail with the correct documentation.
The IRS Office Audit is usually with a Tax Examiner who will request numerous documents and explanations of various deductions. This type of audit may also require you to produce all bank records for a period of time so that the IRS can check for unreported income.
The IRS Home or Office Audit should be taken more seriously because the IRS auditor is a Revenue Agent. Revenue Agents receive more training and learn more auditing techniques than a typical Tax Examiner.
The IRS audits should be taken seriously because they often lead to other tax years and other tax problems not originally stated in the audit letter.
Payroll Tax Problems
The IRS is very aggressive in their collection attempts for past due payroll taxes. The penalties assessed on delinquent payroll tax deposits or filings can dramatically increase the total amount you owe in just a matter of months.
I believe that it is critical for a taxpayer to have an attorney for a representation in these situations. How you answer the first five IRS questions may determine whether you stay in business or are liquidated by the IRS. We always advise clients to avoid meeting with any IRS representatives regarding payroll taxes until you have met with a professional to discuss your options.
IRS Levy
An IRS Levy is the action taken by the IRS to collect taxes. For example, the IRS can issue a Bank Levy to obtain your cash in savings and checking accounts. Or the IRS can levy your wages or accounts receivable. The person, company, or institution that is served with the levy must comply or face their own IRS problems.
The additional paperwork this person, company, or institution, is faced with to comply with the IRS Levy often causes the taxpayers relationship with that person to suffer. Levies should be avoided at all costs and are usually the result of poor or no communication with the IRS.
When the IRS levies a bank account, the levy is only for the particular day the levy is received by the bank. The bank is required to remove whatever amount of money is in your account that day (up to the amount of the IRS Levy) and send it to the IRS within 21 days unless notified otherwise by the IRS. This type of levy does not affect any future deposits made into your bank account unless the IRS issues another Bank Levy.
An IRS Wage Levy is difficult. Wage Levies are filed with your employer and remain in effect until the IRS notifies the employer that the Wage Levy has been released. Most Wage Levies take so much money from the taxpayer’s paycheck that the taxpayer doesn’t even have enough money to live on.
IRS Seizures
The IRS has extensive powers when it comes to Seizures of Assets. These powers allow them to seize personal and business assets to pay off outstanding tax liabilities. This occurs when taxpayers have been avoiding the IRS.
This is one of the IRS’s ultimate weapons. They can seize cars, television sets, jewelry, computers, collectibles, business equipment, or anything with value which can be sold in order to acquire the money the IRS wants to pay off tax debts. If you are facing a seizure, you have a serious problem.
Wage Garnishments
The IRS Wage Garnishment is a very powerful tool used to collect taxes owed through your employer. Once a Wage Garnishment is filed with an employer. Once a Wage Garnishment is filed with an employer, the employer is required to collect a large percentage of each paycheck. The paycheck that would have otherwise been paid to the employee will then be paid to the IRS.
The Wage Garnishment stays in effect until the IRS is fully paid or until the IRS agrees to release the garnishment. Having wages garnished can create other debt problems because the amount left over after the IRS takes its cut is often small, so you may have difficulty with bills and other financial obligations.
Lance Wallach speaks at more than 20 conventions annually and writes for more than fifty publications about tax reduction ideas, abusive welfare benefit and retirement plans, captive insurance companies, cash balance plans, life settlements, premium finance, etc. He is a course developer and instructor for the American Institute of Certified Public Accountants and a prolific author. He has written or collaborated on numerous books, including, The Team Approach to Tax and Financial Planning; Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hotspots; Alternatives to Commonly Misused Tax Strategies: Ensuring Your Clients Future, all published by the American Institute of CPAs. The CPA’s Guide to Life Insurance, and The CPA’s Guide to Trusts and Estates, both published by Bisk Education, and his latest book, Protecting Clients from Fraud, Incompetence, and Scams, published by Wiley. In addition, Mr. Wallach writes for various national business associations that sell his books to their members and others. He has been an expert witness on some of the above issues, and to date his side has never lost a case.Contact LanWalla@aol.com or visit www.reportabletransaction.com/IRSHelp.html
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.
How to Find the Right Experts to Guide You Through These Times
By Lance Wallach
The Commercial Flooring Report
January 2009
These days, business owners have a lot on their plates. Not only do they have businesses to run, but they need to have the resources to operate, manage, and flourish those businesses in order to stay afloat. Without serious knowledge of things like finances, taxes, tax audits, and retirement plans, it’s hard to keep a shop open for business and to ensure that your future is in good hands. Especially now, as the economy begins to change, it is smart to look into different ways to secure your future and money. Recent well documented events have made it increasingly important to educate yourself on how to handle such endeavors correctly.
Thousands of businesses have closed as a result of bankruptcy, corrupt policies, lowered sales, and other factors, often because issues that seemingly, in hindsight, should have been obvious were overlooked. In this environment, more than ever, you simply cannot afford mistakes or omissions with respect to your finances. Such mistakes can result in audits and other problems that could eventually lead to the closing of your establishment. Being aware of the amount of debt that you are carrying, when your sales tend to plummet, and your number of employees are three trivial yet important aspects of watching your money. Websites such as IRS.gov, financeExperts.org, and taxlibrary.us are resources that can help make sure that there are often neglected, things ZERO unpleasant surprises in your numbers. Additionally, keeping accurate records and constantly double checking your numbers are two obvious, yet that you should do. So the question stands: how knowledgeable are you about your own finances?
Many of you have received information about the current state of your investments in the past few months. Sticker shock would be an understatement. Thousands have been lost as a direct result of the fiascoes constantly occurring as of this writing. Savings that would not only brighten your futures, but in many cases investments that you planned to use for your children’s educations, are gone. The downward spiral will continue, as the shrapnel from these events moves throughout our failing economy. It won’t stop in the foreseeable future, and it will entail more than just monetary losses. The watchdog agencies that will now have to redeem themselves for failing to perform their regulatory functions, leading at least in part to all of these failures, will respond with increased scrutiny of American citizens and businesses in every manner imaginable. Trust me, no stone will be left unturned, including that of increased IRS audits for the express purpose of raising money, which in fact has already started.
All of which is why treading water in the tide of an ebbing economy is not a solution.
It would appear that the seemingly indestructible giants of Wall Street have begun to crumble. Lehman Brothers is no more, Merrill Lynch has been taken down a peg or two, and now, disaster is apparently looming over Morgan Stanley. To say nothing of the looming threat to the consumer banking industry. As industry insiders, we’ve seen the writing on the wall for quite some time. Now, everybody else can see it, too.
In this day, the veil has been pulled back on the stock market’s heavy hitters. Consumers now know there is indeed no “wizard” behind the curtain, just a few individuals in designer suits pulling down astronomical sums of money for the advice they send down from on high. Who can forget the images of the Lehman Brothers employees in New York City, emptying their offices into boxes and carrying them down Seventh Avenue? As sad as it was to see, it was a day we all had the feeling was coming, right? But now that it’s here, why don’t we feel any better?
The hopes of many investors in the stock market have been shaken to the core, but we cannot forget about the morose consumers and business owners. A number of individuals are suffering the potentially substantial loss (or potential loss) of their hard-earned money in a volatile market. Consumers need advisors who can guide them toward a safe harbor. As previously mentioned, financeexperts.org can give you the help you need in this failing economy. The leading authorities are members, and will most likely give helpful feedback. Consumers are fearful, and if they say they aren’t, it’s probable that they aren’t being honest. For most Americans today, a stress free retirement is looking more and more impossible, and the difficulties looming between ourselves and that goal seem insurmountable. But things do not have to look and seem so bleak.
In a sense of the word, we feel compassion. Too many scoundrels plague Wall Street but, to some degree, we all feel the brunt. Be it for the out of work traders and brokers, or the investors who are wondering what is going to happen to their futures, we all feel some concern. But when it comes to who will receive most of our compassion, my money is on the investors. We hate to have an “I told you so” attitude, but at times it is hard to avoid. However, rather than dwell on this compassion, why not capitalize on it? Often unforeseen opportunities arise from the ashes of situations such as these. In fact, many such opportunities are available as I write this. They will be taken advantage of by those with the imagination and talent to position themselves to do so.
By reading this, you may be off to a good start. There are many ideas you will get from our leading finance experts to better run your business, reduce taxes and insurance costs, and much more. You will learn how to avoid audits, which are already up fifty (50) percent and are expected to increase further still, and turn your accountant into your protector instead of a tax collector. You will learn from Lance Wallach, who, as an American Institute of CPAs instructor and course developer, teaches CPAs. Lance also draws upon the knowledge and expertise of his associates, who are the leading finance experts in the United States. None of them work for any of the firms that were affected by the recent and ongoing financial fiascoes. Many of them perceived the arrival of these problems, and only their clients benefited because most other business people were too busy buying products from stockbrokers, insurance agents, and so-called financial planners who did not know what was going on. In Lance’s spare time, between speaking at conventions, writing and helping a select few business owners, Lance appears as an expert witness. In fact, for two days in Sept 2008, Lance Wallach testified as an expert witness in Federal Court for a business owner that was sold a faulty financial product by a combination of his accountant and a so-called retirement plan expert. After Lance completed his testimony, the judge call the retirement plan salesman a “crook” and said that he should settle with the plaintiff. He did not, and the jury awarded the business owner TWICE what he had sued for. As a side note, Lance had advised the lawyer that this was a so called “ERISA case” and instead of the $400,000 that the business owner was suing for, $800,000 (double damages, as is possible in “ERISA” cases), could be awarded if the jury felt that was appropriate.
The point is that, under no circumstances, should you be forced to lay down and take the abuse and malpractice that most salespeople pin on you. Get your financial and business affairs in order, and, if necessary, take some action! Take some serious action!
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 visitwww.taxaudit419.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.
Transfer Pricing
By Lance Wallach
The IRS dedicates enormous resources toward dealing with taxpayer’s who are involved with any form of transfer pricing. The transfer pricing provisions of IRC 482 address four general types of transactions between commonly owned or controlled parties.
1- Use or transfer of tangible property
2- Services
3- Loans
4- Use or transfer of intangible property (especially cost sharing agreements)
Use of tangible property: When one member of a controlled group rents or leases property to another member of the group, the price paid for use of such property must equal an arm’s length amount. Per Treas. Reg. 1.482-2(c )(2)(i), the arm’s length amount is determined by reference to the amount that would have been charged between independent parties for use of the same or similar property under similar circumstances.
Determination of what is arm’s length for fair rental value transactions:
a) Period of use
b) Location of use
c) Owner’s investment in property or rent paid
d) Expenses of maintaining the property
e) Type of property
f) Condition of property
Transfer of tangible property: When sales or transfers of tangible property are made between related parties (sales of goods), the arm’s length price generally is the price that an unrelated party would pay for similar property under similar circumstances.
Determination of what is arm’s length for inter-company sales: The regulations specify six methods used to determine whether an arm’s length amount has been charged between members of a controlled group. Treas. Reg.1.482-3(a), states that the “best method” should be used to determine arm’s length price. The IRS views the “best method” as the method that produces the most reliable results based on facts and circumstances. The IRS is well aware of the fact that many transfer pricing studies are prepared with the intention to validate year-end inter-company cost of sales regardless of whether they are arm’s length just to avoid the IRC 6662 penalties. Taxpayer’s would be best served if transfer pricing studies were prepared by knowledgeable experts in the field of transfer pricing.
Inter-company Services: When one member performs services for another member of a controlled group, an arm’s length charge is required. This includes services such as marketing, management, technical services, or any other type of service. Such services can be provided by one party for the joint benefit of all members, or can be provided between two members of the controlled group.
Determination of what is arm’s length for inter-company services: The arm’s length standard for services between related parties is found in Treas. Reg. 1.482-2(b)(3) which states, “ an arm’s length charge for services rendered shall be the amount which was charged or would have been charged for the same or similar services in independent transactions with or between unrelated parties under similar circumstances considering all relevant facts.” The arm’s length charge for services between related parties will depend upon the facts related to the services provided. The pricing rules fall within three categories:
1) An arm’s length charge will be based on the amount that would have been charged by an unrelated party. This generally means that the price should be based on reimbursement of cost, plus a mark-up for profit.
2) An arm’s length charge may be based on only the costs incurred, provided that certain criteria are met.
3) No charge is necessary, if certain criteria are met.
The area that concerns the IRS most with these type transactions are technical services fees provided by larger U.S corporations to its foreign CFC’s which are not charged. In regards to smaller cases, the IRS typically examines management fees in detail to ensure they are arm’s length.
Inter-company Loans: In the context of IRC 482, most of the areas of conflict in this area revolve around interest. When loans are made between members of a controlled group, interest rates charged do not always meet the required arm’s length standard.
Determination of what is arm’s length for inter-company loans: The arm’s length standard for loans between related parties is found in Treas. Reg. 1.482-2(a)(2) which states that “ an arm’s length rate of interest shall be a rate of interest which was charged, or would have been charged, at the time the indebtedness arose, in independent transactions with or between unrelated parties under similar circumstances.”
Factors that are listed in Treas. Reg. 1.482-2(a)(2) that should be considered in determining arm’s length interest are:
a) The principle amount and duration of the loan.
b) The security involved
c) The credit standing of the borrower
d) The prevailing interest rate where the loan was made
The regulations provide further guidance in the following areas:
a) Safe harbor rules
b) Ordering rules
c) Determination of bona fide indebtedness
d) Period for which interest is charged
Transfers of intangible properties: When transfers of intangible property are made between controlled parties, the arm’s length price is often difficult to determine, in part because the property’s value derives from intellectual capital such as ideas, the outcome of research and development or creation of software.
Determination of what is arm’s length for transfer of intangible property:The regulations specify four methods to determine whether an arm’s length amount has been charged between the members of a controlled group with respect to the transfer or use of intangible property. Treas.Reg.1.482-4(a) states that the “best method” should be used to determine the arm’s length price between related parties. Controlled parties may enter into a qualified cost sharing arrangements to share costs related to developing intangibles. They may also contribute existing intangibles for use in further development or for use in developing new and distinct intangibles.
The following general rules of Treas.Reg.1.482-7(a) and (b) apply to qualified cost sharing arrangements:
a) Two or more controlled participants agree to share the costs of developing intangibles.
b) Costs are shared based on each participant’s share of reasonably anticipated benefits from the intangibles to be developed.
c) A “buy-in” must be paid to the participant that contributes pre-existing intangible property to the qualified cost sharing arrangement.
As with transfer pricing reports, cost sharing agreements should be prepared by qualified experts who are knowledgeable in this area. If examined by the IRS, the cost sharing agreement will be reviewed in detail. For further insight refer to the Coordinated Issue Paper utilized as a guideline for the IRS personnel dated June 5th 2009.
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 visitwww.taxaudit419.com and www.Experttaxdvisors.org
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.
Captive Insurance – Buyer Beware!
Parts of this article are from the book by John Wiley and Sons, Protecting Clients from Fraud, Incompetence and Scams, authored by Lance Wallach.
September 24, 2010
Herol Graham has turned defensive boxing into a poetic art. Trouble is, nobody ever got knocked out by a poem.
—Eddie Shaw
Every accountant knows that increased cash flow and cost savings are critical for businesses in 2009. What is uncertain is the best path to recommend to garner these benefits.
Over the past decade business owners have been overwhelmed by a plethora of choices designed to reduce the cost of providing employee benefits while increasing their own retirement savings. The solutions range 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, the high life insurance commissions (often 90 percent of the contribution, or more) fostered an environment that led to aggressive and noncompliant plans.
The result has been thousands of audits and an IRS task force seeking out tax shelter promotion. For unknowing clients, the tax consequences are enormous. For their accountant advisors, the liability may be equally extreme.
Recently, there has been an explosion in the marketing of a financial product called Captive Insurance. Small companies have been copying a method to control insurance costs and reduce taxes that used to be the domain of large businesses: setting up their own insurance companies to provide coverage when they think that outside insurers are charging too much. A captive insurance company would be an insurance subsidiary that is owned by its parent business(es). There are now nearly 5,000 captive insurers worldwide. More than 80 percent of Fortune 500 companies take advantage of some sort of captive insurance company arrangement. Now small companies can, too.
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. Single-parent captives allow an organization to cover any risk they wish to fund, and generally eliminate the commission-price component from the premiums. Jurisdictions in the United States and in certain parts of the world have adopted a series of laws and regulations that allow small non–life insurance companies, taxed under IRC Section 831(b), or as 831(b) companies.
Captives can be a great cost-saving tool, but they can also be 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 or tax deferral vehicles, or 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 efficacy 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 within 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. 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.
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 Scamspublished 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 visitwww.taxadvisorexperts.org or www.taxlibrary.us.
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.
Senior Abuses
New and Bestselling
AICPA CPE Self-Study Courses
Best Sellers – March 2008
Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots, by Sid Kess
Author/Moderator: Lance Wallach, CLU, CHFC,
Publisher: AICPA
Excerpts have been taken from this book about Senior Abuses.
The following example is unfortunately not an isolated incident of an abusive sales practice. If accountants were consulted more often by their clients, maybe the following would never happen.
Senior citizen clients thought they had every reason to trust Mr. Sell BigPolicy as a financial counselor. The insurance agent had obtained a designation recognizing him as WE DO NOT WANT TO MENTION THE NAME Senior Advisor. He obtained this designation in 2002, a credential he made sure to advertise on fliers sent to retirees.
He did not mention how easy it had been to get that title.
He had paid $1,095 for a correspondence course, then took a multiple-choice exam with questions like, “Marketing can best be described as:” (The answer: “The process or technique of promoting the sale or distribution of a product or service.”) Like more than 18,700 other applicants since 1997, he passed.
Insurance companies, eager for sales representatives, embraced Mr. Sell Bigpolicy, as they have thousands of other newly credentialed advisors.
The following year, multiple insurers paid him commissions totaling $720,000 as his business with retirees soared.
But many of those sales came from steering older Americans into unwise investments, regulators contend in a lawsuit.
Mr. Sell Bigpolicy denies all wrongdoing, but one of his clients – a 73-year-old widow caring for a son with Down syndrome – said he tricked her into buying complicated insurance contracts that left her unable to pay dental and home repair bills.
“His office was filled with things saying he was certified to help seniors,” said that client. “The only one he really helped was himself.”
Taking care of the finances of older Americans is a huge and potentially lucrative field, and the market is growing. Attracted by this market, many financial planners have shifted their focus to it – and bring widely varying attitudes and professional training to the consultation table. Training and certification in financial gerontology is now being offered by at least four groups.
The Securities and Exchange Commission does not regulate these groups – or any other groups that provide financial planning certification, for that matter. “The S.E.C. does not endorse any professional designation,” said Susan Wyderko, director of the office of investor education of the S.E.C.
The absence of government supervision is a problem, said Stephen Brobeck, executive director of the Consumer Federation of America. “There’s an opportunity for fraud,” he said, adding that older people need to be very careful about whom they trust for advice.
Regardless of any planner’s credentials, the S.E.C. and consumer organizations say the best approach is “buyers beware.”
Investors can learn how to check the background of a financial planner, including any disciplinary actions, at the S.E.C.’s website, www.sec.gov. Such background checks, along with a discussion about an advisor’s approach to investing, are well advised before signing up with a planner.
“We see too many investors who might have avoided trouble,” Ms. Wyderko of the S.E.C. said, “had they asked basic questions right from the start.”
Mr. Sell Bigpolicy is one of tens of thousands of financial advisers working hand-in-hand with insurance companies to market themselves to older Americans using impressive sounding credentials.
Many of these titles can be earned in just a few days from businesses concerned only with the bottom line and sound similar to established credentials that require years of study, difficult tests and extensive background checks.
Many graduates of these short programs say they only want to help older Americans. But they are frequently dispensing financial counsel that they are not qualified to offer, advocates for the elderly say. And thousands of them are paid by some of the country’s largest insurance companies to sell elderly clients complicated investments that some economists say most retirees should never own.
More than two dozen such programs now exist, and have enrolled more than 39,000 people over the last decade.
But some of the existing programs, which are often linked to insurance companies, have taught agents to use abusive sales techniques, regulators say.
Some insurers have been listed as sponsors at seminars with names like the Million Dollar Academy, where thousands of sales representatives were advised to scare retirees by saying, “I am all that stands between you and potential catastrophic loss.” Other seminars instructed agents to “drive a wedge” between retirees and their established advisors.
“The insurers are happy to turn a blind eye to what salesmen are doing, as long as they make a sale,” said Minnesota’s attorney general, Lori Swanson, who is suing several companies, contending that their products are at best inappropriate, and possibly worse.
Insurance companies say they investigate the backgrounds of all agents, screen all sales to consumers to make sure they are appropriate, and have terminated representatives using improper sales methods. Those companies said they were not aware of abusive methods taught at any seminar they endorsed.
Some insurance companies say that they do not tolerate misrepresentation.
Another insurance company, in a statement, said “Any evidence of sales agent misconduct, without exception, results in immediate termination.”
Nonetheless, complaints over sales of insurance products have soared. In particular, grievances have stemmed from annuity sales. Obviously, occasionally a buyer of a product buys it without a full understanding of the product. If the product does not perform as expected, possibly because the stock market went down, the buyer may have a selective memory failure. The buyer can then complain to the insurance company, among other places. If the salesperson sold in good faith, and the product was appropriate, sometimes the buyer may still have recourse. Is this fair?
Over one third of all cases of financial exploitation of the elderly involve annuities, according to the North American Securities Administrators Association, a regulatory group [EM1]. Hundreds of lawsuits have been filed against insurers over annuity sales to the elderly. A judge in Minnesota ruled in 2007 that just one class action suit against a large insurance company could encompass as many as 400,000 plaintiffs. Do all of the plaintiffs deserve to be compensated? Who ends up with much of the money if the lawsuit is won? If you do not know the answer to the last question, ask yourself if it is a coincidence that huge class action litigation attracts prestigious large law firms like a picnic does flies.
In interviews, sales agents who have been accused of wrongdoing invariably say that they followed the guidance of insurance companies.
But consider, for example, that the vast majority of annuity sales do not offer immediate payouts. Instead, they require buyers to wait as long as 10 years to begin receiving benefits. Such contracts, known as deferred annuities, made up 97% of all annuity sales last year.
Deferred annuities, however, offer sales agents the richest commissions, which is one reason so many of them are sold every year, regulators say. Selling a $100,000 deferred annuity, for example, typically earns a sales representative $9,000, though buyers are sometimes prohibited from touching much of their money for 10 years without incurring penalties. No-load annuities, may feature little or no commission, and may not have penalties. Annuities with shorter tie ups carry much smaller commissions.
In summation, if it is true that sales agents who push large deferred annuities with long tie up periods are only following company guidance, that may be as negative a commentary on the companies as on the agents.
“An annuity that pays a fixed immediate income offers seniors a lot of security,” said Jean Setzfand, director of financial security with AARP. “But a deferred annuity is almost always a bad idea for a retiree.”
Those concerns, however, have not stopped many insurance agents from aggressively selling deferred annuities.
Some of those agents have been trained by organizations that require only a few days of classroom instruction.
For instance, the 1,200 people who have enrolled in a different senior adviser program spent only four days in a classroom, according to a spokesman.
The organization which gave Mr. Sell Bigpolicy his credentials is a for-profit company that has trained 24,000 enrollees since it was started in 1997.
The company that gave Mr. Sell Bigpolicy his designation has a course that lasts three and a half days, according to recent participants, and includes uplifting lectures, overviews on the sociology of aging and exercises including peering through vision-blurring lenses to get a sense of how some clients’ eyesight can falter.
Regulatory authorities tend to be ultra critical of these programs.
“There are limitless phrases being coined to convey an expertise in senior finances,” said Massachusetts securities regulator William F. Galvin. “Most of them seem designed to trick seniors into listening to swindlers.”
Most insurance salespeople are honorable and are not swindlers. As in most lines of work, however, not everyone is honorable and does the correct thing.
A representative for the organization said the program’s courses and questions were written and evaluated by experts. In a statement, the company said its training was intended to supplement, not substitute for, professional credentials and education. The organization began asking titleholders in March to disclose to potential clients that designation alone does not imply expertise in financial, health or social matters.
Despite that disclaimer, the company has trained thousands of insurance agents and other financial advisors. And about 100 companies, many of them insurers, endorse the designation, said a spokesman for the group.
Soon after Mr. Sell Bigpolicy received his designation, Mr. Sell Bigpolicy started displaying it in ads and on letters inviting retirees to seminars over free chicken lunches, according to Massachusetts regulators.
At those meetings, Mr. Sell Bigpolicy told retirees that they were perilously close to financial calamity, according to Massachusetts regulators and attendees. He warned them that the stock market’s ability to offset inflation was “a big lie,” according to documents collected by those regulators. Banks contained “weapons of mass destruction,” read one handout.
But annuities, Mr. Sell Bigpolicy noted, offered guaranteed returns, attendees said. At the time, he was authorized to sell annuities offered by more than two dozen insurance companies, state records show.
Mr. Sell Bigpolicy’s script, Massachusetts regulators say, used materials from another training company that had more than a dozen insurers as “partners” or “carriers” on the company’s Web site.
There are a few dozen companies, like the training company in question, that teach sales agents how to find retirees willing to buy annuities.
Some insurance companies say they endorse only training programs that are committed to ethical sales tactics and that their support is often limited to providing speakers or marketing materials. But they acknowledge that they cannot always police how agents present themselves.
Dozens of lawsuits against insurers contend that those companies failed to adequately supervise sales agents who sold inappropriate annuities to aging clients and then did not act when buyers complained.
Some insurers, in court filings and interviews, say they spend millions of dollars supervising sales agents and investigating consumer complaints.
Some insurance companies, and some state regulators, have changed the rules governing how annuity sales agents can behave.
This year, Massachusetts prohibited most financial advisers from using some titles unless they were recognized by an accreditation organization or the state. In 2007, two of the largest insurers told sales agents they could not use the designation of WE DO NOT WANT TO MENTION THE NAME senior adviser.
But in most other states and at most insurance companies, sales representatives can use any title they choose.
For his part, Mr. Sell Big Policy, while he awaits the outcome of his case, is still approved to sell annuities by more than two dozen insurers, according to state records. This is not an isolated example, which does not mean that an accountant should think that all insurance salespeople behave like this sales person. This example, in differing versions, does happen. If the customer consulted his or her accountant, which admittedly most do not, the above example, or something like it, may not happen.
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 visitwww.taxaudit419.com/TaxHelp.html and www.taxlibrary.us
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.
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