Avoid IRS Penalties: abusive insurance plans

Showing posts with label abusive insurance plans. Show all posts

Lance Wallach - Expert Witness Services, Section 79, insurance Expert Witness

Lance Wallach - Expert Witness Services, Section 79, insurance Expert Witness

http://www.section79problem.com/

IRS Audits Focus on Captive Insurance Plans - Lance Wallach

IRS Attacks Business Owners in 419, 412, Section 79 and Captive Insurance Plans Under Section 6707A

Taxpayers who previously adopted 419, 412i, captive

insurance or Section 79 plans are in big trouble.

In recent years, the IRS has identified many of these arrangements as abusive devices to funnel tax deductible dollars to shareholders and classified these arrangements as listed transactions." These plans were sold by insurance agents, financial planners, accountants and attorneys seeking large life insurance commissions. In general, taxpayers who engage in a “listed transaction” must report such transaction to the IRS on Form 8886 every year that they “participate” in the transaction, and you do not necessarily have to make a contribution or claim a tax deduction to participate. Section 6707A of the Code imposes severe penalties for failure to file Form 8886 with respect to a listed transaction. But you are also in trouble if you file incorrectly. I have received numerous phone calls from business owners who filed and still got fined. Not only do you have to file Form 8886, but it also has to be prepared correctly. I only know of two people in the U.S. who have filed these forms properly for clients. They tell me that was after hundreds of hours of research and over 50 phones calls to various IRS personnel. The filing instructions for Form 8886 presume a timely filling. Most people file late and follow the directions for currently preparing the forms. Then the IRS fines the business owner. The tax court does not have jurisdiction to abate or lower such penalties imposed by the IRS.

"Many taxpayers who are no longer taking current tax deductions for these plans continue to enjoy the benefit of previous tax deductions by continuing the deferral of income from contributions and deductions taken in prior years."

Many business owners adopted 412i, 419, captive insurance and Section 79 plans based upon representations provided by insurance professionals that the plans were legitimate plans and were not informed that they were engaging in a listed transaction. Upon audit, these taxpayers were shocked when the IRS asserted penalties under Section 6707A of the Code in the hundreds of thousands of dollars. Numerous complaints from these taxpayers caused Congress to impose a moratorium on assessment of Section 6707A penalties.

The moratorium on IRS fines expired on June 1, 2010. The IRS immediately started sending out notices proposing the imposition of Section 6707A penalties along with requests for lengthy extensions of the Statute of Limitations for the purpose of assessing tax. Many of these taxpayers stopped taking deductions for contributions to these plans years ago, and are confused and upset by the IRS’s inquiry, especially when the taxpayer had previously reached a monetary settlement with the IRS regarding its deductions. Logic and common sense dictate that a penalty should not apply if the taxpayer no longer benefits from the arrangement. Treas. Reg. Sec. 1.6011-4(c)(3)(i) provides that a taxpayer has participated in a listed transaction if the taxpayer’s tax return reflects tax consequences or a tax strategy described in the published guidance identifying the transaction as a listed transaction or a transaction that is the same or substantially similar to a listed transaction.

Clearly, the primary benefit in the participation of these plans is the large tax deduction generated by such participation. Many taxpayers who are no longer taking current tax deductions for these plans continue to enjoy the benefit of previous tax deductions by continuing the deferral of income from contributions and deductions taken in prior years. While the regulations do not expand on what constitutes “reflecting the tax consequences of the strategy,” it could be argued that continued benefit from a tax deferral for a previous tax deduction is within the contemplation of a “tax consequence” of the plan strategy. Also, many taxpayers who no longer make contributions or claim tax deductions continue to pay administrative fees. Sometimes, money is taken from the plan to pay premiums to keep life insurance policies in force. In these ways, it could be argued that these taxpayers are still “contributing,” and thus still must file Form 8886.

It is clear that the extent to which a taxpayer benefits from the transaction depends on the purpose of a particular transaction as described in the published guidance that caused such transaction to be a listed transaction. Revenue Ruling 2004-20, which classifies 419(e) transactions, appears to be concerned with the employer’s contribution/deduction amount rather than the continued deferral of the income in previous years. Another important issue is that the IRS has called CPAs material advisors if they signed tax returns containing the plan, and got paid a certain amount of money for tax advice on the plan. The fine is $100,000 for the CPA, or $200,000 if the CPA is incorporated. To avoid the fine, the CPA has to properly file Form 8918.

Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, Wallach is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters. He is also a featured writer and has been interviewed on television and financial talk shows including NBC, National Pubic Radio’s All Things Considered and others. Lance authored 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.

Contact him at:

516.938.5007,

wallachinc@gmail.com, or

www.taxadvisorexperts.org, or

www.taxlibrary.us.

Expert Witness in IRS tax and finance cases.

Did you Participate in a 419 or 412i Benefit Plan?: Reportable Transactions & 419 Plans Litigation: Se...

Did you Participate in a 419 or 412i Benefit Plan?: Reportable Transactions & 419 Plans Litigation: Se...: Reportable Transactions & 419 Plans Litigation: Senior Abuses : Bestselling AICPA CPE Self-Study Courses– March 2008 Avoiding Circular...

Monday, January 17, 2011

Senior Abuses

Bestselling AICPA CPE Self-Study Courses– 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 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 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.

Lance Wallach Life Insurance: Life Insurance

Lance Wallach Life Insurance: Life Insurance: In many of Lance Wallachs CPE books he discusses 412i or 412e3 and listed transactions. One day when you were complaining about what yo...

Friday, April 27, 2012

Notice 2007–84 Notice to all that 419 plans are abusive

Division Counsel/Associate Chief
Counsel (Tax Exempt and Government
Entities). For further information regarding
this notice, contact Mr. Isaacs
at RetirementPlanQuestions@irs.gov

Ms. Clary. Trust Arrangements
Purporting to Provide
Nondiscriminatory
Post-Retirement Medical
and Life Insurance

Benefits

Notice 2007–84

Sections 419 and 419A of the Internal
Revenue Code set forth rules under
which employers are permitted to make
currently deductible contributions to welfare
benefit funds in order to provide their
retirees with medical and life insurance

benefits. Businesses often maintain welfare
benefit funds that comport with the
intent of §§ 419 and 419A and do in fact
provide meaningful medical and life insurance

benefits to retirees on a nondiscriminatory
basis, and make substantial contributions
to those welfare benefit funds that
are fully deductible. Such welfare benefit

Did you Participate in a 419 or 412i Benefit Plan?: 412i Plans Attacked by IRS, Lawsuits

Did you Participate in a 419 or 412i Benefit Plan?: 412i Plans Attacked by IRS, Lawsuits: IRS has been attacking abusive 412i plans for years. Business men have been suing the insurance agents who sold the plans. The IRS has att...

Abusive Insurance and Retirement Plans

Wednesday, April 30, 2014

Why You Should Stay Away from Section 79 Life Insurance Plans

I’ve had several calls lately from doctors who are being pitched Section 79 plans and are wondering if these plans are any good. The doctors are being told that Section 79 plans are the best wealth-building tool they can use to reduce their income taxes and create a tax-free retirement income

Must Read

Friday, March 28, 2014

Life Insurance

In many of Lance Wallachs CPE books he discusses 412i or 412e3 and listed transactions.

One day when you were complaining about what you pay the government, your cousin Tilly suggested that she knew a life insurance agent who could help you with your taxes. You met with him, you listened to his pitch about a deferred benefit plan, and you asked a lot of questions. He suggested a 412i plan, whatever that is. From the initial description it sounded as if you would have to fund retirement for your rotating staff which you weren’t interested in doing, but he told you that he could arrange an executive carve out. You really didn’t have the income to fund it initially but he convinced you to sell your investment real estate, declare your gain as ordinary income, and then buy the plan to offset that.

You’ve been hearing that the IRS is after “listed transactions” and you’re worried. Suddenly you’re having a tough time having cousin Tilly’s friend return your calls. The insurance company whose products fund your plan has taken your calls, but for the fourth time in as many months a representative has promised to get back to you. Honest he will!

You have gone to a new accountant and you learn that the plan was unsuited for you, it was formed improperly, and it’s going to cost you a lot more money than you have to pay the IRS not to mention the accountant and the actuary to sort it all out. Now you are worried that the problems may wipe out your retirement nest-egg and keep you working years longer than you intended.

Fortunately, there are ways to provide for your retirement that can afford you tax benefits while creating a solid retirement fund for your future so that you won’t have to be “that doctor”. However, getting there doesn’t necessarily start with cousin Tilly’s insurance agent friend or the “financial planner” you met on the golf course. If you want to avoid problems in your retirement plans, there are some things you should do.

Educate yourself. When you need a new car, do you go to your dry cleaner’s brother who is a car salesman to tell you what you want? Of course not. You choose some cars that interest you, you study them, and then you work with dealers to get the best car for you at the best deal. Why should your retirement planning be different? There are many types of financial advisors. There are also different types of retirement plans available and one is probably more suitable for your current financial capabilities and retirement needs. A great and easy tool is the IRS Retirement Plans Navigator.www.retirementplans.irs.gov.
Then find a financial advisor. There are lots of folks who want to sell you their retirement services: insurance agents, accountants, lawyers, stockbrokers and financial planners. Do research about them, search the internet, read about them, contact local professional associations, and use similar resources.
Interview potential advisors. There are a number of things you will want to find out, but one question is paramount – are you a fee-only advisor? A fee-only financial advisor is compensated solely by you the customer and not by some mega insurance company or broker for selling you their products. Advisors paid by insurance companies or brokers are not necess