The IRS is attacking people in retirement plans and so-called 419 plans that contain life insurance, and the consequences are very bad. The IRS has collected millions by calling various types of retirement plans, more specifically 412(i), plans listed transactions or similar to. They have also attacked all types of 419 plans.
If the business owner and accountant do not file various forms under section 6707A they will be fined at least $200,000. This fine can be eliminated simply by filing the appropriate forms properly. The second problem is that if the forms are not filled out exactly right or filed properly, the IRS is still assessing the fines. We have received a large number of calls for help from accountants, business owners and insurance agents in similar situations. Don’t think this will happen to you? It is happening to a lot of accountants and business owners, because most of these so called listed, abusive plans, or plans substantially similar to the so-called listed, abusive plans are currently being sold by most insurance agents currently. Bruce Hink, who has given me permission to utilize his name and circumstances, is a perfect example of what the IRS is doing to unsuspecting business owners. What follows is a story about Bruce Hink and how the IRS fined him $200,000 a year for being in what they called “a listed transaction”. In addition, I believe that the accountant who signed the tax return and the insurance agent who sold the retirement plan will each be fined $200,000 as material advisors.
In 2002, an insurance agent representing a 100 year-old well established insurance company suggested the owner Bruce Hink start a pension plan. The owner was given a portfolio of information from the insurance company, which was given to the company’s outside CPA to review and give an opinion on. The CPA gave the plan the green light and the plan was started for tax year 2002.
Contributions were made in 2003. Then the administrator came out with amendments to the plan, based on new IRS guidelines, in October of 2004.
The business owner’s agent disappeared in May of 2005 before implementing the new guidelines from the administrator with the insurance company. The business owner was left with a refund check from the insurance company, a deduction claim on his 2004 tax return that had not been applied, and without an agent.
It took 6 months of making calls to the insurance company to get a new insurance agent assigned. By then, the IRS had started an examination of the pension plan. Asking advice from the CPA and local attorney (who had no previous experience in such cases) made matters worse, with a “big name” law firm being recommended and over $30k in additional legal fees being billed in three months.
To make a long story short, the audit stretched on for over 2 ½ years to examine a 2 year old pension with 4 participates and $178,000 in contributions.
During the audit, no funds went to the insurance company, which was awaiting IRS approval on restructuring the plan as a traditional defined benefit plan, which the administrator had suggested and which IRS had indicated would be acceptable. The $90,000 2005 contribution was put into the company’s retirement bank account along with the 2004 contribution.
In March of 2008, the business owner received an apology from the IRS agent that headed the examination.
The IRS denied any appeal and ruled in October 2008 that the $400,000 penalty for 2003 and 2004 for not filing lender 6707A and notifying IRS of participating in a listed transaction would stand.
Could you or one of your clients be next?
Even this sympathetic IRS agent thinks there is a problem with the IRS enforcement of these Draconian penalties. Below is one of her emails to the business owner who was fined $400,000.
From: Kowalski Jean M
Date: Tue, Mar 4, 2008 at 7:12 AM
Subject: RE: Urgent
To: Bruce Hink
Thanks Bruce - yes - please just overnight them to the Grand Rapids address. Once again, I'm sorry about this. Basically, our Counsel told us that we needed language specific to the IRC 6707A penalty in order for that statute to be extended. I will ask the Reviewer to hold off an extra day.
I'm also very sorry that this is getting you down. Deeply sorry. It’s very difficult for me as well - before I started working this project (412(i)) I was doing audits of 401(k) and profit sharing plans. If there was an error in the plan, the employer would just fix it and the audit was over. There wasn't anything controversial or adversarial about it - and I felt like I was helping people - employers and plan participants. I really liked my job. In two years time, that has completely changed. I know it’s not very "professional" to make such confessions - so forgive me. But I guess I just wanted you to know that I really sympathize with your situation - and have been doing whatever I can to help. I know that having this hanging over your head can't be fun - but as this project goes forward - I think that the IRS is going to have to soften their position somewhat - so these delays may be to your benefit.
Also, I'm not really supposed to be sending emails to you - but when I went through the file I couldn't find a good phone number for you. Could you just send me a note or an email with a current phone number?
Looking to receive the signed 872s on Thursday. If you have any questions at any time - please call me. I'm usually in the office in the mornings.
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.
In 2002, an insurance agent representing a 100 year-old well established insurance company suggested the owner Bruce Hink start a pension plan. The owner was given a portfolio of information from the insurance company, which was given to the company’s outside CPA to review and give an opinion on. The CPA gave the plan the green light and the plan was started for tax year 2002.
Contributions were made in 2003. Then the administrator came out with amendments to the plan, based on new IRS guidelines, in October of 2004.
The business owner’s agent disappeared in May of 2005 before implementing the new guidelines from the administrator with the insurance company. The business owner was left with a refund check from the insurance company, a deduction claim on his 2004 tax return that had not been applied, and without an agent.
It took 6 months of making calls to the insurance company to get a new insurance agent assigned. By then, the IRS had started an examination of the pension plan. Asking advice from the CPA and local attorney (who had no previous experience in such cases) made matters worse, with a “big name” law firm being recommended and over $30k in additional legal fees being billed in three months.
To make a long story short, the audit stretched on for over 2 ½ years to examine a 2 year old pension with 4 participates and $178,000 in contributions.
During the audit, no funds went to the insurance company, which was awaiting IRS approval on restructuring the plan as a traditional defined benefit plan, which the administrator had suggested and which IRS had indicated would be acceptable. The $90,000 2005 contribution was put into the company’s retirement bank account along with the 2004 contribution.
In March of 2008, the business owner received an apology from the IRS agent that headed the examination.
The IRS denied any appeal and ruled in October 2008 that the $400,000 penalty for 2003 and 2004 for not filing lender 6707A and notifying IRS of participating in a listed transaction would stand.
Could you or one of your clients be next?
Even this sympathetic IRS agent thinks there is a problem with the IRS enforcement of these Draconian penalties. Below is one of her emails to the business owner who was fined $400,000.
From: Kowalski Jean M
Date: Tue, Mar 4, 2008 at 7:12 AM
Subject: RE: Urgent
To: Bruce Hink
Thanks Bruce - yes - please just overnight them to the Grand Rapids address. Once again, I'm sorry about this. Basically, our Counsel told us that we needed language specific to the IRC 6707A penalty in order for that statute to be extended. I will ask the Reviewer to hold off an extra day.
I'm also very sorry that this is getting you down. Deeply sorry. It’s very difficult for me as well - before I started working this project (412(i)) I was doing audits of 401(k) and profit sharing plans. If there was an error in the plan, the employer would just fix it and the audit was over. There wasn't anything controversial or adversarial about it - and I felt like I was helping people - employers and plan participants. I really liked my job. In two years time, that has completely changed. I know it’s not very "professional" to make such confessions - so forgive me. But I guess I just wanted you to know that I really sympathize with your situation - and have been doing whatever I can to help. I know that having this hanging over your head can't be fun - but as this project goes forward - I think that the IRS is going to have to soften their position somewhat - so these delays may be to your benefit.
Also, I'm not really supposed to be sending emails to you - but when I went through the file I couldn't find a good phone number for you. Could you just send me a note or an email with a current phone number?
Looking to receive the signed 872s on Thursday. If you have any questions at any time - please call me. I'm usually in the office in the mornings.
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.
As an expert witness Lance Wallach's side has never lost a case. People need to be careful of 419 Welfare Benefit Plans, 412i plans, Section 79 plans and Captive Insurance Plans. Most of these plans are sold by insurance agents. If you are in an abusive, listed or similar transaction plan you need to file under IRS 6707a. The participant files form 8886, and the salesmen or accountant who signs the tax returns files form 8918 if they got paid over $10,000. They are called Material Advisors and face a minimum $100,000 fine. Some plans are offshore which could involve FBAR or OVDI filings. If you have money overseas you probably need to file for IRS tax amnesty. If you want to reduce the tax we suggest that you first file and then opt out. For more information Google Lance Wallach.
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
Judge Remands 412(i) Case Back to State Court
ReplyDeleteOn August 17th, United States District Judge Jane Boyle granted the Plaintiffs request and remanded the case of Sawaged vs. Indianapolis Life, et al. back to the Superior Court of New Jersey, Law Division, Essex County.
Like many others, this case concerns the promotion, marketing, and sale of life insurance policies used to fund a defined pension plan pursuant to 26 U.S.C § 412(i) of the Internal Revenue Code.
Indianapolis Life removed the case from the New Jersey state court on a theory of complete preemption under ERISA. Specifically, Indy Life claimed that certain of Plaintiffs' allegations pertaining to misconduct following plan formation can be recharacterized as claims for breach of fiduciary duty under ERISA §§ 502(a)(2) and (a)(3). The court specifically rejected this argument.
Additionally, the court found that "although admittedly failure to file form 8886 may have been undertaken in a fiduciary capacity, the Court determines that it is an isolated allegation which is insufficient to support a finding of complete preemption."
Restricted Property Trust
ReplyDeleteRestricted Property Trust, RPT, Ken Crabb, Kenton C. Crabb
Friday, January 27, 2017
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The fines are severe. Under IRC 6707A, fines were up to $200,000 annually for not properly disclosing participation in a listed transaction. There was a moratorium on those fines until June 2010, pending new legislation to reduce them, but the new law, which was passed in September, virtually guarantees you will be fined. The fines had been $200,000 per year on the corporate level and $100,000 per year on the personal level. You were fined even if you made zero contributions for the year. All you had to do was to be in the plan and fail to properly disclose your participation.
You can possibly still help your clients avoid all this by properly filing Form 8886 immediately with the IRS. Time is especially of the essence now, as you must file before they assess the penalty. For months, the IRS held off on actually collecting from people that they assessed because they did not know what Congress was going to do. But now they do know, so they are going to move aggressively to collect from people that were already assessed.
There is no reason not to now, which is especially true because the new legislation still does not provide for a right to appeal or judicial review. The IRS is still judge, jury and executioner. Its word is absolute as far as determining what is a listed transaction, or now, a reportable transaction, participation that now triggers the same penalty. A reportable transaction is defined as any transaction with the potential for tax avoidance, a much broader definition than that for a listed transaction. So you have to file Form 8886 fast, but you also have to file it properly. The IRS treats forms that are incorrectly filed as if they were never filed. You can be fined for filing incorrectly, or for not filing at all. The statute of limitations will not begin unless you properly file. This means that the IRS can come back to get you any time in the future unless you file properly.
If you don’t want these new IRS agents, or any other IRS agents for that matter, to be earning their paychecks by coming after your clients and you as a material adviser, make sure you have done all you can to ensure that you have filed properly by reaching out for expert help today.