- Member of the
AICPA faculty of
- AICPA author,
- National Society of
Speaker of the
- Writes financial
articles for over 50
A VEBA Plan LLC site
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Retirement Today Sept 2011
Did you get a letter from the IRS threatening to impose this fine? If you haven’t already, you
still may. Consider yourself lucky if you have not because this means that you have more
time to straighten this situation out. Do not wait for this letter to come from the IRS before
you call an expert to help you. Even if you have been audited already, you could still get the
letter and/or fine. One has nothing to do with the other, and once the fine has been
imposed, it is not able to be appealed.
Many businesses that participated in a 412i retirement plan or the IRS is auditing a 419-
welfare benefit plan. Many of these plans were not in compliance with the law and are
considered abusive tax shelters. Many business owners are not even aware that the
welfare benefit plan or retirement plan that they are participating in may be an abusive tax
shelter and that they are in serious jeopardy of huge IRS penalties for each year that they
have been in this type of plan.
Insurance companies, CPAs, sellers of these 419 welfare benefit plans or 412i retirement
plans, as well as anyone that gave tax advice or recommended participation in one or
more of these plans, also known as a material advisor, is in danger of being sued, fined
by the IRS, or both.
There is help available if you think you may be involved with one of these 419 welfare
benefit plans, 412i retirement plans, or any abusive tax shelter. IRS penalty abatement is
an option if you act now. Feel free to contact me for more information. www.lancewallach.
Lance Wallach, National Society of Accountants Speaker of the Year and member of the
AICPA faculty of teaching professionals, is a frequent speaker on retirement plans,
abusive tax shelters, financial, international tax, and estate planning. He writes about 412
(i), 419, Section79, FBAR, and captive insurance plans. He 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 the 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,
email@example.com or visit www.taxadvisorexpert.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.
Copyright (C) 2015 - Lance Wallach
Don’t Become a ‘Material Advisor’
July 1, 2011
By Lance Wallach
Accountants, insurance professionals and others need to be careful that they don’t
become what the IRS calls material advisors.
If they sell or give advice, or sign tax returns for abusive, listed or similar plans; they risk a
minimum $100,000 fine. They will then probably be sued by their client, when the IRS
finishes with their client
In 2010, the IRS raided the offices of Benistar in Simsbury, Conn., and seized the
retirement benefit plan administration firm’s files and records. In McGehee Family Clinic,
the Tax Court ruled that a clinic and shareholder’s investment in an employee benefit
plan marketed under the name “Benistar” was a listed transaction because it was
substantially similar to the transaction described in Notice 95-34 (1995-1 C.B. 309). This
is at least the second case in which the court has ruled against the Benistar welfare
benefit plan, by denominating it a listed transaction.
The McGehee Family Clinic enrolled in the Benistar Plan in May 2001 and claimed
deductions for contributions to it in 2002 and 2005. The returns did not include a Form
8886, Reportable Transaction Disclosure Statement, or similar disclosure. The IRS
disallowed the latter deduction and adjusted the 2004 return of shareholder Robert
Prosser and his wife to include the $50,000 payment to the plan.
The IRS assessed tax deficiencies and the enhanced 30 percent penalty under Section
6662A, totaling almost $21,000, against the clinic and $21,000 against the Prossers.
The court ruled that the Prossers failed to prove a reasonable cause or good faith
In rendering its decision, the court cited Curcio v. Commissioner, in which the court also
ruled in favor of the IRS. As noted in Curcio, the insurance policies, which were
overwhelmingly variable or universal life policies, required large contributions relative to
the cost of the amount of term insurance that would be required to provide the death
benefits under the arrangement. The Benistar Plan owned the insurance contracts. The
excessive cost of providing death benefits was a reason for the court’s finding in Curcio
that tax deductions had been properly disallowed.
As in Curcio, the McGehee court held that the contributions to Benistar were not
deductible under Section 162(a) because the participants could receive the value
reflected in the underlying insurance policies purchased by Benistar—despite the
payment of benefits by Benistar seeming to be contingent upon an unanticipated event
(the death of the insured while employed). As long as plan participants were willing to
abide by Benistar’s distribution policies, there was no reason ever to forfeit a policy to the
plan. In fact, in estimating life insurance rates, the taxpayers’ expert in Curcio assumed
that there would be no forfeitures, even though he admitted that an insurance company
would generally assume a reasonable rate of policy lapse.
Companies should carefully evaluate their proposed investments in plans such as the
Benistar Plan. The claimed deductions will be disallowed, and penalties will be
assessed for lack of disclosure if the investment is similar to the investments described
in Notice 95-34, that is, if the transaction is a listed transaction and Form 8886 is either
not filed at all or is not properly filed. The penalties, though perhaps not as severe, are
also imposed for reportable transactions, which are defined as transactions having the
potential for tax avoidance or evasion.
Insurance agents have been selling such abusive plans since the 1990's. They started
as 419A(F)(6) plans and abusive 412i plans. The IRS went after them. They then evolved
to single-employer 419(e) plans, which the IRS also went after. The latest scams may be
the so-called captive insurance plan and the so called Section 79 plan.
While captive insurance plans are legitimate for large corporations, they are usually not
legitimate for small business owners as a way to obtain a tax deduction. I have not yet
seen a legitimate Section 79 plan. Recently, I have sent some of the plan promoters’
materials over to my IRS contacts, who were very interested in receiving them. Some of
my associates are already trying to help defend some unsuspecting business owners
who are being audited by the IRS with respect to these plans.
Similar, though perhaps not as abusive, plans fail after the IRS goes after them. Niche
was one example. The company first marketed a 419A(F)(6) plan that the IRS audited.
They then marketed a 419(e) plan that the IRS audited. Niche, insurance companies,
agents, and many accountants were then sued after their clients lost their deductions,
paid fines, interest, and penalties, and then paid huge fines for failure to file properly
under 6707A. Niche then went out of business.
Millennium sold 419A(F)(6) plans and then 419(e) plans through insurance companies.
They stupidly filed for a private letter ruling to the effect that they were not a listed
transaction. They got exactly the opposite: a private letter ruling saying that they were a
listed transaction. Then many participants were audited. The IRS disallowed the
deductions, imposed penalties and interest, and then assessed large fines for not filing
properly under Section 6707A. The result was lawsuits against agents, insurance
companies and accountants. Millennium sought bankruptcy protection after a lot of
I have been an expert witness in a lot of the lawsuits in these 419, 412i, etc., plans, and
my side has never lost a case. I have received thousands of phone calls over the years
from business owners, accountants, angry plan promoters, insurance agents, etc. In the
1990's, when I started writing for the AICPA and other publications warning about these
abusive plans, most people laughed at me, especially the plan promoters.
In 2002, when I spoke at the annual national convention of the American Society of
Pension Actuaries in Washington, people took notice. The IRS chief actuary Jim Holland
also held a meeting, similar to mine on abusive 412i plans. Many IRS agents attended
my meeting. I was also invited to IRS headquarters, at the request of the acting IRS
commissioner, to meet with high-level IRS officials and Treasury officials to discuss 419
issues in depth, which I did after the meeting.
The IRS then set up task forces and started going after 419 and 412i plans. I have been
warning accountants to properly file under 6707A to avoid the large fines, but most do
not. Even if they file, if they make a mistake on the forms the IRS fines. Very few
accountants have had experience filing the forms, and the IRS instructions are difficult to
follow. I only know of two people who have been successful in properly filing the forms,
especially after the fact. If the forms are filled out wrong they should be amended and
corrected Most accountants call me a few years later when they and their clients get the
large fines, either after improperly filling out the forms or not doing them at all, but then it
is too late. If they don’t call me then, then they call me when their clients sue them.
Lance Wallach is a frequent speaker on retirement plans, financial and estate planning,
and abusive tax shelters, and writes about 412(i), 419 and captive insurance plans. He
can be reached at (516) 938-5007, firstname.lastname@example.org, or visit www.vebaplan.com.
For more information, please visit www.taxadvisorexperts.org Lance Wallach, National
Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching
professionals, is a frequent speaker on retirement plans, abusive tax shelters, financial,
international tax, and estate planning. He writes about 412(i), 419, Section79, FBAR, and
captive insurance plans. He 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 the 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, email@example.com or visit www.
Fax: (516)938-6330 www.vebaplan.com
National Society of Accountants Speaker of The Year