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6707A Penalties & 419 Plans Litigation: Don't Become A Material Advisor

6707A Penalties & 419 Plans Litigation: Don't Become A Material Advisor: Accounting Today JULY 1, 2011   BY LANCE WALLACH        Accountants, insurance professionals and others need to be careful that they ...

Will Your Municipal Bond or Your Life Insurance Company Still Have Value Next Year?

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Investor protection with municipal bonds is so spotty that there is potential for much mischief.

Disclosure, that bedrock of fair securities markets, is the heart of the problem facing municipal investors. Municipal issuers often don’t file the most basic reports outlining their operating results or material changes in their financial conditions.

Even though hospitals, cities and states that borrow money are required by their bond covenants to make such filings, nondisclosure among the nearly 60,000 issuers is common.

With the S.E.C. largely on the sidelines, disclosure enforcement in the municipal market is left to participants. Do you think they really want to police themselves very closely? That leaves individuals who trade the securities, the investors, and the dealers, to monitor the disclosure information. There is almost no penalty for not complying with those requirements. This is another disaster waiting to happen. If you own municipal bonds, you had better be careful. You may want to investigate www.financeexperts.org and select someone that knows what they are doing to assist you.

Do you have a life insurance or annuity policy? If so, you may be in trouble. The plummeting financial markets are dragging down the life insurance industry, which is an important component of the U.S. economy. Continuously escalating losses weaken the companies’ capital and eat away at investor confidence.

More than a dozen life insurers have been awaiting action on applications for aid from the government’s $700 billion Troubled Asset Relief Program, and the industry is expecting an answer to its request for a bank-style bailout in the upcoming weeks. So far, the government hasn’t stated whether or not insurers qualify for the program.
Life insurers have undoubtedly been taking a beating in recent weeks. The Dow Jones Wilshire U.S. Life Insurance Index has fallen 82% since its May 2007 all time high. The Dow Jones Industrial Average has lost 21% this year to date.

Several of the hardest-hit companies are century-old names that insure the lives of millions of Americans. Shares of Hartford Financial Services Group Inc. are down 93% as of the close on Wednesday, March 11, 2009 from their 2008 high. MetLife Inc. and Prudential Financial Inc. are both suffering as the value of their vast investment portfolios declines.

As the economy weakens, analysts say many insurers face losses can eat away at the capital cushions regulators require them to maintain. In addition, experts say the industry is going through its most chaotic period in recent history and it’s a pretty scary situation right now.
The consequences of a weakened life-insurance industry for the overall economy are significant because life insurers are among the biggest holders of the nation’s corporate debt. For example, if life insurers stop buying bonds, the capital markets may not fully recover. Their buying activity has already declined.

Wall Street analysts say another problem for some life insurers is obligations for variable annuities, a retirement-income product that often guarantees minimum withdrawals or investment returns. As stock markets plunge to new lows, life insurers need to set aside additional funds to show regulators they can meet their obligations, further crimping sparse capital.

Life insurers’ woes have come largely from investment grade corporate bonds, commercial real estate and mortgages, regulatory filings show. Many insurers ended 2008 with high levels of losses that, due to accounting rules, they haven’t had to record on their bottom lines.
Hartford Financial had $14.6 billion in unrealized losses at year’s end. In addition, Hartford Insurance, through its agents, sold life insurance policies that were part of a welfare benefit plan popularly known as Niche Marketing, which has long been under IRS attack and is almost certainly regarded by the Service as an abusive tax shelter and/or listed transaction. Prudential, the second-largest insurer by assets, had nearly $11.3 billion in unrealized losses, up $5.4 billion in the fourth quarter from the previous quarter.

Lance Wallach, the National Society of Accountants Speaker of the Year, speaks and writes extensively about retirement plans, Circular 230 problems and tax reduction strategies. He speaks at more than 40 conventions annually, writes for over 50 publications, is quoted regularly in the press, and has written numerous best-selling AICPA books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Business Hot Spots. He does extensive expert witness work and has never lost a case. Contact him at 516.938.5007 or visit www.taxadvisorexperts.org.
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.

419, 412i, Captive And Section 79 Plans Continue To Draw IRS Attention.


By Lance Wallach, Consultant & Expert Witness       

Recent court cases have highlighted serious problems in welfare benefit plans issued by Nova Benefit Plans. Recently unsealed IRS criminal case information now raises concerns with other plans as well. If you have any type plan issued by NOVA Benefit Plans, U.S. Benefits Group, Benefit Plan Advisors, Grist Mill trusts, Rex Insurance Service or Benistar, you may have a criminal problem. You may be subject to an audit or in some cases, criminal prosecution.

On November 17th, Fifty-nine pages of search warrant materials were unsealed in the Nova Benefit Plans litigation currently pending in the U.S. District Court for the District of Connecticut. According to these documents, the IRS believes that Nova is involved in a significant criminal conspiracy involving the crimes of Conspiracy to Impede the IRS and Assisting in the Preparation of False Income Tax Returns.

In 2010, seventy armed IRS Criminal Division special agents raided the offices of Nova Benefit Plans. The IRS has taken other recent criminal enforcement actions in other states including Nebraska and Milwaukee, Wisconsin. The IRS has told the court that it believes Nova is promoting abusive "section 419" welfare benefit plans.

The IRS claims that a cooperating witness and several undercover agents "penetrated" Nova to ascertain its internal operations. They say Nova helped their clients violate tax laws by claiming the most minor injuries as permanent disabilities to qualify for special tax treatment. In other words, they would assist clients claim a minor scrape was a disabling and disfiguring permanent injury.

The IRS also claims that Nova assisted clients in backdating documents filed with the IRS.

According to the IRS, Nova's plan was a scam because Nova helped taxpayers claim false disabilities. The Internal Revenue Code says disability payments are tax free if there is a permanent loss of a bodily part or function. A small scrape is a far cry from the loss of an eye."

Nova is not alone in the scam. According to the IRS affidavit, Nova and its principals have also done business as U.S. Benefits Group, Benefit Plan Advisors, Grist Mill trusts, Rex Insurance Service and Benistar.

Anyone who has purchased a plan from Nova or the related entities should immediately get help. If the IRS is correct and these plans are not legitimate, the tax consequences to participants could be very high. In some cases, if clients entered these plans with knowledge of Nova's history or promises to evade taxes, the consequences could involve prison.

As a result of the raid and a cooperating witness, the IRS is believed to have the client lists of Nova, Grist Mill and the others.

The IRS is also auditing other 419 and 412i plans. They are also fining participants a large amount of money for not properly informing on themselves under IRS 6707. If you are in an abusive 419, 412i captive insurance or section 79 plan you must file with the IRS. If you don’t file, or incorrectly fill out the forms, the fines that I am aware of have averaged around $300,000. If someone sold one of these plans, or signed a tax return claiming deductions for one, IRS can call them a material advisor and fine them $100,000. They have to file also. I have been getting a large volume of phone calls from people getting these fines. You need to act before this happens to you.

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 visit www.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.

section 79,412i captive insurance and other scams | Lance Wallach | Pulse | LinkedIn

section 79,412i captive insurance and other scams | Lance Wallach | Pulse | LinkedIn

Captive Insurance and Other Tax Reduction Strategies – The Good, Bad, and Ugly



By Lance Wallach                                                                  May 14th


Every accountant knows that increased cash flow and cost savings are critical for businesses.  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 ranged 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% 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 Plans. 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.

While captives can be a great cost saving tool, they also are 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 vehicles, tax deferral 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 with small captives. The outcome looks eerily like that of the 419 plans 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. And, 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 speaks and writes extensively about VEBAs, retirement plans, and tax reduction strategies.  He speaks at more than 70 conventions annually, writes for 50 publications, and was the National Society of Accountants Speaker of the Year.  Contact him at 516.938.5007 or visit www.vebaplan.com.
    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.



Audit Lottery, Captive insurance, 419, 412i, Section 79

The audit lottery is a gambit in which taxpayers claim tax benefits to which they are not entitled in the hope that the IRS will never audit the returns or, if audited, the improper benefits will not be discovered.  The audit lottery is simply an attempt to exploit the IRS's limited resources.  The IRS has limited audit coverage.  Most taxpayers are not audited and, when audited, tax benefits may not be reviewed.  The taxpayer wins the audit lottery if the IRS does not discover the improperly claimed benefits.

With 419 and 412i plans the IRS does have special task forces who are catching the taxpayers. The fines are large and then the taxpayer gets fined again under IRS section 6707A for not telling on themselves.

Taxpayers’ positions exploiting the audit lottery often are sometimes criminal in nature.  By criminal I mean that the taxpayer voluntarily violated a known legal duty.  This is often referred to as the Cheek definition of willfulness which is the standard for most tax crimes (e.g., tax evasion in § 7201, tax perjury, in § 7206(1) and aiding and assisting in § 7206(2)).  Taxpayers’ whose conduct is criminal are playing the audit lottery.  As an aside, while most taxpayers in 419 412i section79 and captive insurance plans are not aware that they are doing anything wrong, some are aware. Over 50 armed IRS agents raided the offices of Benistar taking records of taxpayers in Benistar, Grist Mill Trust, Nova, and other plans affiliated with Benistar. I would think that there may be a few criminal charges. At the very least we are receiving phones calls about people in Benistar, Grist Mill Trust, Nova, etc getting audited. Very few taxpayers would engage in that conduct if they knew they would be detected; hence, their conduct is explainable only because the probability of detection is sufficiently low that the risk / reward ration is quite favorable.  For reasons, I describe below, the audit lottery is not limited to criminal misconduct. Taxpayers merely taking super aggressive positions, positions they know are not likely to prevail but are not criminal, may also play the audit lottery.  In either event, both types of taxpayers seek to exploit the IRS’s limited ability to discover, understand and correct their erroneous tax benefit claims.

I do not mean to just pick on Benistar and other 419 plans operated from the same locations. We have received thousands of phone calls from people in other plans like Niche, Sea Nine, Millennium, etc.

The significant civil tax penalties for present purposes are:

(i) the 20% accuracy related penalty (§ 6662), consisting of (a) the negligence penalty (for negligence or intentional disregard of the rules) and (b) the substantial understatement penalty for failure to pay some threshold level of tax (fairly low) from claiming positions that do not rise to a certain level of probability of being sustained; and  
(ii) the 75% civil fraud penalty (§ 6663) which is the civil counterpart to tax evasion. 
These rules create certain constructs about probability – sometimes called likelihood – that a taxpayer is entitled to the tax benefit the taxpayer claimed improperly.

These levels of probability are:

More likely than not to prevail if litigated (quantified as more than 50 percent likely)
Substantial authority (quantified as perhaps 40% likely)
Reasonable basis (quantified as perhaps 20 or 25% likely)
Frivolous (less than reasonable basis)
The last category -- frivolous -- could involve potential criminal prosecution and/or the civil fraud penalty, at least where the Government proves that, in making the frivolous claim, the taxpayer violated a known legal duty.  Many taxpayers assert frivolous claims that they really believe are available, thereby not violating a known legal duty.  Other taxpayers assert frivolous claims to mask that they intend to avoid paying the tax they know they owe.  The thinking among the practitioner community is that frivolous claims are at high risk of criminal prosecution and assertion of the civil fraud penalty because a jury could read the taxpayers’ intent either way.

The other categories – the nonfrivolous categories – represent some level of probability that the claim rises above being frivolous.  The thinking among the practitioner community is that these taxpayers claiming tax benefits with these higher levels of probability are not committing a tax crime.  These taxpayers could commit a tax crime if the tax benefit with this higher level of probability is accompanied by acts designed to impair or impede any IRS investigation, which are independent crimes regardless of the merits of the tax benefit.  Assume that the taxpayer has a reasonable basis the claimed tax benefit from transaction X is would prevail.  In the real world, that is not much of a probability (20 or 25%) that the taxpayer will actually sustain the position if it is discovered and contested by the IRS.  But, the taxpayer claiming such a position will be subject to the civil penalty regime only, and the only civil penalty that will apply is the 20% accuracy related penalty.  That taxpayer will not be subject to the civil fraud penalty or to criminal tax penalties.


The 6707A fines for not reporting on yourself can be very large. Most taxpayers, and accountants are not aware of this.

 Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters.  He writes about 412(i), 419, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public Radio's All Things Considered, and others. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education's CPA's Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small
Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxaudit419.com 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.





IRS Tax Audits, 419 and 412i plans, Tax resolution services

IRS Tax Audits, 419 and 412i plans, Tax resolution services: Check out http://taxadvisorexperts.com! Expert CPA help with 419a, 419e, 419, 412i, welfare benefit plans, 6707a penalties, form 8886, IRS audits, Section 79, Captive insurance, FBAR, tax masters, jk harris, wpi, us tax shield.

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