Being Audited by the IRS?

Abusive Insurance, Welfare Benefit, and Retirement Plans

By Lance Wallach

The IRS has various task forces auditing all section 419, section 412(i), and other plans that tend to be abusive. These plans are sold by most insurance agents. The IRS is looking to raise money and is not looking to correct plans or help taxpayers.

The fines for being in a listed, abusive, or similar transaction are up to $200,000 per year (section 6707A), unless you report on yourself. The IRS calls accountants, attorneys, and insurance agents ''material advisors'' and also fines them the same amount, again unless the client's participation in the transaction is reported. An accountant is a material advisor if he signs the return or gives advice and gets paid. More details can be found on http://www.irs.gov and http://www.vebaplan.com.

Bruce Hink, who has given me written permission to use his name and circumstances, is a perfect example of what the IRS is doing to unsuspecting business owners. What follows is a story about how the IRS fined him $200,000 a year for being in what they called a listed
transaction. Listed transactions can be found at www.irs.gov. Also involved are what the IRS calls abusive plans or what it refers to as substantially similar. Substantially
similar to is very difficult to understand, but the IRS seems to be saying ''if it looks like some other listed transaction, the fines apply.'' Also, 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.

We have received many calls for help from accountants, attorneys, 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, or substantially similar plans are being sold by insurance agents.

Recently I came across the case of Hink, a small business owner who is facing $400,000 in IRS penalties for 2004 and 2005 because of his participation in a section 412(i) plan. (The penalties were assessed under section 6707A.) In 2002 an insurance agent representing a 100-year-old, well-established insurance company suggested the owner 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. Contributions were made in 2003. The plan administrator came out with amendments to the plan, based on new IRS guidelines, in October 2004. The business owner's insurance agent disappeared in May 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 no agent.

It took six 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 a local attorney (who had no previous experience in these cases) made matters worse, with a ''big name'' law firm being recommended and over $30,000 in additional legal fees being billed in three months.

To make a long story short, the audit stretched on for over 2½ years to examine a 2-year-old pension with four participants and $178,000 in contributions. During the audit, no funds went to the insurance company, which was awaiting formal IRS approval on
restructuring the plan as a traditional defined benefit plan, which the administrator had suggested and the IRS had indicated would be acceptable. The $90,000 in 2005 contributions was put into the company's retirement bank account along with the 2004 contributions.

In March 2008 the business owner received a private e-mail apology from the IRS agent who headed the examination, saying that her hands were tied and that she used to believe she was correcting problems and helping taxpayers and not hurting people. The IRS denied any appeal and ruled in October 2008 the $400,000 penalty would stand. The IRS fine for being
in a listed, abusive, or similar transaction is $200,000 per year for corporations or $100,000 per year for unincorporated entities. The material adviser fine is $200,000 if you are incorporated or $100,000 if you are not.

Could you or one of your clients be next?

To this point, I have focused, generally, on the horrors of running afoul of the IRS by participating in a listed transaction, which includes various types of transactions
and the various fines that can be imposed on business Lance Wallach is the author of the American Institute of Certified Public Accountants' The Team Approach to Tax, Financial and Estate Planning. He can be reached at 516-938-5007, wallachinc@gmail.com, or on the Web at http://www.taxaudit419.com. Lance has given his expert witness testimony in court to help others fight these penalties and to date his side has never lost a case. Are you facing an IRS audit, penalties and interest? Contact him and his nation-wide team of associates today.

*The information in this article is not intended as accounting, legal, financial,
or any other type of advice for any specific individual or other entity. You should consult an appropriate professional for that advice.

Copyright 2009 Lance Wallach.
All rights reserved.®