*************************************************************************************************

BISK CPEasy™ CPE Self-Study Course

 

CPA’s Guide to Life Insurance

 

Author/Moderator: Lance Wallach, CLU, CHFC

 

Introduction

The CPA faces a daunting series of roles—those of advisor, practitioner, and consumer.  Life insurance can be a powerful tool but improperly wielded, it can lead to malpractice.

The authors hope this text effectively introduces the advisor to basic and also more com­plex concepts, enabling the advisor to appropriately counsel clients, or at least spot pitfalls and client opportunities.  Similarly, the authors hope that the practitioner who is licensed and sells insurance is aware of the myriad options available and which ones best help the client.  Finally, the authors hope the CPA as a consumer gains an understanding of the important concepts that can help the CPA on a personal level.

This text and its corresponding video was a daunting challenge -- how to encapsulate the complex field of life insurance and its applications into an understandable and useful reference.  

Program Learning Objectives

Upon successful completion of this program, the user should:

 

·                    Understand the basics of life insurance

·                    Have a general understanding in determining insurance needs

·                    Be aware of the major pros and cons of each type of insurance

·                    Be familiar with business related insurance

·                    Be familiar with “split-dollar insurance”

·                    Be familiar with foundational estate planning issues

·                    Understand how life insurance is used to protect the estate

·                   Understand basic buy-sell agreement theory (estate planning for the business)

·                    Understand basics about various retirement plans

·                    Understand alternatives to cashing out or terminating a policy

·                    Be familiar with how products are illustrated

·                    Have a general understanding of annuities

·                    Be aware of trouble areas

 

Prerequisite: None

Formats: Online, Software, Text          $109.00/6 CPE Credit Hours

Formats: Audio w/text                         $119.00/8 CPE Credit Hours

            Formats: DVD w/text                          $179.00/8 CPE Credit Hours

*************************************************************************************************
Bestselling AICPA CPE Self-Study Courses

Best Sellers – 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

This course will enable the practitioner to better understand many of the abusive insurance and annuity-based products being marketed to your clients and how you can alleviate exposure to IRS scrutiny.

Objectives: 

Prerequisite: None

Accepted for CFP^® credit.

Text Product# 733720 Availability: In Stock

Regular:              $150.00 AICPA Member: $120.00 Your Price:          $150.00

*************************************************************************************************

Bestselling AICPA CPE Self-Study Courses

Best Sellers – 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 Adviser.  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 advisers.

 

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 advisers.

 

“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 is a frequent speaker at national  conventions and writes for more than 50 national publications.   Visit www.taxaudit419.com or call 516-938-5007.

 

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.

 

*************************************************************************************************

 

 

 

NSA Member Link:

ABUSIVE WELFARE BENEFIT AND RETIREMENT PLANS CAN LEAD TO SEVERE PENALTIES FOR ACCOUNTANTS

By Lance Wallach

Accountants who are unaware of recent developments are likely to encounter a nightmarish scenario that may play out something like this:  you sign a client’s tax return that claims a tax deduction for participation in a “welfare benefit plan”.  A few years pass, and nothing happens.  Then, on audit, the deductions are disallowed and your client is hit with back taxes, penalties, and interest.  He discovers that he may be looking at a large penalty for not disclosing his participation in the plan to the IRS.

Naturally, at this point, your client wants out of the plan.  But he discovers that he cannot get the money that he has contributed out of the plan.  He finds that the money is being used by the plan sponsor to fight the IRS; his money is being used to defend a plan that he no longer wants to be in.  This is claimed to be legal.  Or he may even find that the money is simply gone, that it has been stolen or otherwise misappropriated.

And now you find that you are a “material adviser”  with respect to your client’s participation in the plan.  Like your client, you were supposed to disclose your role here; in your case, as a “material adviser”.  You also may be looking at a large penalty for failing to disclose.

If you think this could never happen to you, think again.

Welfare benefit plans are a creation of and are sanctioned by Section 419 of the Internal Revenue Code. There are single employer plans and multiple employer plans; the latter rely mostly on IRC Section 419A (f) (6) (in the most common cases where there are ten or more employers as part of the same plan). The 419A(f)(6) plans are, and perhaps always were, generally regarded as abusive, and were substantially curtailed in recent years by harsh IRS regulation. Amazingly, however, they refuse to totally die, and are still being marketed.  These plans are called listed transactions (more on that later).

While the principle purpose of this article is to discuss the current state of the welfare benefit plan, and everything outside of this paragraph will do just that, it is perhaps worth noting that welfare benefit plans are not the only subject of current IRS scrutiny and/or regulation.  The Section 412(i) defined benefit plan, for example, is such a target that a task force has been formed internally solely to audit 412(i) plans.  Many of them are being deemed listed transactions, many of the plans are being involuntarily terminated, and back taxes, penalties, and interest are being assessed.  Not surprisingly, all of this has resulted in considerable litigation.

Single employer welfare benefit plans are now more popular than multiple employer plans. All welfare benefit plans tend to share certain characteristics, however. They tend to be marketed most frequently by insurance agents and financial planners, and sometimes by accountants and attorneys. Prospects tend to be professionals and profitable small businesses. The most attractive selling point is the ability to claim large tax deductions and remove money tax free. Life insurance tends to be the funding vehicle. Often cheap term insurance is purchased for rank and file workers and some form of permanent coverage (universal life, variable life, etc., for the owners and key employees. But many times workers are completely left out of the plan. For businesses looking to do as little as possible for workers, a selling point is that the great majority of benefits, in most cases, eventually go to the owners. This type of discrimination was recently addressed by IRS Notice 2007-84, which disallowed tax deductions and penalties with respect to welfare benefit plans that discriminate. If done correctly, the plans can accomplish things like facilitating estate planning, business succession, and asset protection. But the promised tax deduction is usually the sizzle that sells the steak.

 In October of 2007, welfare benefit plans were affected by IRS rulings. The two most important developments were Revenue Ruling 2007-65, which declared, in essence, that premiums paid inside of a welfare benefit plan for cash value life insurance were not tax deductible, and Notice 2007-83, which identified the trust within welfare benefit plans involving cash value life insurance policies, AND substantially similar arrangements, as listed transactions. In other words, in essence, not only are premiums paid for cash value life insurance policies in welfare benefit plans not tax deductible, but, and far more importantly, the plans themselves are now listed transactions. This, in turn, means that most welfare benefit plans are now listed transactions, because most feature cash value life insurance.  This designation creates disclosure obligations with absurdly harsh penalties both for failure to disclose or incorrectly or incompletely disclosing, as we shall soon see.

A listed transaction, basically, is any transaction identified as such by specific IRS guidance OR any transaction substantially similar to the specifically identified transaction. Participants in listed transaction must file Form 8886 with both the Service and the Office of Tax Shelter Analysis. Failure to timely and completely file leads to penalties of $100,000 for individuals and $200,000 for corporate taxpayers.

The practitioner has filing requirements, also, which can lead to equally severe penalties, if the practitioner qualifies as a “material adviser” with respect to one of these transactions. What is a material adviser? Basically, someone who gives advice, sells, or otherwise plays a significant part in the promotion, sale, or paperwork with respect to a taxpayer’s participation in a listed transaction. Put simply, from an accountant’s standpoint, you must give advice, the client must do it, and you must satisfy a certain income threshold with respect to the transaction, usually $10,000. The accountant who signs a return taking a tax deduction with respect to the transaction is surely a material adviser, if the income threshold is met.

 A problem is that many accountants are not even aware of these plans. Often it is discovered when preparing the client’s tax return, at which point the client expects you to allow the deduction and sign the return, since the client was sold a tax deduction. Or worse yet, the deduction may already have been disallowed on audit. The point is that, far too frequently, the practitioner does not even discover a client’s involvement in a listed transaction until too much damage has already been done. This is often the case if the contribution has already been made, as it usually has, and irretrievably so if the deductions have already been disallowed on audit. And added to all of this is the distaste that most professionals must have for all of these policing types of duties, to say nothing of the difficulties that are created with clients and, probably, the loss of some clients.

The material adviser must file Form 8918 describing her exact role in the client’s participation in the transaction. Failure to file can lead to penalties imposed on the adviser that are as severe as those imposed on taxpayers ($100,000 for individuals and $200,000 for corporations) who fail to file Form 8886. The accountant may escape material adviser status by not meeting the $10,000 income threshold. A problem, however, is the accountant who is paid $10,000 in the aggregate by the client, but not that much specifically with respect to the listed transaction. Does such a person satisfy the income threshold? The author and his associates have discussed this point, among others, directly with IRS personnel who actually wrote published guidance in this area. The best we have been able to get is a declaration that any test that would be applied to the determination of any of these issues would have to consider all surrounding facts and circumstances. This would be unlikely to yield any general rules, for each situation has its own facts and circumstances.

Another section that the practitioner, or at least the prudent one, should be aware of, largely apart from what has been discussed so far in this article, is Section 6701, entitled “penalties for aiding and abetting understatement of tax liability.” This penalty is imposed upon those who assist in, procure, or advise while knowing or having reason to believe that the subject matter will be used in connection with any material matter arising under the tax laws and who know that the use thereof would result in the understatement of another person’s tax liability. The penalty may be applied separately to each occurrence, and it is $1,000 if an individual is the taxpayer and $10,000 for a corporate taxpayer.  

 Three (3) definitions are now in order, which will hopefully help to clarify any confusion that may exist in the reader’s mind. A “material adviser” is any person who provides any material aid, assistance, or advice with respect to organizing, managing, promoting, selling, implementing, insuring, or carrying out any reportable transaction, and who directly or indirectly derives gross income in excess of a certain threshold amount. More on threshold soon, but the most common one is $10,000 for listed transactions. A “reportable transaction”, basically, is any transaction which has been deemed to have a potential for tax avoidance or evasion. That is pretty broad, and the reader should consult the regulations under section 6011 for more on this. Finally, a “listed transaction” is a reportable transaction which is identical or substantially similar to a transaction specifically identified as a tax avoidance transaction.

As for threshold amounts, in the case of reportable transactions, it is $50,000, if substantially all tax benefits are provided to natural persons, and $250,000 in other cases. Natural person is construed most broadly, generally ignoring trusts, corporations, and other such entities. For listed transactions, the numbers are $10,000 (previously discussed) and $25,000.

 Lance Wallach speaks and writes about benefit plans, and has authored numerous books for the AICPA, Bisk Total tape, and others. He can be reached at (516) 938-5007 or lawallach@aol.com. For more articles on this or other subjects, feel free to visit his website at www.vebaplan.com.

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

Presented by Lance Wallach, CLU, CHFC, CIMC, a frequent speaker on pensions, VEBAs, financial and estate planning, practice management, and tax-oriented strategies at accounting and financial planning.       

******************************************************************

New Spring/Summer 2008 AICPA CPE Self-Study and On-Site Training Catalog is here!  Best Selling Course From Catalog:

The New Spring/Summer 2008 AICPA CPE Self-Study Catalog is here!  Turn to the AICPA for a wide variety of quality training and educational resources for you and your staff. 

Sid Kess’ Practical Alternatives to Commonly Misused and Abused Small Business Tax Strategies: Insuring Your Client’s Future

Author/Moderator: Lance Wallach, CLU, CHFC, CIMC

Publisher: AICPA

Availability: In Stock

A perfect follow-up to “Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots,” this course was created by the renowned Sid Kess. Learn the best strategies for reducing taxes and building, conserving and passing wealth to the next generation while at the same time avoiding abusive strategies. Utilize retirement planning strategies under the Pension Protection Act and the latest health care financing methods. Advise your clients how to avoid being victims of IRS enforcement of aggressive insurance and retirement products.

Objectives: 

• Identify practical alternatives to abusive tax shelters
• Understand how to integrate financial products as part of a retirement plan
• Discover how to use innovative retirement and financial programs to improve business and personal financial wealth of your clients
• Optimize your value in the planning process between your clients and their financial advisors

Prerequisite: None

A NASBA Field of Study: Taxes

Level: Intermediate

Recommended CPE Credit: 4

Accepted for CFP^® credit.

• Overview
  • Course Objectives
  • Introduction
  • Organization
• Chapter 1 - Planning for Business Owners
  • Learning Objectives
  • Introduction
  • Building the Perfect Retirement Plan
    • SEP IRA: The Good
    • SEP IRA: The Bad
    • SEP IRA: The Ugly
    • The K
    • The Double K
    • Defined Benefit Plans
    • Adding Survivor Benefits
    • 412(i) Defined Benefit Plan
    • Cash Balance Plans
  • VEBAs and 419 Plans
    • Taxability of Trust Net Income
    • Taxability of Excess Benefits
    • Group-Term Life Insurance Plan
    • Post-Retirement Medical Benefit
    • Voluntary Employees Beneficiary Association (VEBA) - Commentary
    • New Development - Welfare Benefit Plans under Section 419(e)
  • Executive Carve Out Long-Term Care
    • What Is Long-Term Care?
    • How Much Does It Cost
    • Benefits of Long-Term Care Insurance to Employees
    • Benefits of Long-Term Care Insurance to Employers
    • Executive Carve Out Long-Term Care
    • Taxability
    • Long-Term Care Insurance Premium Deductibles
    • 2007 Eligible Long-Term Care Insurance Premiums Age-Based Deduction Limits
• Chapter 2 - Personal Financial Planning
  • Learning Objectives
  • Introduction
  • IRA Planning
    • RMDs
    • Stretch IRA
    • Stretch IRA Example
    • Stretch IRA Pitfalls
    • Other Beneficiary Pitfalls
    • Important Questions Your Client Should Ask Their IRA Custodian
    • When a Stretch IRA Might Not Make Sense
    • Taxable Estate
    • Company Stock
    • What Investments Should be In Your Client's IRA?
  • Estate Planning
    • What Makes a Good Estate Plan?
    • Minimizing Taxes
    • Gift Taxes
    • Generation Skipping Tax (GST)
    • Estate Division
    • Insurance Trusts
    • Pay Estate Taxes at a Discount
    • Estate Planning Mistakes of the Rich and Famous
    • Unintended Heirs
    • Estate Tax Problems
    • Incapacity
    • Leaving Money Outright to Children
    • Pension Plan Beneficiary Problems
  • Premium Financing as a Tool to Pay Life Insurance Premiums
    • The Benefits of Premium Financing
    • Type of Premium Financing Arrangements
    • Collateral
    • Interest Rate Risk
    • General Account Universal Life
    • Variable Life Insurance
    • Single Index Life
    • Multiple Index Life
    • Premium Financing Components
    • Loan Options
    • Process
    • Repaying Premium Loans
    • Income Tax Considerations
    • Gift Tax Considerations
    • Estate Tax Considerations
    • Premium Finance Due Diligence
  • Life Settlements
    • Life Settlement History
    • The Life Settlement Market
    • Life Settlement Case Studies
  • The Insurance Swap out Process(TM)
    • Reasons for Using an ISP
    • Why You Would Not Want to Use an ISP
    • Important Considerations
  • Annuities
    • Types of Annuities
    • Non-Qualified Funds in a Tax Deferred Annuity
    • Surrender Charges
    • Tax Rules
    • Sales Abuses
    • Risks
    • Annuity Checklist
• Chapter 3 - Advanced Planning
  • Learning Objectives
  • Introduction
  • Hedge Funds
    • Availability
    • Hedge Fund Risks and Disadvantages
    • Hedge Fund Advantages
    • Hedge Fund Investing Styles
    • Relative Value
    • Event Driven
    • Long/Short
    • Tactical Trading
    • Due Diligence
    • Returns
    • Risks
    • Diversification
    • Hedge Fund of Funds
    • Mutual Funds That Follow Hedge Fund Strategies
    • Tax Implications
  • Private Placement Variable Universal Life Insurance
    • Why High Net Worth Investors Use Hedge Funds
    • Taxation of Life Insurance
    • PPVUL
    • Prospect Profile
    • Practitioner Beware
    • Conclusion
  • International Mortgages
    • How it Works
    • Loan Features
    • Other Considerations
    • Costs
    • Risks
    • Frequently Asked Questions
• Chapter 4 - Health Insurance Planning
  • Learning Objectives
  • Introduction
  • Health Insurance Basics
  • Health Savings Accounts
  • Health Reimbursement Arrangements
  • Other Health Insurance Arrangements
    • Self-Funded Plans and Stop-Loss
    • Limited Coverage and Supplemental Plans
  • Conclusion
  • Appendix A - Qualified Medical Expenses - Distributions from an HSA
  • Appendix B - Health Savings Accounts - Preventive Care, Safe Harbor
  • Appendix C - Sample Sections of an Actual Health Reimbursement Arrangement Summary Plan Document
• Chapter 5 - Ethics Focus: Taxation
  • Ethics Overview
  • Recent Developments
  • Spotlight on Independence in Tax Services
  • Key Ethical Dilemmas and Judgment Calls
  • Addressing Ethical Dilemmas
  • Available Resources
• Chapter 6 - Latest Development

*********************************************************************

A.  I have been writing and speaking about tax, insurance, financial planning and related matters for about 35 years. Because my associates are leading authorities in these fields, I have had great access to cutting edge information that others have wanted. My friends in the industry have also assisted in giving me useful information. Friends like Sid Kess, Esq., CPA, who has lectured to more than 715,000 practitioners on tax, and Ira Kaplan, Esq., CPA, have taught me how to present to audiences. Editors at the AICPA, Bisk, etc. have taught me what readers really want to know. I have just finished two books for Bisk, and two courses for the AICPA. By speaking at national conventions such as those of the American Association of Attorney Certified Public Accountants, the American Society of Pension Actuaries, the National Association of Tax Professionals, and the National Society of Accountants, I have had the opportunity to discuss important issues with IRS officials who were also speaking at these programs.

Q. What brought you to NATP and what keeps you as a member?

A.  Many years ago the National Association of Tax Professionals asked me to speak at their national convention. I found out about how wonderful the organization was, and have been a member since. In fact, many of the conventions that I now speak at are a result of someone seeing me speak at the NATP and recommending me. I have also been privileged to write for the NATP publications. As a result, I have received hundreds of phone calls from members, some of whom have become my friends. I have also enjoyed mentoring members of the organization.

 

Q. What are the biggest challenges facing tax professionals today?

A.  I think the biggest challenge facing tax professionals is the IRS trying to make them policemen. Most tax professionals do not realize that they can now be subject to large fines for nondisclosure of certain activities of their clients. I have authored a few books for the AICPA on these issues. In fact, allowing an item on a client’s tax return that turns out to be a listed transaction can be disastrous. This can happen even if the item became listed after the fact, and even if the tax professional never knew that it was listed or abusive. I have spoken at hundreds of conventions about abusive products that clients are buying. Most professions think that these products are legitimate, or think that they are retirement plans, etc. Without further education, the Tax Pro can lose his or her career, not to mention being sued.

Q. What are your goals for the future personally and for your career?

A.  Most of my extra time is now spent helping tax professionals get their clients out of abusive or just bad financial products. I think that will involve more of my future time.

Q. Did you ever have a "defining moment," an embarrassing moment, or another memorable experience related to your career as a tax preparer?

One of my most memorable experiences was being named the National Society of Accountants “Speaker of the Year”.

 

Lance always welcomes hearing from NATP members.

Section 79, Captive Insurance, 419,412i Plans

Don't go to Arbitration Sue

  Lance Wallach

                                                          

Thomas, Francis, Edward, and Dolores Ehlen¹("the Ehlens") are employees of Ehlen Floor Covering, Inc. ("Ehlen Floor"). In 2002, Ehlen Floor created a 412(I) employee benefit pension plan, the Ehlen Floor Coverings Retirement Plan ("the Plan"), with the help of advisors and administrators. IPS, a corporation specializing in pension plan design and administration for small businesses, took over as the Plan administrator at the start of 2003. As part of the commencement of IPS's services, Edward Ehlen, in his capacity as president of Ehlen Floor, signed an Arbitration Addendum ("AA") attached to an Administrative Services Agreement ("the Agreement") between IPS and Ehlen Floor. The AA called for arbitration of "any claim arising out of the rendition or lack of rendition of services under [the] [A]greement." The Agreement provided a list of available services that IPS could provide, such as performing annual reviews of the Plan, making amendments, and preparing annual report forms. The Agreement also stated that Ehlen Floor would indicate in Section VI of the Agreement which of the available services it desired for IPS to actually perform. There is no Section VI in the Agreement, nor is there any testimony or evidence that plaintiffs ever viewed a Section VI of the Agreement.

Shortly after IPS stepped in as administrator of the Plan, it became aware that the Plan was not in compliance with several Internal Revenue Service ("IRS") rules and regulations. IPS contends that it drafted an amendment to correct these flaws, but the amendment was never officially adopted. In 2004, the IRS promulgated new rules explaining that it would consider 412(i) plans with beneficiary payout limitations to be listed transactions², possibly subject to serious penalties. The rule required any plans that could be considered listed transactions to file Form 8886 to avoid potential penalties. IPS drafted another amendment to the Plan after determining that the Plan would likely be classified as a listed transaction under the new rules. Ehlen Floor was not informed about the pre-rule tax problems, the existence of the new rule, the additional filing requirements that the new rule imposed, or the drafting of the new amendment. The IRS instigated an audit on March 6, 2006, found the Plan to be non-compliant, and ultimately assessed significant penalties against Ehlen Floor.

In August 2007, plaintiffs filed a complaint in state court against a number of parties involved with the creation and initial administration of the Plan, asserting claims of negligence, fraudulent and negligent misrepresentation, negligent supervision, breaches of fiduciary duties, and unfair and deceptive trade practices. The case was removed to federal court on the basis of preemption under ERISA. In May 2009, as requested by the court, plaintiffs recast their complaints as federal matters in their Second Amended Complaint, but plaintiffs contested the removal and argued against federal jurisdiction. IPS was added as a defendant in the Second Amended Complaint. IPS then moved to compel arbitration of the dispute, claiming that the terms of the AA govern the matter. The district court denied the motion. IPS appeals; plaintiffs cross-appeal to challenge the existence of federal jurisdiction.

II. STANDARD

 Innovative Pension Strategies, Inc. ("IPS") appeals the district court's denial of its motion to compel arbitration and stay plaintiffs' claims against it. Plaintiffs cross-appeal, disputing the preemption of their claims under the Employment Retirement Income Security Act ("ERISA") and alleging a lack of federal jurisdiction. We find that jurisdiction is proper and affirm the district court's denial of IPS's motion to compel arbitration.

We therefore affirm the district court's denial of IPS's motion to compel arbitration and to stay plaintiffs' claims against it.

Lance Wallach can be reached at: WallachInc@gmail.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, wallachinc@gmail.com or visit www.taxadvisorexperts.com.

 

Lance Wallach
68 Keswick Lane
Plainview, NY 11803
Ph.: (516)938-5007
Fax: (516)938-6330 www.vebaplan.com

National Society of Accountants Speaker of The Year


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.

 

 

NCCPAP November 2010

Newsletter 2010

 

Business Owners in 419, 412i, Section 79 and Captive Insurance Plans Will Probably Be Fined by the IRS Under Section 6707A

by Lance Wallach

 

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 the taxpayer does not necessarily have to make a contribution or claim a tax deduction to be deemed to participate. Section 6707A of the Code imposes severe penalties ($200,000 for a business and $100,000 for an individual) for failure to file Form 8886 with respect to a listed transaction. But a taxpayer can also be in trouble if they file incorrectly. I have received numerous phone calls from business owners who filed and still got fined. Not only does

the taxpayer have to file Form 8886, but it has to be prepared correctly. I only know of two people in the United States who have filed these forms properly for clients. They told me that the form was prepared after hundreds of hours of research and over fifty phones calls to various IRS personnel. The filing instructions for Form 8886 presume a timely filing. 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 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

they 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 the deductions

taken in prior years. 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. It follows that taxpayers who no longer enjoy the benefit of those large deductions are no longer “participating” in the listed transaction.

 

But that is not the end of the story. 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. This language may provide the taxpayer with a solid argument in the event of an audit.

 

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; speaks at more than ten conventions annually; writes for over fifty publications; is quoted regularly in the press; and has been featured on TV and radio financial talk shows. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams (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.taxadvisorexperts.org or www.taxlibrary.us.or www.vebaplan.org, www.lancewallach.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.

 

Lance Wallach
68 Keswick Lane
Plainview, NY 11803
Ph.: (516)938-5007
Fax: (516)938-6330 www.vebaplan.com

National Society of Accountants Speaker of The Year


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.