BETA Plan Strategy

Starting in 2001, and continuing through 2007, Plaintiffs made annual contributions of $40,000 to the BETA Plan and, "as advised by Rau and Defendants Moritt ... and Designs," claimed the same amount as annual tax deductions. (Id. ¶¶ 4041.) In 2003, the IRS issued stricter regulations on multiple-employer benefit plans under Section 419A(f)(6) of the IRC. (Id. ¶ 34.) In response to those regulations, Designs signed a BETA Plan Severance Agreement, effective January 1, 2003, that effectively transformed the BETA Plan from one multiple-employer plan ("MEP") into several single-employer plans ("SEP"). (Id. ¶¶ 34, 43.) This change in plan structure resulted in a split-dollar life insurance arrangement for plan participants, pursuant to which plan benefits would be separated between employers and shareholder-employees. (Id. ¶ 34.)

In February 2004, Rau sent a letter to Winebrenner (who presumably forwarded the letter to Plaintiffs, as they have attached the letter to their Second Amended Complaint) stating that the IRS regulations had made the BETA Plan strategy "stronger than ever." (Id. ¶ 42, Ex. C.) Plaintiffs allege, instead, that the changes made the plan strategy riskier, and that Designs should have been aware of the risks associated with the regulations and alerted Plaintiffs to such risks. (Id. ¶ 42.) In December 2004, the BETA Plan Administrator sent plan participants a letter notifying them of the plan's re-characterization as a SEP, as described above. (Id. ¶ 45.) The letter informed Plaintiffs that the changes did not affect them and were made for compliance purposes only. (Id.) Plaintiffs allege, however, that such changes "solidified the [BETA] Plan as a deferred compensation plan rather than the legitimate welfare benefit plan it was [785 F.Supp.2d 242] marketed to be," (id. ¶ 35); that, under the new plan structure, plan participants' contributions were subject to funding limitations that rendered Plaintiffs' contributions no longer tax-deductible, (id. ¶¶ 34, 43); and that, had they been properly informed of how to comply with the IRS regulations, they would not have claimed plan contributions as deductions, and would have paid the necessary taxes on such contributions, (id. ¶ 46).

Captive Insurance Bogus Risk Pools

Captive Insurance Bogus Risk Pools

Lance Wallach | LinkedIn

Lance Wallach | LinkedIn

How to Avoid IRS Fines for You and Your Clients

n; the insurance agent is motivated by a substantial commission.

A few years ago, I testified as an expert witness in a case in which a physician was in an abusive 401(k) plan with life insurance. It had a so-called "springing cash value policy" in it. The IRS calls plans with these types of policies "listed transactions." The judge called the insurance agent "a crook."

If your client was currently is in a 412(i), 419, captive insurance, or Section 79 plan, they may be in big trouble. Accountants who signed a tax return for a client in one of these plans may be what the IRS calls a "material advisor" and subject to a maximum $200,000 fine.

If you are an insurance professional who sold or advised on one of these plans, the same holds true for you.

Section 79 scams

The attack on 412(i) and 419 plans has been going on for some time now, but the IRS will likely begin cracking down on Section 79 plans more heavily in the near future. So what is a Section 79 plan? It is a tax plan where small-business owners are told that they're allowed to take a tax deduction through their businesses in order to purchase life insurance. That sounds pretty good, doesn't it? When you break down the math and the sales pitch, however, it just doesn't make sense.

Agents try to sell Section 79 plans for two simple reasons:

1. Many small business clients will buy any plan that is "deductible" because they hate paying income taxes.
2. Insurance advisors want to sell life insurance.

This brings up an interesting issue: If the plan is marginal from a wealth-building standpoint, then why are agents selling it? Again, there are two reasons:

1. Most advisors have not broken down the math so they can come to a correct conclusion, which is that the plans are not worth implementing from a pure financial standpoint.
2. Some advisors know the plan is marginal from a financial standpoint and don't care because they know they can still sell it to business owners who are looking for deductions. The IRS considers them abusive, and will audit them.

How to avoid the fines

In order to avoid substantial IRS fines, business owners and material advisors involved in the sale of any of the above type plans must properly file under Section 6707A. Yet filing often isn't enough; many times, the IRS assesses fines on clients whose accountants did file the form yet made a mistake - an error that usually results in the client being fined more quickly than if the form were not filed at all.

Everyone in a Section 79 should file protectively under Section 6707A - and anyone who has not filed protectively in a 419 or 412(i) had better get some good advice from someone who knows what is going on, and has extensive experience filing protectively. The IRS still has task forces auditing these plans, and will soon move on to Section 79 scams, including many of the illegal captives pushed by the insurance companies and agents (though not all captives are illegal).

As an expert witness in many of cases involving the 412(i) and 419, I can attest that they often do not go well for the agents, accountants, plan promoters, insurance companies, and other involved parties.

Here is one example: Pursuant to a settlement with the IRS, a 412(i) plan was converted into a traditional defined benefit plan. All of the contributions to the 412(i) plan would have been allowable if they had initially adopted a traditional defined benefit plan. Based on negotiations with the IRS agent, the audit of the plan resulted in no income and minimal excise taxes due.

Toward the end of the audit, the business owner received a notice from the IRS. The IRS had assessed a $400,000 penalty for the client under Section 6707A, because the client allegedly participated in a listed transaction and failed to file Form 8886 in a timely manner.

The IRS may call you a material advisor for selling one of these plans and fine you $200,000.00. The IRS may fine your clients over a million dollars for being in a retirement plan, 419 plan, etc. Anything that the Service deems, at its sole discretion, a "listed transaction" is fair game. As you read this article, hundreds of unfortunate people are having their lives ruined by these fines. You may need to take action immediately.

BETA Plan

A. FACTS

For the purposes of the instant motions, the Court assumes the facts, although not the legal conclusions, in the Second Amended Complaint to be true. Plaintiff Leland Eaves is a Colorado resident and the owner of Plaintiff Cando Consultant Services, Inc. ("Cando"), a Florida-based construction services company. (SAC ¶¶ 89.)¹ Plaintiffs allege that in the late 1990s and early 2000s, Defendants Designs for Finance, Inc. ("Designs"), Moritt, Hock, Hamroff & Horowitz LLP ("Moritt"), and Prusky Law Associates, P.C. ("Prusky") devised a scheme to market and sell illegal tax shelters, including, and most notably for the purposes of this case, the BETA Multiple Employer Death Benefit Plan (the "BETA Plan"). (Id. ¶¶ 1, 31.) Despite knowing it to be an illegal tax shelter, Defendants represented the BETA Plan as a legitimate multiple-employer welfare benefit plan under Section 419A(f)(6) of the Internal Review Code ("IRC"). (Id. ¶ 2.) Such plans are funded through the purchase of life insurance and annuities, and their purpose is to fund the insurance needs of the small businesses that buy into them. (Id. ¶ 32.) As such, the Internal Revenue Service ("IRS") permits participating businesses to take tax deductions for contributions to the plan — but only to the extent that such contributions are for legitimate insurance needs, not as a form of deferred compensation. (Id.)

Designs acted as the BETA Plan Sponsor and, in that capacity, created and "primarily advocated" for the plan. (Id. ¶¶ 2, 36a.) Knowing that the IRS considered plans structured similarly to the BETA Plan to be illegal tax shelters, Designs opted not to obtain a private letter ruling from the IRS regarding the plan; instead, it sought legal analysis from Defendant Moritt, a New York-based law firm. (Id. ¶¶ 6, 12.) Despite knowing that, as Plaintiffs allege, "IRS laws were not strong and that it was skating on thin ice by approving the BETA Plan," Moritt endorsed the plan in a 54-page opinion letter to Designs dated September 24, 2000-a letter, Plaintiffs allege, that contained "questionable analysis of IRS code and case law." (Id. ¶¶ 6, 36b.)

In July 2001, Plaintiffs' accountant Jack Winebrenner suggested to Eaves that he look into the BETA Plan for use with his small business, Cando. (Id. ¶ 37.) Winebrenner had received information regarding the plan from John Rau, an agent of CNA, one of the plan's marketers and funders, who himself had received information from Designs. (Id. ¶ 38.) Winebrenner prepared a packet of information for Plaintiffs (the "BETA Plan Sales Packet"), which included a letter from Rau, an overview of the plan, questions and answers regarding the plan, cost information, and Moritt's September 24, 2000 opinion letter to Designs. (Id. ¶¶ 3839, Ex. B.) After reading through the BETA Plan Sales Packet, which Plaintiffs allege was "endorsed" by both Designs and Moritt, Plaintiffs decided to enroll in the BETA Plan in October 2001. (Id. ¶ 40.)

Specializing in IRS Audit Defense

Our team of experienced consulting "tax attorneys", CPAs, and "insurance experts" specializing in Beta Plans 412i" and "419 "IRS  audits" that resulted from plans you sold to your clients, mainly "419 plans", "412i plans", "captive insurance" plans and "Section 79" plans as well as other similar "employee benefit plans" or "welfare benefit plans" that the IRS is targeting as "abusive tax shelters".

Our firm has been successful in "defending life insurance agents" and "material advisors" who have participated in the sale of these "benefit plans".

If you signed a return or participated in the sale of these "welfare benefit plans", you are probably a "material advisor" and subject to huge "IRS penalties and interest". No "Form 8886" or "Form 8918" that we have reviewed for new clients has been properly prepared, which leaves the "material advisor" subject to the $200,000 "IRS penalty".

We fight for our clients to defend against the $200,000 IRS "6707A penalty" by providing "expert witness testimony".  Lance's side has never lost a case!