The IRS and U.S. Department Justice Department have a special relationship with welfare benefit plan promoters and the brokers and insurance agents that sell them. They hate them. For over a decade, the IRS has declared that many welfare benefit plans are fraudulent and abusive tax shelters. Many of the promoters are now out of business or under criminal investigation (or both). Last month’s announcement by DOJ of new enforcement actions within the “industry” therefore comes as no surprise. The customers who bought these plans, however, might be in for a rude awakening. Huge taxes and maybe even criminal prosecution.
Last month the government took action against Tracy L. Sunderlage and his wife, Linda Sunderlage, SRG International, Ltd., of Nevis, West Indies, and three related Illinois companies – SRG International U.S. LLC, Maven U.S. LLC and Randall Administration LLC . Prosecutors say they improperly helped high income taxpayers avoid taxes by funneling monies into phony welfare benefit plans. These plans are often known as 419 plans based on a provision found in section 419 of the tax code. (The Sunderlages mostly called their plans Employee Benefit Plans, Maven Structures or PBT Multiple Employer Plans- same basic concept with a different name; the IRS says they are all scams.)
Although there are legitimate plans in existence, the IRS contends that many welfare benefit plans have been vehicles for rampant tax abuse. In one common tax avoidance scheme, employers pay excessive contributions to purported welfare benefit funds that obtain cash value insurance policies or otherwise set the money aside for the company owners’ future benefit. In doing so, the companies are not really contributing for their business or the benefit of the employees, but rather, are either distributing excess corporate profits or providing deferred compensation to their owners and, in the process, avoiding current federal taxes.
Lest you think the IRS is wrongfully singling out the Sunderlages, the husband and wife couple are no strangers to legal problems. Although Tracy Sunderlage is licensed to sell insurance, prosecutors say that he has a long history of compliance issues.
419 plan litigationThe IRS says Tracy Sunderlage has been sued by clients on multiple occasions. T
Question. What is the general IRS position on these plans?
Answer. Though there can be some differences among plans, the basic IRS position is that the plans are not welfare benefit plans, but really plans of deferred compensation. As such, the contributions remain deductible at the business level but are included in the owner’s 1040 income for every open year and the value of the insurance policy with respect to contributions in closed years is included in the owner’s income either in the first open year or the year of termination or transfer. The IRS will normally apply 20% penalties on the tax applied and 30% with respect to nonreporting cases (see discussion below).
Question. Is there a benefit to representing multiple taxpayers of the same promotion?
Answer. We believe there is. By representing large numbers of participating employers in a promotion, not only do we get a very detailed understanding of the promotion, but we have a chance to negotiate on a group basis with the IRS Examination Division, Appeals Division and ultimately the IRS Issue Management Team. We also have the efficiencies of responding to IRS template documents such as 30 day letters and 90 day (statutory deficiency) letters with our protests and petitions that benefit from a standard template. We also have the opportunity to learn of the best settlements and make sure that all of our clients receive the best deal from the IRS. From a litigation standpoint, we have the opportunity to observe the best fact cases for purposes of making those be chosen as the first cases litigated.
Question. Can the penalties ever be waived?
Answer. Yes. The penalties can often be waived upon a showing of the taxpayer’s due diligence and good faith reasonable cause. For example, if the taxpayer can show reliance on an outside tax advisor who reviewed the plan and the law, the Examining Agent normally has the authority to waive the 20% negligence penalty. Note that there are different standards for waiving penalties among the IRS Offices. It is important to know the standards of each office before requesting a waiver.
The IRS and U.S. Department Justice Department have a special relationship with welfare benefit plan promoters and the brokers and insurance agents that sell them. They hate them. For over a decade, the IRS has declared that many welfare benefit plans are fraudulent and abusive tax shelters. Many of the promoters are now out of business or under criminal investigation (or both). Last month’s announcement by DOJ of new enforcement actions within the “industry” therefore comes as no surprise. The customers who bought these plans, however, might be in for a rude awakening. Huge taxes and maybe even criminal prosecution.
ReplyDeleteLast month the government took action against Tracy L. Sunderlage and his wife, Linda Sunderlage, SRG International, Ltd., of Nevis, West Indies, and three related Illinois companies – SRG International U.S. LLC, Maven U.S. LLC and Randall Administration LLC . Prosecutors say they improperly helped high income taxpayers avoid taxes by funneling monies into phony welfare benefit plans. These plans are often known as 419 plans based on a provision found in section 419 of the tax code. (The Sunderlages mostly called their plans Employee Benefit Plans, Maven Structures or PBT Multiple Employer Plans- same basic concept with a different name; the IRS says they are all scams.)
Although there are legitimate plans in existence, the IRS contends that many welfare benefit plans have been vehicles for rampant tax abuse. In one common tax avoidance scheme, employers pay excessive contributions to purported welfare benefit funds that obtain cash value insurance policies or otherwise set the money aside for the company owners’ future benefit. In doing so, the companies are not really contributing for their business or the benefit of the employees, but rather, are either distributing excess corporate profits or providing deferred compensation to their owners and, in the process, avoiding current federal taxes.
Lest you think the IRS is wrongfully singling out the Sunderlages, the husband and wife couple are no strangers to legal problems. Although Tracy Sunderlage is licensed to sell insurance, prosecutors say that he has a long history of compliance issues.
419 plan litigationThe IRS says Tracy Sunderlage has been sued by clients on multiple occasions. T
Question. What is the general IRS position on these plans?
ReplyDeleteAnswer. Though there can be some differences among plans, the basic IRS position is that the plans are not welfare benefit plans, but really plans of deferred compensation. As such, the contributions remain deductible at the business level but are included in the owner’s 1040 income for every open year and the value of the insurance policy with respect to contributions in closed years is included in the owner’s income either in the first open year or the year of termination or transfer. The IRS will normally apply 20% penalties on the tax applied and 30% with respect to nonreporting cases (see discussion below).
Question. Is there a benefit to representing multiple taxpayers of the same promotion?
Answer. We believe there is. By representing large numbers of participating employers in a promotion, not only do we get a very detailed understanding of the promotion, but we have a chance to negotiate on a group basis with the IRS Examination Division, Appeals Division and ultimately the IRS Issue Management Team. We also have the efficiencies of responding to IRS template documents such as 30 day letters and 90 day (statutory deficiency) letters with our protests and petitions that benefit from a standard template. We also have the opportunity to learn of the best settlements and make sure that all of our clients receive the best deal from the IRS. From a litigation standpoint, we have the opportunity to observe the best fact cases for purposes of making those be chosen as the first cases litigated.
Question. Can the penalties ever be waived?
Answer. Yes. The penalties can often be waived upon a showing of the taxpayer’s due diligence and good faith reasonable cause. For example, if the taxpayer can show reliance on an outside tax advisor who reviewed the plan and the law, the Examining Agent normally has the authority to waive the 20% negligence penalty. Note that there are different standards for waiving penalties among the IRS Offices. It is important to know the standards of each office before requesting a waiver.