Watch out because the IRS is watching 419 Plans

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     By Lance Wallach, CLU, CHFC 

A business owner wants legitimate tax planning ideas. One solution sometimes offered today is a 419(e) plan (419 Welfare Benefit Plan). The local insurance agent or the company’s CPA who may have an insurance sales license, may suggest that the 419 Welfare Benefit Plan will provide shelter from taxes today, the costs of the plan are tax deductible and the plan will provide tax free benefits for the owner when he or she is ready to retire. The concept seems too good to be true.

Watch out because the IRS is watching, and it often says that the plan is too good to be true.

A 419 Welfare Benefit Plan is generally a plan set up in the form of a trust to provide certain benefits to the employees of a company. You will notice that the term trust is used because the large whole life insurance policies that the owner is instructed to buy go into a trust where neither the company nor the business owner actually owns them. The trust owns the policies.

The insurance agent or CPA wants you to set up a 419(e) plan because you are agreeing to buy high dollar life insurance with premiums payable until you retire. That can generate fees of up to 125% of the first year premium as a commission – that’s right; you read that correctly – 125%.

The plan is sold as a win-win for everyone. It is for the insurance company because it locks the business owner into long-term, expensive insurance. It is for the trust administrator (remember: the insurance policies must be put into a trust to make the plan work) because the business owner has to pay a fee every year to administer the plan. But for the business owner? Maybe not so much!

The big sales pitch often is that the contributions are tax deductible to the business and the business can exclude employees. Moreover, the seller promises that the big insurance policies that are paid for with tax free money can be cashed out or transferred from the trust to the business owner at some later date without paying taxes. It is all so easy: no taxes in and no taxes out. Good right?

Unfortunately, it is often too good to be true. The IRS has been actively attacking such 419 Welfare Benefit Plans as TAX SHELTERS. If a transaction is classified as a tax shelter then the salesperson and your CPA are supposed to tell you to file an 8886 form which highlights tax shelters to the IRS. Think of it as a beacon so that the IRS knows who to come pursue for taxes, penalties, interest and listed transaction charges.
The IRS focus on 419(e) plans came up in a case identified as Curcio v. Commissioner of Internal Revenue, T.C. Memo 2010-115.

The end result was a financial disaster for the company that took the ordinary business deductions for the plan and the individual taxpayers that also took deductions on their personal taxes.
If something goes wrong on one of these plans (as it often does) who does the business owner look to? The insurance company will claim in defense that it simply sold insurance. The agent or the CPA will claim that it was the responsibility of the third party administrator (TPA) to make sure that the plan was solid and lawful. The TPA will claim that the business owner is not the owner of the product and cannot sue because it was in a trust. The business owner is often left facing the IRS on his or her own while paying other professionals to correct the tax situation.
If you are a business person in a 419(e) plan you should contact Lance Wallach.

ABOUT THE AUTHOR: Lance Wallach
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.

Copyright Lance Wallach, CLU, CHFC
More information about Lance Wallach, CLU, CHFC

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or le

Why You Should Stay Away from Section 79 Life Insurance Plans

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     By Lance Wallach, CLU, CHFC 

I’ve had several calls lately from doctors who are being pitched Section 79 plans and are wondering if these plans are any good. The doctors are being told that Section 79 plans are the best wealth-building tool they can use to reduce their income taxes and create a tax-free retirement income.

Unfortunately for these unsuspecting doctors, what they don’t know is that not only are Section 79 plans not the best wealth-building tool they can use, they are not even a good wealth-building tool. 

I have problems with Section 79 plans for several reasons: 

1. You have to lie to employees to implement them. Most try to exclude workers.

2. The life illustrations given by ignorant or crooked insurance agents are not realistic. Most use today’s historically low lending rates with 2 percent to 3 percent loan spreads on variable loans on EIUL policies (ones that do not have a fixed lending rate). 

3. You have to be a C-corporation to use them. Many agents don’t inform their clients of this.

4. The life policies sold in these plans are so bad that the companies don’t want them sold unless they are in Section 79 plans. (The policies are designed to have poor performance so the deduction is increased.) This is similar to the springing cash value problems with the 412i and 419 plans that got people audited and sued.

5. Another very good reason not to use these plans is because there are better alternatives. 

6. Another reason not to use a Section 79 plan is because when you run the real numbers, the client would be better off not funding the plan, taking his/her money home after taxes, and funding a good no load EIUL policy. 

7. The IRS audits many of them and unless you properly file under IRC 6707A the fines are very large.

ABOUT THE AUTHOR: Lance Wallach
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 more than 50 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.

Copyright Lance Wallach, CLU, CHFC
More information about Lance Wallach, CLU, CHFC go to lancewallach.com

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

Captive Insurance Plans, Want to Get Audited?

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     By Lance Wallach, CLU, CHFC 

The insurance industry have been conjuring ways to make life insurance premiums tax deductible. Over the years we have seen many schemes that have failed IRS scrutiny. Welfare benefit plans set up under I.R.C. section 419, 412(e) plans and Producer Owned Reinsurance Companies (PORCs) are all common examples.

When one scheme fails it isn’t long before a resourceful promoter comes up with a different product. Inevitably promoters find some lawyer or accountant to draft a favorable opinion letter and a new industry is born. In a few years, however, the IRS catches up and declares the arrangement to be a listed transaction and abusive tax shelter. As an expert witness I have never lost a case in this field. It is easy to beat the deep pockets of the insurance companies who provide product to these plans. Even though they have business owners sign fraudulent disclaimers saying that the owners will get their own tax advice. These disclaimers are then used when the inevitable happens, the IRS audits and the business owner sues the insurance company.
The latest entries seeking to find a way to make life insurance premiums deductible is a small business captive insurance company or CIC.

How do they work and what will the IRS do? Great questions.

Congress has long given special tax considerations to life insurance. IRC section 101(a) provides that life insurance death benefits can be paid to the beneficiaries’ tax free. The IRS also allows the investment gains of the policy to grow tax free on whole life policies until retirement. If a whole life policy is held until death, the gains are completely tax free.

Clearly Congress ‘legislative intent is to provide tax breaks on the back end. For some promoters, however, that isn’t enough. Unfortunately the IRS has been very diligent in shutting down life insurance products that provide tax benefits on both ends.
The newest product under scrutiny is a small business captive insurance company. The theory behind these CICs is that the business will form a captive to insure against some type of business risk. The CIC then invests its money by purchasing life insurance on the owner’s life. Even though the money is being invested in personal life insurance policies, promoters suggest that the funding of the captive is an ordinary and reasonable business expense (26 USC sec 162).

On paper, the transaction seems legitimate. The business is insuring itself against some type of risk. The CIC is using life insurance as an investment. While each component may be acceptable under the Internal Revenue Code, the practical reality is that the IRS still views them as a subterfuge and therefore void.

IRC sec. 264(a)(1) states the general proposition that life insurance premiums are not deductible if the taxpayer is a direct or indirect beneficiary under the policy. Notwithstanding the recent popularity of these and similar plans, the IRS has been quite assertive in rebuffing these attempts. To date, the courts usually side with the Service as well.

On paper, CICs are the perfect tax shelter. The business can set up a captive insurance company to insure against a legitimate business risk. That means the premiums are a valid business expense and thus deductible. The captive can exclude over a million dollars a year of premiums. And the captive has the ability to invest its premium money to earn a return.

Where things can get dicey is when the captive invests in life insurance on the business owner’s life. Remember, those dollars are still pre-tax.

It all sounds perfect and there are some promoters out there ready to tell you exactly how perfect and legitimate it really is.
If you think this article ends here, it doesn’t. Before going the captive route – and there are legitimate captives – speak to a good CPA or tax attorney. If created for legitimate insurance purposes, a captive insurance company offers many benefits; including tax minimization, lower insurance costs and even the unavailability of certain types of coverage. Use premiums to purchase life insurance on the owner’s life and trouble will follow.

Why? Here are some reasons.

The IRS looks to see if a transaction is arm’s length, if the purpose is tax avoidance and if there is a legitimate business purpose for the transactions.

Second, the IRS strongly holds on to its policy of no deductions for life insurance premiums. We have seen several 419 welfare benefit plans fail despite great sounding legal opinion letters.

For many years, promoters have marched out slick new products designed to allow individuals to deduct life insurance premiums. Since at least 1995, the IRS has warned that these devices are potential abusive tax shelters and listed transactions. A captive insurance company can be an important and legitimate money saving tool for business. Extreme caution must be used if the captive and its owners decide to invest in certain life insurance contracts, however.

Although deducting life insurance premiums for business owners is still doubtful, a very recent U.S. The tax Court opinion suggests that the courts are willing to be open minded if a captive is properly structured.

In the 2014 Rent-A-Center, Inc. case, a majority of the court ruled that payments by a parent company’s wholly owned subsidiaries to a wholly owned captive were deductible insurance expenses. Previously the Tax Court upheld the IRS’ determination that such expenses were not deductible in “brother sister” captive insurance arrangements.

I have helped hundreds of business owners who have had IRS problems with 419 welfare benefit plans, 412i and section 79 plans. I am just starting to get phone calls on captive insurance plans.

If you are planning to create a captive for the sole purpose of investing in life insurance, contact someone that knows what they are doing and file under IRS code 6707A to reduce fines. Failure to report a listed transaction can involve huge civil penalties. These penalties are in addition to any other tax, interest and penalties attributable to disallowed deductions and accuracy penalties.

ABOUT THE AUTHOR: Lance Wallach
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.

Copyright Lance Wallach, CLU, CHFC
More information about Lance Wallach, CLU, CHFC

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

Don't Get Caught in Section 79 Trap One doctor almost lost everything.....

Don’t Get Caught in Section 79 Trap
One doctor almost lost everything ………..




In 2006 Doctor X found himself in what he thought was 
the pleasant position of having a substantial amount of 
cash on hand that was not essential to the operation of 
his practice. That comfortable feeling did not last long. 
He quickly fell prey to a predatory insurance agent who 
sold him on the idea of Section 79 scam as a vehicle to 
obtain tax deductions. Of course what really interested 
the insurance agent was the funding vehicle, a large 
life insurance contract with American General as the 
insurance carrier, which just happened to net the 
agent a large commission.


Unfortunately, the large, questionable tax deductions 
claimed by Doctor X indeed attracted the attention of 
the IRS. As a result of their audit, the IRS not only 
disallowed all of the tax deductions, but also imposed 
back taxes, an array of penalties, and interest, turning 
the doctor’s anticipated investment vehicle into 
something that could cost him everything he was 
saving and more. As if that weren’t bad enough, even 
that Draconian action was not the end of the story.


None of his so-called financial advisors had told Doctor 
X about IRC Section 6707A. Under this section of the 
Code, huge fines can be imposed on those who fail to 
inform the Service about participation in listed or 
reportable transactions, or transactions substantially 
similar to listed transactions. Loosely defined, a 
reportable transaction is any transaction that has the 
potential for tax avoidance or evasion. Since he had no 
knowledge of this requirement, the doctor did not make 
the proper filings under Section 6707A, and is now 
also being threatened with monstrous fines for that 
failure to submit the proper forms in the proper format.


Although these issues had the potential for great 
disaster and great financial loss for this doctor, all the 
anxiety and stress he has been suffering over this 
matter may soon have a happier ending than he 
expected at its onset because he had the sense to 
contact us for help, perhaps just in the nick of time. As 
a result of putting experts with a great deal of 
experience on his case, he now stands an excellent 
chance of having at least some of the penalties from 
the original audit abated. He will probably be able to 
recover the money that he sank into that large 
American General life insurance contract as well. 
Sometimes a properly worded letter to the insurance 
company is all it takes. Last, but certainly not least, 
Doctor X also has an excellent chance of avoiding the 
large Section 6707A penalties, as our experts in the art 
of filing late without paying fines are currently at work 
on that as well.


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.

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