by Brian Mahany
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.
The IRS says Tracy Sunderlage has been sued by clients on multiple occasions. Two years ago a Nebraska state court judge sanctioned him in a related employee benefit case and noted his “delay, misstatements of fact, and harassment with respect to that lawsuit”, his “willful disregard of Orders” made by the Court, and his protraction of the litigation in a manner that was “both unnecessary and wasteful.”
In 1986, the SEC obtained a permanent injunction against Sunderlage after finding he misrepresented the risks of an investment, was dishonest about his commissions, failed to disclose potential conflicts of interest, and misrepresented expected returns on investments.
Apparently his definition of “permanent injunction” is not the same as mine as mine. After the 1986 injunction the feds say he participated in a massive tax evasion scheme known as Aegis. We have represented several clients who were scorched by the Aegis promoters and lost hundreds of thousands of dollars relying on their advice.
Somehow Sunderlage slipped through the cracks and was never sent to prison.
What does this mean for someone holding one of these questionable plans? Seek competent tax counsel or a CPA immediately.
The IRS has long declared these type plans to be subject to abuse. While the promoters of these plans always claim differently, the courts have sided with the IRS. As early as 1995 the IRS warned taxpayers that these plans are often abusive transactions. In 2007, the IRS said that purported single employer plans or 419(e) involving cash value life insurance are “listed transactions.” That means the IRS says they are so subject to abuse that both you and your advisor must specially declare the existence of the plan or face huge penalties, even if the plan itself is subsequently found to be legal.
The IRS routinely audits anyone holding one of these plans. Many are disallowed. With the imposition of listed transaction and fraud related penalties, the economic consequences are huge. Just having an undisclosed or disallowed plan alone could involve a $100,000 or $200,000 penalty for each year the plan is held or funded.
In addition, if the IRS believes you purchased the plan with the intent to evade taxes, the penalties could involve federal prison. The line between “avoid” and “evade” is often quite blurry. Why chance things?
If you have one of these plans, it is not enough that the promoter who sold you the plan produced a legal opinion. Because the abuse within the industry is so rampant, many promoters have obtained “legal opinions” saying the plan isn’t a 419 plan or isn’t a listed transaction. The IRS, of course, is not bound by these opinions. They say if it quacks like a duck, it’s a duck meaning the name of the plan or the opinion doesn’t carry much weight.
Promoters or professional advisers who assisted you with the plan may be responsible for your damages. There are several cases where insurance agents or tax advisers have been held responsible for the legal expenses and huge IRS penalties incurred by their client.
If you have one of these plans, it is imperative that you seek advice from a tax attorney or CPA knowledgeable about welfare benefit plans. Most lawyers and accountants don’t and many a good accountant has been burned by these same promoters and bogus legal opinions.
The tax lawyers and Mahany & Ertl concentrate in helping victims of abusive tax shelters unwind the transaction and recover their losses. For a confidential consultation, contact attorney Brian Mahany at (414) 704-6731 or by email at firstname.lastname@example.org
Mahany & Ertl, LLC – America’s Tax Lawyers and America’s Fraud Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine and San Francisco, California. Services nationwide.Find me on Google +!