by Brian Mahany
Welfare benefit plans are a hot topic with the IRS these days. Huge penalties – up to $200,000 per year, criminal investigations, civil suits and many, many scams.
Because we are both tax attorneys and asset recovery lawyers (fraud recovery), we see many welfare benefit plan cases. Obviously, each case is unique but they do tend to fall into three categories:
* Phony Plans
* Plans That Don’t Do Provide The Tax Breaks Promised
* Plans That Don’t Let You Out
Each is a fraud and scam, although in much different ways.
To date we have recovered monies for two individuals that had purchased phony plans. These are cases of outright theft. In one case the fraudster was shot and killed a year after we obtained a refund for our client. Evidently, that unlucky con man probably stole from the wrong person.
Totally phony plans are thankfully rare.
Next are the plans that don’t deliver the tax breaks promised. The IRS takes a dim view of most welfare benefit plans. Whether or not they are legal, the IRS calls them abusive tax shelters and considers them listed transactions. If you invest in one, expect an audit and expect to lose. The bulk of the plans fall into this category.
These are the plans that result in huge assessments of tax, interest and penalties. In most cases we can recover the money from the plan and unwind the transaction. Participants may also have remedies against the promoter of the plan and those that sold the plan (frequently stockbrokers, insurance agents and financial planners).
The final category involves deceptive advertising. Many of these plans advertise how they provide valuable disability benefits and the like. They also tell prospective clients that they can have access to their investment principal if things get tight. Unfortunately, the information they provide is just wrong.
Earlier this week I spoke with a gentleman who invested tens of thousands of dollars into a disability type plan issued by Legacy Benefit Plans, Legacy’s website advertises how they can protect one’s assets from creditors. According to the gentleman I spoke with, they protect them so well that he can’t even get them. Money in the bank is not worth much if you can’t reach it in an emergency.
Many plans in the last category fail to tell you that your monies are placed in a trust, a trust that you don’t control. The trust is usually given the right to unilaterally change terms. In one case, the plan stopped offering the original disability plan and instead offered access to a health coach!
Is the Legacy Benefits Plan a scam? I haven’t read the plan document yet but it certainly sounds like one.
All of these plans are set up pursuant to IRS code section 419 – at least they claim to be. This creates more problems. The IRS has found so many of these plans to be problematic that they deem them to be “listed transactions.” What does that mean?
It means you have to fill out a special IRS form, Form 8886, disclosing your participation in a listed transaction. While not every plan is illegal, the IRS requires that you notify them when investing in one. Fail to tell the IRS and the penalty is $5000 to $100,000 for individuals per plan per year and double that for companies.
What should you do if you have a welfare benefit plan? Contact a competent tax lawyer or CPA well versed in welfare benefit plans. Even if your plan is legal, you must insure that you haven’t accidentally failed to file the appropriate forms. Your lawyer or accountant can also help you unwind the plan, amend returns and seek an abatement of any penalties that may follow. An attorney can also represent you if the matter must go to federal tax court or if you elect to bring a lawsuit to recover your losses.
Mahany & Ertl, LLC is a boutique tax firm offering a wide range of professional tax services including audit defense, collection representation, tax court litigation, offers in compromise and criminal tax defense. Contact Brian Mahany for more information at (414) 704-6731 (direct) or through the firm’s website, https://www.mahanyertl.com.
The firm also concentrates in asset recovery and fraud recovery and has recovered hundreds of thousands of dollars from promoters of bogus or deficient plans. Sometimes we can recover IRS interest and penalties from insurance agents, stockbrokers or financial planners that may have recommended the plan.
(C) Mahany & Ertl, LLC. Milwaukee, Wisconsin asset recovery lawyers, fraud lawyers and tax attorneys. Services available in all 50 states.