[Post updated May 2021] When this post was first written in 2011, welfare benefit plans were a hot topic with the IRS. Huge penalties – up to $200,000 per year, criminal investigations, civil suits and many, many scams. If getting huge fines from the IRS wasn’t enough, several promoters of these plans managed to get hooked up with Bernie Madoff feeder funds. What’s worse than a multimillion IRS penalty? Paying that penalty and losing all of your money too.
Its been two years since we have seen any of these cases but we are leaving this post up. Until you try and get your money or the IRS finds you, there could still be some folks living in a state of bliss not knowing their plan isn’t all it was supposed to be.
As 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 several 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.
In a pending case, an individual purchased a plan only to find out years later that the money went to two fraudsters, Nikolai Battoo and Tracy Sunderlage.
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 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.
Second, if you can’t get your money back, contact us. Even if the fraudster who has your money is long gone, we can sometimes go after the financial professionals selling these plans or the accountants and lawyers who “blessed” them.
Of particular note are 419 and 412 welfare benefit plans sold by insurance agents. We are shocked by the number of these plans sold by insurance agents who aren’t even licensed to do so. The silver lining is that often we can hold responsible the insurance company that issued the life insurance funding these plans.
Mahany Law is a national boutique investment fraud recovery law firm. Contact Brian Mahany for more information online, by phone or by email .
Mahany Law – America’s Fraud Recovery Lawyers