Advisers staring at a new ‘slew' of litigation from small-business clients

 

Analysis Of

Advisers staring at a new ‘slew' of litigation from small-business clients

Lance Wallach Council Member President, VEBA Plan

December

Premise

Five-year-old change in tax has left some small businesses and certain benefit plans subject to IRS fines; the advisers who sold these plans may pay the price

Discussion

Advisers staring at a new ‘slew' of litigation from small-business clients

Five-year-old change in tax has left some small businesses and certain benefit plans subject to IRS fines; the advisers who sold these plans may pay the price

By Jessica Toonkel Marquez

October  Financial advisers who have sold certain types of retirement and other benefit plans to small businesses might soon be facing a wave of lawsuits — unless Congress decides to take action soon.

For years, advisers and insurance brokers have sold the 412(i) plan, a type of defined-benefit pension plan, and the 419 plan, a health and welfare plan, to small businesses as a way of providing such benefits to their employees, while also receiving a tax break.

However, in 2004, Congress changed the law to require that companies file with the Internal Revenue Service if they had these plans in place. The law change was intended to address tax shelters, particularly those set up by large companies.

Many companies and financial advisers didn't realize that this was a cause for concern, however, and now employers are receiving a great deal of scrutiny from the federal government, according to experts.

The IRS has been aggressive in auditing these plans. The fines for failing to notify the agency about them are $200,000 per business per year the plan has been in place and $100,000 per individual.

So advisers who sold these plans to small business are now slowly starting to become the target of litigation from employers who are subject to these fines.

“There is a slew of litigation already against advisers that sold these plans,” said Lance Wallach, an expert on 412(i) and 419 plans. “I get calls from lawyers every week asking me to be an expert witness on these cases.”

Mr. Wallach declined to cite any specific suits. But one adviser who has been selling 412(i) plans for years said his firm is already facing six lawsuits over the sale of such plans and has another two pending.

“My legal and accounting bills last year were $864,000,” said the adviser, who asked not to be identified. “And if this doesn't get fixed, everyone and their uncle will sue us.”

Currently, the IRS has instituted a moratorium on collecting these fines until the end of the year in the hope that Congress will address the issue.

In a Sept. 24 letter to Sens. Max Baucus, D-Mont., Charles Boustany Jr., R-La., and Charles Grassley, R-Iowa, IRS Commissioner Douglas H. Shulman wrote: “I understand that Congress is still considering this issue and that a bipartisan, bicameral bill may be in the works … To give Congress time to address the issue, I am writing to extend the suspension of collection enforcement action through Dec. 31.”

But with so much of Congress' attention on health care reform at the moment, experts are worried that the issue may go unresolved indefinitely.

“If Congress doesn't amend the statute, and clients find themselves having to pay these fines, they will absolutely go after the advisers that sold these plans to them.”  

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, financial and estate planning, and abusive tax shelters. He writes about 412(i), 419, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education’s CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and his side has never lost a case. For more information go to www.taxadvisorexperts.org or www.taxaudit419.com.

Lance Wallach
68 Keswick Lane
Plainview, NY 11803
Ph.: (516)938-5007
Fax: (516)938-6330www.vebaplan.com

National Society of Accountants Speaker of The Year


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.