Protecting Clients From Fraud, Incompetence, and Scams
By: Lance Wallach
Published by John Wiley and Sons, Inc.
Copyright  2010. All rights reserved.

Excerpts have been taken from this book about:

Bruce Hink, who has given me permission to utilize his name and circumstances, is a perfect example of what the IRS is doing to unsuspecting business owners. What follows is a story about Bruce Hink and how the IRS fined him $200, 000 a year for being in what they called a “listed transaction”. In addition, I believe that the accountant who signed the tax return and the insurance agent who sold the retirement plan will each be fined $200, 000 as material advisors. We have received a large number of calls for help from accountants, business owners, and insurance agents in similar situations. Don’t think this will happen to you. It is happening to a lot of accountants and business owners, because most of these so-called listed, abusive plans, or plans substantially similar to the so-called listed, are currently being sold by most insurance agents.

Bruce was a small business owner facing $400, 000 in IRS penalties for 2004 and 2005 for his 412(i) plan (IRC6707A). Here is how the story developed.

In 2002 an insurance agent representing a 100-year-old well-established insurance company suggested he start a pension plan. Bruce was given a portfolio of information from the insurance company, which was given to the company’s outside CPA to review and to offer an opinion. The CPA gave the plan the green light and the plan was started for tax year 2002.

Contributions were made in 2003. Then the administrator came out with amendments to the plan, based on new IRS guidelines, in October 2004.

The business owner’s agent disappeared in May 2005 before implementing the new guidelines from the administrator with the insurance company. The business owner was left with a refund check from the insurance company, a deduction claim on his 2004 tax return that had not been applied, and without an agent.

I took six months of making calls to the insurance company to get a new insurance agent assigned. By then, the IRS had started an examination of the pension plan. Bruce asked for advice from the CPA and the local attorney (who had no previous experience in such cases), which made matters worse, with a “big name” law firm being recommended and more than $30, 000 in additional legal fees being billed in three months.

To make a long story short, the audit stretched on for more than two years to examine a two-year old pension with four participants and $178, 000 in contributions.

During the audit, no funds went to the insurance company. The company was awaiting IRS approval and restructuring the plan as a traditional defined benefit plan, which the administrator had suggested and which the IRS had indicated would be acceptable. The $90, 000 2005 contribution was put into the company’s retirement bank account along with the 2004 contribution.

In March 2008, the business owner received an apology from the IRS agent who headed the examination. Even this sympathetic IRS agent thinks there is a problem with the IRS enforcement of these Draconian penalties. Below is one of her emails to the business owner who was fined $400, 000.

From: XXXXXXXX XXXXX <[email protected]>
Date: Tue, Mar 4, 2008 at 7:12 AM
Subject: RE: Urgent
To: Bruce Hink <[email protected]>

Thanks Bruce – yes – please just overnight then to the Grand Rapids address. Once again, I’m sorry about this. Basically, our Counsel told us that we needed language specific to the IRC 6707A penalty in order for that statute to be extended. I will ask the Reviewer to hold off an extra day.
I’m also very sorry that this is getting you down. Deeply sorry. It’s very difficult for me as well – before I started working on this project (412(i)) I was doing audits of 401(k) and profit sharing plans. If there was an error on the plan, the employer would just fix it and the audit was over. There wasn’t anything controversial about it – and I felt like I was helping people – employers and plan participants. I really liked my job. In two years time, that has completely changed. I know it’s not very “professional” to make such confessions – so forgive me. But I guess I just wanted you to know that I really sympathize with your situation – and have been doing whatever I can to help. I know that having this hanging over your head can’t be fun – but as this project goes forward – I think that the IRS is going to have to soften their position somewhat – so these delays may be to your benefit.
Also, I’m not really supposed to be sending emails to you – but when I went through the file I couldn’t find a good phone number for you. Could you just send me a note or an email with a current phone number?
Looking to receive the signed 872s on Thursday. If you have any questions at any time – please call me at XXX-XXX-XXXX. I’m usually in the office in the mornings.

The IRS subsequently denied any appeal and ruled in October 2008 that the $400, 000 penalty would stand.


Could You or One of Your Clients Be Next?

Some of the areas SB/SE will be examining include pass-though entities, high-income filers, and abusive transactions. S corporations are likely to receive particular scrutiny. Further review would not be limited to S corporations, but would extend to pass-through entities like partnerships, which can expect to receive a “significant amount of attention” because SB/SE has found an area of abuse and would like to curb what is called a growing trend of abusive high-income filers, typically classified as those with an adjusted gross income of more than $200, 000.

The IRS has been cracking down on what it considers to be abusive tax shelters. Many of them are being marketed to small business owners by insurance professionals, financial planners, and even accountants and attorneys. I speak at numerous conventions, for both business owners and accountants. And after I speak, I am always approached by many people who have questions about tax reduction plans that they have heard about.

I have been an expert witness in many of these 419 and 412(i) lawsuits and I have not lost one of them. If you sold one or more of these plans, get someone who really knows what they are doing to help you immediately. Many advisors will take your money and claim to be able to help you. Make sure they have experience helping accountants who signed the tax returns. IRS calls them material advisors and fines them $200, 000 if they are incorporated or $100, 000 if they are not. Do not let them learn on the job, with your career and money at stake.


Lance Wallach, a member of the AICPA faculty of teaching professionals and an AICPA course developer, is a frequent and popular speaker on retirement plans, financial and estate planning, reducing health insurance costs, and tax-oriented strategies at accounting and financial planning conventions. He has authored numerous books including The Team Approach to Tax, Financial and Estate Planning, Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots, and Sid Kess’ Alternatives to Commonly Misused Tax Strategies: Ensuring Your Client’s Future, all published by the AICPA, and Wealth Preservation Planning by the National Society of Accountants. His newest books CPAs’ Guide to Life Insurance and CPAs’ Guide to Federal and Estate Gift Taxation by Bisk CPEasy, and Protecting Clients from Fraud, Incompetence, and Scams, published by John Wiley and Sons, Inc.

Mr. Wallach, CLU, CHFC, is a leading speaker on accounting and taxation topics and the author of numerous AICPA CPA exam publications. In addition to developing CPE courses, he is also a member of the AICPA faculty of teaching professionals, and has been featured in the Wall Street Journal, the New York Times, Bloomberg Financial News, NBC, National Pubic Radio’s All Things Considered, and other radio talk shows. Mr. Wallach is listed in Who’s Who in Finance and Business.


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.