Ethics: Insider SecretsEthics: Insider Secretsto Avoid Malpractice and Huge to Avoid Malpractice and Huge

PenaltiesPenalties

Presented by Lance Wallach, CLU, CHFC, CIMC, a frequent speaker on pensions, VEBAs, financial and estate planning, practice management, and tax-oriented strategies at accounting and financial planning conventions.

This webinar will help you navigate some of the ethical minefields inherent in practice today,

especially under Circular 230. Understand many of the abusive insurance and annuity based products being marketed to your clients and how to alleviate IRS scrutiny.

Identify potentially abusive deductions claimed on tax returns, which include many popular retirement and welfare benefit plans. Learn about various disclosure requirements and how to avoid large penalties, both to yourself and your client.

Protect your senior clients from abusive life settlements, reverse mortgages, annuities and more.

Discover opportunities available under the Pension Protection Act and new regulations, and how to use them correctly.

This webinar will give you expertise in tax shelters, listed transactions, captive insurance, 419 and 412i plans, premium finance, and other potentially abusive products and strategies.

DisclaimerDisclaimer

The information provided herein is not intended The information provided herein is not intended as legal, accounting, financial, or any other type as legal, accounting, financial, or any other type of advice for any specific individual or other of advice for any specific individual or other entity. You should contact an appropriate entity. You should contact an appropriate professional for any such advice.professional for any such advice.

Notice Pursuant to IRS Circular 230Notice Pursuant to IRS Circular 230

Any tax advice expressed in this communication Any tax advice expressed in this communication (including any attachments) is not intended to be (including any attachments) is not intended to be used, and cannot be used, for the purpose of used, and cannot be used, for the purpose of avoiding penalties imposed on the taxpayer by avoiding penalties imposed on the taxpayer by any governmental taxing authority or agency.any governmental taxing authority or agency.

Insurance agents often sell ways to Insurance agents often sell ways to deduct life insurance premiumsdeduct life insurance premiums

This is usually done in 419 plansThis is usually done in 419 plans

Most of these deductions are disallowed Most of these deductions are disallowed on auditon audit

Notice 2007-83 was issued on 10/17/2007Notice 2007-83 was issued on 10/17/2007

It identified certain trust arrangements It identified certain trust arrangements involving cash value life insurance as involving cash value life insurance as listed transactions.listed transactions.

Revenue Ruling 2007-65 was issued Revenue Ruling 2007-65 was issued simultaneouslysimultaneously

It is now clear that an employer usually It is now clear that an employer usually cannot claim deductions for cash value cannot claim deductions for cash value life insurance inside of 419 plans, life insurance inside of 419 plans, especially if the plan is a listed especially if the plan is a listed transactiontransaction

Persons participating in a listed Persons participating in a listed transaction have disclosure obligationstransaction have disclosure obligations

They must file Form 8886 with their tax They must file Form 8886 with their tax returnsreturns

Failure to file and disclose results in Failure to file and disclose results in penalties of up to $200,000penalties of up to $200,000

These penalties can also be imposed These penalties can also be imposed upon agents, advisors, and other upon agents, advisors, and other professionalsprofessionals

Taxpayers who otherwise would be Taxpayers who otherwise would be required to file a disclosure statement required to file a disclosure statement prior to Jan. 15, 2008, as a result of prior to Jan. 15, 2008, as a result of Notice 2007-83 had until Jan. 15, 2008, to Notice 2007-83 had until Jan. 15, 2008, to make the disclosuremake the disclosure

Revenue Ruling 2007-65 has the same Revenue Ruling 2007-65 has the same target as Notices 2007-83 and 2007-84target as Notices 2007-83 and 2007-84

The target is those arrangements where The target is those arrangements where cash value life insurance is purchased on cash value life insurance is purchased on employees who are owners of the employees who are owners of the businessbusiness

Sometimes it is also purchased on key Sometimes it is also purchased on key employeesemployees

Term insurance is then purchased on the Term insurance is then purchased on the lives of other employeeslives of other employees

These plans are currently sold as 419(e), These plans are currently sold as 419(e), 419A(f)(6), or 419 plans419A(f)(6), or 419 plans

Sometimes they are sold as single Sometimes they are sold as single employer plansemployer plans

It is anticipated that the plan will be It is anticipated that the plan will be terminated with the cash value policies terminated with the cash value policies being distributed to owners or key being distributed to owners or key employeesemployees

Little if anything goes to the other Little if anything goes to the other employeesemployees

Promoters claim the insurance premiums Promoters claim the insurance premiums are a current deductionare a current deduction

The ruling makes it absolutely clear that The ruling makes it absolutely clear that this is not the casethis is not the case

Most businesses cannot deduct the cost Most businesses cannot deduct the cost of premiums paid through a 419 of premiums paid through a 419 (welfare benefit) plan for cash value life (welfare benefit) plan for cash value life insuranceinsurance

The ruling also describes arrangements The ruling also describes arrangements that may be listed transactionsthat may be listed transactions

These plans are usually sold by These plans are usually sold by insurance agents and financial plannersinsurance agents and financial planners

They are also sometimes sold by They are also sometimes sold by accountants and attorneysaccountants and attorneys

There is an excellent chance that the There is an excellent chance that the accountant with a client or clients in these accountant with a client or clients in these plans will be deemed a “material advisor” plans will be deemed a “material advisor” to these plansto these plans

You are a material advisor if the client You are a material advisor if the client participated in the plan, you gave the participated in the plan, you gave the client tax advice with respect to the client tax advice with respect to the transaction, and yourself and/or a related transaction, and yourself and/or a related entity received $10,000 or more in entity received $10,000 or more in compensationcompensation

The material advisor must file Form 8918. The material advisor must file Form 8918. As with the 8886 form (for taxpayers) As with the 8886 form (for taxpayers) failure to file or even incomplete, failure to file or even incomplete, misleading, or inaccurate filings can lead misleading, or inaccurate filings can lead to penalties of $100,000 for individuals or to penalties of $100,000 for individuals or $200,000 for corporations$200,000 for corporations

A filing on a protective basis is possible if A filing on a protective basis is possible if the advisor believes, in good faith, either the advisor believes, in good faith, either that he does not meet the income that he does not meet the income threshold or that the transaction in threshold or that the transaction in question is not a listed one.question is not a listed one.

Professional discipline is even Professional discipline is even possible in connection with this possible in connection with this area, as is indirect (as a witness) area, as is indirect (as a witness) or even direct (as a defendant) or even direct (as a defendant) involvement in legal proceedingsinvolvement in legal proceedings

There are many reasons why the IRS There are many reasons why the IRS may challenge the claimed tax benefits may challenge the claimed tax benefits of these arrangementsof these arrangements

The Section 4976 100 percent excise The Section 4976 100 percent excise tax may disqualify benefits provided to tax may disqualify benefits provided to owner-employees or key employeesowner-employees or key employees

Where property, including life insurance Where property, including life insurance policies, is not properly valued, the IRS policies, is not properly valued, the IRS will challenge the valuewill challenge the value

A particular target here would be A particular target here would be "springing cash value" life insurance"springing cash value" life insurance

This type of insurance features This type of insurance features temporarily artificially depressed policy temporarily artificially depressed policy values, the goal being to reduce tax values, the goal being to reduce tax owed on the value of the life insurance owed on the value of the life insurance when said insurance is removed from when said insurance is removed from the planthe plan

In a proper arrangement, deductions are In a proper arrangement, deductions are limited by IRC Sections 419 and 419Alimited by IRC Sections 419 and 419A

Depending on facts and circumstances, Depending on facts and circumstances, the rules for split-dollar arrangements the rules for split-dollar arrangements may applymay apply

Again depending on facts and Again depending on facts and circumstances, contributions on behalf of circumstances, contributions on behalf of an owner-employee may be characterized an owner-employee may be characterized as dividends or as deferred compensation as dividends or as deferred compensation pursuant to IRC 404(a)(5) or 409A, or bothpursuant to IRC 404(a)(5) or 409A, or both

Be especially cautious should a client Be especially cautious should a client approach you with any 419 plan, for approach you with any 419 plan, for both yourself and the clientboth yourself and the client

The Government has the names of most The Government has the names of most former 419 A(f)(6) promoters, as many former 419 A(f)(6) promoters, as many current 419 promoters werecurrent 419 promoters were

This leads to increased scrutiny of such This leads to increased scrutiny of such promoters, making audits far riskier and promoters, making audits far riskier and more likelymore likely

More on listed More on listed transactionstransactions

Listed transactions are those deemed by Listed transactions are those deemed by the IRS to be structured for the significant the IRS to be structured for the significant purpose of tax avoidance or evasionpurpose of tax avoidance or evasion

Participants in listed transactions must Participants in listed transactions must attach Form 8886 to their tax returnsattach Form 8886 to their tax returns

There are severe penalties for failure to There are severe penalties for failure to file Form 8886 disclosing such file Form 8886 disclosing such participationparticipation

There are also severe penalties for those There are also severe penalties for those who aid and abet participation in listed who aid and abet participation in listed transactionstransactions

CPE Code Word #1CPE Code Word #1

LanceLance

For CPE, you will be asked to For CPE, you will be asked to recall this code word in the online recall this code word in the online

evaluationevaluation

Abusive 412(i) and other Abusive 412(i) and other Retirement PlansRetirement Plans

On Feb. 13, 2004, the Treasury DepartmentOn Feb. 13, 2004, the Treasury Departmentand Internal Revenue Service issued guidanceand Internal Revenue Service issued guidanceto shut down abusive transactions involvingto shut down abusive transactions involvingspecially designed life insurance policies inspecially designed life insurance policies inretirement plans, Section “412(i) plans.” Theretirement plans, Section “412(i) plans.” Theguidance designates certain arrangements asguidance designates certain arrangements as““listed transactions” for tax-shelter reportinglisted transactions” for tax-shelter reporting

purposespurposes

A “Section 412(i) plan” is a tax qualified A “Section 412(i) plan” is a tax qualified retirement plan that is funded entirely by retirement plan that is funded entirely by a life insurance contract or an annuity. a life insurance contract or an annuity. The employer claims tax deductions for The employer claims tax deductions for contributions that are used by the plan to contributions that are used by the plan to pay premiums on an insurance contract pay premiums on an insurance contract covering an employee. The plan may covering an employee. The plan may hold the contract until the employee dies, hold the contract until the employee dies, or it may distribute or sell the contract to or it may distribute or sell the contract to the employee at a specific point, such as the employee at a specific point, such as when the employee retires.when the employee retires.

There are many legitimate Section 412(i) There are many legitimate Section 412(i) plans, but some push the envelope, claiming plans, but some push the envelope, claiming tax results for employees and employers that tax results for employees and employers that do not reflect the underlying economics of do not reflect the underlying economics of the arrangements,” according to the IRS.the arrangements,” according to the IRS.

One of the main abuses is that any life One of the main abuses is that any life insurance contract transferred from an insurance contract transferred from an employer or a tax-qualified plan to an employer or a tax-qualified plan to an employee must be taxed at its full fair market employee must be taxed at its full fair market value. Some firms have promoted an value. Some firms have promoted an arrangement where an employer establishes arrangement where an employer establishes a Section 412(i) plan under which the a Section 412(i) plan under which the contributions made to the plan are used to contributions made to the plan are used to purchase a specially designed life insurance purchase a specially designed life insurance contract.contract.

The insurance contract is designed so The insurance contract is designed so that the cash surrender value is that the cash surrender value is temporarily depressedtemporarily depressed

These contracts are sometimes called These contracts are sometimes called springing cash value insurancespringing cash value insurance

These abuses also occur in other types These abuses also occur in other types of retirement plansof retirement plans

The 2004 regulation has led to numerous The 2004 regulation has led to numerous IRS audits of 412(I) plansIRS audits of 412(I) plans

While many plans are substantially in While many plans are substantially in compliance, the Service regards others as compliance, the Service regards others as abusiveabusive

The ones that are regarded as abusive are The ones that are regarded as abusive are listed transactions, which trigger the listed transactions, which trigger the disclosure requirements necessitating the disclosure requirements necessitating the filing of Forms 8886 and 8918, and of filing of Forms 8886 and 8918, and of course the possible penalties therecourse the possible penalties there

As for the plans themselves, plan sponsors of As for the plans themselves, plan sponsors of listed transactions (those that deemed listed transactions (those that deemed abusive), are treated as if the plans never abusive), are treated as if the plans never existed, and are forced to pay the income taxes existed, and are forced to pay the income taxes that would have been due and owing had the that would have been due and owing had the plan never existed, together with interestplan never existed, together with interest

The Service, in conducting these audits, is The Service, in conducting these audits, is critically concerned with compliance with non-critically concerned with compliance with non-discrimination rules and applicable deduction discrimination rules and applicable deduction limits. Failures in either or both of these areas limits. Failures in either or both of these areas are more likely to lead to being regarded as are more likely to lead to being regarded as abusive and therefore being denominated a abusive and therefore being denominated a listed transactionlisted transaction

Large Companies have long used captive Large Companies have long used captive insurers to reduce premiums paid for insurers to reduce premiums paid for property and casualty insurance.property and casualty insurance.

The amount of money necessary to fund The amount of money necessary to fund self-insured risks associated with tangible self-insured risks associated with tangible and intangible assets is also reduced.and intangible assets is also reduced.

Large companies commonly establish single Large companies commonly establish single parent captives.parent captives.

However, for small and medium sized However, for small and medium sized businesses, the group captive structure and businesses, the group captive structure and its protected cell variation can realize cost its protected cell variation can realize cost savings at a cost far less than establishing a savings at a cost far less than establishing a single parent captive.single parent captive.

So it is a win-win situation – you save money So it is a win-win situation – you save money while saving moneywhile saving money

The accountant can use the group captive The accountant can use the group captive and captive cell structures to introduce new and captive cell structures to introduce new cost saving opportunities to business clientscost saving opportunities to business clients

These opportunities can be enhanced by These opportunities can be enhanced by income tax and succession planning income tax and succession planning techniques commonly used by estate techniques commonly used by estate planning professionalsplanning professionals

What requirements must be met What requirements must be met to obtain a legitimate tax to obtain a legitimate tax

deduction while using captive deduction while using captive insurance?insurance?

Risk sharingRisk sharing

Risk distributionRisk distribution

Using group captives makes it significantly Using group captives makes it significantly cheaper to satisfy these requirement, especially cheaper to satisfy these requirement, especially the risk distribution requirementthe risk distribution requirement

More on the risk distribution requirementMore on the risk distribution requirement

If done properly, premium finance allows If done properly, premium finance allows large amounts of life insurance to be large amounts of life insurance to be obtained with a small dollar outlayobtained with a small dollar outlay

Various problems occur if it is done wrongVarious problems occur if it is done wrong

It is not a free way to obtain life insurance, It is not a free way to obtain life insurance, and should not be sold as suchand should not be sold as such

What spread over the loan interest rate What spread over the loan interest rate must the client earn to make this work?must the client earn to make this work?

Is the loan commitment reasonable?Is the loan commitment reasonable?

How long is the loan renewable for? How long is the loan renewable for? Does its term exceed life expectancy?Does its term exceed life expectancy?

Is the loan secured by the cash value of Is the loan secured by the cash value of the life insurance?the life insurance?

Is it a life expectancy program? Such a Is it a life expectancy program? Such a program would assume dying at the IRS program would assume dying at the IRS life expectancylife expectancy

Problem – if the client lives beyond that, Problem – if the client lives beyond that, the loan amount begins to exceed cash the loan amount begins to exceed cash value, and the program unravelsvalue, and the program unravels

If policy cash values do not grow faster If policy cash values do not grow faster than the loan amount, the design will failthan the loan amount, the design will fail

Caution – there is little IRS guidance on Caution – there is little IRS guidance on whether a personally owned or business whether a personally owned or business owned policy falls under an investment owned policy falls under an investment interest situation, allowing loan interest interest situation, allowing loan interest to be deducted. In general, interest on a to be deducted. In general, interest on a loan to acquire a life insurance policy is loan to acquire a life insurance policy is considered personal interest and is not considered personal interest and is not deductibledeductible

Using this strategy sometimes leads to Using this strategy sometimes leads to estate tax problemsestate tax problems

Investor or stranger owned life insurance Investor or stranger owned life insurance is different from premium finance and is different from premium finance and should not be confused with itshould not be confused with it

IOLI or STOLI often involve financing the IOLI or STOLI often involve financing the purchase of a policy. The policy is then purchase of a policy. The policy is then sold as an investment to a strangersold as an investment to a stranger

STOLI may be illegal in some jurisdictionsSTOLI may be illegal in some jurisdictions

In a life settlement, an unneeded policy is In a life settlement, an unneeded policy is sold to a third party, usually an institutional sold to a third party, usually an institutional investorinvestor

They originated with the viatical settlements They originated with the viatical settlements formerly used by AIDS patientsformerly used by AIDS patients

It is projected that the industry may It is projected that the industry may ultimately grow to an annual volume of $160 ultimately grow to an annual volume of $160 billionbillion

There are licensing and commission There are licensing and commission disclosure requirements in some jurisdictionsdisclosure requirements in some jurisdictions

Tax considerations and other Tax considerations and other insurance issuesinsurance issues

• Surrendering a life insurance policy can Surrendering a life insurance policy can result in a taxable gain, but no deduction result in a taxable gain, but no deduction is allowed in the event of a lossis allowed in the event of a loss

• Clients can benefit from the Section 1035 Clients can benefit from the Section 1035 exchange and the insurance swapout exchange and the insurance swapout process, but, depending on the situation, process, but, depending on the situation, there can be reasons not to use these there can be reasons not to use these strategiesstrategies

One reason is if the client’s health has One reason is if the client’s health has declined, making it impossible to obtain a declined, making it impossible to obtain a new policy at favorable ratesnew policy at favorable rates

The client may have to enter a new The client may have to enter a new surrender charge period, which would surrender charge period, which would affect cash value liquidity. Or the client affect cash value liquidity. Or the client may simply be unsuitable for a new may simply be unsuitable for a new productproduct

The accountant should be aware that The accountant should be aware that sometimes the objective of transactions sometimes the objective of transactions such as this is to generate commissionssuch as this is to generate commissions

New surrender chargeNew surrender charge

New suicide and contestability periodNew suicide and contestability period

Tax consequences are possible if the existing Tax consequences are possible if the existing loan is not paid off prior to the exchangeloan is not paid off prior to the exchange

The accountant receiving compensation from The accountant receiving compensation from the transaction should disclose that in the transaction should disclose that in writing, detailing any possible conflicts of writing, detailing any possible conflicts of interest arising from the receipt of interest arising from the receipt of compensation. Reasons for the transaction compensation. Reasons for the transaction should also be set forth in writingshould also be set forth in writing

Fill out all state regulatory forms. Go the Fill out all state regulatory forms. Go the extra mile in the regulatory arena, as extra mile in the regulatory arena, as appropriateappropriate

The accountant, even if not initiating or The accountant, even if not initiating or suggesting the transaction, must be suggesting the transaction, must be knowledgeable and well versed about the knowledgeable and well versed about the issues involvedissues involved

There are abusive sales practices that have There are abusive sales practices that have targeted and victimized seniorstargeted and victimized seniors

One is inducing seniors into reverse One is inducing seniors into reverse mortgages. Unnecessary annuity products mortgages. Unnecessary annuity products of questionable benefit to the senior are of questionable benefit to the senior are then sold, and purchased with the then sold, and purchased with the mortgage proceedsmortgage proceeds

These annuities tend to feature abusive These annuities tend to feature abusive high commissions and long surrender high commissions and long surrender periodsperiods

But the accountant should bear in mind But the accountant should bear in mind that not all annuities are bad, and that that not all annuities are bad, and that reverse mortgages can serve a useful reverse mortgages can serve a useful purposepurpose

The real trick is separating the good from The real trick is separating the good from the badthe bad

CPE Code Word #2CPE Code Word #2

InstructorInstructor

For CPE, you will be asked to recall this For CPE, you will be asked to recall this codecode

word in the online evaluationword in the online evaluation

What is the accountant’s What is the accountant’s role in all this?role in all this?

The accountant should never engage in The accountant should never engage in “dabbling”. That is accepting “dabbling”. That is accepting professional engagements that you are professional engagements that you are unable to handle competently, perhaps unable to handle competently, perhaps featuring the selling, buying, or use of featuring the selling, buying, or use of products with which you are not products with which you are not familiar.familiar.

Should you consider being your Should you consider being your client’s contractor? client’s contractor?

Learn to use opportunities created by Learn to use opportunities created by the Pension Protection Act wisely and the Pension Protection Act wisely and correctly, notably the cash balance correctly, notably the cash balance plan.plan.

Questions?Questions?

ADDITIONAL RESOURCESADDITIONAL RESOURCES www.vebaplan.com

The NSA MemberLinkThe NSA MemberLink

NSA 63NSA 63RDRD Annual Meeting Annual Meeting

The NSA Tax TalkThe NSA Tax Talk

The CPA’s Guide to Life Insurance by The CPA’s Guide to Life Insurance by Lance Wallach published by Bisk cpeasyLance Wallach published by Bisk cpeasy

Various published articles included with Various published articles included with this webinarthis webinar

I welcome your calls and emails to I welcome your calls and emails to discuss these issues. I spend most discuss these issues. I spend most days speaking with accountants like days speaking with accountants like you anyway and I don’t have a life. you anyway and I don’t have a life. No, seriously, contact me so that we No, seriously, contact me so that we can try to help you.can try to help you.

• Lance Wallach 516-938-5007Lance Wallach 516-938-5007• Fax 516-938-6330Fax 516-938-6330• Email Email lawallach@aol.com• www.vebaplan.comwww.vebaplan.com