"The search (more like an armed assault), which involved between 35 and 50 IRS Criminal Investigation Division agents wearing black Kevlar bullet-proof vests and fully armed with automatic weapons, who herded the employees of the various companies then at the office located at 100 Grist Mill Road into a conference room and illegally searched and interrogated them, was completely over-the-top, unnecessary, and more akin to something that would happen in the movies or the TV show "24" rather than in the small town of Simsbury...", said lawyers for the welfare benefit plan promoters. And so began the battle by Benistar and others to get back documents seized by the IRS last year. In a stipulation filed in federal court last week, the feds get to copy and keep the documents. Bad news for the NOVA folks and bad news for the thousands holding the disputed welfare benefit plans.

Court documents released in the ongoing litigation between NOVA Benefit Plans and the IRS read like a script from a thriller movie. Shortly after the IRS special agents raided the company's headquarters, Benistar 419 Plan & Trust and other entities purportedly related to Wayne Bursey and NOVA filed motions seeking return of the documents seized during the raid.

Although the raid was primarily directed at NOVA and Benistar, federal agents seized records belonging to Grist Mill Partners, Grist Mill Capital, Avon Capital, ARIA LLC, Charter Oak Trust, Avon Trust, USB Client Services, Caroline Financial Group, Rex Insurance Services, BESTCO Benefit Plans, Boston Property Exchange Transfer Company and Lincoln Financial Services and others. The government believes the entities are related.

Included in the documents seized are records belonging to Pettibone Tavern. According to a motion filed by Pettibone, the tavern hosted many famous Americans including George Washington, Ethan Allen and Mark Twain. The tavern is named after the son of Captain Pettibone, "who gave his life on Christmas day in the famous campaign launched from Valley Forge during the American Revolution that led to the founding of this great Country {sic} and American Independence." The motion goes on to state that both Captain Pettibone and his son are "turning in their graves thinking that Federal agents of the young country he dies for would illegally seize... tax records for the Pettibone Tavern..."

Benistar's court filings may be an interesting from a history standpoint but are not relevant to the real dispute, did NOVA, Benistar, their related entities and their customers violate the Internal Revenue Code?

If tales of the American Revolution and George Washington sitting in a bar were not enough, the motions question why the government would even conduct the raid since the tax return filed for NOVA Benefit Plans shows it "consistently" has no assets and that Benistar Ltd is out of business. Again, not great news for welfare benefit clients who now owe millions to the IRS.

Later in the motion for return of seized property, the lawyers state that the NOVA offices were less than two miles from Tulmeadow Farm, "complete with cows and ice cream" and less than 1 mile from a high school. The connection and relevance of that statement is a complete mystery. Lawyers for the promoters call the search the "most egregious illegal search in the history of the United States." They further states that more agents were present for the "heinous" raid at NOVA than at Ruby Ridge. {Of course, unlike Ruby Ridge no one was injured or killed at NOVA's office.}

Although very colorful, the pleadings do not have much legal substance. And in the end, despite a plea for the court to "sign an emergency order to have the moving van truck turn around forthwith and bring back all of the illegally seized property," the government gets to keep the documents. In the interest of complete accuracy, the government must return the documents but gets to copy them first.

What does all this mean to the thousands of people and small businesses that trusted NOVA, Grist Mill, Benistar and the other welfare benefit plan providers? Two things - first, NOVA probably has no money to pay claims and second, the government has the names and addresses of all the plan holders.

Whatever money Bursey and the plans have is probably going to pay legal fees. There is litigation pending in multiple states and at least one criminal grand jury in Wisconsin probing the plan promoters. That is bad news for the holders of the plans. The aftermath of the raid and criminal investigation will likely spur a great deal of litigation but without any money to pay claims.

There is some good news, however. If you purchased your plan through a stockbroker or investment advisor, you may have some recourse.

The news is also bad because the government now has a complete list of all the clients of NOVA and the other plans. Already the IRS has begun auditing and assessing massive penalties against the holders of these plans - people who relied on NOVA's slick marketing materials and a well crafted legal opinion.

Because the IRS views most of these benefit plans as abusive tax shelters, the penalty can be as high as $200,000 per year!

Lance Wallach remarks about the above article that was written by an atty.. Not all of this article by Brian is correct, but I agree if you are in a 419 plan you need an expert right away. If you are in any 419, 412i, captive insurance or section 79 plan you should get an expert to HELP YOU. Time is of the essence. You must also properly file under 6707 A to try to avoid additional large IRS fines. These fines come after the first IRS audit. Most accountants think once your audit is over you are done. This is not true. If you did not properly file under IRS code 6707 A you have no statue of limitations. The IRS usually comes back again, sometime years later and fines you again for not reporting on yourself.

Do not let a CPA or tax atty learn on the job. I have received hundreds of phone calls from people where this has happened. The cost to the business owner is very large. We have also had great success in making people whole. Sometimes all it takes is a letter. Google Lance Wallach and then Google who ever you are working with. Who knows these subjects better? My associates include ex long term IRS agents, CPA tax attys. etc. Some people who call us get upset and do not do anything. They think this will go away. If they have been audited they think it is over. BIG MISTAKE. The problems are just starting. Most people that sue LOSE. As an expert witness Lance Wallach's side has NEVER lost a case. Lance has won both for the plaintiffs and for the defendants. Most attys learn on the job and will LOSE the case. Disclaimers were signed by the business owner saying that he would get his own tax advise : and most cases are dismissed after the judge sees that. There is a way around that, but most attys are not aware.

Good luck, as you will need a lot. If you are reading this you probably have a very big problem.

 

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Small Business Retirement Plans Fuel Litigation

Dolan Media Newswires  

Lance Wallach

Small businesses facing audits and potentially huge tax penalties over certain types of retirement plans are filing lawsuits against those who marketed, designed and sold the plans. The 412(i) and 419(e) plans were marketed in the past several years as a way for small business owners to set up retirement or welfare benefits plans while leveraging huge tax savings, but the IRS put them on a list of abusive tax shelters and has more recently focused audits on them.

 

The penalties for such transactions are extremely high and can pile up quickly.

 There are business owners who owe taxes but have been assessed 2 million in penalties. The existing cases involve many types of businesses, including doctors' offices, dental practices, grocery store owners, mortgage companies and restaurant owners. Some are trying to negotiate with the IRS. Others are not waiting. A class action has been filed and cases in several states are ongoing. The business owners claim that they were targeted by insurance companies; and their agents to purchase the plans without any disclosure that the IRS viewed the plans as abusive tax shelters. Other defendants include financial advisors who recommended the plans, accountants who failed to fill out required tax forms and law firms that drafted opinion letters legitimizing the plans, which were used as marketing tools.

 

A 412(i) plan is a form of defined benefit pension plan. A 419(e) plan is a similar type of health and benefits plan. Typically, these were sold to small, privately held businesses with fewer than 20 employees and several million dollars in gross revenues. What distinguished a legitimate plan from the plans at issue were the life insurance policies used to fund them. The employer would make large cash contributions in the form of insurance premiums, deducting the entire amounts. The insurance policy was designed to have a "springing cash value," meaning that for the first 5-7 years it would have a near-zero cash value, and then spring up in value.

Just before it sprung, the owner would purchase the policy from the trust at the low cash value, thus making a tax-free transaction. After the cash value shot up, the owner could take tax-free loans against it. Meanwhile, the insurance agents collected exorbitant commissions on the premiums - 80 to 110 percent of the first year's premium, which could exceed million.

 

Technically, the IRS's problems with the plans were that the "springing cash" structure disqualified them from being 412(i) plans and that the premiums, which dwarfed any payout to a beneficiary, violated incidental death benefit rules.

Under §6707A of the Internal Revenue Code, once the IRS flags something as an abusive tax shelter, or "listed transaction," penalties are imposed per year for each failure to disclose it. Another allegation is that businesses weren't told that they had to file Form 8886, which discloses a listed transaction.

 

According to Lance Wallach of Plainview, N.Y. (516-938-5007), who testifies as an expert in cases involving the plans, the vast majority of accountants either did not file the forms for their clients or did not fill them out correctly.

 

Because the IRS did not begin to focus audits on these types of plans until some years after they became listed transactions, the penalties have already stacked up by the time of the audits.

 

Another reason plaintiffs are going to court is that there are few alternatives - the penalties are not appeasable and must be paid before filing an administrative claim for a refund.

 

The suits allege misrepresentation, fraud and other consumer claims. "In street language, they lied," said Peter Losavio, a plaintiffs' attorney in Baton Rouge, La., who is investigating several cases. So far they have had mixed results. Losavio said that the strength of an individual case would depend on the disclosures made and what the sellers knew or should have known about the risks.

 

In 2004, the IRS issued notices and revenue rulings indicating that the plans were listed transactions. But plaintiffs' lawyers allege that there were earlier signs that the plans ran afoul of the tax laws, evidenced by the fact that the IRS is auditing plans that existed before 2004.

 

"Insurance companies were aware this was dancing a tightrope," said William Noll, a tax attorney in Malvern, Pa. "These plans were being scrutinized by the IRS at the same time they were being promoted, but there wasn't any disclosure of the scrutiny to unwitting customers."

 

A defense attorney, who represents benefits professionals in pending lawsuits, said the main defense is that the plans complied with the regulations at the time and that "nobody can predict the future."

 

An employee benefits attorney who has settled several cases against insurance companies, said that although the lost tax benefit is not recoverable, other damages include the hefty commissions - which in one of his cases amounted to 400,000 the first year - as well as the costs of handling the audit and filing amended tax returns.

Defying the individualized approach an attorney filed a class action in federal court against four insurance companies claiming that they were aware that since the 1980s the IRS had been calling the policies potentially abusive and that in 2002 the IRS gave lectures calling the plans not just abusive but "criminal." A judge dismissed the case against one of the insurers that sold 412(i) plans.

The court said that the plaintiffs failed to show the statements made by the insurance companies were fraudulent at the time they were made, because IRS statements prior to the revenue rulings indicated that the agency may or may not take the position that the plans were abusive. The attorney, whose suit also names law firm for its opinion letters approving the plans, will appeal the dismissal to the 5th Circuit.

 

In a case that survived a similar motion to dismiss, a small business owner is suing Hartford Insurance to recover a "seven-figure" sum in penalties and fees paid to the IRS. A trial is expected in August.

 

But tax experts say the audits and penalties continue. "There's a bit of a disconnect between what members of Congress thought they meant by suspending collection and what is happening in practice. Clients are still getting bills and threats of liens," Wallach said."Thousands of business owners are being hit with million-dollar-plus fines. ... The audits are continuing and escalating. I just got four calls today," he said. A bill has been introduced in Congress to make the penalties less draconian, but nobody is expecting a magic bullet.

 

"From what we know, Congress is looking to make the penalties more proportionate to the tax benefit received instead of a fixed amount."