An organization to help those harmed by the IRS

Lance has spoken at conventions for the AICPA, NSA, NYSSCPA and more. 

IRS auditing 412i plans

Protecting Clients From Fraud, Incompetence, and Scams
By: Lance Wallach
Published by John Wiley and Sons, Inc.

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.

Lance Wallach 401(k)

The IRS audited plaintiffs’ plan
and concluded that the plan failed to comply with § 412(i)(3) because it was “overfunded.”


The United States District Court for the Northern District of Texas recently
issued several important decisions in MDL No. 1983, a multidistrict
litigation proceeding designed to address claims related to employee
benefit plans created under § 412(i) and § 419 of the Internal Revenue Code. For
example, in two similar § 419 cases, the Court reaffirmed its earlier rulings and
dismissed plaintiffs’ fraud-based claims with prejudice. The Court concluded
that the allegations that plaintiffs were induced to establish § 419 plans based
on allegedly fraudulent representations that the plans would be valid and
subject to favorable future tax consequences were simply non‑actionable
statements of opinion or predictions of future action. The Court explained
that because plaintiffs could identify no law or IRS guidance that made
plaintiffs’ § 419 plan illegal when the policies were sold, “any representations
or omissions made … about the tax benefits or legality of the plans were not
false when made but rather non-actionable opinions or predictions regarding
future IRS enforcement.”

On a related note, the United States District Court for the Southern District
of Florida recently granted the defendant insurer’s motion for final summary
judgment in a lawsuit relating to the use of insurance policies to fund defined
benefit pension plans under § 412(i) of the Internal Revenue Code. In that
case, plaintiffs established a § 412(i) pension plan and purchased insurance
policies issued by the insurer to fund the plan. The IRS audited plaintiffs’ plan
and concluded that the plan failed to comply with § 412(i)(3) because it was
“overfunded.” Plaintiffs sued, arguing that the insurance policy was unsuitable
for use in a § 412(i) plan. However, the court concluded that the § 412(i) plan’s
alleged noncompliance with § 412(i) was not caused by any incompatibility
between the insurance policy and § 412(i). Rather, the IRS concluded the
plan violated § 412(i)(3) because plaintiffs purchased too much insurance and
overfunded the plan – a point which plaintiffs’ own expert conceded.


Plaintiffs also argued that the insurer had guaranteed that plaintiffs’ § 412(i) plan
would comply with § 412(i). However, the Court concluded that the insurer made no such promise and, to the contrary,
repeatedly disclosed that it did not establish or administer § 412(i) plans; guarantee the validity of any such plans; or
provide tax or legal advice regarding these plans.

Jorden Burt represented the defendant insurers in these cases.