The Internal Revenue Service has declared an all out war on what they deem as fraudulent tax shelters. Unfortunately in their zeal to close the tax gap, many legitimate taxpayers find themselves in the crosshairs of the IRS. Regulators view many Internal Revenue Code section 419, 412i, 79 and captive insurance plans as abusive tax shelters. That has given rise to the dreaded "listed transaction" designation. At the top of their list? Plans issued by Nova Benefit Plans, LLC.
Does this mean these plans are illegal? That issue is being litigated but the IRS has instituted at least three criminal investigations involving Nova plans.
Nova claims they have drawn together "the very best and brightest in the welfare benefit planning industry" to bring together a package of welfare benefit plans. They say their plans and concepts have been tested and proven. The IRS apparently disagrees. On April 20th of this year, 70 heavily armed IRS Criminal Investigation Division agents raided Nova's offices.
The raid resulted from a search warrant issued by a federal court in Connecticut. It authorized the seizure of Nova's 419 plans records. Nova is litigating that raid in Connecticut.
Meanwhile, IRS agents subpoenaed records from Washington National Insurance Company seeking to identify all the participants in Nova's sickness and disability plans. Nova is fighting that battle in a Nebraska federal court.
What does this mean for taxpayers investing in plans issued by Nova Benefit Plans? It could mean big trouble. Fines, interest and penalties and perhaps criminal prosecution. While the latter seems remote for most taxpayers, the IRS certainly considers investment in certain types of plans to be a "listed transaction." Listed transactions require special forms and filing requirements, requirements that are unfamiliar to most tax preparers and many CPAs.
Fail to tell the government of the plan and special penalties of $200,000 for businesses and $100,000 for individuals may be assessed.
The battle over section 419 plans is far from over. But everyone who invested in one of these plans should know the risks.
So many plans failed IRS scrutiny that thousands of taxpayers found themselves on the wrong end of an IRS penalty assessment. Things got so bad that Congress imposed a moratorium on certain penalties for several months. That moratorium expired in June and the IRS has resumed aggressive penalty assessments.
Many people, alarmed by audit notices, stopped taking deductions or funding their plan thinking that would end the problem. Unfortunately, as long as they continue to receive a tax benefit, annual reports are required. (One problem we have encountered is filing the listed transaction report only in the year the plan was created or funded.)
Filing the reports alerts the IRS to pay extra scrutiny to these plans. For that reason, getting a "second opinion" is always wise advice, especially if purchasing the plan through a promoter or commissioned sales representative or agent. As I indicated earlier, there are many legitimate plans. Unfortunately a combination of zealous enforcement and misinformed promoters or promoters simply interested in making a commission has caused widespread compliance issues.
Insure that your CPA or tax accountant is familiar with the rules or learns them before investing and before filing your return. And think twice before trusting an insurance agent or financial planner for complex tax advice. Better agents will often team up with an experienced tax professional to insure that the client investing is truly eligible for special tax treatment. "Cookie cutter" legal opinions offered by some plan promoters are an invitation to disaster.
If you receive an audit notice because of a Nova plan or similar welfare benefit plan, get professional audit representation. If you have a plan that ultimately fails IRS scrutiny, you may have recourse against the promoter or others.
Mahany & Ertl is a full service law firm concentrating in tax matters, asset recovery and white-collar criminal defense. Tax representation includes audit defense, tax court litigation, tax collections and criminal investigations. The author, Brian Mahany, is a former state revenue secretary, enforcement agent and prosecutor. He can be contacted through his website, http://www.mahanyertl.com