419 Welfare Benefit Plan Fraud: What Remedies Are Available?
If you’ve been the victim of a 419 Welfare Benefit Plan scheme and now find yourself owing the Internal Revenue Service (IRS) taxes on something you were told was going to be tax deductible, it’s important to know what remedies might be available to you.
Remedies for abusive tax shelter schemes
Steve Burgess, an insurance expert and mediator on 412(i) pension and 419 welfare benefit plans with The Center for Life Insurance Disputes, says that there are remedies for those who have been injured by an insurance company’s abusive tax shelter schemes. He told us, “Basically, if we can get the policy out of the trust, then we can go to the insurance company and negotiate with them to refund the money back to the client.”
While insurance companies are very willing to negotiate Internal Revenue Code Section 412(i) pension plan matters, we asked Burgess whether they are as willing to negotiate Internal Revenue Code Section 419 matters. He told us:
They’re not as willing because the welfare benefit trust did not become a reportable transaction until 2007. My prediction is that we’ll see a huge spike in the number of people getting audited by the IRS for these plans about six months from now. However, it takes a little bit of time for them to catch up, and once they do, then I think the insurance companies will be a lot more willing to negotiate.
Another issue is that although some insurance companies will not allow their policies to be sold into welfare benefit trusts, agents have figured out how to get around that limitation so that they can still sell a policy, get the commission and not inform the insurance company of what they’ve done.
Preparing a case against insurers
When preparing a case against insurance companies, Burgess says that there are two main issues – paying taxes on the plan which were supposed to be tax-free and finding out that individuals and companies no longer have any rights in the policy because a trust now owns it. In order to successfully prepare a case, clients should obtain copies of sales materials, copies of illustrations that were presented, copies of letters from the IRS or from law firms that are endorsing these plans.
Mediating 412(i) & 419 Claims With Insurers: Can You Really Win?
You can, according to Steve Burgess, an insurance expert and mediator on 412(i) pension and 419 welfare benefit plans with The Center for Life Insurance Disputes. However, to do so successfully, a mediator should have an insurance background, a tax background and a legal background – a powerful combination that is sometimes hard to come by.
Mediator Steve Burgess
Having worked in almost every part of the life insurance industry for 20 years, Burgess started working with clients on tax shelter schemes involving Internal Revenue Code Sections 412(i) Pension Plans and Internal Revenue Code Section 419 Welfare Benefit Plans about five years ago. He is now an intermediary between his clients and insurance companies and negotiates settlements to have premium payments refunded and to unwind these sometimes very complicated insurance transactions.
Unwinding abusive insurance transactions
Burgess says that there are not many firms who do what he does. He explained:
412(i) and 419 plans are generated by the insurance industry. So you’ve got to have knowledge about life insurance and the insurance industry first and foremost to understand the appeal of these transactions. You’ve also got to understand tax law and how it relates to 412(i) and 419 plans as tax code sections. Finally, you need to have some knowledge of the legal system. You don’t find a lot of people who have got those three skills all in one person or in one firm.
I was exposed to these plans from the very beginning and understand the insurance, the tax and the legal issues. Consequently, that’s why I get contacted from people all over the country that are at one stage or another in these plans who are trying to get out, get their tax issues taken care of and get their money paid back. I also act as an expert witness on about a dozen different ongoing cases to get these plans and these issues settled – and we’ve had great success with that.
Working in conjunction with attorneys
Burgess’s firm will review a case and make an assessment on it for free. He says that his clients can hire him in addition to an attorney, several of whom he can refer clients to that know the landscape of both 412(1) and 419 plans, and all work together on the case without any conflict of interest.
Recognizing time bombs
There are a small number of promoters of these tax shelter plans across the country, according to Burgess, and of that small number, only a handful offer bona fide plans. He says, “The others are just time bombs waiting to happen for the taxpayer who’s involved in the plan. We can look at those situations very quickly – and in some cases we already know the details of the plan just by hearing the name of the plan – and can advise the client as to the legitimacy of the plan.”