Tag Archives: Section 79 plans

What is a Section 79 Plan Anyway?

Tax free zone.Simply put, it is a tax plan where small business owners are allowed to take a 20 percent to 40 percent deduction through their business to purchase an individually owned cash-value life (CLV) insurance policy.  If you just read the above paragraph, you’d think that a Section 79 Plan is the nirvana of plans (a tax deductible way to buy CVL insurance). However, when you break down the math and the sales pitch, you’ll know why I despise these plans.

Group underwriting for businesses with fewer than 10 employees For businesses with fewer than 10 employees, the law prohibits full medical underwriting of the policies that are issued (“group” underwriting is required, which is much more risky for an insurance company). Amazingly, one of the insurance companies offering these plans doesn’t have the ability to issue non-medically underwritten policies. This is laughable and pathetic all at the same time.  Why are the finances of Section 79 Plans so marginal? Section 79 Plans are up to 40 percent deductible because the life insurance policy purchased is a crummy policy by design. That’s right, by design, the policy is a terrible cash accumulator. The better the policy, the less the deduction. A good policy, Retirement Life(TM), for example, would receive only a 5 percent to 8 percent deduction through the plan.

Converting the crummy policy after year five  Section 79 Plans are funded into a crummy cash accumulating policy for five years. Then, the client is typically shown how the policy can be converted to a variable life policy or EIUL policy earning 9 percent annually going forward. Besides that, this is not a conservative example, the numbers are financially marginal even assuming a 9 percent rate of return.  Why are so many agents trying to sell Section 79 Plans? This is what really moved me to write this article?

Agents are pitching Section 79 Plans to clients for two simple reasons:

  1. Many small business clients will buy any plan that is “deductible” because they so despise paying income taxes,
  2. Insurance advisors want to sell life insurance.

This brings up an interesting issue. If the plan is marginal from a wealth-building standpoint, then why are agents selling it? Again, there are two reasons:

1) Most advisors have not broken down the math so they can come to a correct conclusion, which is that the plans are not worth implementing from a pure financial standpoint.

2) Some advisors know the plan is marginal from a financial standpoint and don’t care because they know they can still sell it to business owners who are looking for deductions.

The first reason is somewhat excusable (or was, before you knew the truth). The second reason is what helps gives life insurance agents a bad reputation.  Clients would be better off paying tax on their money and funding a “good” EIUL policy for wealth building. It sounds crazy, but it’s true. The math does not lie. Clients would be better off paying tax on their money and taking it home to buy a “good” cash accumulating policy.

IRS Targeting Section 79 Plans of Southwest Financial Group, Inc. (“SFG)

IRS BookJul 16, 2015 IRS audit, IRS audit of Section 79 Plan, IRS audit of Southwest Financial Group plan, Phoenix, representation for Section 79 Plan audit, Section 79 Plan, Section 79 Plan audit, Southwest Financial Group audit, Southwest Financial Plan audit.

IRS tax auditor man with a stern or mean expression Insurance agents and related enterprising people have continually endeavored to concoct plans that make them a great deal of money. And when I say “plans,” I mean welfare benefit plans. These are insurance-based plans that employers can invest money into under the guise that the contributions are tax-deductible; likewise, they are represented as having the benefit of allowing withdrawals at some point in a non-taxable manner.

The IRS has never (as far as we are aware) agreed with one of these Plans. In other words, these types of Plans (and, oftentimes, their promoters) have been subject to extreme scrutiny by the IRS—and this, generally, has included not only an audit of the Plans, but also of participating employers/employees in the Plans.

As if this were not ominous enough (having the IRS audit participating employers/employees), almost invariably, these audits result in a requirement to pay not only back taxes, but overwhelming penalties of various types, as well as interest on these amounts—all of which can be staggering and even life-altering to participants who were innocently trying to plan for retirement.

One of the latest targets by the IRS is Southwest Financial Group, Inc. (“SFG”). SFG is a business located in Phoenix, Arizona, that created and/or promoted a number of “Section 79” Plans. These plans are now the focus of the IRS and their participants are beginning to receive audit notices.

We believe the participating employers/employees in the SFG “Section 79” Plans may have been exposed to severe and significant losses as a result of their participation in these suspect, scheme-based tax shelters. Our firm has handled many cases relating to welfare benefit plans and we have helped a tremendous number of damaged employers and employees. I am confident we can help those damaged by Southwest Financial Group if given the opportunity.  If you have any questions regarding this issue, please call our office 519-938-5007.


Large IRS Fines Continue For 419, 412i, Captive Insurance and Section79 Plans

Taxpayers must report certain transactions to the IRS under Section 6707A of the Tax Code, which was enacted in 2004 to help detect, deter, and shut down abusive tax shelter activities. For example, reportable transactions may include being in a 419,412i, or other insurance plans sold by insurance agents for tax deduction purposes. Other abusive transactions could include captive insurance and section 79 plans, which are usually sold by insurance agents for tax deductions. Taxpayers must disclose their participation in these and other transactions by filing a Reportable Transactions Disclosure Statement (Form 8886) with their income tax returns. People that sell these plans are called material advisors and must also file 8918 forms properly. Failure to report the transactions could result in monetary penalties in excess of $10,000. Accountants who sign tax returns, which have these deductions, can also be called material advisors and should also file forms 8918 properly.

The IRS has fined hundreds of taxpayers who did file under 6707A. They said that they did not fill out the forms properly, or did not file correctly. The plan administrator or a 412i advised over 200 of his clients how to file. They were then all fined by the IRS for filling out the forms wrong. The fines averaged about $500,000 per taxpayer.

 A report by the Treasury Inspector General for Tax Administration (TIGTA) found that the procedures for documenting and assessing the Section 6707A penalty were not sufficient or formalized, and cases often are not fully developed.

TIGTA evaluated the IRS’s effectiveness in identifying, developing, and applying the Section 6707A penalty. Based on its review of 114 assessed Section 6707A penalties, TIGTA determined that many of these files were incomplete or did not contain sufficient audit evidence. TIGTA also found a need for better coordination between the IRS’s Office of Tax Shelter Analysis and other functions.

“As penalties are meant to encourage voluntary taxpayer compliance, it is important that IRS procedures for documenting and assessing them be well developed and fully documented,” said TIGTA Inspector General J. Russell George in a statement. “Any failure to do so raises the risk that taxpayers will not receive consistent and fair treatment under the law, and could further reduce their willingness to comply voluntarily.”

The Section 6707A penalty is a stand-alone penalty and does not require an associated income tax examination; therefore, it applies regardless of whether the reportable transaction results in an understatement of tax. TIGTA determined that, in most cases, the Section 6707A penalty was substantially higher than additional tax assessments taxpayers received from the audit of underlying tax returns. I have had phone calls from taxpayers that contributed less than $100.000 to a listed transaction and were fined over $500,000. I have had phone calls from taxpayers that went into 419, or 412i plans but made no contributions and were fined a large amount of money for being in a listed transaction and not properly filing forms under IRC section 6707A. The IRS claims that the fines are non-appealable.

On July 7, 2009, at the request of Congress, the IRS agreed to suspend collection enforcement actions. However, this did not preclude the issuance of notices of assessment that are required by law and adjustment notices that inform the taxpayer of any account activity. In addition, taxpayers continued to receive balance due and final notices of intent to levy and pay Section 6707A penalties.

TIGTA recommended that the IRS fully develop, document, and properly process Section 6707A penalties. The IRS agreed with TIGTA’s recommendation and plans to take appropriate corrective actions. I think as a result of this many taxpayers who have not yet been fined will shortly receive the fines. Unless a taxpayer files properly there is no statute of limitations. The IRS has, and will continue to go back many years and fine people that are in listed, reportable or similar to transactions.

If you are, or were in a 412i, 419, captive insurance or section 79 plan you should immediately file under 6707A protectively. If you have already filed you should find someone who knows what he is doing to review the forms. I only know of two people who know how to properly file. The IRS instructions are vague. If a taxpayer files wrong, or fills out the forms wrong he still gets the fine. I have had hundreds of phone calls from people in that situation.

Court Hammers Taxpayers in 419 Ruling


I’m not sure why this 419 case hasn’t been talked about much, but it certainly got my attention when it came across my desk.

If you’ll remember, 419 plans were the darling of the life insurance industry for years. The plans were sold as a way to buy cash-value life insurance in a 100 percent tax-deductible manner in which the death benefit would pay out tax-free. Additionally, individuals (usually business owners) could exit from the plans, at which time the cash-value life insurance policies would be distributed to the individuals. The individuals then could borrow from the policies tax-free in retirement.

If you know the history of 419 plans, you know that the Internal Revenue Service has despised them for over a decade. For the most part, the courts have ruled against taxpayers in cases involving 419 plans, and the IRS has acted several times to curb their use. The IRS essentially killed multi-employer plans, which spawned the use of single employer plans which were subsequently killed (or so we thought).

Scorpion and the frog — If you have never read the story of the scorpion and the frog, I highly recommend it. Many 419 administrators (such as Section 79 plan administrators) are scorpions. They do what they do, no matter the consequences to clients or to the advisors who recommend them.

Tax court sounds death knell on 419 plans?

On July 13, the same tax court that issued the landmark 419 case back in the day (Neonatology Associates v. Commissioner of Internal Revenue) came down hard on one of the few remaining 419 plans in the industry. It seems the judge was trying to send a message in his opinion, and I hope it will be received loud and clear.

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Internal Revenue Code Section 79 Plans and Captive Insurance History

by Lance Wallach
by Lance Wallach

When trying to understand how a product becomes the focus of IRS scrutiny it helps to know its history. In the case of plans that fall under Internal Revenue Code Section 79, that history is complex. Insurance companies, agents, financial planners, and others have pushed abusive 419 and 412i plans for years. They claimed business owners could obtain large tax deductions. Insurance companies, agents and others earned very large life insurance commissions in the process.

Eventually, the IRS cracked down on the unsuspecting business owners. Not only did they lose the tax deductions, but they were also fined, in addition to being charged penalties and interest. A skilled CPA with extensive IRS experience could usually eliminate the penalties and reduce the fines. Most accountants, tax attorneys and others, however, have been unsuccessful in accomplishing this.

After the business owner was assessed the fines and lost his tax deduction, he had another huge, unforeseen problem. The IRS then came back and fined him a huge amount of money for not telling on himself under IRC 6707A. If you participate in a listed or reportable transaction, you must alert the IRS or face a large fine.

In essence, you must alert the IRS if you were in a transaction that has the possibility of tax avoidance or evasion. Not only must you file Form 8886 telling on yourself, but the form needs to be filed properly, and done every year that you are in the plan in any way at all, even if you are no longer making contributions.

According to IRC 6707A Expert Lance Wallach, “I have received hundreds of phone calls from business owners who filed Form 8886, usually with the help of their accountants or the plan promoter. They got the fine for either improperly filing, or for making mistakes on the form.”

Obamacare-Tax-Small-Business-ConfusionThe IRS directions about preparing the form are vague, especially if the form is filed late. They presume a timely filing. In addition, many states also require forms to be filed.

“For example, if you work in New York State and manage to properly fill out the Federal form, but do not file the State form, you may still get fined,” says Wallach, adding that he only knows of two people that know how to properly prepare and file the forms, especially forms being filed late. As an expert witness in such cases, Lance Wallach’s side has never lost.

The result of the all of the above was many lawsuits against insurance companies, including Hartford, Pacific Life, Indianapolis Life, AIG, and Penn Mutual, to name just a few. Agents, accountants, and attorneys were also successfully sued.

Lately, insurance companies, agents, accountants, and others have been selling captive insurance and Section 79 scams. The motivations are exactly the same. They push large tax deductions for business owners. There are also huge commissions for salespeople, though this is usually mentioned only in passing, if at all.

Anyone participating in a listed or reportable transaction must properly file Form 8886 or face large IRS fines. A listed transaction is any transaction specifically identified as such by published IRS guidance, or one substantially similar to that transaction. A reportable transaction is any transaction that has the potential for tax avoidance or evasion.

“In my experience, the desire to avoid taxes is usually the principal and sometimes the only reason why people participate in Section 79, captive insurance, or 419 plans. That is why I generally take the position that virtually everyone participating in one of these arrangements should properly file Form 8886, if only protectively as a precaution,” says Wallach.

If you do not properly file Form 8886, there is no Statute of Limitations. That means the IRS can come back and fine you many years later. Anyone that wants to risk an IRS audit by utilizing a captive insurance or Section 79 scam should, at the very least, engage a competent professional to file 8886 forms. By filing protectively and properly, the Statute of Limitations starts running and you avoid the very large IRS penalties under 6707A.

Never utilize directions from a plan promoter or salesman as to how to fill out 8886 forms. They would only be attempting to protect themselves, and doing so could result in you being fined. Lance Wallach stated that he knows of many examples of this happening, including a plan promoter who assisted almost 200 business owners in preparing and filing 8886 forms. All of them got fined for improper preparation of the forms.

The two people that have been successful in filing 8886 forms for business owners have had numerous conversations with IRS personnel. They get the impression that it is almost impossible for an accountant, tax attorney, or anyone else to properly prepare and file the forms. One of them, who spent 35 plus years with the IRS, has also been successful in fighting the IRS on penalties and fines assessed against business owners who participate in these plans, though the IRS publicly claims that you cannot appeal the fine under 6707A.

IRS Increases Audits of Section 79, 419, 412i and Captive Insurance

by Lance Wallach
by Lance Wallach

In recent years, the IRS has identified many of these arrangements as abusive devices to funnel tax deductible dollars to shareholders and classified these arrangements as “listed transactions.”

These plans were sold by insurance agents, financial planners, accountants and attorneys seeking large life insurance commissions. In general, taxpayers who engage in a “listed transaction” must report such transaction to the IRS on Form 8886 every year that they “participate” in the transaction, and you do not necessarily have to make a contribution or claim a tax deduction to participate. Section 6707A of the Code imposes severe penalties ($200,000 for a business and $100,000 for an individual) for failure to file Form 8886 with respect to a listed transaction.But you are also in trouble if you file incorrectly.I have received numerous phone calls from business owners who filed and still got fined. Not only do you have to file Form 8886, but it has to be prepared correctly. I only know of two people in the United States who have filed these forms properly for clients. They tell me that was after hundreds of hours of research and over fifty phones calls to various IRS personnel.

There is no doubt that while the public doesn’t really think much about buying life insurance, they have a need for it. Life insurance serves the purpose of funding the family’s continuation at death, and prevents the financial shock from the loss of the family’s main provider.

Uncle Sam Wants You To Pay TaxesLife insurance is also sold as a tax shelter of sorts. Because the investment growth on the cash value of a life insurance policy is not taxed, and in fact may never be taxed, life insurance can sometimes be a very efficient investment. (And sometimes not — eventually, the cost of insurance which increases dramatically with age can significantly eat away at investment returns, and more often than not the investment returns somehow never quite match the pollyannaish predictions of the illustrations shown to prospective buyers — those illustrations with unrealistic financial projections being known in the industry as “liar ledgers”).

The problem with life insurance as a tax shelter is that typically it must be purchased with post-tax dollars. Historical attempts by creative attorneys and financial advisers to manipulate various tax-free strategies to encompass a life insurance policy have nearly all ended in disaster: VEBAs, 412(i) plans, and 419 plans all ended with the taxpayers often paying more tax in the end than if they had done nothing in the first place, and lawsuits against advisers for professional negligence nearly hit the epidemic point.

For somewhat obvious reasons, the IRS has typically gone after arrangements that were pitched to clients that they could purchase a large amount of life insurance with pre-tax dollars like a heat-seeking missile. Yet, advisers persist in trying to wed life insurance to things that it shouldn’t be hitched to, so as to obtain the result of a pre-tax purchase of life insurance — and big commissions to the advisers, who if in good with their insurance company, might make upwards of 40% of the first-year’s premiums paid in on a Universal Life policy, and upwards of 80% on a Whole Life policy (they almost never disclose these commissions to their clients, of course).

The latest attempt to wed life insurance to something that will result in a pre-tax purchase of life insurance is that involving smallish captive insurance companies. These companies make the 831(b) election so that they are not taxed on their premium income, with the result that the underlying company can quite lawfully pay some reasonable amount of premiums to the captive and take a current-year deduction for it, but the captive does not pick up the premiums received as income.

From a tax standpoint, the benefits of an 831(b) captive are not that great — most of the money should be used to pay claims if the actuarial calculations of the premiums are anything like close, and then the balance of the money is subject to capital gains taxes when the company is liquidated. In the meantime, an 831(b) captive is not allowed to deduct all, or even most, of its operating costs.

Plus — and here is where life insurance re-enters the picture — an 831(b) captive is internally taxed annually on its investment income, which further eats into the tax efficiency of the captive. But what if the captive could purchase life insurance — which grows tax-free — and thus avoid the tax on its investment income? Welcome to the life insurance tax shelter du jour.

There are now tax shelter promoters out there (many of them the same ones who sold VEBAs, 412(i), and 419A(f)(6) plans in past years) actively marketing and selling 831(b) companies as a conduit to purchase life insurance with pre-tax dollars. Sometimes they try to disguise the transaction by having the captive do a split-dollar transfer to a trust that buys the life insurance, or having the captive invest in a preferred share of an LLC that buys the life insurance. This is just putting lipstick on the pig. Others just tell their clients to purchase life insurance directly inside the captive.

The truth is that it is probably fine for a mature captive, meaning one that has been around for some years and has large reserves and surplus, to use a small amount of its investable assets to purchase a key-man policy, or maybe invest in life settlements or the like.

But this is not how the 831(b) captives are being sold; instead, clients are being shown illustrations where the life insurance is being purchased soon after the first premiums are paid to the captive (the advisers want their commissions now, not later), and the efficiency of the captive is being measured not in its effectiveness as a risk-management tool (it’s proper purpose) but rather as an investment and estate planning tool (the improper tax shelter purpose).

In reviewing these transactions, the presence of the 831(b) captive is simply a sham. Premiums in these deals are rarely calculated based on anything like real-world risks, but the promoters are making a determination of how big of a deduction the client wants, and then “backing in” the premium amounts with the help of actuaries who will testify that a $500,000 premium for $2 million worth of terrorism insurance for a business in Lenexa, Kansas, is reasonable, and, oh, also that the world is flat, water is dry, hot is cold, and the sun comes up in the West.

Section 79

by Lance Wallach
by Lance Wallach

For businesses with 10 or fewer employees, the law prohibits full medical underwriting of the policies that are issued (“group” underwriting is required, which is much more risky for an insurance company).

Beginning this article, I wanted to reiterate my comments on implementing plans with fewer than 10 employees.

Amazingly, one of the insurance companies offering this plan seemly doesn’t have the ability to issue non-medical underwriting policies. This is laughable and pathetic all at the same time, and a plan you’ll want to stay far away from.

As I briefly alluded to in my previous article, one of the reasons I really do not like Section 79 plans is that they basically force employers and those helping them set up Section 79 plans to lie to the employees when implementing the plan.


Section 79 plans are employee benefits plans. As such, employers are not supposed to discriminate in favor of key employees or business owners.

As you know, Section 79 plans are implemented so business owners can take a business deduction for the purchase of an individually owned life insurance policy that the owner can borrow from tax free in retirement.

It sounds great until you break down the math and understand that a client would be better off paying taxes on his/her money, taking it home, and funding a good cash value life policy rather than the low cash accumulation Section 79 Plan policy.

Notwithstanding the math behind Section 79 plans, let’s talk about the benefits for employees. The employee owner is going to buy a “permanent” policy that will carry cash and can be borrowed from tax free in retirement.

That same policy must be offered to all employees. If that actually happened in a full-disclosure manner, virtually all the employees would opt for the same permanent policy; and if that happened, the finances of the plan would really go out the window because of the tremendous costs for the employees.

How do you “work around” this issue?

The work around of this issue is a bit clever and deceptive. The employees will be scared into voluntarily opting for $50,000 of term insurance instead of the full-benefit policy (term or permanent).

Why would an employee opt for $50,000 in term instead of a policy with several hundred thousands of dollars or even millions of dollars in death benefits? Because employees who are provided death benefits by an employer in excess of $50,000 are taxed on the additional benefit on an annual basis (and it increases every year).
Roccy is a good man and the author of the above article. I did not copy the entire article. I only copied the first page. Roccy D is a very smart man who is aware of the problems with abusive tax shelters including 412i 419 and the new abusive section 79 plans. It seems that over the years he and I have attacked abusive 419 and 412i plans, while everyone else was selling them. Now he and I are warning about section 79 scams.

The Truth Behind Section 79 Benefit Plans— I Can’t Stand the Hypocrisy Anymore

What is a Section 79 Plan? Simply put, it is a tax-plan where small business owners are allowed to take a 20-40% deduction through their business to purchase an individually owned cash value life (CLV) insurance policy. This is the huge selling point of the plan.

If you just read the above paragraph, you’d think that a Section 79 Plan is the nirvana of plans because you’ve been trying to get your profitable small business owners to buy CVL for years.

Why are the finances of Section 79 so marginal? In short, the reason Section 79 Plans are up to 40% deductible is because the life insurance policy purchased is a crummy policy by design. That’s right, by design, the policy is a terrible cash accumulator.

The better the policy, the less the deduction. A good policy (Retirement Life) for example would receive only an 8-10% deduction through the plan.

Improving the finances of the Section 79 Plan Section 79 Plans are funded into a crummy cash accumulating policy for five years. Then the client is shown how the policy can be flipped to a variable life policy earning 9% annually going forward. Besides that this is not a conservative example, the numbers are marginal even assuming a 9% rate of return.

Now in the marketplace is a new Section 79 Plan using an EIUL policy. The EIUL policy was also designed to be a crummy cash accumulating policy in the early years so the client can obtain his/her 30-40% deduction (not to mention that the company screwed up their plan for groups under 10 employees by not dealing the non-medical underwriting issue).

Why are so many agents trying to sell Section 79 Plans? This is what really moved me to write this newsletter. Agents are pitching Section 79 Plans to clients for two simple reasons: 1) Many small business clients will buy any plan that is “deductible” because they so despise paying income taxes. 2) Insurance advisors want to sell life insurance.

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Why You Should Stay Away from Section 79 Life Insurance Plans

by Lance Wallach
by Lance Wallach

I’ve had several calls lately from doctors who are being pitched Section 79 plans and are wondering if these plans are any good. The doctors are being told that Section 79 plans are the best wealth-building tool they can use to reduce their income taxes and create a tax-free retirement income.

Unfortunately for these unsuspecting doctors, what they don’t know is that not only are Section 79 plans not the best wealth-building tool they can use, they are not even a good wealth-building tool.

I have problems with Section 79 plans for several reasons:

1. You have to lie to employees to implement them. Most try to exclude workers.

2. The life illustrations given by ignorant or crooked insurance agents are not realistic. Most use today’s historically low lending rates with 2 percent to 3 percent loan spreads on variable loans on EIUL policies (ones that do not have a fixed lending rate).

3. You have to be a C-corporation to use them. Many agents don’t inform their clients of this.

4. The life policies sold in these plans are so bad that the companies don’t want them sold unless they are in Section 79 plans. (The policies are designed to have poor performance so the deduction is increased.) This is similar to the springing cash value problems with the 412i and 419 plans that got people audited and sued.

5. Another very good reason not to use these plans is because there are better alternatives.

Will IRS Get A Piece Of Google’s Generous Death Benefits?

forbes_logo_whiteLike a lot of people, I am astounded over Google’s employee death benefits. Forbes’ Meghan Casserly’s interview with Google’s Chief People Officer Laszlo Bock is must reading: Here’s What Happens To Google Employees When They Die. It’s all the more awe-inspiring as a simple disclosure long after the fact, not a recruiting stunt or PR move.

If a U.S. Google employee passes away while employed there, his or her surviving spouse or domestic partner gets a check for 50% of the employee’s salary every year for 10 years. There’s no tenure requirement so most of the 34,000 employees qualify. That’s a big benefit and big-hearted, but is it taxed?

That turns out to be a more confusing question than you might think. Much may depend on how Google set it up. If it is funded as group term life insurance (as seems likely), is it part of a Googler’s compensation? In a sense, sure. But whether it’s taxable depends on how much it’s worth.

Section 79 of the tax code provides an exclusion for the first $50,000 of group-term life insurance coverage provided under a policy by an employer. Google can deduct the cost and there’s no income to Googlers if the total coverage doesn’t exceed $50,000. Presumably 10 years of half salary coverage is more than $50,000.

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