Recently I have received phone calls from participants in the Sea Nine VEBA and have learned that the IRS may be auditing many more participating employers in the coming months.
Tax Roundup, 4/23/14: The Tax Fairy isn’t named “VEBA.” And: frivolous IRS notices! April 23rd, 2014 by Joe Kristan tax fairyThe Tax Fairy, that fickle goddess of painless massive tax reduction, is often sought in the misty fens of the welfare benefit sections of the tax law. A U.S. District Court in California has deprived the Tax Fairy’s believers of one guide for their hunt.
CPA Ramesh Sarva and Kenneth Elliot led Tax Fairy seekers to Section 419, which provides for VEBAs — “Voluntary Employee Beneficiary Association” plans. Properly operated, VEBAs enable employers to make deductible contributions to a plan that buys insurance for employees.
A company associated with Mr. Sarva and Mr. Elliot, Sea Nine, told employers that they could use VEBAs to get around the tax law rules against deducting most life insurance premiums. Their customers deducted contributions to VEBAs and used them to buy whole-life insurance policies with high cash value accumulation on the business owners’ lives. The owners then borrowed the cash values. The purported result was a deduction, followed by tax-free access to the deducted cash via borrowing cash values.
Tax Fairy guides can always find willing customers: “…small business owners with high net worth (often doctors with small but lucrative medical practices),” according to the IRS complaint. It has not gone well for the Tax Fairy adherents:
Sarva has successfully marketed at least 33 separate VEBAs plans to a variety of small business owners. All of these participants have been or are currently being audited by the IRS. 13 of these participant audits have been completed and have resulted in total tax adjustments of $3,500,519.
In other words, it doesn’t work. The IRS warned people off of such plans as early as 1995, and the scheme was firmly shot down by a U.S. Court of Appeals in 2002 in the Neonatology Assoc. P.A. case. In fact, Neonatology was a Sea Nine client. Undaunted, Sea Nine kept selling the idea, selling the plans through “a network of affiliated third parties” including “independent certified publica accountants (“CPA”) and financial planners.” At least they did until yesterday, when they consented to a permanent injunction yesterday against further Tax Fairy hunts.
Sea Nine had clients all over the place; the complaint lists clients in California, Florida, Alabama, and Hawaii, all with big IRS exam adjustments.
A side note: This is another example of why preparer regulation will be little use in keeping practitioners on the straight and narrow. The defendant was a CPA and as such faced much stricter credentialing than anything contemplated by the IRS. Yet he continued to sell these plans for years after it should have been obvious that they didn’t work.
The Moral? There is no Tax Fairy, and just because somebody has gotten away with something for a long time doesn’t mean they’ve found her. Also: you can make somebody take a test. You can make them somebody take CPE. But you can’t make a bumbler competent or a scammer honest.
Tax Roundup, 4/23/14: The Tax Fairy isn’t named “VEBA.” And: frivolous IRS notices!
ReplyDeleteApril 23rd, 2014 by Joe Kristan
tax fairyThe Tax Fairy, that fickle goddess of painless massive tax reduction, is often sought in the misty fens of the welfare benefit sections of the tax law. A U.S. District Court in California has deprived the Tax Fairy’s believers of one guide for their hunt.
CPA Ramesh Sarva and Kenneth Elliot led Tax Fairy seekers to Section 419, which provides for VEBAs — “Voluntary Employee Beneficiary Association” plans. Properly operated, VEBAs enable employers to make deductible contributions to a plan that buys insurance for employees.
A company associated with Mr. Sarva and Mr. Elliot, Sea Nine, told employers that they could use VEBAs to get around the tax law rules against deducting most life insurance premiums. Their customers deducted contributions to VEBAs and used them to buy whole-life insurance policies with high cash value accumulation on the business owners’ lives. The owners then borrowed the cash values. The purported result was a deduction, followed by tax-free access to the deducted cash via borrowing cash values.
Tax Fairy guides can always find willing customers: “…small business owners with high net worth (often doctors with small but lucrative medical practices),” according to the IRS complaint. It has not gone well for the Tax Fairy adherents:
Sarva has successfully marketed at least 33 separate VEBAs plans to a variety of small business owners. All of these participants have been or are currently being audited by the IRS. 13 of these participant audits have been completed and have resulted in total tax adjustments of $3,500,519.
In other words, it doesn’t work. The IRS warned people off of such plans as early as 1995, and the scheme was firmly shot down by a U.S. Court of Appeals in 2002 in the Neonatology Assoc. P.A. case. In fact, Neonatology was a Sea Nine client. Undaunted, Sea Nine kept selling the idea, selling the plans through “a network of affiliated third parties” including “independent certified publica accountants (“CPA”) and financial planners.” At least they did until yesterday, when they consented to a permanent injunction yesterday against further Tax Fairy hunts.
Sea Nine had clients all over the place; the complaint lists clients in California, Florida, Alabama, and Hawaii, all with big IRS exam adjustments.
A side note: This is another example of why preparer regulation will be little use in keeping practitioners on the straight and narrow. The defendant was a CPA and as such faced much stricter credentialing than anything contemplated by the IRS. Yet he continued to sell these plans for years after it should have been obvious that they didn’t work.
The Moral? There is no Tax Fairy, and just because somebody has gotten away with something for a long time doesn’t mean they’ve found her. Also: you can make somebody take a test. You can make them somebody take CPE. But you can’t make a bumbler competent or a scammer honest.
Kenneth Elliot KAE Insurance Co
ReplyDelete#kenelliotseanineveba
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