The observations by Monika Templeman and Colleen Patton of the Internal Revenue Service (IRS) came during an hour-long IRS Webinar held as part of the tax agency’s public outreach efforts.
Templeman, Director of Employee Plans Examinations, told Webinar attendees that rather than individually going after questionable retirement plans, the IRS tries to identify the person who organized the scheme as part of what the agency terms “promoter investigations.” In one case, for example, the IRS identified one person at the center of 500 cases of suspected retirement plan tax fraud and that investigators found issues in 83% of those matters.
“We are very concerned that we have promoter schemes that could corrupt the whole employee retirement system,” Templeman declared.
“This is a very new thing with promoter investigations,” added Patton, Area Manager of Employee Plans Examinations for the Pacific Coast region. “The concerns that these things are going on in our backyard are a relatively new thing, but we are reacting to (the issue).”
Among the areas receiving IRS attention, the two officials listed:
- Deductions for excess life insurance in a 412(i) plan.
- ROBS – (Rollover as Business Start-ups) arrangements created to secure available funds held in tax-deferred savings (usually under a prior employer’s plan) for an aspiring entrepreneur without incurring resultant tax liabilities. Patton said the agency is particularly concerned about ROBS because of the high bankruptcy rate with startups. “We’re seeing people lose their retirement savings because they don’t have the skills to run a business,” Patton said.
- Invalid collectively bargained plans. The two officials said these instances often involve a professional office (lawyer, doctor, etc,) where the owner unilaterally decides that workers will join a union plan - frequently one offered by the Teamsters Union.
- A one-person defined benefit plan where the organization’s returns don’t show enough cash flow to support such a pension program.
- A complicated scheme involving a company that creates a management firm to establish a DB plan. Much of the firm’s revenue is shifted to the management arm through fees to minimize taxes and the resulting DB plan only benefits the owner. “We look at the plan as basically a deduction where there is no intent to really have a plan,” Patton said. “The plan is more smoke and mirrors.”
The two officials also pointed to an announcement by the U.S. Department of Justice about a civil suit being filed against a retirement plan fraud suspect (see DoJ Sues Adviser for Tax Fraud Related to Sham Benefit Plans).
More information about the IRS Webinar presentation is at http://www.irs.gov/pub/irs-tege/atat_phoneforum_presentation.pdf.