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    Five-year-old change in tax has left some small businesses and certain benefit plans
    subject to IRS fines; the advisors who sold these plans may pay the price.

    Financial advisors who have sold certain types of retirement and other benefit plans to small
    businesses might soon be facing a wave of lawsuits — unless Congress decides to take action
    soon.

    For years, advisors and insurance brokers have sold the 412(i) plan, a type of defined-benefit
    pension plan, and the 419 plan, a health and welfare plan, to small businesses as a way of
    providing such benefits to their employees, while also receiving a tax break.

    However, in 2004, Congress changed the law to require that companies file with the Internal
    Revenue Service if they had these plans in place. The law change was intended to address tax
    shelters, particularly those set up by large companies.

    Many companies and financial advisors didn't realize that this was a cause for concern,
    however, and now employers are receiving a great deal of scrutiny from the federal
    government, according to experts.

    The IRS has been aggressive in auditing these plans. The fines for failing to notify the agency
    about them are $200,000 per business per year the plan has been in place and $100,000 per
    individual.

    So advisors who sold these plans to small businesses are now slowly starting to become the
    target of litigation from employers who are subject to these fines.

    “There is a slew of litigation already against advisors that sold these plans,” said Lance Wallach,
    an expert on 412(i) and 419 plans. “I get calls from lawyers every week asking me to be an
    expert witness on these cases.”  

    Mr. Wallach declined to cite any specific suits. But one advisor who has been selling 412(i)
    plans for years said his firm is already facing six lawsuits over the sale of such plans and has
    another two pending. “My legal and accounting bills last year were $864,000,” said the advisor,
    who asked not to be identified. “And if this doesn't get fixed, everyone and their uncle will sue
    us.”

    Currently, the IRS has instituted a moratorium on collecting these fines until the end of the year
    in the hope that Congress will address the issue.

    In a Sept. 24 letter to Sens. Max Baucus, D-Mont., Charles Boustany Jr., R-La., and Charles
    Grassley, R-Iowa, IRS Commissioner Douglas H. Shulman wrote: “I understand that Congress
    is still considering this issue and that a bipartisan, bicameral bill may be in the works … To give
    Congress time to address the issue, I am writing to extend the suspension of collection
    enforcement action through Dec. 31.”

    But with so much of Congress' attention on health care reform at the moment, experts are
    worried that the issue may go unresolved indefinitely.

    If Congress doesn't amend the statute, and clients find themselves having to pay these fines,
    they will absolutely go after the advisors that sold these plans to them.

Litigation From Small-Business Clients