Treasury/IRS Investigating Abusive Tax Schemes

June 2, 2005

In 2003 the Treasury Department released new rules regarding abusive tax shelters. Beginning in 2004, the Internal Revenue Service initiated audits of hundreds of doctors, and the government has summoned records from various insurance, financial and accounting firms, which would enable it to audit around 2,000-plus physicians who participated in one or more tax planning programs considered abusive.

One target of IRS investigation is whether Xélan, a California-based organization that has marketed “tax reduction plans” and other services to tens of thousands of physicians since its founding in 1971, has been promoting abusive tax shelters. A federal grand jury in San Diego has also looked into Xélan activities.

Senior officials from the Internal Revenue Service and the Treasury Department have expressed ongoing concerns about certain abusive pension plans. The officials are targeting what they consider to be potentially abusive arrangements including, but not limited to, arrangements where plan sponsors (physician practices) purchase large life insurance policies to fund their plans, pay significant life insurance premiums for the first few years and then terminate the plans and distribute the insurance policies when they have low cash values. Treasury and IRS officials have indicated that issuing guidance in this area both prospectively and retroactively is a high priority.

Investigation of abusive tax arrangement is widening, and as yet there are no definitive indications as to the outcome of IRS probes. What is known is that several Xélan divisions have filed Chapter 11 bankruptcy. How this may affect physicians who are being audited is unclear.

If you or your practice have implemented a plan or plans that have been marketed to you as methods designed to accumulate “critical mass” for you and/or your physician partners, through either specialized pension plans funded exclusively with life insurance, or through various welfare benefit plans, you should know that the IRS has prioritized audits of plans where abuses are considered to exist.

We are currently pursuing information that will enable us to determine ways that may be available to cure problems that will produce satisfactory outcomes for taxpayers. Ideally, this information would identify problems before they are discovered during IRS audits. However, since this information may not be available for several weeks, we do not suggest any steps be taken absent a clear indication of how Treasury and the IRS intend to proceed with their discoveries and resulting determinations (i.e., taxes, interest and penalties). In any event, in consideration of potentially severe consequences, we do not recommend action at any time without the advice of experienced tax and legal advisors who are conversant with the applicable regulations and the particulars of these given, potentially abusive practices.

If you are concerned about a plan or plans you may have implemented and would like to place your name on our mailing list, in order to receive updated information when it becomes available, please send us an email at reedt@rtacpa.com.

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