IRS Cracks Down on Welfare Benefit Plans

Recent court cases have highlighted serious problems in plans welfare benefit plans issued by Nova Benefit Plans of Simsbury, Connecticut. Recently unsealed IRS criminal case information now raises concerns with other plans as well. If you have any type plan issued by NOVA Benefit Plans, U.S. Benefits Group, Benefit Plan Advisors, Grist Mill trusts, Rex Insurance Service or Benistar, contact a competent tax lawyer immediately. You may be subject to an audit or in some cases, criminal prosecution.

On November 17th, 59 pages of search warrant materials were unsealed in the Nova Benefit Plans litigation currently pending in the U.S. District Court for the District of Connecticut. According to these documents, the IRS believes that Nova is involved in a significant criminal conspiracy involving the crimes of Conspiracy to Impede the IRS and Assisting in the Preparation of False Income Tax Returns.

Earlier this year, 70 armed IRS Criminal Division special agents raided the offices of Nova Benefit Plans in Connecticut. The IRS has taken other recent criminal enforcement actions in other states including Nebraska and Milwaukee, Wisconsin. The IRS has told the court that it believes Nova is promoting abusive "section 419" welfare benefit plans.

The IRS claims that a cooperating witness and several undercover agents "penetrated" Nova to ascertain its internal operations. They say Nova helped their clients violate tax laws by claiming the most minor injuries as permanent disabilities to qualify for special tax treatment. In other words, they would assist clients claim a minor scrape was a disabling and disfiguring permanent injury.

The IRS also claims that Nova assisted clients in backdating documents filed with the IRS.

How does the phony welfare benefit plan scam work? A taxpayer can contribute money tax free to the plan on behalf of the beneficiary. At a later date and with the assistance of Nova, the beneficiary can claim the money (again tax free) because of a disability. According to the IRS, Nova's plan was a scam because Nova helped taxpayers claim false disabilities. The Internal Revenue Code says disability payments are tax free if there is a permanent loss of a bodily part or function. A small scrape is a far cry from the loss of an eye.

In one recorded conversation a representative of Nova said, "We've never denied a claim... I recently, I don't want to say the client's name, but he went through a minor surgery, had a little--had a mole removed off his elbow I think and left a little scar the size of a pencil eraser, and, you know, that--that qualified."

When discussing the "independent plan trustee" that must approve the claims, the Nova representative said, "I, I'm gonna put this very simply for you, we control the trustee, okay, and I, I don't mean that in a bad way. He's independent but he's part of the family and we control the stuff that happens, we have ways to make stuff happen...It's best for us to pay out as much claims so when it times for us to fight this in tax court, we can play and sing the welfare benefit song."

Nova is not alone in the scam. According to the IRS affidavit, Nova and its principals have also done business as U.S. Benefits Group, Benefit Plan Advisors, Grist Mill trusts, Rex Insurance Service and Benistar.

Anyone who has purchased a plan from Nova or the related entities should immediately seek competent counsel. If the IRS is correct and these plans are not legitimate, the tax consequences to participants could be very high. In some cases, if clients entered these plans with knowledge of Nova's history or promises to evade taxes, the consequences could involve prison.

As a result of the raid and a cooperating witness (we call these people informants), the IRS is believed to have the client lists of Nova, Grist Mill and the others. Generally as a matter of policy, the IRS will not criminally prosecute a taxpayer who comes forward voluntarily and agrees to come into compliance. If the IRS knocks on your door first, however, all bets are off and the IRS can prosecute criminally.