Fraudulant pension practitioner - What to do?

[SoCalActuary]

Just met with accountant for plan sponsor who showed me past admin work for a possible takeover.

1040 Tax forms were wrong. Participant was advised to borrow back all the pension contributions, by way of the pension administrator who accomodated the transaction.

Big deductions for a db plan for two 35 yr olds. The TPA wrote to explain how all the prohibited transactions would be done.

I agreed the admin looked wrong. Then I checked the DOL who did not receive any of the prior 5500 forms. Thus, the copies of 5500 for db that were given to client and signed by client were never filed. The forms did not disclose the loans.

In addition, the forms did not show the actuary's cert. so I cannot ask if there was a valid enrolled actuary's work done.

My attorney says that the client can ignore the invalid past work at their own peril. Or, much better to go back and correct 4 past tax returns and 4 5500 filings, go into CAP, and sue the old TPA for damages for all the back penalties and underpaid taxes.

Any suggestions on handling this situation?

[mbozek]

How is the clients lawyer going to get paid? On a contingency fee? Is your attorney a litigator?

[david rigby]

Don't take the assignment. Run. Very fast.

[Guest b2kates]

I agree that you should run away fast.

But, why file 4 years returns, were returns never filed?

Suggest that any litigator know ERISA and a"professional Malpractice"

Good luck.

[SoCalActuary]

Back income tax 1040's were wrong. Back 1120 forms were wrong.

Back 5500 forms were never filed.

The old TPA has a history of being way outside the rules. I might consider telling you some excerpts from his client letters. The TPA claims tax and pension expertise but appears to have a competitive edge over people who have the conscience to stay within the law. If the IRS only knew!!!

The new client is very nervous about the illegal past activity and wants to operate clean. My inclination is to start fresh and assume the supposed plan did not really exist. But I would like to hear any other suggestions.

[GBurns]

A conundrum. To take over or to not take over? To clean up or to hope for the best?

I do not see a problem in helping this client as long as there is a clear delineation between the work of the previous TPA and your work going forward. Make sure any "clean up" is a separate engagement and not a part of your TPA agreement.

That the client wants to be clean, is the client's decision, as long as the client is aware of all the problems, consequences and penalties and is paying you for your efforts.The client's decision might change when all is made clear.

What needs to be done, rather than what should be done is going to be based on the consequencies and penalties disclosed eventually to the client and what his legal advisor suggests. Make sure that you do not give the legal advice, make sure it is someone of his own choosing.

It might turn out, after afull evaluation of the consequences etc, that ignoring the past might be prudent, but that advice should not come from you as TPA. You also should not be in any position to pass judgement on the effect etc on 1040s or 1120 etc unless you have looked at them as they would be amendment. Including any aaditional income etc might have no effect because of being offset by deductions etc. You really have to look to know for sure. If there is no serious eefect in amending the returns, then your choices might be simpler.

I would not run, this will be a great learning experience, will create a great relationship and generate respect for you with both the client and the client's CPA and lawyers. It might present you with an opportunity to help any others that both this client, the CPA and lawyer are aware of. I am sure that they know other clients of this TPA. And you will be well paid for all these benefits. I would not pass on this opportunity.

Litigation against the TPA is a side issue and can only be addressed after all the "damage" is quantified. Getting side tracked or ahead of the game serves no purpose.

[SoCalActuary]

GBurns Thanks for the encouragement. Both the tax advisor and I have reviewed the past personal tax returns. The tax advisor asked me if they could be right.

E.g., sole prop who deducts their pension on schedule C without any benefiting employees.

Another - deduction on 1040 for $25,000 for "Investment"

The TPA wrote a letter to client to put $100,000 into plan, make check to TPA for a "Note" and then endorse the check immediately back to the client. client then pays personal expenses from the same funds. This looks like income to the accountant and to me. So we have plenty of reason to say "severe audit risk"

But I'm still looking for advice on the bad boy down the street. Has anyone taken action against criminally inclined competitors?

[GBurns]

Very rarely does anything ever happen to these "wrongdoers". The "good guys" are usually too chicken and the clients very often will not provide any evidence or verfication. The clients are afraid that it might be cutting off their nose to spite their face. After all, it was the client who agreed to and allowed the wrongdoing, then benefited from it. It is also the client whose tax return has the tax fraud etc and who owes the back taxes and penalties.

Watch what happens when this prospective client finds out how much he owes etc. He might just stop taking your calls.

The only thing that you can do is to provide the documentation to the CID of the IRS, the DoL and any other regulators and insurers (WC and Gen Liability if this affected the payroll). If you do not have his permission, after you have done your best for him, you can always do it anonymously. If you press them, they will investigate all the clients for similar issues. It helps if there is documentation on at least 1 other client. The client letters that you have will help.

Sleazy but what else is there to do?

[mbozek]

I would not recommend contacting any govt entity especially the IRS with the above allegations because of the difficulty of proving them and the ramifications that could result such as a law suit for defamation, damage to reputaton, etc from the party you are accusing. Also It will be necessary for this client to retain counsel in dealing with the govt agencies at their own expense to protect thier interest. Another reason not to get the IRS involved is that the client's tax returns for last 3-6 years will be subject to IRS audit which based on what has been alleged and will require the payment of additonal taxes and penalities by the client. Under the tax law the taxpayer is responsible for the accuracy of the tax return, not the advisors, so there is a question of whether the advisor could be liable for inaccuracies on the tax return. Coulnsel will need to review state laws to see if the acts are considered malpractice and what is the s/l for filing a suit as some tax adviors may not be considered persons subject to a suit for malpractice.

[david rigby]

Might there be other professional groups who have some "influence"? For example, if the "questionable practioner" were also a licensed CPA or attorney, would it be of value to identify this to the appropriate professional society? (Perhaps the answer depends on whether we talking about fraud vs. incompetence.)

[RCK]

SoCalActuary: If you are approaching this as a pure business decision, I vote with several others--RUN. You can't possilby bill all the time that it is going to take to fix this. It looks like it is going to require completely new valuations going back 4 years, plus all the prohibited transaction filings and discussions with the IRS.

If you want to do this out of some sense of professional responsibility and can view the whole project as essentiallly pro bono work, then by all means go for it!

And if you are going to be the new Actuary, and can find a predecessor, you will want to double check Precept 13 of the Actuarial Standards Board Code of Conduct and your responsibility to disclose the problem.

RCK, FSA, EA