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  1. You have a new client named Allen. Allen worked his whole life to build his small successful business that now has five employees. He saved every dollar he could, and he invested very conservatively in anticipation of retirement.

    Allen comes to see you and tells you a story that is disquieting. A few years ago, he was at the country club and played a round of golf with a happy, friendly insurance agent named Bill. They quickly became friends. Over drinks, Allen complained to Bill about taxes and expressed his concern about his investments. Bill told him about a new and bullet-proof retirement plan for his business. Allen told Bill he could not afford to pay for his employees’ retirement, but Bill assured him that he could arrange an “executive carve out” for the defined benefit plan. Bill convinced Allen to implement a 412i plan that would include life insurance that gives Allen tax deductions now and when he retires. Bill sold him the plan and life insurance provided by Colossal Insurance, an A+ company. Allen paid big money and took big deductions. Life was great until recently. Allen is having trouble getting information from Bill, and he is worried about his investment.

    You look further into the situation. It turns out that Allen was in a hurry since Bill convinced him he’d lose the opportunity if he did not move quickly. He told Bill to do all the paperwork (filled with errors and inaccuracies), and Allen does not remember signing anything. You call Bill and Colossal, and everyone claims to be too busy to answer questions, but they will get back to you. Promise! After some digging, you conclude that there are serious misrepresentations on the life insurance application (where Allen’s signature is clearly forged) that may give the insurance company grounds to avoid paying benefits. Even worse, it looks like Allen’s got an unqualified plan for which he was never entitled to take tax deductions and a present tax problem – a serious one. The economy has been tough, and he does not have nearly enough cash to resolve potential IRS issues. What do you do?

    One alternative is to develop a plan to engage with the IRS and come to some agreement. But the idea that the IRS is ready to help Allen exists only in IRS propaganda. And contacting the IRS without all the facts and all the paperwork can open your new client to serious risks. No matter what, an agreement with the IRS will probably be more than Allen can afford. Why should Allen suffer the losses that were caused by those he trusted?

    Another alternative, since the IRS remedies are likely to outstrip his ability to pay, is to wait until Allen can develop some resources to handle the IRS situation. But how will he do that?

    The answer to each question is the same – those who were responsible should pay for what your client has suffered. Let’s go through the process of establishing a defined benefit plan, what can and sometimes does go wrong, to whom your client can look for compensation, and what relief is likely available.

    Establishing a Defined Benefit Plan
    It’s no secret why business owners look at adopting defined benefit plans. Social Security payments (assuming they will be available at a reasonable age for retirement) are hardly sufficient to maintain the lifestyle of a typical business owner. Substantial supplementation of annual income will be required. A defined benefit plan can provide the means of funding the sup