Doc's Tax Dodges Probed

Physician's Money Digest, Nov30 2004, Volume 11, Issue 22

Forbes

Doctors are often fair game forschemes that promise to help themlighten their tax burden. Faced with theprospect of handing over a hefty percentageof their income to Uncle Sam,they often sign up for tax-avoidanceplans that the IRS has problemswith. According to a recent report, that's the case with a group ofcompanies known as Xélan, which arethe brainchild of L. Donald Guess,DDS, a former dentist who turned toselling insurance.

The basic idea behind Xélan plans,which are sold through a network ofindependent insurance agents, is to sockpretax dollars into one or more of ahalf dozen supposedly deductible savingsplans. About 2000 US doctors whohave bought into the plans are now inthe hot seat with the IRS. The agency isauditing about 4000 doctors who tookpart in the plans, and a federal courthas temporarily frozen more than $500million of the doctors' assets.

Among the ploys that Xélan promotedwere deductible donations to itsXélan Foundation. The donations,Xélan claimed, could then be used topay the doctors for "research and probono work" at their usual rate. Thepayments could also be deferred untilthe doctors needed the extra income.Multimillion-dollar life insurance policiespaid through pretax dollars are alsopart of Xélan's financial grab bag. Thedoctors were promised that almost allof the premiums paid would bereturned, along with any investmentgains on the premiums.

The IRS is now looking intowhether Xélan's basket of insuranceproducts qualify as insurance or arenondeductible, deferred-compensationschemes. While a grand jury is decidingwhether to hand up criminal indictmentsagainst the company, four Xélancompanies have filed for Chapter 11bankruptcy, citing the negative impactof the investigations, and are headed forthe auction block.

Doctors who have taken part inXélan programs, while not currentlyunder any threat of criminal action, doface in-depth IRS audits, which couldturn out to be painful. In one Xélanaudit, a doctor had more than$262,000 in deductions denied and washit with a 20% penalty as well. He iscontesting the audit in US Tax Court.