Self Directed IRA – Caution

Self directed IRA schemes have a great chance of being involved in prohibited transaction and hence the owner of these retirement benefits face the potential danger of their IRA account being disqualified. This was discussed and decided in the Peek V. Comr. Case. The details of this case are explained below.

A fire safety business was considered a potential investment opportunity by two taxpayers. A broker, who was facilitating the sale, connected these tax payers to a third party agent who managed the process further. This agent explained a technique to the tax payers which involved them to set up a self directed IRA, move funds from their existing IRA schemes to the self directed schemes, set up a company, sell shares of the company and direct the funds into the self directed IRA scheme and finally use these funds to buy a business interest.

The paperwork for this scheme suggested that any prohibited transaction undertaken would prove harmful for the whole objective of this strategy. The paperwork was also accompanied by a letter from the firm’s accountant explaining the prohibited transaction rules clearly, though no personal guaranties were specified.

The scheme went as per plan and the transferred funds were used to purchase the assets of the fire safety business. This transaction included a promissory note from the company to the sellers for one fifth of the total sales price. A couple of years later, the tax payers moved to Roth IRAs from their original IRAs and hence when the company was finally sold, the payments were finally transferred to Roth IRAs.

The taxpayers’ income was fully adjusted to include the capital gains acquired from company stock sales by the IRS and the justification provided by them was that personal guaranties were equivalent to prohibited transactions. The assets from the IRA were deemed to have been distributed to these guaranties. The IRS reasoned that section 4975©(1) (B) disallows tax payers from creating loans or loan guaranties indirectly to their IRAs. The Roth IRAs discontinue its existence if it is funded by company owned stock.

The tax payers had to suffer additional burden of 20% in penalties for not declaring the sales of the company. Their tax advisers could not be trusted upon, because they were the promoter of this sales strategy. The advisers were not given full information either because they were not transparent with the advisors and did not inform them about their decision to personally guarantee their loans.

This is a good example for investors to understand the prohibition rules clearly and what transactions to proceed with and what transactions to avoid. It becomes doubly complicated when dealing with investment in retirement funds as the rules pertaining to the IRA accounts are more comprehensive than the other funds. This case also explains the needs to be fully transparent with the tax advisers as they are the ones who represent a particular tax strategy and no transaction should be carried out without their knowledge.

IRS and YouTube Partnership To Educate You

Internal Revenue Service has partnered up with online video site, YouTube, to deliver its message to general public.  You can find hundreds of useful tax related videos on YouTube.   You can estimate the popularity of this combination by looking at viewership of IRS channel.  Over 1.7 million views makes the IRS YouTube Channel  the fifth most viewed online channel out of more than one hundred and twenty-five YouTube Channels.

IRS conducts online webcast on various topics and post those webcast as video’s on YouTube.  You can participate in online webcast to ask your questions live to an IRS agent or simply view the video’s to enhance your knowledge.  During tax time you find videos about last minute tax tips or how to arrange payment schedule with the IRS.   However, you will also find wealth of knowledge even after the tax time.

Just last month, IRS conducted a webinar called “Small Business Advantage: Put our knowledge to work for you.”  Webinar was over one hour long and included multiple resources to help small businesses thrive.

You can easily find IRS YouTube channel by simply typing IRS in the search box on YouTube.

Sanjiv Gupta CPA advises all his clients to learn from online videos but don’t depend upon those advises entirely.  Often time interpretation of online video can cause quite a bit of confusion and usually end up costing penalties and late payment charges to tax payers.  ‘You should watch the video to understand the basic concept but always consult with tax professional to understand how you can apply the concept in your business” explains bay area’s popular certified public accountant Sanjiv Gupta.