US Treasury & IRS Turn Attention To Roth IRA Tax Abuses

by Leroy Baker, Tax-News.com, New York

02 January 2004

The US government has fired another shot in its barrage against abusive tax sheltering by issuing new guidance with the intention of preventing tax abuse involving the channelling of funds to Roth IRAs.

The notice states that these abuses satisfy the list-keeping and registration requirements for tax shelter arrangements that are ‘listed transactions.’ The guidance addresses situations in which value is shifted into an individual’s Roth IRA through transactions involving entities owned by the individual.

“The notice illustrates that a contribution to an IRA through a transaction that disguises the value of the contribution may disqualify the IRA,” stated Treasury Assistant Secretary for Tax Policy Pam Olson.

For example, notes the Treasury, a business owned by the individual could sell its receivables for less than fair value to a shell corporation owned by the individual’s Roth IRA. This scheme artificially shifts taxable income away from the individual’s business into the shelter of the Roth IRA structure.

“In effect, this is a disguised contribution to the Roth IRA and the notice makes clear that it will be treated as such,” Olson concluded.

Meanwhile, IRS Commissioner Mark Everson commented: “For many people, the Roth IRA is an important retirement savings tool. We are concerned that some would try to abuse this savings vehicle in an attempt to shirk their tax responsibilities.”

The notice applies to any arrangement that has the effect of transferring value to the Roth IRA corporation comparable to a contribution to the Roth IRA.

The IRS also may assert that these are “prohibited transactions” under the Code rules that disqualify the IRA or impose an excise tax on transactions between an IRA and the individual for whom the IRA is maintained or other disqualified persons with respect to the IRA.

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