BEWARE OF TAX SHELTERS IN IRAS

The American Jobs Creation Act of 2004 signed into law back on October 22, 2004 imposes a fine for suspected tax shelters.

This little known provision of the Act provides penalties for not reporting "listed transactions." The penalty is steep at $100,000 for individuals and $200,000 for all others, including corporations. The penalty for listed transactions cannot be waived or rescinded.

A listed transaction is a transaction that is the same as or substantially similar to one of the types of transactions that the IRS has determined to be a tax avoidance transaction. These transactions are identified by IRS notice, regulation, or other form of published guidance as a listed transaction.

The IRS maintains a list of their listed transactions. A taxpayer with such a transaction, or something "substantially similar", must report it at tax time, generally April 15th. If not, the tax law makes the fines almost automatic. It doesn't matter how much money was sheltered or whether the taxpayer knew about the IRS list.

For updates to the list, go to the IRS web site at www.irs.gov/businesses/corporations/index.html and click on "Abusive Tax Shelters and Transactions".

IRS Form 8886, Reportable Transactions Disclosure Statement, is where reportable transactions are disclosed. It is referred to as the most expensive tax form because of the severe penalties. The instructions for Form 8886 detail listed transactions.

RETITLING IRA AT DEATH OF ACCOUNT OWNER

The IRA owner has named a trust as the beneficiary of the IRA. The IRA owner has died and the executor, advisor, IRA custodian has been advised that the IRA needs to be retitled "in the name of the trust."

There is a right way and a wrong way to retitle the IRA in the name of the trust. If you do it the wrong way, you will have a taxable distribution to the trust and there will be no more IRA. If you do it the right way and the trust is a qualifying trust, then the trust can stretch distributions from the IRA over the age of the oldest trust beneficiary.

To correctly retitle the IRA, the name of the decedent must remain in the title of the IRA. For example: John Smith, deceased, IRA fbo the John Smith Trust. (fbo means "for benefit of")

An IRA that is titled in the name of the trust only (or in the name of any non-spouse beneficiary only) is considered distributed in full to the trust and is taxable in the year of the distribution. Be very careful when retitling an IRA at the death of the account owner.

Private Letter Ruling 200946063:

Two 76-year-old taxpayers, we will call them "Joe" and "Fred", received distributions from their IRAs and assert that their failure to accomplish a rollover with the 60-day prescribed period was due to an error by the bank.

Both Joe and Fred went to the bank in September 2005 and met with a financial representative who mistakenly opened non-IRA CDs. An employee of the financial institution even signed an affidavit acknowledging the error that caused both distribution amounts to be deposited in non-IRA CDs

The Internal Revenue Service considers all relevant facts and cirumstances when deciding to grant a waiver of the 60-day rollover requirement, including: (1) errors committed by a financial institution; (2) inability to complete a rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error; (3)the use of the amount distribution; (4)the time elapsed since the distribution occurred.

The IRS waived the 60-day rollover requirement with respect to the distribution of the amount from the two IRAs.

This ruling brings up an important point that happens all too frequently. Account owners need to double check on their transfers and make sure the funds transferred find their way into the right kind of account (whether it be an IRA, Roth IRA or non-IRA).