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 The penalty for listed transactions cannot be waived or rescinded.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.