Accounting Firm Penalized $34 Million for Promoting Illegal Tax Shelters Involving IRAs | Ed Slott and Company, LLC

Accounting Firm Penalized $34 Million for Promoting Illegal Tax Shelters Involving IRAs

By Joe Cicchinelli, IRA Technical Expert

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The IRS announced that it reached a financial settlement with an accounting firm that promoted illegal tax shelters, some of which involved Roth IRAs. BDO USA LLP was fined $34.4 million dollars for its part in promoting and not reporting various tax shelters over seven years. Some of these abusive tax shelters involved the use of Roth IRAs.

When someone engages in transactions with a business whose shares are owned by his Roth IRA, that transaction is a “listed transaction” that must be reported, generally by both the Roth IRA and by the individual.

In this case, BDO did not report these listed transaction as required by law. In addition to the $34 million penalty, BDO also agreed to cooperate with the IRS in IRS audits and litigations involving its tax shelter products.

Reminder: The IRS has been warning taxpayers for many years that transactions involving using Roth funds to hold a business may be illegal. These transactions often involve a taxpayer who runs a business that is owned by his Roth IRA. An example would include an IRA owner who owns and creates separate businesses and then runs his money through these Roth IRA-owned businesses. As a result, money that should be taxed flows tax-free into his Roth IRA.

Another problematic scenario is what IRS is calling ROBS (rollovers as business start-ups). This transaction involves the set-up of a new business that sponsors a 401(k) plan. Retirement assets are rolled into the 401(k) plan and are then invested in the stock of the company. The cash then ends up in the bank account of the business, income tax free, where it can be used to start up the business. While this strategy is technically legal, many business owners fail to follow the rules to implement the strategy correctly or fail to operate the 401(k) plan properly. IRS has warned that it will continue to scrutinize these types of transactions.

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