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Don’t mix Roth IRA and business; IRS cracking down

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in Small Business Tax,Small Business Tax Deduction Strategies

Have you heard about the new, "creative" way to shift assets from your business to a Roth IRA to skirt the IRA contribution limits? Well, forget that advice and heed this:

The IRS came out swinging last month, issuing formal notice that such transactions would be listed as "abusive tax shelters" and trigger stiff penalties. (IRS Notice 2004-8)

How do those transactions work? Typically, they involve entities owned by one person. For example, a business owned by John Smith sells its receivables for less than fair value to a shell corporation owned by John's Roth IRA.

The goal: to shift taxable income away from a person's business into the shelter of a Roth IRA. The transactions were never fairly valued, and so this in effect shifts value into the Roth IRA, where future withdrawals are tax-free.

The IRS notice applies to any arrangement that has the effect of transferring value into so-called "Roth IRA corporations" (corporations owned by the taxpayers' Roth IRAs). The IRS argues that such transfers are similar to making excess contributions to a Roth IRA, which is prohibited. The end result could be an excise tax on those transactions or even disqualifying the IRA.

In addition, the IRS declared that type of shelter a "listed transaction." Taxpayers who involve themselves with any listed transactions must disclose that fact to the IRS. Plus, the promoters of such deals must keep lists of the taxpayers who sign up. Such disclosure gives the IRS a way to pursue the shelter's users and promoters.

Best bet: Play it safe; stay away from mixing your Roth IRA with your business transactions.

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