Washington (Jan. 5, 2004) -- The Treasury and Internal Revenue Service have issued new guidance aimed at shutting down abuses involving indirect contributions to Roth IRAs.


The guidance, in IRS Notice 2004-8, addresses situations in which value is shifted into an individual’s Roth IRA through transactions involving entities owned by the individual. Notices are published in the Internal Revenue Bulletin.


“The notice illustrates that a contribution to an IRA through a transaction that disguises the value of the contribution may disqualify the IRA,” said Pam Olson, Treasury assistant secretary for tax policy. For example, 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, a scheme that 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 said.


The notice applies to any arrangement that has the effect of transferring value to a Roth IRA corporation comparable to a contribution to a Roth IRA. The IRS 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. Such transactions and any transactions that are substantially similar are identified as “listed transactions,” subject to disclosure and to list-keeping and registration requirements, the Treasury said.


-- WebCPA staff

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