The events of recent years around Roth IRA abuse reaffirm the importance of having a reputable investment advisor. Today I’m not advocating against Roth IRAs, but for thoroughly considering what it is you’re signing up for. An experienced advisor from a reputable wealth management firm can be the best line of defense against questionable investment practices. Regardless of the consequences, including harsh taxes and penalties, many are still seduced by the tax-free earnings of Roth IRAs and highly questionable tax schemes, so a prudent investment advisor can be your best line of defense.
A recent example of such abuse occurred in the U.S. Tax Court Case, Brian M. Polowniak v. Commissioner. In February of 2016, a business consultant suffered the consequences of participating in an abusive Roth IRA scheme. According to Investment News columnist Ed Slott, Mr. Polowniak established a consulting business he named Strategies, a subchapter S corporation. He then named himself the sole shareholder, officer, and director and was awarded a big contract with Delphi Systems, a global automotive parts supplier, for consulting services.
At the urging of his financial advisor, according to Slott, Polowniak met with an attorney “who promoted a scheme he called ‘privately owned Roth IRA corporations,’ or PIRACs. How a PIRAC works—an individual’s new Roth IRA would buy the stock of a new corporation. The PIRAC would then conduct transactions with the individual’s preexisting business, typically a pass-through company like Strategies, a wholly owned S corporation.
The consequences of Polowniak’s actions were severe. Through this abusive investment activity, it was determined that Polowniak owed more than half a million dollars in taxes, interest and penalties. In total, the taxpayer owed taxes on gross receipts not reported, a 6% excess IRA contribution penalty, plus penalties for failing to file a tax return (IRS Form 5329) and failing to pay the 6% penalty. He was also charged an enhanced 30% accuracy penalty.
If this ruling sounds harsh, it is, yet the attraction of tax-free investment has lured many unsuspecting investors into fraudulent Roth IRA investment schemes. Don’t fall prey to one of them. Visit mooneylyons.com for sound investment advice, and to find out how we can help you pursue the retirement of your dreams.
Slott, Ed. Advisers beware. Another Roth IRA scam backfires. InvestmentNews. 11, May. 2016.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax-free, as long as they are considered qualified. Limitations and restrictions may apply.
Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.