Client Should Have Realized CPA Firm’s Tax Deal “To Good to be True”
Robert K and Joan L. Paschall V. Commissioner of Internal Revenue
(No. 2: Nos. 10478-08, 25825-08, Decided July 5, 2011
Robert Paschall, a married resident of California and an MIT graduate, worked for Rockwell International for his entire career until he retired in 1996. Early in 2000, Paschall paid Grant Thorton, a national accounting ﬁrm, $120,000 for advice on his regular IRA that had a value of $1,391,942. They presented Paschall with a plan, which he accepted, to “restructure” his regular IRA into a Roth IRA – the $425K IRA Mistake.
Under Grant Thorton’s guidance, Paschall rolled his IRA over into a self-directed traditional IRA. He also opened a self-directed Roth IRA, funding it with $2,000, and created two corporations. The Roth IRA purchased all the stock of one corporation for $2,000, and the traditional IRA purchased all the stock of the second corporation for close to the traditional IRA’s balance. The second corporation transferred the purchase amount (plus $120,000 paid as consideration in a merger) to the ﬁ rst corporation. The ﬁ rst corporation then transferred the proceeds ($1,272,802) to the Roth IRA, which then transferred the funds into a second Roth IRA.
He was caught by IRS and got hit with penalties for excess Roth contributions, late ﬁling and negligence penalties for multiple years. He essentially made a $1.4 million excess contribution to a Roth IRA in a year when the contribution limit was $2,000. The IRS assessed deﬁciencies against Paschall and his wife totaling more than $425,000 for tax years 2002 to 2006 for the excise tax on the excess contribution and assessed penalties of more than $103,000 for the same years for failure to ﬁle Form 5329.
In 2008, Paschall and his wife petitioned the Tax Court for relief.
The Paschalls argued that the statute of limitation barred the assessment of the excise tax for 2002-2004, since they had ﬁled Form 1040 for those years. The taxpayers also argued that the penalty for Paschall’s failure to ﬁ le Form 5329 should not apply, since his failure to ﬁle was due to reasonable cause –speciﬁcally, his reliance on the certiﬁed public accountant.
The court ruled on July 5, 2011 that the IRS was right and that it was unreasonable for Paschall to rely on the opinion of a tax advisor who was actively involved in the planning of the transaction in question and was tainted by an inherent conﬂict of interest.
The Paschalls owed income tax on their Roth conversion. Interest was owed on the late tax. They owed accuracy-related penalties. They owed failure to ﬁle penalties for not ﬁling Form 8606.
The court stated, “Mr. Paschall should have realized that the deal was too good to be true.” Despite his doubts during the process, Paschall never asked for advice from an independent advisor, the court said.
What you can do
If you have doubts about advice you are receiving, get a second opinion! IRS holds the tapayer responsible for taxes, interest, and penalties.
Work with someone you trust and don’t fall for “too good to be true.”
Copyright 2016 Ed Slott and Company LLC
Photo credit: 401(K) 2013 via Foter.com / CC BY-SA