CPA Accountant discusses ROBS | Rollover Business Startups | Tax Form 5500

Most CPA accountants don’t deal with ROBS (Rollover Business Startups). Why? ROBS is seldom used and incurs IRS tax audits. Our virtual, nationwide CPA firm drew clients from a larger population than most brick and mortar CPAs, and ROBS eventually became a sub-specialty for us.

Simplistic, General Overview of ROBS:

• Client has funds trapped in a pension plan wants to start-up a company.
• Typically, this a high-paid employee who got downsized in the Recession. Prospects for a new job are bleak.
• But early distribution of pension funds incurs immediate income tax and an extra 10-15% tax. So, maybe 45% of the pension plan distribution goes the IRS. Ouch.
• The ROBS specialist converts the existing pension plan to a self-directed IRA.
• The ROBS specialist sets up a C Corporation.
• The client invests up to 95% of the pension funds into the C Corporation.
• Poof your company is capitalized.
• This neatly avoids all taxation and penalties for early withdrawal.
• Client can even draw a paycheck from the paycheck from the C Corporation.

Background on non-ROBS Self Directed IRA:

Folks got tired of flat line retirement fund performance by external managers. Some thought they could do better managing it themselves. The IRS allows self-directed retirement accounts. Predictably, issues arose over acceptable investments and prohibited transactions. The underlying conceptual framework for IRS policy on self-directed IRAs? Pension funds are for retirement.

So, any current personal benefit, assuming you’re under the retirement age, risks:

• A 15% penalty.
• Immediate current taxation on the distribution.
• The standard 10% additional tax on early distributions.

“Don’t let the explicit IRS interest on ROBS dissuade you. But compliance with the initial ROBS transaction and annual requirements is crucial. Keeping spotless C Corporation accounting and preparing bullet proof Form 1120 tax returns is prudent.”
- Gary Bode, CPA accountant with an interest in ROBS

The IRS ROBS Concerns

Numerous Internet-based promoters advertised that a self-directed IRA could be used as start-up capital for a new business. The IRS eventually dubbed the technique ROBS. Unemployed folks began to see that one viable way to find a job was creating their own company. The IRS expressed concern over this technique in an almost hostile Technical Memorandum dated October 1, 2008. The memorandum provided guidance to IRS auditors. They later held a national phone forum, from which they published further concerns.

Specifically, the IRS has the following concerns:

• The new ROBS retirement plan may discriminate for the owner of the rollover funds. The IRS generally requires pension plans to be an even playing field for all employees. In a single owner/employee situation, this isn’t an issue.
• The retirement plan is not well communicated throughout the company.
• The new company is never started. ROBS is then just early withdrawal of pension funds and subject to the taxes and penalties listed above.
• The new company’s stock was over-valued. Initially, ROBS was popular with franchise purchases, probably because the franchise offered tangible value for the issued stock. Conservative, well documented, independent stock valuations are vital.
• Form 5500 is not filed. Some ROBS promoters do offer annual compliance services for about $1000+ per year. My guess, a bank could do this for far less.
• Form 1099-R is never issued. Again some ROBS promoters do offer continued annual procedural compliance.
• Form 1120 is not prepared. The 401(k) is in a C Corporation and the corporation is required to file a tax form.
• Prohibited transactions occurred.
• ROBS promoter fees make themselves fiduciaries, so the entire transaction is invalid. Documenting separate payment to these promoters is prudent.
• ROBS promoters offer investment advice, making the entire transaction invalid. So, bringing your own business plan, or franchise idea, into play before contacting the ROBS promoter might overcome this point.

ROBS Internet Promoters

Fees seem to run between $3800 and $5000; for this, they set up a corporation and arrange rollover of your existing 401(k). They generally get an IRS Determination Letter for the new pension plan for another $300. The IRS Memorandum states these are generally taken directly from IRS templates.

“In a Technical Memorandum, the IRS clearly states it uses Determination Letters to start audits of taxpayers using the ROBS technique. As with any area of implicit IRS interest, use due diligence.�?
- Gary Bode, CPA accountant and ROBS specialist

Bottom Line

The ROBS technique works. Just be aware of potential pitfalls.

“We’ve seen some ROBS C Corporations who’ve faltered because they didn’t have a clear and practical business plan. My recommendation is to do you homework and then run it past a ROBS CPA accountant.”
- Gary Bode, ROBS CPA

I’m a CPA accountant with a virtual office specializing in Form 1099-A, Form 1099-C and Form 982. Distance isn’t a factor for our service. (910) 399-2705

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