IRS to Crack Down on Roth IRA Abuses

The Treasury Department took action Wednesday aimed at cracking down on taxpayers who use certain business transactions to avoid contribution limits on tax-advantaged Roth individual retirement accounts.

The Internal Revenue Service’s notice says such transactions will be put on its list of abusive tax shelters. That means taxpayers are required to disclose them and tax advisors must keep lists of investors who use them. The yearly individual contribution to a Roth individual retirement account in 2003 was $3,000 -- although people age 50 or older may contribute an extra $500.

The government’s action is aimed at situations in which a taxpayer shifts assets from a business to a Roth IRA in an effort to skirt the contribution limits. “A contribution to an IRA through a transaction that disguises the value of the contribution may disqualify the IRA,” said Pam Olson, Treasury’s assistant secretary for tax policy.

A department spokeswoman did not have information on the number of such transactions that would be affected.

Contributions to Roth IRAs are not tax deductible, but money in the accounts can grow tax free. Tax shelters are investment strategies aimed at shielding income from taxes; some are legal and others can be deemed by the IRS as outside the bounds of the law.