This game completely changes when you try to claim losses or biz expenses. We are not talking about that. If you do a few surveys and try to deduct your car then clearly that is not allowed.
Just a note of caution. If you are a high earner, you are much more likely to get audited. Despite the rumors that audit % went down, it actually went way up for high earners. When you pay your 1 year old kid $12k a year for ‘modeling’, that is more likely than not going to be questioned by the IRS, and while you probably have a relatively low probability of being audited, if and when you do, expect to pay for it. This might be an OK tradeoff for some, but just bear this in mind. Same goes for the current thread. While it is probably not going to be noticed, if and when you end up in an audit, prepare to share your documentation with the IRS to defend your choices. It all comes down to this. What’s the worst thing that can happen to you? I think the worst thing in this case is the unwinding of a solo 401k plan, and owning all of the taxes on disallowed contributions. If the contribution amounts are high, this can create a problem. If not, then you are probably looking at some penalties/taxes. Just like with your regular tax return, you can get away with anything as long as nobody notices. But if you are taking care to make sure that everything is done by the book, this is no different. As long as you have proper documentation and paperwork, you should not have any trouble. The longer you do something that is borderline questionable, the worse the end result would be if you are ever asked to justify it and you can’t. And it might happen in 5, 10, 15 years, when you least expect it. IRS is also developing software to examine tax returns, and as that gets more sophisticated, I would expect that more things will be found automatically, and the more money you have in play, the more likely will IRS try to go after you.
I’m not advocating breaking any IRS tax laws, but I wonder what the real likelihood of an audit is for this sort of thing. I’d be curious to know how often Johanna or other CPAs have their clients audited. Knock on wood, but I’ve never been audited, although I’m not aware of any red flags that would possibly trigger an audit. Similar to the whole Roth for kids discussion, although that seems like it would be pretty low hanging fruit for the IRS.
Right. But there are no (or minimal) contributions being discussed here. It’s all about the IRA rollover.
When it comes to gray areas, Laura and I will discuss whether we are comfortable or not. We have to both vote yes to file the return. This is not necessarily a morality judgment on the client or prospective client, but something we don’t want to risk tainting our reputation (or licenses) over should the random audit ever arise.
Right. But there are no (or minimal) contributions being discussed here. It’s all about the IRA rollover.
Actually, Kon didn’t outline the worst case scenario if the actions are deemed willful in a one-participant plan. The entire plan can be disqualified, resulting in the forced distribution of all assets (contributions and rollovers), rollover ineligible, subject to ordinary income taxes and early withdrawal penalties. These are the same as potential consequences of prohibited transactions in a self-directed plan.
It is not likely to happen, but is it worth it to risk $500K on a $5 survey, I think not.
Bear in mind the IRS cares about this criteria NOT to keep you from opening a solo 401(k), but to keep you from claiming a business loss indefinitely for your hobbies.
That to me is the open and shut case here.
The rule seems to be in place (reasonably) to prevent business loss claims from sham businesses carried out with no inclination to grow, market, or even profit but rather to deduct material goods.
“Respondent does not dispute that petitioner’s music activities constituted a trade or business within the meaning of sec. 162.”
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