Tax and financial advice from the Silicon Valley expert.

Permitted investments for Roths and IRAs

It's easier to say what can't be held than what can be held in a Roth or IRA. You can't hold collectibles or life insurance contracts in a Roth or IRA. Roths and IRAs aren't permitted shareholders of S corporations, except for bank stock held on October 22, 2004, so S corporation stock generally is not a permitted investment for a Roth or IRA.

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Does your Roth or IRA owe an income tax?

Many people aren’t aware that “tax exempt” entities, including charities and retirement plans, are subject to income taxes on certain types of income, called “unrelated business income.” How to apply the tax rules for unrelated business income is one of the more complex sections of the income tax laws.

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IRS “audits” tax return preparers

The IRS has announced that about 10,000 tax return preparers are receiving a letter reminding them of their responsibilities as a tax return preparer and common errors on income tax returns. In addition, a random sample of preparers are being visited by IRS revenue agents this tax season. The visits are expected to last about three hours.

The IRS professional responsibilities division has also lately been more heavy handed in raiding offices of preparers viewed as being abusive in claiming unsubstanted deductions and credits and imposing penalties, including suspending preparers from preparing income tax returns. A leading reason for suspending enrolled agents, CPAs and attorneys from practicing before the IRS is failure to file their own income tax returns.

Taxpayers who “shop” for a tax return preparer based on “getting the maximum refund” or taking very agressive tax positions should be on notice. The IRS is serious about improving enforcement at the preparer level. The entire client file of a tax return preparer who is deemed to be “abusive” may be selected for tax audits. It has already happened.

When evaluating who to hire to prepare your income tax returns, you should try to assess whether this is an individual or firm who is making a priority of keeping you out of trouble with the IRS. If you are taking a position that could lead to litigation, you want to know about it in advance and what your risks are by taking such a position.

Also, ask if your tax return preparer is up to date in filing his or her own income tax returns.

Tax and financial advice from the Silicon Valley expert.