A recent tax scheme of a tax attorney in league with financial advisors and accountants has hurt several scores of small businessmen in St. Louis. The scheme was promoted nationwide by a handful of tax attorneys in league with financial advisors.
The tax shelter was called a PIRAC (Private IRA Corporation). In its simple terms, a Roth IRA was established and, within the IRA, the taxpayer established a C corporation. The corporation was funded by diverting an existing money stream from an existing business and diverting that money into the PIRAC. The taxpayer thereafter invested the money in securities which could grow tax free and eventually fund a retirement.
The fault in the scheme was the contribution limits of a Roth IRA. All taxpayers in the PIRAC had been advised to redirect the profits of their business into the PIRAC. The taxpayer unknowing had violated the IRA contribution limits which subjected the taxpayer to excise and other penalties. More importantly, the IRS made this type of transaction a listed transaction and subjected the taxpayers to substantial and automatic penalties. The listed transaction has an automatic penalty of as much as $10,000 for each taxpayer and corporation for each year the PIRAC was operating. The PIRAC was a sham and the taxpayers were, unwittingly, exposed to giant penalties.
One of many situations that took place
A couple owned and operated an executive recruiting firm called Burchard & Associates in St. Louis. Their long time CPA, Doug Mueller, referred them to Tax Attorney Phil Kaiser. Kaiser and Mueller recommended that they establish a PIRAC. A new corporation was formed called B & A Search Group, a C corporation which in turn was owned by a Roth IRA. After the setting up of the PIRAC, the Burchards transferred assets from their original business into the PIRAC without those assets having been purchased by the PIRAC. Kaiser and Mueller had jointly decided to promote the PIRAC as a safe and legal way of avoiding taxes on assets that could grow while invested until retirement. Unknown to the Burchards, Kaiser and Mueller had formed a joint venture solely to share fees obtained from the legal and accounting work generated from the PIRAC. They also knew that the PIRAC was a sham, that the IRS in 2010 had designated the PIRAC on its “Dirty Dozen” list of common tax schemes, and their clients were about to be subject to intense audits in which the IRS would seek literally millions in penalties. None of that was disclosed to their approximate 100 PIRAC clients because they were concerned about their own personal and professional liability.
After a three day jury trial, I obtained a jury verdict against Kaiser for all the damages that were sought. Thereafter Kaiser agreed to a consent judgment from the Department of Justice. Missouri professional disciplinary actions are still pending.
Doctors were particularly vulnerable to the PIRAC. Several of them were advised to transfer the management of their practices into a PIRAC and did so. Thereafter, they were audited by the IRS. The longer that the PIRAC operated the greater the penalties levied by the IRS. No one that was put into a PIRAC by Kaiser and Mueller escaped an audit by the IRS. I’m personally aware of other cases in Kansas City, Chicago, and Florida.
Notwithstanding my efforts to recover damages from the victims in St. Louis, similar schemes still exist and investors should be wary. No taxpayer should operate a business through an IRA and use the profits to invest in the stock market. Unsuspecting clients lost millions of dollars in IRS penalties and were put through the nightmare of IRS audits. If you have any questions feel free to contact me.
To learn more about Stuart Berkowitz, visit his site at www.sberkowitz.com.