A Shameless Checkbook IRA Smear Campaign Outed

Every year, the IRS lists the top dozen taxation schemes in what is know as: ‘The Dirty Dozen.’ These are the most common tax scams that people fall for, reminding us to be cautious when preparing our taxes or choosing who prepares our tax returns for us. Generally, this list is published to ensure we don’t fall for common schemes like identity theft or phishing.

However, a recent press release on a well-known website recently stated:

“You can go to IRS.gov and in the IRS search box type in dirty dozen.The top 12 tax shams the IRS is targeting this year will be displayed. Note that the IRA LLC combination is on the top 12 list.”

Whoever wrote this propaganda hit piece obviously did not even bother to read the Dirty Dozen list. So, what is the agenda? We will get to that in a moment, as there is still more we need to touch on.

But, as you can see for yourself, the IRA LLC with checkbook control is clearly NOT listed on the IRS website as the press release claims: http://www.irs.gov/newsroom/article/0,,id=254383,00.html

In fact, the checkbook IRA will most likely never appear on the list, because it’s been already been vetted in tax court in the 1990s by the IRS in the case of Swanson V. The Commissioner. In the case, the checkbook IRA and its validity came under very harsh scrutiny, but, in the end, it stood in the tax courts against the unlimited budget and weight of governmental scrutiny. In fact, the IRS lost the Swanson case and had to pay the defendant’s court costs. It is not often that the IRS loses in tax court, and it is much less likely that they have to pay the opposing parties’ court costs, even when they lose.

In another quote from the release, it states that a person can purchase whatever they want in a checkbook IRA. Here is the exact shameful quote:  Do you really think the IRS is going to let you spend your IRA money any way you want before retirement age without any taxes or penalties?

This again is just a plain falsehood. There are very detailed rules to follow when investing with an IRA, and there are some prohibited investments you definitely need to be aware of if you choose to invest on your own. You should know what the rules are in advance of making an alternative investment with your retirement. However, truth be told, investing with a checkbook IRA does not mean you are automatically or intentionally violating the rules, or that it gives you carte blanche to do whatever you want with your retirement funds, but more on that in a moment.

The question you are probably asking yourself by now is, ‘Why would anyone want to smear the good name of the checkbook IRA? What do the disseminators of such misinformation get out of it by misinforming the public?’ Well, for a long time, traditional financial planners (captive sellers of securities, note the added emphasis on sellers) have done their best to misinform the general public, and have decided to muddy the waters about the capabilities of the checkbook IRA because this type of structure allows individuals to invest outside of their limited investment pool. So, what is the bottom-line? Financial planners fear that if you go truly self directed, then they will be left with a smaller client pool or a future client that they can earn a commission off of. Can you say, ‘Show me the money?!’ We have made mention of this before in another recent blog post, but most financial planners (not all, of course), generally speaking, aren’t truly planners at all, but they are for the most part commissioned sales people!

In their limited thinking, for every person that has a checkbook IRA, there is one less person that they can do business with. However, this is somewhat of an illusion. After all, if their products were worth diversifying into in the first place, you could, in most cases, allocate a portion of your IRA funds and buy their securities. They don’t like competition, though, and many would rather misinform you and limit you to their bucket of options. Oh wait, I thought most institutions were about diversity. Well, they are, so long as you buy from their so-called diversified products that they sell.

The confusion is not limited to financial planners either. Some IRA custodians also add to the online misinformation campaign, more than likely because one of their shackled clients, who is being fee-d to death or wants to invest in something other than their narrowly defined planned document, which does not allow a certain investment or perhaps they have read our site. Whatever the case, once the voices of their clients get loud enough, they put out through their standard operating procedure a statement like, “The checkbook IRA is a prohibited transaction.” In our opinion that is like saying an IRA is a prohibited transaction. Why would they do that? After all, what is in it for them? Well, let’s just suffice it to say again that it also boils down to a profit motive. When you have a checkbook IRA, you still have to report to a custodian, but with this structure, since you are authorized to handle more of the account administration, it significantly reduces the amount of fees custodians are traditionally able to collect over the lifetime of your account.

Blatant misinformational tactics like those mentioned above are unfortunately just part of this business. They are used to blind people to the potential of the proper use of the checkbook IRA entity, and it will only do harm to the industry in the long run.

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