PERMANENT PENALTY RELIEF FOR DELINQUENT SOLO 401K RETURNS

by | Aug 18, 2015 | News

Do you have a solo 401(k)? Have you been filing form 5500-EZ each year for the 401(k)? Are you aware that there is a penalty up to $15,000 per year for failure to file? While many solo 401(k)s are exempt from the 5500-EZ filing requirement, we have ran across many solo 401(k) owners who should have filed and who have failed to do so. If you you have a solo 401(k) and have no idea what I’m talking about, stay calm, but read on.

ANNUAL 5500-EZ FILING FOR SOLO 401Ks

One of the benefits of a solo 401(k) is the ease of administration and control because you can be the 401k trustee and administrator. However, as the 401(k) administrator and trustee it is your own responsibility to make the appropriate tax filings. This would include filing any required tax returns  for the 401(k).  In general, there is no tax return to file for a self-directed solo 401(k) with total assets below $250,000.  However, once the plan assets exceed $250,000 at the end of a plan year, a tax return filing is required.  The return the 401(k) files is called a 5500-EZ.  Recently, more and more solo 401(k) owners have contacted us because they set up their solo 401(k) online or with some other company and they were never made aware that they are supposed to file a 5500-EZ when their plan assets exceed $250,000.  Some of these individuals have multiple years in which they should have filed the 5500-EZ but failed to do so.  The penalties for failing to file a 5500-EZ when it is required can be quite severe, with fees and penalties as high as $15,000 for each late return, plus interest.

TEMPORARY PENALTY RELIEF PROGRAM EXPIRED

The IRS conducted a temporary program and allowed penalty relief from June 2, 2014 to June 2, 2015. We used this temporary penalty relief program to avoid tens of thousands of dollars of penalties from the IRS for clients who had failed to properly file annual 5500-EZ returns for their solo 401(k). The IRS has indicated that over 10,000 delinquent returns were filed under the temporary program which ended on June 2, 2015.

PERMANENT PENALTY RELIEF PROGRAM

The IRS recently announced a new 5500-EZ penalty relief program for delinquent returns from solo 401(s)s (aka, one-participant plans). This new relief program is known as Rev. Proc. 2015-32 and is similar to the temporary program except that a submission fee is now due. The procedure and criteria of the new program are as follows.

  1. In order to qualify for this program, your solo 401(k) plan must not have received a CP 283 Notice for any past due 5500-EZ filings, and the only participants of your solo 401(k) plan can be you and your spouse, and your business partner(s) and their spouse.  This program is available to all solo 401(k) plans, regardless of whether it is a self-directed plan. I will note that we have successfully used the temporary program which had this same requirement for a client who did have a IRS collection notice (CP 283 Notice) so don’t count yourself out if you have received a notice.
  2. File all delinquent returns using the IRS form in the year the filing was due.
  3. Write in red letters at the top of the first page of each filing, “Delinquent return submitted under Rev. Proc. 2015-32, Eligible for Penalty Relief”.
  4. Attach IRS form 14704.
  5. Mail all documents to the IRS, Ogden, UT office.
  6. Pay a $500 fee per delinquent return being filed up to a maximum total fee of $1,500 (e.g. three years of delinquent returns). You can file more than three years of delinquent returns but the total fee will not exceed $1,500. While this fee seems high, we have seen $15,000 penalties per year against solo 401(k) plans who have failed to file so it is a deal in contrast to the penalty.

In sum, if you have a solo 401(k) plan that should have filed a 5500-EZ for years past because the plan assets exceeded $250,000 at the end of the plan year, then you should take advantage of this program. This relief program can literally save you thousands of dollars in penalties and fees.  If you have any questions about this program or would like assistance with submitting your late 5500-EZ filings under this program, please contact the law firm as we are assisting clients with current and past due 5500-EZ filings for their solo 401(K)s.

By: Mat Sorensen, Attorney & Author of The Self Directed IRA Handbook

What Every Lawyer and Advisor Needs to Know About Self Directed IRAs

by | Aug 17, 2015 | News

Wealth Counsel Presentation: Last week I gave a presentation and continuing legal education class, What Every Lawyer and Advisor Needs to Know About Self Directed IRAs, to the Arizona Forum of Wealth Counsel. This was a mighty fine group of lawyers and they even bought all of the books I brought. Thanks guys. Here’s a copy of the slides from the presentation to anyone who is interested. WHAT EVERY LAWYER AND ADVISOR NEEDS TO KNOW ABOUT SDIRAs Wealth Counsel …

Have You Amended Your Solo 401k Plan Lately?

by | Aug 11, 2015 | News

Have you amended your solo 401(k) plan lately or are you planning on paying penalties? IRS Rev Proc. 2007-44 requires that every 401(k) plan, including solo 401(s)s,  be updated and amended at least every six years.

PLANS MUST BE UPDATED EVERY 6 YEARS

This six year cycle doesn’t begin on the date you established your solo 401(k) but instead on the date that the plan document you are using was approved or last amended. So, for example, if you established a solo 401(k) in 2010 and if you used a plan last updated or amended in 2008 then your plan amendment due date has passed and your plan is now out of compliance and will be subject to penalties.

LARGE PENALTIES FOR NON-COMPLIANCE

Unfortunately, we are running across more and more self directed clients who have self directed solo 401(k) plan documents that have not been amended and kept up to date properly and as a result their plan isn’t in compliance with the law. The penalties for non-compliance are steep and increase the longer your plan is out of date. We’ve seen fines in the tens of thousands of dollars for plans out of compliance for over a couple of years. Don’t forget your obligation to keep the solo 401(k) plan updated.

CORRECTION PROGRAMS

The IRS does have a Voluntary Corrective Program that can be used to fix plan mistakes such as plan update failure but you must avail yourself of these options before the IRS issues penalties and fines. There are still typically fees for using the plan correction program but they are insignificant when compared to the penalties that can be assessed for failing to update your plan or to keep it up to date. While self directed solo 401(k) plans established with self directed IRA custodians have generally been kept in compliance, the plans we find that are typically out of compliance are those set up by third party companies who simply sell you documents on-line and leave you to figure everything else out. And, unfortunately, this is one of those things that isn’t being figured out.

Talk to your professional plan administrator, if you have one, or contact us at the law firm to determine if your plan is in compliance with the plan amendment requirements.

By: Mat Sorensen, Attorney and Author of The Self Directed IRA Handbook

Swimming in Liability: Demi Moore, Pools, and Landlord Tips

by | Aug 4, 2015 | News

Actress Demi Moore recently discovered a dead man in her pool. This unfortunate situation caught the media’s attention and caused many to think of pool safety and liability issues.

As a lawyer with many clients who own rentals in Arizona, Florida, and California and other states where pools are common, I thought it would be helpful to address the issues of pool liability and safety.

LIABILITY

First, let’s discuss liability as it relates to pools. Generally, the property owner is responsible for maintaining the pool in a safe and reasonable manner. In the case of Demi Moore, what occurred was that her assistant held a party at the house while Demi was away and a man drowned in the pool at this party. Because Demi’s assistant is an employee that means that Demi is also responsible for her employee’s actions. So her assistant’s failure to keep the pool safe during the party becomes a liability issue for Demi. Also, as the pool and property owner, Demi is responsible to maintain care at the home and around the pool.

There are two ways a property owner can be liable for accidents that occur at a pool. First, if you violate a local law (city or state) that relates to pool safety you can be held strictly liable. In most instances, there are laws that govern what safety precautions should be present on a home. These requirements vary by state but include a combination of safety barriers (e.g. fences), pool covers, and door exit alarms. If your property and pool do not comply with these requirements and if an accident occurs at your properties pool, you can be held “strictly” liable for the accident that occurs on the property. Consequently, make sure you understand the rules in your city and state so that you are complying with the safety laws. Not only will this help prevent unfortunate accidents but it will also make you less liable in the event of an accident.

The second way you can be liable for a pool accident, is if the property and pool is otherwise unsafe. This could occur if safety precautions aren’t working (e.g. broken fence) or if the pool is otherwise unsafe or is left unsupervised while children or other persons who may need supervision are around. In many instances, if the landlord is aware of a dangerous pool condition and doesn’t fix it then they are liable for any accidents. In the case of Demi Moore, the argument may likely be that the pool was un-safe because it was not properly supervised while there was a party where alcohol was served (I’m assuming that occurred). While I haven’t seen these facts alleged, this is a common issue and safety problem and if alcohol is being served around a pool you better make sure the pool is properly being supervised. Appoint a designated non-drinking lifeguard.

As a landlord, you have a duty to your tenants to ensure that the pool includes the necessary safety features required by law. You can also be liable for damages and accidents to their guests to the property. And sometimes, even trespassers can hold you liable for damages incurred from the pool while trespassing (usually this would only apply to children who were able to access the pool).

HOW TO PREVENT LIABILITY AND PROTECT ASSETS

Here’s a quick summary of things to do that will limit your liability from pool accidents.

  1. Comply with all safety requirements for your city/state (e.g. fences, exit alarms, etc.)
  2. Include a clause or separate pool disclosure and waiver. This document will include the following.
    1. The tenants use the property at their own risk.
    2. Have the tenant specify if all of the occupants of the property can swim. If any occupant cannot swim (e.g. young children), then additional caution should be taken and indicate in the waiver that the pool must be supervised at all times the child is at home. This may also be a good reason not to rent to someone as your liability does increase.
    3. State that the tenant is responsible for maintenance of the pool safety equipment (e.g. fences, exit alarms, as applicable) and that the tenant must immediately notify the landlord of any safety feature or pool equipment repairs that are needed.
    4. State that the Tenant agrees to supervise the pool at all times that guests are at the property.
  3. Make sure that your property/landlord insurance (rental dwelling landlord policy) includes protection for the swimming pool and that your agent knows there is a swimming pool on the property. The presence of a pool will increase your insurance premium slightly. I have a rental with a swimming pool personally and it increased my premium slightly over a similar rental I have without a pool but it isn’t significant. The pool is listed on my policy and accidents are covered under my Landlord/Business liability policy provisions. One thing to keep in mind is that your insurance company could deny coverage if you do not have the adequate pool safety features on the property required by law. So, again, make sure you know the local pool safety laws and requirements for pools in your state and city.
  4. Own your property with an LLC so that if something occurs on the property your LLC is liable for any damages as opposed to exposing all of your personal assets. In general, when the LLC owns the property the LLC is liable for anything that occurs on the property and a plaintiff tenant cannot reach your personal assets held outside the LLC.

Hopefully none of us have to deal with a tragic pool accident. I hope this article helps landlords and real estate investors understand their responsibility and precautions that should be taken when a pool is located on one of your rentals. Pools can add great value to a home and are a nice feature for the “move-up” rental market but they need some extra attention and care from property owners.

Avoiding State Income Tax on Retirement Plan Distributions

by | Jul 21, 2015 | News

When a retiree begins taking distributions from a traditional IRA, 401(k), or pension plan, those distributions are taxable to the retiree under federal income tax and any applicable state income tax rules. While federal taxation cannot be avoided, state taxation may be avoided depending on your state of residency. In general, there are some states that have zero income tax and therefore don’t tax retirement plan distributions, some states that have special exemptions for retirement plan distributions, and other states that do in fact tax retirement plan distributions. This article breaks down the basics and discusses some of the states where income taxes can be avoided.

The No State Income Tax States

First, the easiest way to avoid state income tax on retirement plan distributions is to establish residency in a state that has no state income tax. It isn’t just the fun and sun of Florida that helps attract all of those retirees. It’s the tax free state income treatment that you’ll get from all of that money stocked away in your retirement account. The other states with no income tax and therefore no tax on retirement plan distributions are Alaska, Nevada, South Dakota, Texas, Washington, and Wyoming.

States with Retirement Income Exclusions

Second, there are some states that have a state income tax but who exempt retirement plan distributions for retirees from state income taxes. There are 36 states in this category that have some sort of exemption for retirement plan distributions. As each of these states are very different, so too are their exemptions. The type of retirement account, however, does tend to govern the exemptions available. Here’s a quick summary of the common exemptions found in the states.

  1. For Public Pensions and Retirement Plans. Distributions from federal or state employer plans are exempt from taxation in many states. This is the most common exemption amongst states that have an income tax but who exempt some types of retirement plan distributions from income. Most of the 36 states that have an exemption for retirement plan income provide an exemption for public employee pensions and retirement plans.
  2. For Private Pensions and Retirement Plans. About 10 states offer a full exclusion for private pensions and retirement plans. Some of them differ between pension and contributory plans (e.g. 401(k)) and some of them make no distinction. Pennsylvania, for example, excludes all income distributions. Hawaii excludes certain distributions from state income tax for private retirement plans and for portions from company plans rolled over to a rollover IRA and then distributed from the rollover IRA.
  3. For IRAs. There are some states that do no tax any retirement pan distributions, including IRA distributions to retirees. Illinois for example does not tax distributions from retirement plans at all (pensions, IRAs, 401(k) s). Tennessee and New Hampshire are states that do not tax wage income and therefore they do not tax retirement plan distributions of any kind (IRA, 401(k), etc.). There are also numerous states that exclude a certain limit of retirement plan income from taxation. For example, Main exempts the first $10,000 of income from any retirement plan, including IRAs.

In sum, the state tax rules for retirement plan distributions are complicated and vary significantly. Each state can be understood rather quickly though and everyone planning for retirement should understand how state income taxes may eat into their planned retirement plan distributions. I, for example, looked into Arizona and found that there is no exemption for 401(k) or IRA income in the state of Arizona. While we do have a low state income tax rate, Arizona state income tax includes income from private retirement plans (pensions and 401(k) s) and IRAs and has a modest deduction for distributions from public retirement plans. Each state is unique to the type of plan, and the amounts being distributed but don’t just think you need to be in a state with zero income tax to avoid taxes on retirement plan distributions. For example, you could be in Illinois, Tennessee, or New Hampshire and could realize state income tax-free distributions of your IRA or 401(k).  The National Conference of State Legislators has an updated 2015 chart that is very useful and can be used to look up your state’s tax treatment of retirement plan distributions for retirees.

DUE DILIGENCE TOP TEN LIST

by | Jul 7, 2015 | News

Before you invest your hard earned savings or your self-directed IRA into a “alternative” business or real estate investment of another you need to ask some hard questions to the person or business receiving your money. Here are some tips to keep you out of legal trouble and to help you avoid bad investments or structures.

  1. If you don’t understand how the business or investment makes the returns being promised, then don’t invest.
  2. If you aren’t given adequate documents outlining what has been explained to you verbally or what has been put into a presentation then don’t invest.
  3. If you’re told that you can get a commission for bringing others to invest into the same company and if you don’t have a license to receive such commissions then don’t invest. If the investment sponsor is willing to violate the law to pay an un-licensed person to raise money from others then what’s stopping them from misappropriating your money you invested? It is only the law preventing them, which they’ve proved they will disregard.
  4. If you are loaning money for a real estate venture, then demand a deed of trust or mortgage on title to the property protecting your investment. Also, make sure that you get a copy of the title report or commitment showing what position your loan is being placed into when the deed of trust or mortgage is recorded. Many savvy investors (and what all banks do) create lending instructions to the title company closing the real estate transaction and tell the title company to only use the funds being loaned when the borrower signs the note/loan documents, when the title company verifies the priority of the deed of trust you are getting (1st position, 2nd, etc.), and when all other defects to title have been cleared (and if not cleared, disclosure of what they are).
  5. If you’re investing into a PPM or offering you should receive lots of documents outlining the investment, the use of funds, the background of those managing the company, and also documents regarding your rights as an investor (e.g. offering memorandum, an LLC operating agreement or LP limited partnership agreement). Also, check to see if the PPM or offering was properly filed with the SEC by going to SEC.gov and checking the company name in the SEC database (click here to search). If no filing record exists for the PPM or offering with the SEC then the person raising the funds has possibly disregarded the law. As stated earlier, if someone is willing to disregard the law to get your money what is stopping them from disregarding the law to not pay you back (it’s just the law)?
  6. Investigate the background of the person you are entrusting your money with. When you are investing with others you need to think like the bank and do what the bank does. What is this person’s credit worthiness? What is their employment or prior business experience? What is their business or investment plan? What are the terms of the investment? Is there a realistic rate of return that fairly recognizes the risk being taken? It is up to you to conduct and drive this investment.
  7. If you are pressured that this opportunity will pass if you don’t invest now, then let the opportunity pass. Most scams use this technique and most legitimate investments never have this funding crisis.
  8. Make sure a lawyer representing your interests reviews the documents. If a lawyer drafted the documents already it is still important to have a lawyer look at the documents as they relate to your interests and with an eye towards protecting you. Sometimes, unfortunately, the devil is in the details and many investments have clauses that can significantly impact your ability to get your money back out or that give the company raising the money the ability to pay whatever compensation to themselves they desire. These are obvious problems that will eat into the bottom line of the profits you may be expecting.
  9. Seek the opinion of another investor, business owner, or friend whose opinion you trust. Sometimes, when you explain the investment to someone else they can help you find issues to consider and questions you should be asking.
  10. Be comfortable saying no and only invest what you are willing to lose. Non-traditional investments have made many millionaires over the years but they have also caused lots of financial ruin. Just keep the risk in perspective and don’t “bet the farm” in one deal.

Don’t be scared about investing into non-traditional investments. Just remember though that you may need to get out of your comfort zone by asking lots of questions, by demanding additional documentation, or by simply saying no. Remember, you are the best person to protect yourself.  So do it.