IRS' Rollovers as Business Start-Ups (ROBS) Compliance Project

By Steven B. Gorin  

Thompson Coburn LLP, St. Louis, MO 

The IRS continues to investigate and attempt to defer what it referred to as "Rollovers as Business Start-Ups," which it abbreviates as ROBS. An individual rolls over his or her existing retirement funds to the ROBS' qualified retirement plan, then the ROBS plan then uses the rollover assets to purchase the stock of the new business.

The IRS admitted that ROBS plans are not considered an abusive tax avoidance transaction, but asserted that they are questionable because they might solely benefit the individual who started the business.

Preliminary findings from its ROBS compliance project include:

  •   Most ROBS businesses either failed or were on the road to failure with high rates of bankruptcy (business and personal), liens (business and personal), and corporate dissolutions by individual Secretaries of State. (However, the IRS' preliminary findings did not mention how that compared to other start-up businesses.)
  •   Promoters incorrectly advised some sponsors they did not have an annual filing requirement because of a special exception in the Form 5500-EZ instructions.
  •   Plans might be run in a way that violates statutory qualified plan requirements, primarily because the owner wants to keep control. 

For more details, see www.irs.gov/retirement/article/0,,id=231594,00.html.

For more information, in BNA's Tax Management Portfolios, see Horahan and Hennessy, 365 T.M., ERISA — Fiduciary Responsibility and Prohibited Transactions.