Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

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neurosphere
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Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by neurosphere »

I'm hoping the provocative title will not lead to a thread which will get locked.

The "legality" of the backdoor Roth has been debated in the past and there are multiple threads on this (some of which have been locked). But I have come across information which I have not yet seen on this forum.

Michael Kitces has tweeted that he knows of situations where the IRS has flagged the backdoor Roth process during an audit and taxpayers had to undo the process (but, can one undo a Roth conversion now?). I don't know how to link to tweets, but today he wrote:
Have talked to a few advisors over the years who had clients get audited & agent called it out for that very reason. Typically it was very blatant scenarios (contribute Monday, convert Tuesday). But they were watching.
He also advises advisors NOT to ever use the term backdoor Roth NOR put anything in writing to a client about making after tax contributions with the intent to convert:
Thus, advisors should also be cautious not to record in the advisor’s CRM [neurosphere: Client Relationship Manager software] and client file that the advisor is facilitating a backdoor Roth contribution, or risk that the advisor’s recommendation to do a “backdoor Roth contribution” is the very document used against the client to defeat the strategy!
And in addition:
But perhaps the most important to step avoid the step transaction doctrine is the simplest one: do not, in any notes or records, indicate that you are doing to do a “backdoor Roth IRA contribution” in the first place! After all, the reality is that the application of the step transaction doctrine is based on the court’s determination of intent – so when you say you are trying to do a backdoor Roth IRA to bypass the Roth contribution income limits, you are making the case for the IRS!
He also (in my opinion) makes it clear that he thinks the backdoor Roth process is a process which is used to attempt/succeed to avoid IRS rules. That is, he all but writes the backdoor Roth is illegal (that word is loaded, but maybe "disallowed" is better?). So much so that he gives advisors a roadmap to hide or erase the "intent" to do something that's not allowed.
Accordingly, then, the key to avoiding the intent test of the step transaction doctrine is conceptually simple: put more time and space between the steps, to clearly establish that they were separate and independent decisions, and not part of a single whole. If there is a deliberate time gap between when the non-deductible IRA contribution is made, and when the subsequent Roth conversion occurs, it's easier to claim that the end result of dollars in the Roth wasn't part of a sole intent to circumvent the rules.
All the above quotes read to me as if he is saying that the backdoor Roth is not legal but if you do a few key things you can prevent getting caught.

He also tweeted that he advises advisors in his seminars thusly:
Yes, which is why our presentations about this strenuously suggest advisors NOT write "backdoor Roth" in financial plan recommendations or document it that way in CRM. If you're not a CPA, your client communication is available to IRS as evidence against your client. :/
So one of the most well known financial advisors is giving presentations (and writing online and tweeting) to OTHER advisors with advice to avoid any mention in their notes about the backdoor Roth so that the IRS can't find it later?

So here are my questions. My wife and I have been doing backdoor Roths for many years. Should we find a way to undo these, just to be safe? Is it LEGAL, or not. If this is a grey area, should we disclose/undo these just to be conservative and on the safe side? Should the wiki come with a giant disclaimer with a long explanation of the controversy that the process itself is not actually allowed? I guess the overall point is, I know that Kitces has always been highly conservative regarding his interpretation on the backdoor Roth. But...he now says the IRS has indeed disallowed it for at least a couple of taxpayers. I'm at a loss for how to now interpret this new information with respect to my personal situation, and as to the advice I give to others here on Bogleheads (and to others in my personal and professional life).

Neurosphere
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
hotscot
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by hotscot »

Not an expert.

But I thought the backdoor Roth was tried and trusted?
No controversy.

If I'm wrong I'm very curious.

(Your sure it's not a Mega?)
adestefan
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by adestefan »

The backdoor Roth legality was made clear in the 2017 tax legislation.

https://www.metzlewis.com/tax-cuts-jobs ... nversions/
Zosima
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by Zosima »

I understand that the legality of the Backdoor Roth was ambiguous until 2017-18 when Congress and the IRS acknowledged the validity of the Backdoor Roth.

https://www.forbes.com/sites/ashleaebel ... a2d07b7471

[Discussion of proposed legislation removed by Moderator Misenplace. Please see forum policies rules#rule-4a]
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by Rex66 »

I wouldn’t make any changes

Congress should outlaw it. As tagged above, relative approval occurred years ago.

Just be prepared to lose the ability in the future.

Early on I avoided bc of such concerns but eventually caved in to agreeing that is accepted under current law.
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by neurosphere »

adestefan wrote: Sun Oct 17, 2021 5:49 pm The backdoor Roth legality was made clear in the 2017 tax legislation.

https://www.metzlewis.com/tax-cuts-jobs ... nversions/
Michael Kitces does not agree. He claims that the TCJA language does not at all imply it is legal, and that others have misinterpreted the significance of the legislation (he tweeted):
There was a statement in Committee Notes of TCJA that acknowledged that traditional contributions can be followed by Roth conversions. Will some took as a 'green light' for backdoor Roths. But it wasn't. Notes were specifically silent on the time period issue.
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by celia »

neurosphere wrote: Sun Oct 17, 2021 5:40 pm The "legality" of the backdoor Roth has been debated in the past and there are multiple threads on this (some of which have been locked). But I have come across information which I have not yet seen on this forum.
Neurosphere, The legaility of it was confirmed about 3 years ago in a lawsuit involving the IRS. You are apparently reading old posts (the only one you linked to was written in 2015). The ‘legality’ was brought up occasionally before it was settled, but no-one questions it now. In fact, I think advisors have been pushing it ever since it was settled.

Let me see if I can find a source. . .

celia
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by neurosphere »

gjlynch17 wrote: Sun Oct 17, 2021 5:53 pm [Discussion of proposed legislation removed by Moderator Misenplace. Please see forum policies rules#rule-4a]
There is no reason at all to mention or discuss what might happen in the future. Let's stay completely away from any FUTURE changes or clarification.

My question is whether my 2021 backdoor is legal, or whether I should be concerned that all of my previous backdoor Roth contributions are invalid and subject to the IRS requiring me to undo them, and perhaps I can avoid taxes/penalties if I undo them sooner than later and in advance of "getting caught". Michael Kitces is contradicting the majority of information/advice provided/offered here, and now claims to know that the IRS has indeed told at least one taxpayer the process was not valid. He is a leading authority on various financial planning matters (although of course not a tax lawyer or whatever).
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by neurosphere »

celia wrote: Sun Oct 17, 2021 6:08 pm
neurosphere wrote: Sun Oct 17, 2021 5:40 pm The "legality" of the backdoor Roth has been debated in the past and there are multiple threads on this (some of which have been locked). But I have come across information which I have not yet seen on this forum.
Neurosphere, The legaility of it was confirmed about 3 years ago in a lawsuit involving the IRS. You are apparently reading old posts (the only one you linked to was written in 2015). The ‘legality’ was brought up occasionally before it was settled, but no-one questions it now. In fact, I think advisors have been pushing it ever since it was settled.

Let me see if I can find a source. . .

celia
Thanks celia, that's exactly what I need to know. Kitces is one of the most well known people in this area. And although his POST is old, he TODAY continues to advise others 100% on the content of that post. He maintains nothing has changed.

An actual tax court case would be very welcome. I don't recall seeing that here. And in addition, if it exists, Kitces should be made aware because it's causes considerable conflict among financial professionals (and individuals).
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by Soon2BXProgrammer »

Lets make sure we separate, the backdoor IRA from the megabackdoor-ira.

As far as I know there is no creditable ruling to rely on in an audit to state that the backdoor IRA isn't against the law. I've had concerns about the step transaction doctrine. (i could have missed it) Some people choose to do it in a more conservative way, contribute early in year, and then late in year convert 95%, which causes prorata and carry over basis into the next 8606. So one is signaling they are honoring the intent of the law. I don't know how well that would actually hold up in an audit though.


However, the mega backdoor ira, relies on this guidance;
https://www.irs.gov/pub/irs-drop/n-14-54.pdf
and
https://www.irs.gov/retirement-plans/ro ... ment-plans
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by neurosphere »

Soon2BXProgrammer wrote: Sun Oct 17, 2021 6:14 pm Lets make sure we separate, the backdoor IRA from the megabackdoor-ira.
In this case, Kitces and I are specifically only referring to after-tax contributions to an IRA, followed by a conversion to a Roth IRA. I.e. backdoor Roth (IRAs) and NOT megabackdoor Roth (employer accounts).
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by anon_investor »

neurosphere wrote: Sun Oct 17, 2021 6:19 pm
Soon2BXProgrammer wrote: Sun Oct 17, 2021 6:14 pm Lets make sure we separate, the backdoor IRA from the megabackdoor-ira.
In this case, Kitces and I are specifically only referring to after-tax contributions to an IRA, followed by a conversion to a Roth IRA. I.e. backdoor Roth (IRAs) and NOT megabackdoor Roth (employer accounts).
I thought the backdoor Roth was confirmed legal:
https://www.irahelp.com/slottreport/irs ... ons-are-ok
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by soxfan10 »

cspitzer wrote: Sun Oct 17, 2021 6:42 pm The House Ways & Means Committee has acknowledged the legitimacy of the backdoor ROTH IRA and is presently attempting to close the loophole. You may want to refer to their budget reconciliation recommendations, which were released on Monday, September 13th. The specific provisions addressing the backdoor Roth IRA are contained in Subpart B – Other Provisions Relating to Individual Retirement Accounts, Sec. 138311, Tax Treatment of Rollovers to Roth IRAs and Accounts, which I copied below.

https://waysandmeans.house.gov/sites/de ... leISxS.pdf

If the backdoor ROTH didn't work under present law, there would be no need for Congress to take any action.

"However, in 2010, the similar income limitations for Roth IRA conversions were repealed, which allowed anyone to contribute to a Roth IRA through a conversion. irrespective of the stillin-force income limitations for Roth IRA contributions. As an example, if a person exceeds the income limitation for contributions to a Roth IRA, he or she can make a nondeductible contribution to a traditional IRA – and then shortly thereafter convert the nondeductible contribution from the traditional IRA to a Roth IRA.

In order to close these so-called “back-door” Roth IRA strategies, the bill eliminates Roth conversions for both IRAs and employer-sponsored plans for single taxpayers (or taxpayers married filing separately) with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of households with taxable income over $425,000 (all indexed for inflation). This provision applies to distributions, transfers, and contributions made in taxable years beginning after December 31, 2031.

Furthermore, this section prohibits all employee after-tax contributions in qualified plans and prohibits after-tax IRA contributions from being converted to Roth regardless of income level, effective for distributions, transfers, and contributions made after December 31, 2021."
This isnt quite right. Its great that the House Ways and Means thinks that (and I agree that there is a gray area), but what the House Ways and Means Committee thinks isnt actually binding on anyone. They want to ensure that the loophole is closed to make it clear to all, but that does not in fact mean the IRS cant attack it on audit. Unlike the mega backdoor which the IRS has put out guidance on, the after tax contribution to Roth coversion (i.e., the "back door Roth") is not as clear.

Unless there is IRS or statutory guidance saying it works, there will always be risk because you are effectively doing in two steps what cannot be done in one. That is straight application of the step-transaction doctrine. The IRS can easily decide to attack a simultaneous (or close to simultaneous) non-deductible contribution and roth conversion with the step-transaction doctrine. Just think about it - the statute says you cant make a Roth contribution - why should you be able to make a non-deductible contribution and convert immediately? That is clearly not what the statute intends with a conversion (i.e., historical deductible conversions) otherwise why have a cap at all? There is a pretty clear distinction there compared to the mega as there are no income caps on 401k contributions.

I wouldnt undo any historical conversions and probably wouldnt hesitate to continue to do backdoor Roths until it is specifically banned. That said saying there is no risk or issue seems to be an aggressive stance considering there is no actual guidance or legal support for the position and there is some against (i.e., income caps for direct Roth contributions). This is always why I have used the mega as absent additional guidance, there is some level of risk.
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by smitcat »

neurosphere wrote: Sun Oct 17, 2021 6:13 pm
celia wrote: Sun Oct 17, 2021 6:08 pm
neurosphere wrote: Sun Oct 17, 2021 5:40 pm The "legality" of the backdoor Roth has been debated in the past and there are multiple threads on this (some of which have been locked). But I have come across information which I have not yet seen on this forum.
Neurosphere, The legaility of it was confirmed about 3 years ago in a lawsuit involving the IRS. You are apparently reading old posts (the only one you linked to was written in 2015). The ‘legality’ was brought up occasionally before it was settled, but no-one questions it now. In fact, I think advisors have been pushing it ever since it was settled.

Let me see if I can find a source. . .

celia
Thanks celia, that's exactly what I need to know. Kitces is one of the most well known people in this area. And although his POST is old, he TODAY continues to advise others 100% on the content of that post. He maintains nothing has changed.

An actual tax court case would be very welcome. I don't recall seeing that here. And in addition, if it exists, Kitces should be made aware because it's causes considerable conflict among financial professionals (and individuals).
There are a number of articles and quotes from Kitces on this topic after 2016 where he advises 'backdoor' Roths are acceptable, here is one of them...
https://www.morningstar.com/articles/84 ... -an-option
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by celia »

OK, This is the timeline of questioning the legality, per my searches:

~ 2015 Kitches was questioning the legality

~ 2017 I seem to recall a footnote in a court case was mentioned. (I searched Alan S.'s posts as he would most likely be the one that posted it, but I can't find a thread like that.)

2017 The TCJA of 2017 repealed the ability to recharacterize Roth conversions (not contributions). It also confirmed the legality of the Backdoor Roth:
Buried in the text of the 2017 Tax Cuts and Jobs Act (TCJA) lies a statement that Congress approved, blessing the so-called “back-door” Roth IRA: "Although an individual with AGI exceeding certain limits is not permitted to make a contribution directly to a Roth IRA, the individual can make a contribution to a traditional IRA and convert the traditional IRA to a Roth IRA."
https://www.linkedin.com/pulse/tcja-ble ... le-malcolm

Jan. 2018 our discussion about a Forbes article saying Congress "blessed" it:
viewtopic.php?f=10&t=238910&p=3736768

Jan. 2019 I completely revised the Backdoor Roth wiki page and none of the current or previous footnotes referenced a lawsuit.


Along the way, I found comments that Ed Slott and Natalie Chaote, who are also considered experts in this area, thought the Backdoor Roth was fine to use. One comment about Michael Kitces said that he had heard from "some people" that the IRS was disallowing it, but that the particular auditors in those cases may not have understood the rules.
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by sc9182 »

celia wrote: Sun Oct 17, 2021 8:22 pm OK, This is the timeline of questioning the legality, per my searches:

~ 2015 Kitches was questioning the legality

~ 2017 I seem to recall a footnote in a court case was mentioned. (I searched Alan S.'s posts as he would most likely be the one that posted it, but I can't find a thread like that.)

2017 The TCJA of 2017 repealed the ability to recharacterize Roth conversions (not contributions). It also confirmed the legality of the Backdoor Roth:
Buried in the text of the 2017 Tax Cuts and Jobs Act (TCJA) lies a statement that Congress approved, blessing the so-called “back-door” Roth IRA: "Although an individual with AGI exceeding certain limits is not permitted to make a contribution directly to a Roth IRA, the individual can make a contribution to a traditional IRA and convert the traditional IRA to a Roth IRA."
https://www.linkedin.com/pulse/tcja-ble ... le-malcolm

Jan. 2018 our discussion about a Forbes article saying Congress "blessed" it:
viewtopic.php?f=10&t=238910&p=3736768

Jan. 2019 I completely revised the Backdoor Roth wiki page and none of the current or previous footnotes referenced a lawsuit.


Along the way, I found comments that Ed Slott and Natalie Chaote, who are also considered experts in this area, thought the Backdoor Roth was fine to use. One comment about Michael Kitces said that he had heard from "some people" that the IRS was disallowing it, but that the particular auditors in those cases may not have understood the rules.
None of the folks mentioned here - are neither a law from congress nor IRS letter fully blessing it. You be on you own on Backdoor Roth until either “law” is passed or “letter” issued by IRS.
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celia
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by celia »

sc9182 wrote: Sun Oct 17, 2021 8:35 pm None of the folks mentioned here - are neither a law from congress nor IRS letter fully blessing it. You be on you own on Backdoor Roth until either “law” is passed or “letter” issued by IRS.
So, you don't think the thousands of pages in the 2017 Tax Cuts and Jobs Act (TCJA) are current law? I haven't found anywhere it has been repealed since then (as of today).
:)
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by soxfan10 »

celia wrote: Sun Oct 17, 2021 8:40 pm
sc9182 wrote: Sun Oct 17, 2021 8:35 pm None of the folks mentioned here - are neither a law from congress nor IRS letter fully blessing it. You be on you own on Backdoor Roth until either “law” is passed or “letter” issued by IRS.
So, you don't think the thousands of pages in the 2017 Tax Cuts and Jobs Act (TCJA) are current law? I haven't found anywhere it has been repealed since then (as of today).
:)
There's nothing in the TCJA that blesses backdoor Roths.

To be clear - the term "illegal" is strange in the tax world and has a connotation that probably isnt at all relevant here. It clearly isnt a criminal act and there is clearly a position that it is fine.

To put it in perspective - tax advisers typically have standards to sign a return. I'd have no problem signing a return with a backdoor roth position on it. Typically, most advisers will sign if there is "substantial authority" (more or less something ot point to and ~30% success if challenged). The IRS guidance for Mega Backdoor although not directly on point, I think clearly satisfies this as it is at least analagous.

All I've meant to say is there is no statutory or regulatory guidance explicitly supporting it and it is well within a step transaction doctrine attack by the IRS (the mega backdoor has IRS regulatory guidance supporting it, but for reasons mentioned upthread is not completely on point as there is no statutory income cap in the 401k context).

Edit: I want to be clear on the TCJA - there is a reference in the Conference report, but there is not statute that says you can make an after tax contribution and then convert and thats all good. Again - conference report is legislative history, it is not law. If the TCJA passed the conversion concept, it would mean more (i.e., we are passing this and we intend for this to work this way), but there is still no statute out there and the IRS and a court is free to interpret as it sees fit.
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by FiveK »

sc9182 wrote: Sun Oct 17, 2021 8:35 pm None of the folks mentioned here - are neither a law from congress nor IRS letter fully blessing it. You be on you own on Backdoor Roth until either “law” is passed or “letter” issued by IRS.
As anon_investor's link
quotes,
IRS has now officially stated that they are ok with the back-door Roth strategy. In a Tax Talk Today webcast, Donald Kieffer Jr., tax law specialist (employee plans rulings and agreements), IRS Tax-Exempt and Government Entities Division, said the back-door Roth is allowed under the law.
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by mikejuss »

If this is illegal, a lot of us are going to jail. See you there, folks.
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by soxfan10 »

FiveK wrote: Sun Oct 17, 2021 9:14 pm
sc9182 wrote: Sun Oct 17, 2021 8:35 pm None of the folks mentioned here - are neither a law from congress nor IRS letter fully blessing it. You be on you own on Backdoor Roth until either “law” is passed or “letter” issued by IRS.
As anon_investor's link
quotes,
IRS has now officially stated that they are ok with the back-door Roth strategy. In a Tax Talk Today webcast, Donald Kieffer Jr., tax law specialist (employee plans rulings and agreements), IRS Tax-Exempt and Government Entities Division, said the back-door Roth is allowed under the law.
This is nice, but is a verbal statement by an IRS employee who is not in charge of what he is commenting on. There is no reason the IRS cant challenge it. Again, I want to be very clear that I think it is worth reporting as non-taxable conversion. I just dont think that an off hand remark by a tax exempt person at the IRS carries any weight whatsoever.

I am not trying to be difficult, but only want to impart that if one has access to a mega backdoor roth and is not maxing it, it is clearly a less risky method to accomplish the same end result.
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by roth evangelist »

Making after-tax contributions to a tIRA is legal. Converting that amount to a Roth is legal. That's what the backdoor Roth is. There is no law prohibiting this combination. Therefore, it's legal. Am I missing something?
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by Soon2BXProgrammer »

roth evangelist wrote: Sun Oct 17, 2021 9:22 pm Making after-tax contributions to a tIRA is legal. Converting that amount to a Roth is legal. That's what the backdoor Roth is. There is no law prohibiting this combination. Therefore, it's legal. Am I missing something?
It's called step transaction doctrine. https://en.m.wikipedia.org/wiki/Step_tr ... orporation.

Effectively, in an attempt to do something illegal, you can't string multiple legal steps to work around the rules.

The argument is if you can't make Roth contributions directly, then working around the rules by using 2 steps should also be illegal
Earned 43 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by soxfan10 »

roth evangelist wrote: Sun Oct 17, 2021 9:22 pm Making after-tax contributions to a tIRA is legal. Converting that amount to a Roth is legal. That's what the backdoor Roth is. There is no law prohibiting this combination. Therefore, it's legal. Am I missing something?
Using the term legal/illegal is a bit much here and generally is in the tax context. I think the real question is: can the IRS reverse your backdoor roth contributions (and i suppose make corresponding adjustments, e.g., including any dividends in open years as taxable dividends)?

I think the answer to that cannot be said to be 100% no. There is a ton of case law in a multitude of contexts that says taxpayers cannot do in two steps what they cannot do in one. And if one cannot make a Roth IRA contribution in a single step (e.g., above income limit), a contribution and conversion could be attacked by the IRS under these principles (referred to as the "step-transaction doctrine"). There is favorable IRS guidance in the mega backdoor roth space that gives some level of comfort (but is not directly on point) and there is some commentary from Congress in the TCJA that indicates Congress thinks that the law may allow it. That is contradicted by the fact that the law specifically has a contribution cap and it is objectively nonsensical to have a cap if it can be avoided by a simple additional step and the fact that when IRA --> Roth IRAs were insitituted the debate was clearly around allowing taxpayers to control when to recognize previously deferred income (e.g., allowing a 40 year old who couldnt take an IRA distribution to recognize the tax deferral, but leave the funds in a Roth rather than pre-tax account).

Edit: dividends would still not be taxable as the funds would still be in an IRA - the IRS would just say any earnings are taxable upon receipt. However, given the risk is technically for the year in which the funds are withdrawn, there is an interesting question as to what happens upon withdrawal. Given the lack of guidance, I see no reason the IRS cant issue guidance and say historical contributions will be treated as they are still traditional after tax contributions and litigation on such a position.
Last edited by soxfan10 on Sun Oct 17, 2021 9:38 pm, edited 1 time in total.
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FiveK
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by FiveK »

soxfan10 wrote: Sun Oct 17, 2021 9:19 pm
FiveK wrote: Sun Oct 17, 2021 9:14 pm
sc9182 wrote: Sun Oct 17, 2021 8:35 pm None of the folks mentioned here - are neither a law from congress nor IRS letter fully blessing it. You be on you own on Backdoor Roth until either “law” is passed or “letter” issued by IRS.
As anon_investor's link
quotes,
IRS has now officially stated that they are ok with the back-door Roth strategy. In a Tax Talk Today webcast, Donald Kieffer Jr., tax law specialist (employee plans rulings and agreements), IRS Tax-Exempt and Government Entities Division, said the back-door Roth is allowed under the law.
This is nice, but is a verbal statement by an IRS employee who is not in charge of what he is commenting on. There is no reason the IRS cant challenge it. Again, I want to be very clear that I think it is worth reporting as non-taxable conversion. I just dont think that an off hand remark by a tax exempt person at the IRS carries any weight whatsoever.

I am not trying to be difficult, but only want to impart that if one has access to a mega backdoor roth and is not maxing it, it is clearly a less risky method to accomplish the same end result.
We're all entitled to our opinions.

With all the circumstantial evidence (and no contrary evidence beyond "I heard someone say they heard...") that the backdoor Roth process walks and quacks like a legal duck, the answer to the thread title should be "no".

Written contrary evidence (e.g., in a law or IRS ruling or tax court decision) would of course change things.
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by drk »

It seems like the IRS has more important things to work on than creating and enforcing secret rules. Absent anything more solid than second-hand anecdotes, this opinion isn't going to give me pause.

By the way, Michael Kitces better get on the horn with the lawyers at Schwab and Fidelity because those clueless hacks have already signed off on public content referring to the Conversion That Shall Not Be Named.
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by soxfan10 »

FiveK wrote: Sun Oct 17, 2021 9:36 pm
soxfan10 wrote: Sun Oct 17, 2021 9:19 pm
FiveK wrote: Sun Oct 17, 2021 9:14 pm
sc9182 wrote: Sun Oct 17, 2021 8:35 pm None of the folks mentioned here - are neither a law from congress nor IRS letter fully blessing it. You be on you own on Backdoor Roth until either “law” is passed or “letter” issued by IRS.
As anon_investor's link
quotes,
IRS has now officially stated that they are ok with the back-door Roth strategy. In a Tax Talk Today webcast, Donald Kieffer Jr., tax law specialist (employee plans rulings and agreements), IRS Tax-Exempt and Government Entities Division, said the back-door Roth is allowed under the law.
This is nice, but is a verbal statement by an IRS employee who is not in charge of what he is commenting on. There is no reason the IRS cant challenge it. Again, I want to be very clear that I think it is worth reporting as non-taxable conversion. I just dont think that an off hand remark by a tax exempt person at the IRS carries any weight whatsoever.

I am not trying to be difficult, but only want to impart that if one has access to a mega backdoor roth and is not maxing it, it is clearly a less risky method to accomplish the same end result.
We're all entitled to our opinions.

With all the circumstantial evidence (and no contrary evidence beyond "I heard someone say they heard...") that the backdoor Roth process walks and quacks like a legal duck, the answer to the thread title should be "no".

Written contrary evidence (e.g., in a law or IRS ruling or tax court decision) would of course change things.
I mean sure, but there isnt a clear answer here and there is nothing binding the IRS to the interpretation that you are proposing. If anything, the case law says that you cant do it (as you generally in tax cannot accomplish in two steps what you cant accomplish in one) and people supporting are using a verbal quote from an IRS official who works in tax exempt orgs (i.e., a position completely irrelevant to the topic).

I'm a tax attorney so by nature, I quantify risk. There is risk here; perhaps not a ton, but enough that I intentionally use mega backdoor and not backdoor as mega backdoor has less risk. That is all. Your mileage may vary, but as I mentioned in my edit above, technically the income item does not occur until you withdraw, so the IRS can challenge up until the statute closes on the return on which you withdraw the earnings. For people in their 20s and 30s that could be 35-50 years from now.
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by Dottie57 »

I guess I think we have enough laws that actually specify illegal activity so I am not going to worry about something that is not specified.


I am not a fan of mega backdoor involving a 401k since it is available on to plans that allow it. So it leaves out people who only have IRAs available and those whose plans don’t allow for it. Seems extremely unfair.
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by celia »

Isn't the 2017 Tax Cuts and Jobs Act (TCJA) a law (as in passed by both houses and signed by the president)?

Doesn't it include the statement:
"Although an individual with AGI exceeding certain limits is not permitted to make a contribution directly to a Roth IRA, the individual can make a contribution to a traditional IRA and convert the traditional IRA to a Roth IRA."

If both answers are "yes", I don't see why we are arguing about it, except for our sloppy terminology (of which I am a participant :oops: ).
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by soxfan10 »

drk wrote: Sun Oct 17, 2021 9:42 pm It seems like the IRS has more important things to work on than creating and enforcing secret rules. Absent anything more solid than second-hand anecdotes, this opinion isn't going to give me pause.

By the way, Michael Kitces better get on the horn with the lawyers at Schwab and Fidelity because those clueless hacks have already signed off on public content referring to the Conversion That Shall Not Be Named.
Please see my post above. Fidelity and Schwab have no risk here and would love to get more assets. They literally are completely irrelevant to the discussion - they arent on the hook if people do the transaction - the people are.
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by soxfan10 »

celia wrote: Sun Oct 17, 2021 9:46 pm Isn't the 2017 Tax Cuts and Jobs Act (TCJA) a law (as in passed by both houses and signed by the president)?

Doesn't it include the statement:
"Although an individual with AGI exceeding certain limits is not permitted to make a contribution directly to a Roth IRA, the individual can make a contribution to a traditional IRA and convert the traditional IRA to a Roth IRA."

If both answers are "yes", I don't see why we are arguing about it, except for our sloppy terminology (of which I am a participant :oops: ).
Its not in the law. Its in the Congressional report. So it literally is not law.
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by randybobandy »

What is a forceful caution?

--Randy Bo Bandy
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by H-Town »

The IRS has to prove the intent, aren’t they? you just converted non-deductible IRA contribution to Roth IRA, and pay tax on the gain. It just happened that there was no gain to be taxed. You already paid tax on the non-deductible contribution. What more the IRS want? A cake and then eat it too?

There are many people doing back door Roth. I can’t even imagine the IRS would go after those individuals. Now if you’re already under audit, anything is fair game. Maybe it’s the low hanging fruits, or maybe it’s one of the many tactics that revenue agents employ.
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by mikejuss »

soxfan10 wrote: Sun Oct 17, 2021 9:48 pm
celia wrote: Sun Oct 17, 2021 9:46 pm Isn't the 2017 Tax Cuts and Jobs Act (TCJA) a law (as in passed by both houses and signed by the president)?

Doesn't it include the statement:
"Although an individual with AGI exceeding certain limits is not permitted to make a contribution directly to a Roth IRA, the individual can make a contribution to a traditional IRA and convert the traditional IRA to a Roth IRA."

If both answers are "yes", I don't see why we are arguing about it, except for our sloppy terminology (of which I am a participant :oops: ).
Its not in the law. Its in the Congressional report. So it literally is not law.
Where is it stated that a backdoor Roth is not supported by the tax code? Link, please.
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by sc9182 »

mikejuss wrote: Sun Oct 17, 2021 9:55 pm
soxfan10 wrote: Sun Oct 17, 2021 9:48 pm
celia wrote: Sun Oct 17, 2021 9:46 pm Isn't the 2017 Tax Cuts and Jobs Act (TCJA) a law (as in passed by both houses and signed by the president)?

Doesn't it include the statement:
"Although an individual with AGI exceeding certain limits is not permitted to make a contribution directly to a Roth IRA, the individual can make a contribution to a traditional IRA and convert the traditional IRA to a Roth IRA."

If both answers are "yes", I don't see why we are arguing about it, except for our sloppy terminology (of which I am a participant :oops: ).
Its not in the law. Its in the Congressional report. So it literally is not law.
Where is it stated that a backdoor Roth is not supported by the tax code? Link, please.
where in the law does it say “upside down Roth” is not the law
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by soxfan10 »

mikejuss wrote: Sun Oct 17, 2021 9:55 pm
soxfan10 wrote: Sun Oct 17, 2021 9:48 pm
celia wrote: Sun Oct 17, 2021 9:46 pm Isn't the 2017 Tax Cuts and Jobs Act (TCJA) a law (as in passed by both houses and signed by the president)?

Doesn't it include the statement:
"Although an individual with AGI exceeding certain limits is not permitted to make a contribution directly to a Roth IRA, the individual can make a contribution to a traditional IRA and convert the traditional IRA to a Roth IRA."

If both answers are "yes", I don't see why we are arguing about it, except for our sloppy terminology (of which I am a participant :oops: ).
Its not in the law. Its in the Congressional report. So it literally is not law.
Where is it stated that a backdoor Roth is not supported by the tax code? Link, please.
There isnt one. There also isnt one that says it is. So youre in a gray area. The IRS has successfully challenge a whole host of transactions whereby a taxpayer got an advantage through doing something through multiple steps that couldnt have been done through one or fewer steps. This, as mentioned above, is called the step transaction doctrine (i.e., a taxpayer should not get something they are not entitled to through using the formality of multiple steps if the substance is the same end result). This has been a concern for backdoor Roth IRAs for 20+ years and was a concern for a while for the MBD roth until the IRS specifically put out guidance for the MBD accepting it. The IRS cannot take a position in litigation that is contrary to public IRS guidance. In theory the IRS could withdraw and attack earnings from withdrawals from Roths that came about through the MBD in future years, but there would be pretty strong estoppel and fair play arguments against and Id feel very good advancing such arguments.

There is no similar guidance for the backdoor roth. The best argument is probably an analogy to the MBD guidance plus the commentary in the TCJA, but my experience with the IRS in somewhat similar contexts is that type of guidance is worth roughly what toilet paper is worth.
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by FiveK »

soxfan10 wrote: Sun Oct 17, 2021 9:43 pm...mega backdoor has less risk. That is all.
On that we agree. :sharebeer
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by Nate79 »

Wow, it's like stepping back in a time machine years ago when this subject was debated to death and since then no one's given a rip.
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by mikejuss »

soxfan10 wrote: Sun Oct 17, 2021 10:02 pm
mikejuss wrote: Sun Oct 17, 2021 9:55 pm
soxfan10 wrote: Sun Oct 17, 2021 9:48 pm
celia wrote: Sun Oct 17, 2021 9:46 pm Isn't the 2017 Tax Cuts and Jobs Act (TCJA) a law (as in passed by both houses and signed by the president)?

Doesn't it include the statement:
"Although an individual with AGI exceeding certain limits is not permitted to make a contribution directly to a Roth IRA, the individual can make a contribution to a traditional IRA and convert the traditional IRA to a Roth IRA."

If both answers are "yes", I don't see why we are arguing about it, except for our sloppy terminology (of which I am a participant :oops: ).
Its not in the law. Its in the Congressional report. So it literally is not law.
Where is it stated that a backdoor Roth is not supported by the tax code? Link, please.
There isnt one. There also isnt one that says it is. So youre in a gray area. The IRS has successfully challenge a whole host of transactions whereby a taxpayer got an advantage through doing something through multiple steps that couldnt have been done through one or fewer steps. This, as mentioned above, is called the step transaction doctrine (i.e., a taxpayer should not get something they are not entitled to through using the formality of multiple steps if the substance is the same end result). This has been a concern for backdoor Roth IRAs for 20+ years and was a concern for a while for the MBD roth until the IRS specifically put out guidance for the MBD accepting it. The IRS cannot take a position in litigation that is contrary to public IRS guidance. In theory the IRS could withdraw and attack earnings from withdrawals from Roths that came about through the MBD in future years, but there would be pretty strong estoppel and fair play arguments against and Id feel very good advancing such arguments.

There is no similar guidance for the backdoor roth. The best argument is probably an analogy to the MBD guidance plus the commentary in the TCJA, but my experience with the IRS in somewhat similar contexts is that type of guidance is worth roughly what toilet paper is worth.
On what legal basis could the IRS seize taxpayers' backdoor Roth contributions? I think you're really stretching here...
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by H-Town »

https://www.currentfederaltaxdevelopmen ... -technique


I’ll say let the IRS challenges you. You stand your ground and fight. The more time you take from the revenue agent, the less time they can work on other items or cases that would bring in more tax assessment. You’ll be the IRS’s worst nightmare.
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by FiveK »

Nate79 wrote: Sun Oct 17, 2021 10:05 pm Wow, it's like stepping back in a time machine years ago when this subject was debated to death and since then no one's given a rip.
Maybe Kitces had an intern configure his Twitter account to go through all his old articles and post links to them...and here we are. ;)
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by Normchad »

I’m certainly not worried about this. If anything, I’m more concerned about TLH and the test of “substantially identical”.

Given that lots of us have been doing it forever, without incident or challenge, I don’t think a forceful caution is warranted.
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by soxfan10 »

FiveK wrote: Sun Oct 17, 2021 10:09 pm
Nate79 wrote: Sun Oct 17, 2021 10:05 pm Wow, it's like stepping back in a time machine years ago when this subject was debated to death and since then no one's given a rip.
Maybe Kitces had an intern configure his Twitter account to go through all his old articles and post links to them...and here we are. ;)
Its interesting from my perspective from a technical tax view - my background is corporate tax and if a corporation ever did something analagous - I can guarantee you theyd be dead to rights on audit. Its just not how the system generally operates -it does and has always operated on what is the substance of the transaction rather than the legal form.

It generally doesnt operate that way on the individual side either.
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by drk »

soxfan10 wrote: Sun Oct 17, 2021 9:47 pm Please see my post above. Fidelity and Schwab have no risk here and would love to get more assets. They literally are completely irrelevant to the discussion - they arent on the hook if people do the transaction - the people are.
Please link to the post you're referring to because you're all over this thread.

As for my post, Kitces recommends that advisors avoid using the label. That's the Fidelity/Schwab connection.
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by H-Town »

soxfan10 wrote: Sun Oct 17, 2021 10:18 pm
FiveK wrote: Sun Oct 17, 2021 10:09 pm
Nate79 wrote: Sun Oct 17, 2021 10:05 pm Wow, it's like stepping back in a time machine years ago when this subject was debated to death and since then no one's given a rip.
Maybe Kitces had an intern configure his Twitter account to go through all his old articles and post links to them...and here we are. ;)
Its interesting from my perspective from a technical tax view - my background is corporate tax and if a corporation ever did something analagous - I can guarantee you theyd be dead to rights on audit. Its just not how the system generally operates -it does and has always operated on what is the substance of the transaction rather than the legal form.

It generally doesnt operate that way on the individual side either.
Yeah cool. But do the IRS care about small beans? Corporate tax audits should yield hundred of thousands additional tax assessment and interest. What does a 6k Back door Roth conversion yield? Probably nothing. Maybe if they withdraw it from Roth many years down the road, there could be some small amount of taxes in play here. I’ll ask again: does the IRS care about back door Roth IRA? Watch carefully what they do, their actions will show what they actually care about.
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by scorcher31 »

Tax audits aren't that uncommon. One of us bogleheads had to have an audit that did a backdoor roth. What was the end result?
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by soxfan10 »

H-Town wrote: Sun Oct 17, 2021 10:28 pm
soxfan10 wrote: Sun Oct 17, 2021 10:18 pm
FiveK wrote: Sun Oct 17, 2021 10:09 pm
Nate79 wrote: Sun Oct 17, 2021 10:05 pm Wow, it's like stepping back in a time machine years ago when this subject was debated to death and since then no one's given a rip.
Maybe Kitces had an intern configure his Twitter account to go through all his old articles and post links to them...and here we are. ;)
Its interesting from my perspective from a technical tax view - my background is corporate tax and if a corporation ever did something analagous - I can guarantee you theyd be dead to rights on audit. Its just not how the system generally operates -it does and has always operated on what is the substance of the transaction rather than the legal form.

It generally doesnt operate that way on the individual side either.
Yeah cool. But do the IRS care about small beans? Corporate tax audits should yield hundred of thousands additional tax assessment and interest. What does a 6k Back door Roth conversion yield? Probably nothing. Maybe if they withdraw it from Roth many years down the road, there could be some small amount of taxes in play here. I’ll ask again: does the IRS care about back door Roth IRA? Watch carefully what they do, their actions will show what they actually care about.
I have no idea what their actual practice is - playing the audit lottery generally works, but I dont think saying things are small beans necessarily does anyting the IRS looks at de minimis stuff all the time. I personally got an inquiry on a sub $100 income item this year and nothing else (so call it maybe $20 in tax). For whats its worth they agreed it was correctly treated after my response so they spent close to dollar in shipping to clear a less than $25 item that looked off. The IRS looks at pretty minimal things on a regular basis.
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by bsteiner »

We may never know.

The amount involved is small. The reporting doesn’t show the time between the contribution and the conversion.

If the issue were to come up on audit, it’s too small to litigate.

The explanation of the Tax Cuts and Jobs Act of 2017 is helpful.

The persons mentioned aren’t lawyers. I would like to see what other lawyers say, especially those who are active in this area.
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by H-Town »

soxfan10 wrote: Sun Oct 17, 2021 10:39 pm
H-Town wrote: Sun Oct 17, 2021 10:28 pm
soxfan10 wrote: Sun Oct 17, 2021 10:18 pm
FiveK wrote: Sun Oct 17, 2021 10:09 pm
Nate79 wrote: Sun Oct 17, 2021 10:05 pm Wow, it's like stepping back in a time machine years ago when this subject was debated to death and since then no one's given a rip.
Maybe Kitces had an intern configure his Twitter account to go through all his old articles and post links to them...and here we are. ;)
Its interesting from my perspective from a technical tax view - my background is corporate tax and if a corporation ever did something analagous - I can guarantee you theyd be dead to rights on audit. Its just not how the system generally operates -it does and has always operated on what is the substance of the transaction rather than the legal form.

It generally doesnt operate that way on the individual side either.
Yeah cool. But do the IRS care about small beans? Corporate tax audits should yield hundred of thousands additional tax assessment and interest. What does a 6k Back door Roth conversion yield? Probably nothing. Maybe if they withdraw it from Roth many years down the road, there could be some small amount of taxes in play here. I’ll ask again: does the IRS care about back door Roth IRA? Watch carefully what they do, their actions will show what they actually care about.
I have no idea what their actual practice is - playing the audit lottery generally works, but I dont think saying things are small beans necessarily does anyting the IRS looks at de minimis stuff all the time. I personally got an inquiry on a sub $100 income item this year and nothing else (so call it maybe $20 in tax). For whats its worth they agreed it was correctly treated after my response so they spent close to dollar in shipping to clear a less than $25 item that looked off. The IRS looks at pretty minimal things on a regular basis.
Actually they don’t look at small things. I’ve dealt with IRS audits and have friends inside the revenue. The IRS has limited resource. They have been understaffed and underfunded many years. Odds are with the taxpayers, especially corporate taxpayers that can afford tax lawyers and big 4 to make their cases.
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Re: Should Backdoor Roth Wiki have a forceful caution that the process may not be legal?

Post by fyre4ce »

My personal feeling is that the IRS has bigger issues to deal with. I’ve heard quite a few personal anecdotes of folks blatantly violating tax laws- not reporting income, deducting business expenses that are definitely personal, lying about residency to save on state taxes, etc. These cases are much lower hanging fruit.
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