[Retric]

The penalty being low doesn’t prevent this from being fraudulent. Second, the transaction doesn’t need to be unwound for the funds not to be in the Roth IRA.

The timing of his “investment” is also off, he put the funds in after a seed round. Therefore those shares where worth far more than the annual Roth IRA contribution limit.

[vmception]

To you the words “illegal” “tax evasion” and “fraudulent” all may be synonyms, to me they are not. The consequences are the only thing I care about, and there is no authority that could view those words as synonyms. The IRS nor any other part of the executive branch could view it as tax evasion or fraud, the courts could not either, and Congress made this product out of their own desperation. As Congress is still desperate for short term revenues its unlikely they would alter the Roth product.

You can sell shares at arbitrary discounts especially when there are not liquid markets. If stock options are more necessary to circumvent accounting then in the money options can be used as well, with the Roth purchasing the stock options instead of earning it and getting more money in future years to purchase the in the money stock.

[Retric]

If the government wanted an unlimited Roth IRA cap they wouldn’t have added a Roth IRA cap. The fact they added a cap shows clear intent, which is definitely how the courts view such forms of Tax Evasion.

Now the government doesn’t go after the vast majority of criminals be that the IRS, FBI, or your local cops. However, that has no impact on what is or isn’t breaking the law as written. As such this was clearly tax evasion because it’s illegally reducing taxes he would owe and it’s fraudulent activity because it’s falsifying financial records for personal benefit. Hell was likely also wire fraud depending on how he submitted tax documents, not that such charges are normally tacked on to such cases but they still apply.

[vmception]

He complied with the contribution cap and the income cap that year.

You know, 22 years later you can still do this as well and it wouldn’t be tax fraud or wire fraud.

You can do it even better now, than then, by doing backdoor Roths.

Play the game by a more efficient set of assumptions because yours are just self limiting.

[Retric]

> He complied with the contribution cap and the income cap that year.

Not if he used am old pre round validation after the investment occurred at a higher valuation as has been reported.

Also your penalties where off: However, if the individual for whom the IRA was established or the IRA’s beneficiary engages in a PT with respect to the IRA, the sanction is the loss of the tax-exempt status of the IRA as of the first day of the taxable year in which the PT occurs.

As such, all transactions after the original transaction lack their tax exempt status. As such based on listed rules and including interest and penalties and he’s potentially facing a multi billion dollar tax bill.