The IRS is more likely to audit a business that’s done ROBS because there are many regulations to follow, and they want to ensure you’re in compliance. The Department of Labor can also send auditors to check your business’s compliance with labor and retirement regulations. Auditors will check if you set up the retirement plan correctly, are administering the retirement plan correctly, and filed all necessary paperwork with the IRS.
If the auditors find that you have not correctly set up your ROBS, they can invalidate the transaction. They’ll charge early withdrawal penalties, plus you’ll have to pay back taxes for every year that the ROBS has been active.
Fortunately, the risk of an IRS audit is still extremely low. Fewer than 1% of business owners get audited for ROBS. And even if you do get audited, some firms like Guidant will pay for any legal fees or tax penalties that you incur.