Client using Prime + 0

[austin3515]

LEt's say you have a client charging prime + 0 on its loans. Do you tell them:

a) There is little or no risk, the IRS is just puffing smoke

b) There is moderate risk, because hey, the auditors want to find something; or

c) I strongly recommend you increase your loan rate to prime +1 (the most common rate out there) because of the "recent" IRS comments endorsing Prime + 2.

Specifically, I'm looking for practical advice on what others are telling clients to help them avoid audit troubles. I agree with all of the arguments I've read that Prime is just as good as any other since there is essentially no risk.

[Guest A_Dude]

I go with B and/or C. I think staying at just prime isn't worth the potential risk and hassle if the IRS audits. Is paying 1 or (as I would) 2 percent really going to costs that much more for loan. I think the IRS and DOL are more worried about serial loan takers, so making interest rates too attractive to for some participants is where they have issues. They wish people could tuck this money into their retirement piggy banks, and not try to access it everyday