Mat Sorensen


March 24, 2015

I’m presently attending and speaking at the Retirement Industry Trust Association’s (RITA) conference in Washington, D.C. RITA is the national association that represents the self directed IRA industry and has most major companies in the industry as members. I have spoke today on Legal/Litigation Case Updates in the industry and will be speaking tomorrow on unrelated business income tax compliance (UBIT). However, I wanted to update those who follow my blog and our firm’s newsletter as to some interesting comments from the IRS relating to self directed IRAs. As RITA does every year, a representative from the IRS was present and spoke on new rules for IRAs. The representative was a high ranking lawyer at the IRS with supervision responsibilities over retirement plans. Her remarks were a good insight into the IRS and what they are interested in with respect to self directed IRAs. I have copied a few items from my notes below.

1. Government Accountability Office Report– The IRS representative referenced a Government Accountability Office (GOA) report on IRA’s issued on October of 2014. This report was called, IRS Could Bolster Enforcement of Multi-million Dollar Accounts, but more direction from Congress is Needed. In short summary, the report outlines that there are over 600,000 IRAs that have balances of over $1M. This is great news for retirees but the GAO believes that a small portion of these accounts may have obtained large values improperly. Specifically, the IRS representative referenced the report on two issues. First, on Roth conversions where the valuation is low at the time of conversion and then increases in value and is distributed tax free. The concern is that the proper valuation needs to be set at the time of the conversion to fairly report tax and GAO report believes that values are being underreported. Second, the IRS representative referenced IRAs that fund a business and then take a salary from that business. This was possibly in reference to what are called Rollover on Business Start-Ups (ROBS) or to IRA/LLCs where the IRA owner takes a salary for serving as manager as a salary is a prohibited transaction (see, Ellis v. Commissioner). As outlined more fully in my book and prior blog articles, it is a prohibited transaction to take a salary for managing your own IRA/LLC.

2. Update IRA Form 5498– The IRS updated from 5498 a couple of years ago and starting in 2015 is requiring IRA custodians to begin reporting the type of assets held in the IRA if those assets include “non market assets”. For example, real estate, LLC or LP, and notes would have specific codes for reporting the assets held by the IRA. I specifically asked the IRS representative what the IRS intends to use this data for and was told that the IRS doesn’t release that information and provide that guidance to the public. Fair enough. The GAO report does, however, offer some insight and it primarily discusses how the form can be used to zero in on potentially abusive transactions and un-fair value shifting transactions where closely held non-publicly traded assets are unfairly purchased or valued (in a roth conversion) in the IRA.

I will be writing more about the GAO report in later articles but these were the two items referenced by the IRS representative today that I though were insightful. The message from the IRS today was really focused on bad actors and that the IRS does have a desire, but admittedly not the resources, to audit and find those bad actors abusing the tax rules with their self directed IRA. And so they should, a self-directed IRA can be an excellent tool for building wealth but must be used properly in accordance with the law.

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