INDIVIDUAL
RETIREMENT
ACCOUNTS
IRS Could Better
Inform Taxpayers
about and Detect
Noncompliance
Related to
Unconventional
Assets
Report to the Ranking Member,
Committee on Finance, U.S. Senate
January 2020
GAO-20-210
United States Government Accountability Office
______________________________________ United States Government Accountability Office
January 2020
INDIVIDUAL RETIREMENT ACCOUNTS
IRS Could
Better Inform Taxpayers about and Detect
Noncompliance Related to Unconventional Assets
What GAO Found
The Internal Revenue Service’s (IRS) Publications 590-A and 590-B serve as a
general handbook for millions of taxpayers with individual retirement accounts
(IRA). However, the two-part publication provides limited information for IRA
owners with unconventional assets surrounding complex tax rules in four
compliance areas: (1) barred investments, (2) prohibited transactions, (3)
unrelated business income, and (4) fair market value. GAO found other limited
information about these topics on IRS’s website. With only about 2 percent of
IRAs invested in unconventional assets, adding more pages to Publications 590-
A and 590-B may not be practical. By assessing options for informing IRA
owners investing in unconventional assets, such as directing them to web pages
with specialized information and technical regulations, IRS could better help them
comply.
Noncompliance involving unconventional IRA assets is difficult to detect and time
consuming for IRS to pursue. Whereas IRS relies on automated enforcement for
IRAs invested in conventional assets held by custodians and trustees,
enforcement for IRAs invested in unconventional assets or under IRA owner
control requires labor-intensive audits of individual taxpayers. Using newly
compiled information, IRS identified about 2 million IRAs that held certain types
of hard-to-value assets as of 2016; however, about 20 percent of the forms were
missing fair market value amounts for these assets (see fig.).
Numbers of IRAs Reporting Certain Types of Unconventional Assets and Reporting Their
Value (Tax Year 2016)
Data element from IRS Form 5498
Number of forms reporting
(in millions)
Certain types of unconventional nonmarket assets
2.0
Fair market value of specified assets
1.6
Source: GAO analysis of IRS data. | GAO-20-210
IRS officials said this type of reporting alone may be inadequate for audit
selection and identifying potentially abusive IRAs. When IRS lacks sufficient data
to detect abusive transactions, IRS can require taxpayers to self-report certain
transactions that have been used by other taxpayers to avoid taxes. Additional
taxpayer or custodian disclosure of potentially abusive IRA transactions coupled
with IRS analysis of reported details may help IRS to select IRA owner tax
returns to audit.
Fragmented responsibility among IRS divisions creates challenges for examiners
who need to share expertise and collaborate on IRA enforcement. The division
responsible for tax-exempt entities trains its examiners on how to determine if an
employee retirement plan has engaged in business activities subject to taxation.
However, examiners in the division that audits complex individual tax returns,
including those involving IRAs, do not receive such training. Training for those
examiners could help improve collaboration on IRA enforcement.
Why GAO Did This Study
Unconventional IRA investments—such
as real estate, certain precious metals,
private equity, and virtual currency—can
introduce risks to account owners who
assume greater responsibility for
navigating the complex rules that govern
tax-favored retirement savings. IRS
enforces tax rules relating to IRAs and
can assess additional taxes.
GAO was asked to examine the
challenges associated with enforcing
rules governing IRAs invested in
unconventional assets. This report
examines (1) the extent to which IRS
offers guidance to help taxpayers
understand the rules governing
unconventional IRA assets; and (2) the
challenges IRS faces in enforcing those
rules. GAO identified and analyzed IRS
information to help taxpayers
understand four compliance areas. GAO
reviewed IRS analysis of nonmarket IRA
assets reported by IRA custodians, and
IRS audit procedures and training
materials; and interviewed relevant IRS
officials to identify enforcement
challenges.
What GAO Recommends
GAO is recommending that IRS (1)
assess options for updating its IRA
publications to provide more information
for taxpayers with unconventional
assets, (2) evaluate the feasibility of
requiring disclosure for high-risk IRA
asset types associated with abusive tax
schemes, and (3) develop auditor
resources (such as training materials or
job aids) that explain how IRAs with
unconventional assets can generate
unrelated business income tax. IRS
generally agreed with GAO’s
recommendations.
James R. McTigue, Jr. at (202) 512-
[email protected], or Charles A.
-7215 or
.
Page i GAO-20-210 Individual Retirement Accounts
Letter 1
Background 3
Primary IRS Publication Could Better Help IRA Owners with
Unconventional Assets Understand Complex Rules 8
Insufficient Data and Fragmented Expertise across IRS
Organizational Units Complicate Enforcement of IRA Rules
Involving Unconventional Assets 12
Conclusions 21
Recommendations for Executive Action 22
Agency Comments 23
Appendix I Status of GAO Recommendations 25
Appendix II IRS Information for IRA Owners Investing in Unconventional Assets 28
Appendix III Comments from the Internal Revenue Service 32
Appendix IV GAO Contacts and Staff Acknowledgments 35
Tables
Table 1: Overview of IRS Organizational Units Responsible for
IRA Enforcement 7
Table 2: Summary of the Information Provided in Selected IRS
Resources on Four Compliance Topics for IRA Owners
with Unconventional Assets 10
Table 3: Numbers of IRAs Reporting Certain Types of
Unconventional Assets and Reporting Their Value (Tax
Year 2016) 15
Table 4: Status of Our Recommendations Related to Individual
Retirement Account Rules Enforcement 25
Contents
Page ii GAO-20-210 Individual Retirement Accounts
Abbreviations
DOL Department of Labor
ERISA Employee Retirement Income Security Act of 1974
FMV fair market value
FAQ frequently asked questions
IRA individual retirement account
IRS Internal Revenue Service
LB&I Large Business and International
SB/SE Small Business/Self-Employed
TE/GE Tax-Exempt and Government Entities
Treasury Department of the Treasury
W&I Wage and Investment
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Page 1 GAO-20-210 Individual Retirement Accounts
441 G St. N.W.
Washington, DC 20548
January 27, 2020
The Honorable Ron Wyden
Ranking Member
Committee on Finance
United States Senate
Dear Senator Wyden:
Individual retirement accounts (IRA) are a key vehicle for individuals to
save for retirement or roll over savings from employer-provided retirement
plans, such as a 401(k) plan. For tax year 2016 (the most recent
statistical data available), an estimated 59 million taxpayers had IRAs
with a total estimated fair market value (FMV) of $8 trillion.
1
IRA owners
are able to invest their IRA savings in a wide variety of asset types. Many
IRA owners choose to invest in publicly traded assets, such as stocks,
bonds, and mutual funds, through a bank or qualified firm that acts as a
trustee or custodian of those investments. Some IRA owners seek out
alternative investment opportunities in less conventional or nonpublicly
traded assets such as real estate, certain precious metals, private equity,
and virtual currency. We previously found that IRA owners who have
accumulated unusually large IRA balances likely have invested in
unconventional assets like nonpublicly traded shares of stock and
partnership interests.
2
As we also previously found, unconventional IRA investments can
introduce new risks to account owners who assume greater responsibility
for navigating the complex rules that govern tax-favored retirement
investments.
3
Difficulty in valuing nonpublicly traded investments can
heighten the risk of noncompliance. We have also found that
noncompliance associated with nonpublicly traded IRA assets has been
difficult for Internal Revenue Service (IRS) to detect and time consuming
1
IRS, Statistics of Income Division, Individual Retirement Arrangements Study, April 2019.
A taxpayer may own multiple IRAs.
2
GAO, Individual Retirement Accounts: IRS Could Bolster Enforcement on Multi-Million
Dollar Accounts, but More Direction from Congress is Needed, GAO-15-16 (Washington,
D.C.: Oct. 20, 2014).
3
GAO, Retirement Security: Improved Guidance Could Help Account Owners Understand
the Risks of Investing in Unconventional Assets, GAO-17-102 (Washington, D.C.: Dec. 8,
2016).
Letter
Page 2 GAO-20-210 Individual Retirement Accounts
to pursue.
4
Overall, IRS audits of individual tax returns have declined in
recent years.
5
You asked us to examine the challenges associated with enforcing rules
governing IRAs invested in unconventional assets. This report examines:
(1) the extent to which IRS offers guidance to help taxpayers understand
the rules governing unconventional IRA assets and (2) the challenges
IRS faces in enforcing IRA rules for unconventional assets. In June 2019,
we issued a separate report on IRS and Department of Labor (DOL)
collaboration on shared oversight of prohibited transaction rules for IRAs
and the DOL process for granting exemptions for prohibited IRA
transactions.
6
These reports are part of a larger body of work on
retirement security—a key issue we have identified facing the nation.
7
To determine the extent to which IRS offers published guidance to help
taxpayers understand rules governing unconventional IRA assets, we
identified and analyzed publicly available IRS information on four
compliance areas where complex rules are likely to apply: (1) barred
investments, (2) prohibited transactions, (3) unrelated business income,
and (4) fair market value (FMV). Information sources reviewed include
federal laws and regulations and guidance published in the Internal
Revenue Bulletin such as revenue rulings and revenue procedures. We
also reviewed IRS publications, forms and instructions, as well as
information on IRS.gov, including frequently asked questions (FAQ).
To identify challenges IRS faces in enforcing rules for IRAs invested in
unconventional assets, we built on the analyses of IRA rules developed
for the first objective by reviewing relevant sections of the Internal
Revenue Manual, IRS audit procedures, and internal training materials
covering IRA rules to determine how IRS detects when violations of the
4
See GAO-15-16.
5
We generally use the term audit, instead of review or examination, for the purposes of
this report. For data about recent declines in the number of IRS audits, see GAO, Tax-Law
Enforcement: IRS Could Better Leverage Existing Data to Identify Abusive Schemes
Involving Tax-Exempt Entities, GAO-19-491 (Washington, D.C.: Sept. 5, 2019).
6
GAO, Individual Retirement Accounts: Formalizing Labor’s and IRS’s Collaborative
Efforts Could Strengthen Oversight of Prohibited Transactions, GAO-19-495 (Washington,
D.C.: June 7, 2019).
7
See https://www.gao.gov/key_issues/retirement_security.
Page 3 GAO-20-210 Individual Retirement Accounts
rules occur, resolves noncompliance, and develops strategies to promote
IRA owner compliance.
We interviewed IRS officials from the Small Business/Self Employed
(SB/SE) division, and the Tax-Exempt and Government Entities (TE/GE)
division’s Exempt Organizations and Employee Plans groups to identify
enforcement challenges and how these units communicate and
coordinate in handling IRA issues. We also discussed with SB/SE and
TE/GE officials the status of implementing our prior recommendations
related to IRAs with unconventional assets.
8
We reviewed documentation
and analysis of nonpublicly traded IRA assets from an IRS team studying
IRA noncompliance. We reviewed the IRS data tabulations and
interviewed staff responsible for compiling the data. Based on our review
and interviews with IRS officials, we determined the data reported on
IRAs with unconventional assets were sufficiently reliable for purposes of
this report.
We conducted this performance audit from December 2016 to January
2020 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit to
obtain sufficient, appropriate evidence to provide a reasonable basis for
our findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.
Created as part of the Employee Retirement Income Security Act of 1974,
as amended (ERISA), traditional IRAs provide tax advantages to help
individuals—including small business owners, independent contractors,
and other workers not covered by employer-sponsored retirement plans—
save for retirement.
9
Employees who have employer-sponsored
retirement plans, such as a 401(k), can also roll over these assets into an
IRA when they retire or change jobs.
Since the enactment of ERISA, different types of IRAs with different
features for individuals and small businesses have been created. The two
IRA types with federal income tax benefits for individuals are traditional
8
Appendix I summarizes recommendations from our prior reports related to IRAs with
unconventional assets and actions that have been taken or are planned to address them.
9
See Pub. L. No. 93-406, 88 Stat. 829 (codified as amended in scattered section of 26
and 29 U.S.C.).
Background
Page 4 GAO-20-210 Individual Retirement Accounts
IRAs (which allow eligible individuals to make tax-deductible contributions
and accumulate tax-deferred investment earnings) and Roth IRAs (which
allow eligible individuals to make after-tax contributions and accumulate
investment earnings tax free).
10
IRA owners are able to invest their IRA savings in a wide variety of asset
types. IRA owners generally make tax-favored contributions to their
accounts to purchase assets from investment options offered through
banks or other IRS-qualified firms acting as custodians of the IRA
assets.
11
Most IRA custodians limit holdings in IRA accounts to firm-
approved stocks, bonds, mutual funds, and CDs.
Some custodians offer so-called “self-directed IRAs” that allow
investments in a broader set of unconventional assets—such as real
estate, certain precious metals, private equity, and virtual currency—than
is permitted by most IRA custodians. As we previously reported, custodial
agreements for these accounts often require IRA account owners to be
responsible for directing their investments, and to oversee the selection,
management, monitoring, and retention of all investments in the
account.
12
The account owners bear the consequences of any mistakes
made in managing their accounts, such as being noncompliant with IRA
rules.
Through our prior work, we identified the following four areas where
complex rules are likely to apply to IRA owners investing in
unconventional assets:
• Barred investments. Investments in life insurance contracts and
collectibles, such as artwork and antiques, are prohibited. Although
10
Two other types of IRAs are intended to encourage savings sponsored through small
employers. A Simplified Employee Pension (SEP) IRA was created in 1978, and was
designed with fewer requirements than traditional employer pension plans to encourage
small employers to offer pension plans to their workers. A Savings Incentive Match Plan
for Employees (SIMPLE) IRA was created in 1996 to help employers with 100 or fewer
employees more easily provide a retirement savings plan to their employees through
employer and employee contributions.
11
All IRA accounts are held for investors by custodians or trustees. An IRA custodian or
trustee must be a bank, a federally insured credit union, a savings and loan association, or
an entity approved by IRS to act as trustee or custodian. Throughout this report, we
generally use the term “custodians” to refer to both trustees and custodians.
12
See GAO-17-102 for more on different types of unconventional IRA investments and
how these IRAs are managed.
Page 5 GAO-20-210 Individual Retirement Accounts
precious metals are generally prohibited collectibles, certain types of
coins and bullion are permitted provided that they meet specific purity
and custody requirements.
• Prohibited transactions. IRA owners are not permitted to engage in
prohibited transactions that personally benefit the owner or other
disqualified persons in a way other than as a vehicle to save for
retirement. Examples of such prohibited transactions include IRA
owners selling their own property to an IRA, or taking a salary from an
IRA-funded business. IRA owners who believe that an otherwise
prohibited transaction should be permitted, may apply to the
Department of Labor (DOL) to request an exemption for a specific
transaction.
13
• Unrelated business income. Earnings and profits made in tax-
deferred savings vehicles like IRAs generally are reinvested in the
account without generating current federal tax liability, but
investments in certain unconventional assets can generate ongoing
tax liability for IRA owners.
14
Any IRA that earns $1,000 or more of
gross income from an unrelated business must file Form 990-T
Exempt Organization Business Income Tax Return with IRS and pay
related taxes.
• Fair market value (FMV). When IRA owners invest in less
conventional and nonpublicly traded assets, custodians may find it
challenging to properly report the FMV of those assets. Starting with
tax year 2015, IRS began requiring IRA custodians to report selected
information on unconventional assets in their clients’ accounts. For
some hard-to-value unconventional assets, IRA owners may need to
supply custodians with independent appraisals or other evidence to
substantiate an asset’s current FMV.
13
IRS and DOL each have responsibilities for overseeing prohibited transactions relating
to IRAs. DOL has primary responsibility for interpretive guidance and exclusive authority
to grant exemptions from the prohibited transaction rules for retirement plans and IRAs.
Whereas IRS and DOL share oversight responsibilities for employer-sponsored retirement
plans such as 401(k) plans, IRS is responsible for enforcing tax laws relating to IRAs and,
among other things, assessing additional taxes for early distributions for IRA owners who
engage in prohibited transactions. See GAO-19-495.
14
Unrelated business taxable income is gross income generated from an ongoing trade or
business (less allowable deductions) that is not related to the exempt or tax-deferred
entity, such as an IRA. Examples include using an IRA to invest in an active business or
using debt to finance a portion of an asset’s purchase. See GAO-17-102 for more about
how certain IRA investments can trigger unrelated business income tax liability.
Page 6 GAO-20-210 Individual Retirement Accounts
Failure to abide by the rules governing IRAs with unconventional assets
can have significant consequences for IRA owners. For example, if an
IRA owner engages in a prohibited transaction that has not been
exempted by DOL, the IRA will lose its tax-favored status, and the
account is treated as distributing all of its assets to the owner at the FMV
on the first day of the year in which the prohibited transaction occurred.
15
Noncompliance with IRA rules—if not detected—can also lead to millions
of dollars in uncollected tax revenue for the government.
Individuals who invest in certain unconventional assets using Roth IRAs
can avoid taxation on investment gains. For example, founders of
companies (or key initial investors) who use IRAs to invest in nonpublicly
traded shares of their newly formed companies can realize many millions
of dollars in tax-favored gains on their investment if the company is
successful.
16
IRS is responsible for enforcing IRA tax laws, including rules that apply
when IRA owners invest in unconventional assets. Within IRS, four
business operating divisions have responsibilities for enforcing
compliance with IRA rules. Table 1 provides an overview of each
division’s IRA enforcement activities.
15
See 26 U.S.C. § 408(e)(2)(B). The IRA owner may also be subject to additional income
taxes because of an early distribution from an IRA. See 26 U.S.C. § 72(t). The prohibited
transaction may also be subject to excise taxes. If a disqualified person other than the IRA
owner engages in a prohibited transaction, that person may be liable for a 15 percent
excise tax on the amount of the prohibited transaction and a 100 percent additional tax if
the transaction is not corrected in a timely manner. 26 U.S.C. § 4975(a). If the IRA ceases
to be an IRA as a result of the prohibited transaction, the IRA owner or beneficiary is not
subject to the excise tax. See 26 U.S.C. § 4975(c)(3).
16
See GAO-15-16. We previously found that with no total limit on IRA accumulations, the
government forgoes millions in tax revenue.
Page 7 GAO-20-210 Individual Retirement Accounts
Table 1: Overview of IRS Organizational Units Responsible for IRA Enforcement
IRS unit
Responsibility for IRA enforcement
Wage and Investment
(W&I)
Operates automated enforcement programs that check
taxpayer reporting of IRA transactions against information
provided by third-parties such as IRA custodians.
Small Business/Self-
Employed (SB/SE)
Enforces traditional and Roth IRA rules through field audits of
more complex individual tax returns.
Tax-Exempt and
Government Entities
(TE/GE)
Has jurisdiction over tax-exempt employee retirement plans
(including employer-sponsored IRAs).
Approves non-bank IRA trustees and custodians and
periodically investigates them.
Large Business and
International (LB&I)
Can penalize financial institutions that are IRA trustees and
custodians for inaccurate reporting.
Provides in-house expertise from IRS’s Engineering
Department (part of LB&I) on hard-to-value assets including
assets held in IRAs.
Source: GAO analysis of IRS information. I GAO-20-210
Third-party reporting by IRA custodians provides information that
taxpayers can use in preparing their tax returns and that IRS can use to
identify noncompliant taxpayers and help close the tax gap.
17
In 2015,
IRS began requiring custodians to report new information to help identify
IRAs with hard-to-value unconventional assets. IRS Form 5498 IRA
Contribution Information has a new box 15a for custodians to report the
portion of the IRA FMV attributable to nonmarket assets as well as a box
15b with codes describing the type of nonmarket assets.
18
Custodians are
to report similar information on IRS Form 1099-R identifying distributions
of IRA assets that do not have a readily available FMV.
17
The tax gap is the difference between tax amounts that taxpayers should pay and what
they annually pay voluntarily and on time. See GAO, Tax Gap: IRS Needs Specific Goals
and Strategies for Improving Compliance, GAO-18-39 (Washington, D.C.: Oct. 31, 2017).
18
Box 15b on the form provides eight codes for identifying the types of unconventional
assets: (A) stock or other ownership interest in a corporation that is not readily tradable on
an established securities market; (B) short- or long-term debt obligation that is not traded
on an established securities market; (C) ownership interest in a limited liability company or
similar entity (unless the interest is traded on an established securities market); (D) real
estate; (E) ownership interest in a partnership, trust, or similar entity (unless the interest is
traded on an established securities market); (F) option contract or similar product that is
not offered for trade on an established option exchange; (G) other asset that does not
have a readily available fair market value; and (H) more than two types of assets (listed in
A through G) are held in this IRA. Precious metals is not one of the specified categories of
hard-to-value IRA assets that custodians can select on the Form 5498.
Page 8 GAO-20-210 Individual Retirement Accounts
The first article in the Taxpayer Bill of Rights is the right to be informed
which means that taxpayers have the right to know what they need to do
to comply with tax laws.
19
IRS’s Publication 1, Your Rights as a Taxpayer,
further states that taxpayers are entitled to clear explanations of the laws
and IRS procedures in all forms, instructions, publications, notices, and
correspondence.
20
To help taxpayers and their advisors better understand tax rules, such as
those governing IRAs with unconventional assets, IRS produces several
types of resources. Taxpayers (or their advisers and paid tax preparers)
with complicated returns or transactions may require detailed and
technical resources, such as guidance published in a weekly IRS
publication called the Internal Revenue Bulletin (IRB).
21
Tax regulations—
issued by the Department of the Treasury (Treasury)—are published in
the IRB together with technical IRS guidance such as revenue rulings and
revenue procedures. IRS has stated that only guidance published in the
IRB contains IRS’s authoritative interpretation of the law.
22
IRS also produces resources that are less technical and intended to be
more easily understood by most taxpayers. IRS issues hundreds of
publications on a variety of tax topics, and many are updated annually.
IRS also produces a variety of information on its website (IRS.gov) such
as online tools, instructions, and FAQs.
IRS’s Publication 590-A, Contributions to Individual Retirement
Arrangements (IRAs), and Publication 590-B, Distributions from Individual
Retirement Arrangements (IRAs), serve as a general IRA handbook for
19
In discharging the duties of the Commissioner of IRS, the Commissioner is to ensure
that IRS employees are familiar with and act in accord with taxpayer rights as afforded by
the Internal Revenue Code, including the right to be informed. 26 U.S.C. § 7803(a)(3)(A).
20
IRS, Your Rights as a Taxpayer, Publication 1 (September 2017). This publication
further explains 10 rights for taxpayers and the processes for examination, appeal,
collection, and refunds.
21
See 26 C.F.R. § 601.601(d)(2)(ii)(a). The Internal Revenue Bulletin (IRB) is the
“authoritative instrument” for publishing official IRS rulings and procedures, and tax
regulations; it is available free online at: https://www.irs.gov/irb. Tax regulations are also
published in the Federal Register.
22
For more information about IRS’s different types of guidance and levels of legal
authority, see GAO, Regulatory Guidance Processes: Treasury and OMB Need to
Reevaluate Long-standing Exemptions of Tax Regulations and Guidance, GAO-16-720,
(Washington, D.C.: Sept. 6, 2016).
Primary IRS
Publication Could
Better Help IRA
Owners with
Unconventional
Assets Understand
Complex Rules
Page 9 GAO-20-210 Individual Retirement Accounts
IRA owners and a logical starting point for all IRA owners with tax
questions, including those with unconventional assets.
23
At more than 120
pages combined, Publications 590-A and 590-B comprise one of IRS’s
longest publications on retirement related topics. Publications 590-A and
590-B provide some limited information on the four compliance topics that
we identified through prior work as likely to affect IRA owners with
unconventional assets. However, the two-part publication lacks additional
information that IRA owners with unconventional assets need to comply.
Publications 590-A and 590-B recommend that taxpayers research IRS’s
website (IRS.gov) for additional information. We found some additional
information on IRS’s website about three of the four compliance topics.
This information was typically in the form of FAQs in a section of IRS’s
website about retirement plans (https://www.irs.gov/retirement-plans).
Table 2 summarizes: what information for IRA owners with
unconventional assets can be found in Publications 590-A and 590-B;
what other IRS sources provide relevant information; and what
information was not readily available on the IRS website for the four
compliance areas likely to affect IRA owners with unconventional assets.
Appendix II describes in more detail the information available and the
information lacking in Publications 590-A and 590-B and other IRS
sources.
23
Beginning for tax year 2014, IRS split Publication 590 into two parts. Publication 590-A
covers contributions to traditional and Roth IRAs as well as the rules for rollover and
conversion contributions. Publication 590-B covers distributions from traditional and Roth
IRAs as well as the rules for required minimum distributions and IRA beneficiaries. At the
time of our review, the latest Publications 590-A and 590-B were those for tax year 2018.
Page 10 GAO-20-210 Individual Retirement Accounts
Table 2: Summary of the Information Provided in Selected IRS Resources on Four Compliance Topics for IRA Owners with
Unconventional Assets
Topic
IRS information for taxpayers
Barred investments
Publications 590-A and 590-B explain what types of collectibles are not permitted, and the consequences of
investing in them, and that certain types of coins and bullion are permitted. Publications 590-A and 590-B do not
explain the storage requirements for bullion nor do the publications mention that investments in life insurance
contracts are not permitted.
Two FAQs web pages contain additional information about bullion custody requirements, and the prohibition on
investments in life insurance contracts.
a
Prohibited
transactions
Publications 590-A and 590-B define prohibited transactions and provide examples; explain the consequences
of engaging in a prohibited transaction; and caution that investing in nonpublicly traded assets or assets that an
IRA owner controls directly increases the risk of engaging in a prohibited transaction. Publications 590-A and
590-B do not provide information about applying to the Department of Labor (DOL) for an exemption to the
prohibited transaction rules.
A web page titled, “Retirement Plan Investments FAQs,” states that plan sponsors can apply to DOL for an
exemption.
b
Neither of the Publications 590 nor the IRS web page provide direct links for IRA owners to DOL
information such as a publication that explains the DOL exemption process.
Unrelated business
income
Publications 590-A and 590-B explain how an IRA can be subject to tax on unrelated business income and
explain IRA trustee requirements to file a Form 990-T. Publications 590-A and 590-B direct taxpayers to
Publication 598, Tax on Unrelated Business Income of Exempt Organizations, for more information.
Publication 598 describes tax-exempt organization activities by that would be considered an unrelated business.
Publication 598 does not have examples specific to IRA investments.
Fair market value
(FMV)
Publications 590-A and 590-B instruct taxpayers to enter the fair market value (FMV) of the IRA from custodian
forms when using the publication’s worksheets. Publications 590-A and 590-B and instructions for custodian
forms do not provide information about how to accurately determine the FMV of hard-to-value unconventional
assets.
A web page titled “Valuation of Plan Assets at Fair Market Value” provides some additional information on FMV
methods, but it is directed at employer-provided retirement benefits like traditional pensions and 401(k) plans.
c
Source: GAO analysis of IRS information. | GAO-20-210
a
IRS, “IRAs FAQs – Investments,”
https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-investments; and
“Retirement Plan Investments FAQs”
https://www.irs.gov/retirement-plans/retirement-plan-investments-faqs.
b
IRS, “Retirement Plan Investments FAQs,”
https://www.irs.gov/retirement-plans/retirement-plan-investments-faqs.
c
IRS, “Valuation of Plan Assets at Fair Market Value,”
https://www.irs.gov/retirement-plans/valuation-of-plan-assets-at-fair-market-value.
Given the complexity of the four compliance topics we identified as well
as the relatively few numbers of taxpayers affected and the already large
publication size, it may not be feasible to provide complete information on
these topics within Publications 590-A and 590-B. IRS publications (like
590-A and 590-B) are intended to explain the law in plain language for
taxpayers and their advisors. They generally summarize and translate
into layperson’s terms more complex and technical information from
authoritative sources like the Internal Revenue Code and more
Page 11 GAO-20-210 Individual Retirement Accounts
authoritative guidance like tax regulations, revenue procedures, and
revenue rulings.
IRS analysis indicates that perhaps only about 2 percent of IRAs have
invested in hard-to-value unconventional assets.
24
However, even small
numbers of taxpayers with particular circumstances have the right to
know what they need to do to comply with tax laws. IRA owners with
unconventional assets who turn to Publications 590-A and 590-B are
unlikely to fully understand how certain IRA investment decisions can
increase their risks for noncompliance. Misunderstanding the rules
governing IRAs could result in increased tax liability for taxpayers making
unintentional errors and jeopardize their retirement savings.
Given the serious consequences that could result for a taxpayer found to
be noncompliant, IRS’s current publications are not clearly providing
information for IRA owners with unconventional assets. Adding
information to Publications 590-A and 590-B would be one solution that
IRS could explore, but we recognize that it may not be practical for IRS to
add substantially more information to Publications 590-A and 590-B for a
relatively small percentage of IRA owners. Alternatives to adding more
pages to Publications 590-A and 590-B could include directing readers
with questions about rules affecting unconventional IRA assets to other
IRS resources, such as IRS web pages or tax regulations that contain
more technical and specialized information. As shown in table 2 above,
we found some additional information on IRS web pages that would be
helpful to IRA owners with unconventional assets. Adding language in
Publication 590-A or 590-B directing taxpayers to specific web page URL
addresses for additional information could help taxpayers more easily
locate this information.
25
For more technical or specialized information,
IRS could direct readers of Publications 590-A and 590-B to the relevant
24
According to IRS analysis of 124 million Forms 5498 filed in 2017 (for tax year 2016),
about 2 million forms indicated that the IRA contained one or multiple types of hard-to-
value unconventional assets.
25
The last chapter of some IRS publications—“How To Get Tax Help”—directs readers to
specific sections of IRS’s web page, rather than directing readers to just IRS.gov in
general. IRS Publication 17 Your Federal Income Tax also contains many hyperlinks to
more detailed parts of IRS.gov as well as to individual Revenue Procedures.
Page 12 GAO-20-210 Individual Retirement Accounts
sections of the Internal Revenue Code and related tax regulations.
26
This
additional information could help IRA owners better understand and
navigate the potential compliance challenges associated with certain
types of unconventional assets.
In October 2017, the Deputy Commissioner for Service and Enforcement
commissioned a cross-divisional team comprised of representatives from
all four IRS operating divisions to identify, assess, and mitigate risks of
IRA noncompliance. In its February 2018 interim presentation, the IRS
cross-divisional team categorized potential noncompliance risks over an
IRA life cycle into two mitigation strategies, which are summarized
below.
27
1. Noncompliance risks for most contribution and distribution IRA rules
can be mitigated systemically through automated enforcement. For
example, IRS can detect excess IRA contribution deductions and
unreported IRA distributions by matching information from taxpayer
26
For prohibited transactions, DOL has primary responsibility for interpretive guidance and
information that could be useful for developing educational outreach to IRA owners. In
June 2019 (see GAO-19-495), we recommended DOL and IRS establish a formal means
to collaborate on oversight of prohibited IRA transaction exemptions. In October 2019, IRS
officials told us providing additional information about prohibited transactions for IRA
owners could be a collaboration opportunity.
27
Stages of an IRA life cycle include, but are not limited to, setting up the account,
investing the funds, and distributing funds to the IRA owner or beneficiaries.
Noncompliance with IRA rules can be unintentional or intentional.
Insufficient Data and
Fragmented
Expertise across IRS
Organizational Units
Complicate
Enforcement of IRA
Rules Involving
Unconventional
Assets
IRS Cross-Divisional Team
Identified Risks of IRA
Noncompliance Based on
Different Asset Types
Page 13 GAO-20-210 Individual Retirement Accounts
returns with information reported by custodians. For the large
population of IRA owners investing in conventional assets held by
custodians, IRS relies on automated enforcement.
2. Noncompliance risks associated with the small population of IRAs
with hard-to-value unconventional assets or under direct control of the
IRA owner are generally mitigated through case-by-case audits. For
example, noncompliance with the complex rules governing prohibited
transactions and unrelated business income is generally not reflected
on individual tax returns. Some custodians rely on IRA owners to
provide asset value information and may not have complete and
accurate data to report to IRS.
28
Undervaluing IRA assets hampers
automated enforcement, for example, to detect excess contributions
and taxable distributions.
Noncompliance involving IRAs with unconventional assets is generally
detected through labor-intensive audits of individual taxpayers. IRS’s
SB/SE division uses field audits to pursue complex individual tax return
cases, including those that could involve IRAs with unconventional
assets.
29
In February 2018, an IRS cross-divisional team that studied the
risks of IRA noncompliance reported that, from fiscal years 2012 to 2016,
IRS audited about 26,000 tax returns with IRA issues.
IRS officials provided us examples of SB/SE job aides and training
materials designed to help examiners recognize different types of
noncompliance associated with IRAs invested in unconventional assets.
For example, the job aides provide instructions on prohibited transactions,
barred collectibles, and FMV issues involving IRAs. When interviewing
taxpayers, examiners are instructed to ask a series of questions covering
subjects such as:
• what kind of advice the taxpayer received from promoters or
custodians of self-directed IRAs,
• whether the taxpayer had direct involvement in purchasing
unconventional assets through a control feature known as “checkbook
access,”
28
As we reported in 2015, custodians may not always be able to get accurate asset
information about IRAs if the IRA owner has day-to-day investment control, which could
lead to unreliable Form 5498 reporting of asset types and FMV. See GAO-15-16.
29
See GAO-15-16 for more information about, and an illustration of, the SB/SE field
examination process.
Page 14 GAO-20-210 Individual Retirement Accounts
• whether the taxpayer has a limited liability company (LLC) tied to the
IRA, and
• how the taxpayer determined the FMV of unconventional assets.
IRS officials told us that enforcing rules associated with IRAs investing in
unconventional assets can be particularly challenging for investments
involving LLCs or special partnership arrangements. An IRA owner may
establish an LLC that is owned by the IRA.
30
Once the LLC is set up, a
business checking account is linked to the IRA funds and the account
owner is named the manager of the LLC with control over the checkbook.
This allows IRA owners to purchase assets directly from investment
sponsors without having to wait for custodians to execute a purchase or
sale.
The LLC may be used to invest in businesses that could generate
unrelated business income. According to IRS officials, prohibited
transactions may also be more likely to occur when custodians allow
“checkbook” access to IRAs, in part because the marketing of this IRA
structure is appealing to individuals who want less oversight of their IRA
transactions and are more likely to intentionally engage in self-dealing
transactions.
IRS examination officials told us that the 3-year statute of limitations for
assessing taxes owed remains an obstacle in pursuing noncompliance
that may span the many years of an IRA investment.
31
For example,
abuses involving prohibited transactions frequently are not reflected on
any filed tax return and may be difficult to detect within the general 3-year
statute of limitations period. IRS agreed with our October 2014
recommendation for the Commissioner to work in consultation with the
Department of the Treasury (Treasury) on a legislative proposal to
30
A single-member LLC is generally treated as an entity disregarded from its owner for
federal income tax purposes. A multi-member LLC is generally treated as a partnership for
federal income tax purposes, unless it elects to be treated as a corporation.
31
Generally, IRS has 3 years from the date a return is filed (whether the return is filed on
time or not) to make an assessment of tax liability. See 26 U.S.C. § 6501(a). The statute
of limitations is extended in certain situations. For example, if a taxpayer submits a false
or fraudulent tax return or otherwise engages in a willful attempt to evade a tax, the tax
may be assessed at any time after the return is filed. See 26 U.S.C. § 6501(c)(1), (2).
Also, IRS and the taxpayer may agree to extend the statute of limitations for assessment.
See 26 U.S.C. § 6501(c)(4). Other extensions are authorized when the taxpayer fails to
file a tax return, omits a certain amount of gross income from the return, or fails to report a
listed transaction. See 26 U.S.C. § 6501(c)(3), (10) & (e)(1).
Page 15 GAO-20-210 Individual Retirement Accounts
expand the statute of limitations on IRA noncompliance. IRS said
Treasury is aware of IRS’ support for changing the limitation period for
IRA noncompliance. Treasury reviews and presents the administration’s
tax proposals and has not released a legislative proposal as of October
2019.
With electronically compiled data for tax year 2016 filed in 2017, IRS was
positioned for the first time to quantify the number of IRAs with specified
types of hard-to-value assets. IRS officials said that even with the new
custodian reporting, the broad IRA asset type data alone may be
inadequate for improving audit selection criteria and identifying potentially
abusive IRAs in a timely manner. In February 2018, using the newly
available data, an IRS cross-divisional team identified that about 2 million
IRAs included one or more types of hard-to-value assets for tax year
2016. However, custodians reported an FMV dollar amount for hard-to-
value assets for only 1.6 million of those IRAs, as shown in table 3. The
combined FMV was approximately $137 billion.
32
Table 3: Numbers of IRAs Reporting Certain Types of Unconventional Assets and
Reporting Their Value (Tax Year 2016)
Data element from IRS Form 5498
Number of forms reporting
(in millions)
Certain types of unconventional nonmarket assets
2.0
Fair market value (FMV) of specified assets
1.6
Source: GAO analysis of IRS data. | GAO-20-210
Note: IRS requires IRA custodians to identify via Form 5498, IRA Contribution Information, IRAs with
certain types of nonmarket assets and report the fair market value (FMV) associated with of those
nonmarket assets. The latest IRS tabulations of Form 5498 data on unconventional nonmarket assets
available for review was for tax year 2016.
As shown in table 3, about 400,000 (about 20 percent) of the Form 5498s
reporting that the IRA held investments in one or more of the specified
unconventional categories were missing the 2016 FMV dollar amount for
those assets. The cross-divisional team identified that undervaluation risk
affects custodian reporting. IRS officials said that the team did not review
32
For IRAs with a reported FMV greater than $5 million in tax year 2016 (about 9,000
IRAs), IRS identified that about 25 percent of the total reported value was held in hard-to
value unconventional assets. In GAO-15-16, we found that taxpayers with IRA values
greater than $5 million had likely accumulated these larger IRA balances by investing in
unconventional assets unavailable to most investors.
Data Collection Has
Improved, but
Opportunities Exist to
Further Strengthen
Identification of Potentially
Abusive IRAs
Page 16 GAO-20-210 Individual Retirement Accounts
the custodian reporting patterns as part of its initial analysis of the 2016
Form 5498 data. Forthcoming tax regulations on IRAs may help to
improve custodian reporting of FMVs on Form 5498.
33
IRS officials told us
that the new IRA regulations would address FMV for certain categories of
hard-to-value unconventional assets. IRS officials also told us that it
would be premature to publish new guidance for IRA owners and
custodians on the FMV of unconventional assets until the new regulations
are issued.
The tax year 2016 Form 5498 information indicated about 141,000 IRAs
invested in LLCs—an asset type which IRS has determined presents
greater noncompliance risk.
34
Prior to the newly available asset type data,
SB/SE conducted an interim Compliance Initiative Project (CIP) using
external state government information to identify businesses, including
LLCs and partnerships, owned by IRAs as a way to select IRA owners for
audit.
35
Completed in October 2019, the interim compliance research
revealed that audits detecting prohibited transactions can result in
substantial tax adjustments.
In September 2018, SB/SE approved a new CIP using the asset type
data from Form 5498s for tax year 2017 to select a sample of traditional
and Roth IRAs that had an ownership in an LLC or real estate. The latest
compliance research field work began in February 2019 and is to be
completed in January 2021. IRS officials told us they plan to use this
research in combination with the interim research results to improve
criteria for selecting tax returns with IRAs at greater risk of noncompliance
for audit.
33
In GAO-17-102 we recommended that IRS provide guidance to IRA owners and
custodians on how to determine and document fair market value for hard-to-value assets.
IRS agreed with the recommendation. If IRS fully implements actions to provide guidance
and reporting instructions, we believe that it will ameliorate some of the data anomalies. In
its October 2019 update of planned tax regulations, Treasury’s Office of Tax Policy and
IRS listed the planned IRA regulations as forthcoming. Department of the Treasury, Office
of Tax Policy and Internal Revenue Service, 2019-2020 Priority Guidance Plan (released
Oct. 8, 2019).
34
On about 141,000 of the Form 5498s, custodians entered Code C for “Ownership
interest in a limited liability company or similar entity (unless the interest is traded on an
established securities market).” On about another 22,000 of the Form 5498s, custodians
entered Code C plus one other code for another type of specified investment category.
35
IRS Compliance Initiative Projects are compliance actions or activities involving the
collection of data on specific groups or segments of taxpayers and contact with those
taxpayers.
Page 17 GAO-20-210 Individual Retirement Accounts
To detect abusive transactions, IRS can require taxpayers to self-report
certain transactions that have been used by other taxpayers to avoid
taxes. Transactions become “reportable” (meaning a taxpayer must report
it to IRS) when IRS designates them as a “listed transaction” or
“transactions of interest.”
36
• Listed Transaction. A listed transaction is reportable when it is the
same or substantially similar to one of the types of transactions that
IRS has determined to be an avoidance transaction.
37
In 2004, IRS
determined that Roth IRA “stuffing” is an abusive tax avoidance
transaction that taxpayers must report to IRS as a listed transaction.
38
“Stuffing” involves shifting value through transactions that disguise
Roth IRA contributions exceeding annual IRA limits, such as selling
receivables at less than FMV to a Roth IRA, or other transactions
between a closely-held business in which the Roth IRA invests and
another closely-held business of the Roth IRA owner.
• Transaction of Interest. A transaction of interest is one that IRS and
Treasury believe to have the potential for tax avoidance or evasion,
but which lacks enough information for IRS and Treasury to determine
whether the transaction should be identified as a tax avoidance
transaction. As of December 2019, IRS has not identified or classified
any IRA asset types or investment transactions as reportable
transactions of interest.
Taxpayers are required to disclose all types of reportable transactions on
Form 8886, Reportable Transaction Disclosure Statement. Similarly,
advisers helping taxpayers conduct reportable transactions are required
to file Form 8918, Material Advisor Disclosure Statement.
39
Results from the ongoing IRS compliance research may yield insights
about existing and emerging abusive schemes involving IRAs. This
36
See GAO-19-491 for more information on these and other types of reportable
transactions.
37
IRS provides a detailed list of the 36 recognized listed transactions on its website. See
https://www.irs.gov/businesses/corporations/listed-transactions.
38
Internal Revenue Service, “Abusive Roth IRA Transactions,” Internal Revenue Bulletin
No. 2004-4, Notice 2004-8 (Jan. 26, 2004).
39
Tax exempt entities like IRAs are required to file Form 8886-T, Disclosure by Tax
Exempt Entity Regarding Prohibited Tax Shelter Transaction, when the entity is party to
listed and confidential transactions and knows the identity of any other party in the
transaction.
Page 18 GAO-20-210 Individual Retirement Accounts
information could be useful for evaluating the feasibility of requiring
greater disclosure by IRA owners and their custodians and advisors. For
example, IRS could consider requiring reporting of known abusive IRA
arrangements and prohibited transactions as listed transactions. Also,
IRS could explore disclosure of high-risk IRA asset types susceptible to
gross valuation misstatements, such as LLCs, as transactions of
interest.
40
We recently found that IRS’s Research, Analysis and Statistics
office had developed the capability to analyze the narrative fields of tax
forms.
41
Additional disclosure of potentially abusive IRA transactions
coupled with greater use of tax form’s narrative fields may help IRS to
select IRA owner tax returns for more detailed review. The cases
identified by such detailed review would help IRS better allocate limited
audit resources.
Responsibility for addressing IRA noncompliance detected through case-
by-case audits is fragmented among multiple IRS organizational units.
This fragmentation creates challenges for IRS examiners from different
units that may need to share expertise and collaborate on enforcement of
complex rules applicable to IRAs that invest in unconventional assets.
42
In
February 2018, the IRS cross-divisional team concluded that no one IRS
operating division alone can effectively identify and penalize IRA
40
The fact that a transaction must be reported does not mean IRS will disallow the tax
benefit, but IRS uses the reports to assess compliance.
41
See GAO-19-491. We found that the narrative analytical tool was not being used
operationally to review the Form 8886 or any other disclosure report. Our analysis showed
that the tool has the potential to help IRS better search disclosure reports for additional
information about transactions involving tax-exempt entity involvement in abusive tax
schemes. In September 2019, we recommended that IRS should use existing data
analytic tools to further mine Form 8886 data for possible audit leads. IRS agreed with the
recommendation.
42
In our body of work on duplication, overlap, and fragmentation within agencies and
across the federal government, we use the term fragmentation when referring to those
circumstances in which more than one federal agency (or more than one organization
within an agency) is involved in the same broad area of national need and opportunities
exist to improve service delivery. Fragmentation may have positive and negative effects.
Negative aspects of fragmentation can be addressed through improving coordination and
collaboration within and across agencies. See GAO, Fragmentation, Overlap, and
Duplication: An Evaluation and Management Guide, GAO-15-49SP (Washington, D.C.:
Apr. 14, 2015).
Enforcing IRA Rules for
Unconventional Assets
Draws on Expertise and
Roles of Multiple IRS
Organizational Units
Page 19 GAO-20-210 Individual Retirement Accounts
noncompliance regarding unrelated business income and undervaluation
of unconventional assets.
43
Unrelated business income. SB/SE and TE/GE officials told us
that detecting unrelated business income unreported by an IRA
can also require the involvement of multiple IRS divisions. IRS
responsibility and expertise in detecting noncompliance with the
rules for unrelated business income resides in IRS’s TE/GE
division. TE/GE is responsible for enforcing the unrelated
business income taxation rules across tax-exempt organizations.
Its Exempt Organizations group audits Form 990-T filed by tax-
exempt charities and its examiners are required to check if tax
exempt charities have reported unrelated business income.
44
Examiners in TE/GE’s Employee Plans group have been trained
on how to determine if a tax-exempt employee retirement plan has
engaged in activities that constitute unrelated trade or business.
45
SB/SE has primary responsibility for auditing individuals owning
IRAs, and its examiners are to verify that all returns within the
taxpayer’s sphere of influence are filed.
46
IRS officials told us that
when SB/SE examiners discover potential unrelated business
income issues when reviewing an individual taxpayer’s IRAs,
those examiners can seek assistance from TE/GE examiners via
an internal Specialist Referral System used to refer cases to other
divisions.
47
43
The cross-divisional team also identified prohibited transactions as a crosscutting
compliance challenge. See GAO-19-495 for more information about how IRS and the
Department of Labor coordinate on shared oversight of prohibited transactions for IRAs.
44
Internal Revenue Manual 4.75.12.
45
Internal Revenue Manual 4.71.10 provides guidance for identifying unrelated business
income and procedures for examining Form 990-T for TE/GE Employee Plan examiners.
According to TE/GE training materials we reviewed, the receipts of an unrelated trade or
business may be buried in with other items of an entity’s income and, as a result, TE/GE
examiners must conduct in-depth reviews of an entity’s books and records to discover the
unrelated trade or business.
46
Internal Revenue Manual 4.10.5.2.1. This examination guidance applies to both SB/SE
and LB&I.
47
Internal Revenue Manual 4.10.5.2.3.
Page 20 GAO-20-210 Individual Retirement Accounts
Although IRS officials described to us how SB/SE examiners, at
their own initiative, can seek out expertise on unrelated business
income, the topic is not addressed in SB/SE examiner training
materials and job aids on auditing IRAs with unconventional
assets. SB/SE officials provided us training slides used to teach
examiners how to recognize excess contributions, prohibited
transactions, barred collectibles, and valuation issues involving
IRAs. While the slides instruct examiners to contact a Senior
Program Analyst or Counsel for assistance with complicated
issues or cases, there is no information educating SB/SE
examiners about unrelated business income or informing
examiners that specialized knowledge about this topic resides in
the TE/GE division. Without resources, such as training materials
or job aides, that provide such information, SB/SE examiners
carrying out the ongoing compliance initiative project are not
positioned to surface unrelated business income tax issues for
referral to TE/GE. Given that IRS plans to use those research
results to refine its audit selection criteria, IRS is missing an
opportunity to learn more about IRA noncompliance with unrelated
business income taxation.
Undervaluation of unconventional assets. In February 2018,
the cross-divisional IRA team cited undervaluation of
unconventional assets as another compliance risk that involves
the expertise and enforcement responses from multiple IRS
units.
48
If SB/SE examiners determine in auditing an IRA owner
that the IRA custodian had inaccurately reported IRA asset
values, other IRS divisions can take action against the custodian.
LB&I can penalize a large financial institution custodian, although
the cross-divisional IRA team reported the $50 penalty for filing an
incorrect Form 5498 poses little deterrent effect.
49
For the
approximately 75 non-bank IRA trustees approved by IRS, TE/GE
48
As we reported in 2015, IRA account owners may try to evade annual contribution limits
or reduce required minimum distributions by undervaluing unconventional assets like real
estate or private equity. To detect noncompliance SB/SE examiners might need to obtain
appraisals from outside experts. See GAO-15-16.
49
The $50 penalty for filing incomplete, incorrect, or late information also applies to certain
other third-party information returns. 26 U.S.C. § 6693.
Page 21 GAO-20-210 Individual Retirement Accounts
can revoke a non-bank’s trustee status for violating any fiduciary,
accounting, or financial requirements.
50
The cross-divisional IRA team explored an approach for joint examination
to more effectively identify and penalize noncompliance associated with
prohibited transactions, unreported unrelated business income, and
undervaluation of IRA assets. Based on knowledge from prior
examinations, the team identified a small subset of non-bank trustees
publicly marketing alternative investments that held IRAs more than $5
million in reported FMV as of tax year 2016.
As of February 2018, the team reported that it had been premature for the
separate divisions to commit examination resources. As of October 2019,
IRS officials said they plan to reconvene the cross-divisional IRA team
after the ongoing SB/SE compliance initiative project is complete in 2021.
IRS officials said the plan is for the team to use the compliance research
results to refine audit selection. Also, the team could continue work on
establishing a joint examination approach for IRA noncompliance
associated with hard-to-value unconventional assets.
IRA owners that invest in unconventional assets—such as real estate,
certain precious metals, virtual currency, or private equity—assume
greater responsibility for navigating complex rules that govern tax-favored
retirement investments. To understand these rules, taxpayers are likely to
consult IRS Publications 590-A and 590-B. While this two-part publication
provides some information on compliance issues likely to affect IRA
owners with unconventional assets, the information in the publication as
well as on IRS web pages is limited. By assessing options for making
such information clearer, IRS could better inform taxpayers and help them
comply. This is particularly important because misunderstanding the rules
governing IRAs can result in increased tax liability for these taxpayers
and jeopardize their retirement savings.
Noncompliance associated with nonpublicly traded IRA assets has been
difficult for IRS to detect and time consuming to pursue. In contrast to
50
TE/GE issues private letter rulings approving non-bank trustees and periodically
investigates them. Non-bank trustees may include major financial institutions, state or
non-profit retirement entities, and small investment companies. A list of IRS-approved
non-bank trustees is available at:
https://www.irs.gov/retirement-plans/approved-nonbank-trustees-and-custodians.
Conclusions
Page 22 GAO-20-210 Individual Retirement Accounts
automated enforcement for IRAs with conventional investments,
noncompliance involving IRAs with unconventional assets is generally
detected on a case-by-case basis through labor-intensive audits of
individual taxpayers. In recent years, IRS has begun collect information
from IRA custodians that IRS can use to quantify the dollar amounts of
specified types of hard-to-value assets held by IRAs.
However, the broad IRA asset type data alone may not be sufficient for
audit selection and identifying potentially abusive IRAs in a timely
manner. When IRS lacks sufficient data to detect abusive transactions,
IRS can require taxpayers to self-report certain transactions that have
been used by other taxpayers to avoid taxes. Additional disclosure of
certain IRA transactions coupled with mining the narrative fields of tax
forms could help IRS to efficiently identify potentially abusive IRA activity
and better allocate limited audit resources.
Fragmented responsibility among IRS operating divisions creates
additional challenges for IRA enforcement. The division responsible for
tax-exempt entities trains its examiners on how to determine if an
employee retirement plan has unrelated business activities subject to
taxation. Yet, examiners in the division that audits complex individual tax
returns, including those involving IRAs, do not receive similar training.
Training for those examiners on unrelated business income tax issues,
and how examiners can refer those cases to other divisions for
assistance, could help improve collaboration on IRA enforcement.
We are making the following three recommendations to IRS:
The Commissioner of Internal Revenue should assess options for
updating Publications 590-A and 590-B to either include more information
or direct taxpayers to other resources for IRA owners with investments in
unconventional assets. Such information could include: storage
requirements for IRA investments in certain precious metals; valuation
methods for hard-to-value IRA assets; the Department of Labor’s process
for granting exemptions to IRA prohibited transactions rules; and IRA
investments with the potential to create unrelated business income tax
liabilities. (Recommendation 1)
The Commissioner of Internal Revenue, building on forthcoming
compliance research using new IRA asset data, should evaluate the
feasibility of requiring disclosure for high-risk IRA asset types associated
with abusive schemes as transactions of interest. (Recommendation 2)
Recommendations for
Executive Action
Page 23 GAO-20-210 Individual Retirement Accounts
The Commissioner of Internal Revenue should develop resources (such
as training materials or job aids) for Small Business/Self-Employed
examiners conducting IRA owner audits that explain how IRAs with
unconventional assets can generate unrelated business income tax
liability, and how examiners can refer cases to unrelated business income
experts in IRS for assistance. (Recommendation 3)
We provided a draft of this report to the Treasury and IRS for review and
comment.
In its comments, reproduced in appendix III, IRS generally agreed with
our recommendations. For recommendation 1, IRS said it will review its
educational publications and web pages for appropriate updates within
the scope of the tax code. For recommendation 2, IRS said that it will
determine whether there are abusive schemes associated with certain
IRA asset types, and if the data indicate such a correlation, it will evaluate
the feasibility of requiring disclosure of such arrangements as
transactions of interest. For recommendation 3, IRS said it will review and
update resources for examiners conducting IRA owner audits, including
guidance on how to address unrelated business income tax (UBIT). It will
incorporate guidance for agents on how to refer such cases to UBIT
experts when assistance is needed. IRS also said that it will renew its
efforts at ensuring collaboration with relevant subject matter experts.
IRS in consultation with Treasury also provided technical comments
which we incorporated as appropriate.
As agreed with your office, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 30 days from the
report date. At that time, we will send copies to the Secretary of the
Treasury, the Commissioner of Internal Revenue, the Secretary of Labor,
and other interested parties. In addition, the report will be available at no
charge on the GAO website at http://www.gao.gov.
Agency Comments
Page 24 GAO-20-210 Individual Retirement Accounts
If you or your staff have any questions about this report, please contact
James R. McTigue, Jr. at (202) 512-9110 or Charles A. Jeszeck at (202)
512-7215. You may also reach us by email at [email protected] or
[email protected]. Contact points for our Office of Congressional
Relations and Public Affairs may be found on the last page of this report.
GAO staff making key contributions to this report are listed in appendix
IV.
Sincerely yours,
James R. McTigue, Jr.
Director, Tax Issues
Strategic Issues
Charles A. Jeszeck
Director, Education, Workforce,
and Income Security
Appendix I: Status of GAO Recommendations
Page 25 GAO-20-210 Individual Retirement Accounts
Table 4: Status of Our Recommendations Related to Individual Retirement Account Rules Enforcement
Recommendation
Implementation status
GAO-15-16: Individual Retirement Accounts: IRS Could Bolster Enforcement on Multimillion Dollar Accounts, but More Direction from
Congress is Needed (October 2014).
1. Matter for Congressional Consideration: To
promote retirement savings without creating permanent
tax-favored accounts for a small segment of the
population, Congress should consider revisiting the
use of individual retirement accounts (IRA) to
accumulate large balances and consider ways to
improve the equity of the existing tax expenditure on
IRAs. Options could include limits on (1) the types of
assets permitted in IRAs, (2) the minimum valuation for
an asset purchased by an IRA, or (3) the amount of
assets that can be accumulated in IRAs and employer-
sponsored plans that get preferential tax treatment.
Not implemented. As of October 2019, no legislation enacted. In its
October 2014 report, we found that individuals with limited,
occupationally related opportunities could engage in sophisticated
investment strategies and accumulate considerable tax-preferred wealth
in IRAs and subsequently suggested to Congress legislative options.
The Senate Finance Committee held a hearing on a range of IRA policy
issues in September 2014 for which we provided a statement for the
record that covered preliminary data on IRA balances (
GAO-14-878T).
Without legislation, the intended broad-based tax benefits of IRAs are
likely to continue to be skewed toward a select group of individuals.
2. To improve the Internal Revenue Service’s (IRS’s)
ability to detect and pursue noncompliance associated
with undervalued assets sheltered in IRAs and
prohibited transactions, the Commissioner of Internal
Revenue should approve plans to fully compile and
digitize the new data from electronic and paper-filed
Form 5498s to ensure the efficient use of the
information on nonpublicly traded IRA assets.
Implemented. As of March 2017, IRS had begun transcribing paper-
filed Form 5498 submissions and compiling information from
electronically filed Form 5498 submissions beginning with tax year 2016
data filed in calendar year 2017. For tax year 2015, the first year the new
IRA asset reporting was required, IRS did not fund electronic
compilation. Once comprehensive digitized information from Form 5498
is available on databases that examiners and examination researchers
can access, IRS will be able to conduct enforcement on IRA rules more
efficiently and accurately.
3. To improve IRS’s ability to detect and pursue
noncompliance associated with undervalued assets
sheltered in IRAs and prohibited transactions, the
Commissioner of Internal Revenue should conduct
research using the new Form 5498 data to identify
IRAs holding nonpublic asset types, such as profits
interests in private equity firms and hedge funds, and
use that information for an IRS-wide strategy to target
enforcement efforts.
Implemented. In February 2018, IRS completed its first analysis of new
information about the amounts and types of nonpublic IRA assets from
Form 5498 for tax year 2016 filed in 2017. IRS used the asset type data
for tax year 2017 filed in 2018 to streamline the process of identifying
those IRAs with hard-to-value nonpublic assets at risk for
noncompliance. In September 2018, the IRS Small Business/Self
Employed (SB/SE) division approved a new compliance research project
examining a sample of IRAs holding certain nonpublic asset types. The
compliance research field work began in February 2019 and is to be
completed in January 2021. IRS convened a cross-divisional team to
identify, assess, and mitigate the risks of IRA noncompliance. As of
October 2019, IRS officials said that the team will use the compliance
research results to refine audit selection and continue work on
establishing a joint examination approach for IRA valuation issues.
4. To improve IRS’s ability to detect and pursue
noncompliance associated with undervalued assets
sheltered in IRAs and prohibited transactions, the
Commissioner of Internal Revenue should work in
consultation with the Department of the Treasury on a
legislative proposal to expand the statute of limitations
on IRA noncompliance to help IRS pursue valuation-
related misreporting and prohibited transactions that
may have originated outside the current statute’s 3-
year window.
Not implemented. IRS agreed with our October 2014 recommendation
on IRAs with large balances and said it had discussed the
recommendation with Treasury’s Office of Tax Policy and Benefits Tax
Counsel. Consequently, IRS said Treasury is aware of IRS’s willingness
to support legislative efforts in this area. Ultimately, Treasury reviews all
tax legislative proposals and presents the administration’s tax proposals
for congressional consideration. However, Treasury had not released a
legislative proposal as of October 2019. Because IRA schemes can
occur over many years and the effects of noncompliance may start small
but grow, IRS efforts to identify and enforce against possible IRA
noncompliance are weakened without expanding the statute in regard to
IRAs.
Appendix I: Status of GAO
Recommendations
Appendix I: Status of GAO Recommendations
Page 26 GAO-20-210 Individual Retirement Accounts
Recommendation
Implementation status
5. To help taxpayers better understand compliance risks
associated with certain IRA choices and improve
compliance, the Commissioner of Internal Revenue
should, building on research data on IRAs holding
nonpublic assets, identify options to provide outreach
targeting taxpayers with nonpublic IRA assets and their
custodians, such as reminder notices that engaging in
prohibited transactions can result in loss of the IRA’s
tax-favored status.
Partially implemented. IRS has taken action to provide general
outreach and as of December 2019 has ongoing compliance research
that could inform additional opportunities to target outreach to taxpayers
with nonmarketable IRA assets at greater risk of noncompliance. In June
2016, IRS published information on IRS.gov outlining the new
information to be reported for nonmarketable IRA assets and included a
general caution that IRAs with nonmarketable investments or assets
under direct taxpayer control may be subject to a heightened risk of
committing prohibited transactions. This caution is similar to those that
IRS added to its publications about IRA contributions and distributions. It
is a step toward helping taxpayers better understand which investments
pose greater risks.
In February 2018, IRS completed its first analysis of new information
about the amounts and types of nonpublic IRA assets from Form 5498
for tax year 2016 that was filed in 2017. In October 2019, IRS also
completed an interim compliance research project examining a sample
of tax returns to determine whether the beneficiary of the IRA caused his
or her IRA to engage in a prohibited transaction. As of December 2019,
IRS was conducting a new compliance research project examining IRAs
holding certain nonpublic asset types. The compliance research began
in February 2019 and is to be completed in January 2021. Unless IRS
augments outreach based on reliable data about nonpublicly traded IRA
investments, taxpayers at greater risk may not be able to ensure
compliance with rules on prohibited transactions.
6. To help taxpayers better understand compliance risks
associated with certain IRA choices and improve
compliance, the Commissioner of Internal Revenue
should add an explicit caution in Publication 590
Individual Retirement Arrangements (IRAs) for
taxpayers about the potential risk of committing a
prohibited transaction when investing in nonpublicly
traded assets or directly controlling IRA assets.
Implemented. In response to our recommendation, in January 2015 IRS
added an explicit caution to taxpayers of the potential risk of committing
a prohibited transaction when investing in non-publicly traded assets or
in directly controlling IRA assets within both the new Publication 590-A,
which focuses on IRA contributions, and the 590-B, which focuses on
IRA distributions.
GAO-17-102: Retirement Security: Improved Guidance Could Help Account Owners Understand the Risks of Investing in
Unconventional Assets (December 2016)
1. To assist IRA owners in addressing challenges
associated with investing their retirement savings in
unconventional assets, the Commissioner of Internal
Revenue should provide guidance to IRA owners on
the potential for IRA transactions involving certain
unconventional assets to generate unrelated business
taxable income subject to taxation in the current tax
year and subsequent years. For example, IRS could
consider adding an explicit caution in Publication 590
Individual Retirement Arrangements (IRAs) and include
a link in Publication 590 to Publication 598 Tax on
Unrelated Business Income of Exempt Organizations
to provide examples demonstrating how certain
unconventional assets in IRAs can generate unrelated
business income tax for account owners.
Implemented. In February 2018, IRS updated both Publication 590-A
and Publication 590-B with language informing IRA owners that an IRA
can be subject to taxes on unrelated business income if it carries on an
unrelated trade or business.
Appendix I: Status of GAO Recommendations
Page 27 GAO-20-210 Individual Retirement Accounts
Recommendation
Implementation status
2. To assist IRA owners in addressing challenges
associated with investing their retirement savings in
unconventional assets, the Commissioner of IRS
should provide guidance to IRA owners and custodians
on how to determine and document fair market value
(FMV) for certain categories of hard-to-value
unconventional assets. For example, IRS could
consider updating Form 5498 instructions to
custodians on how to document FMV for hard-to-value
assets (e.g., last-known FMV based on independent
appraisal, acquisition price) and provide guidance
directed at account owners that provides examples of
how to ascertain FMV for different types of
unconventional assets.
Not implemented. IRS agreed with our recommendation on IRA
valuation guidance and stated that it would discuss this issue with the
Department of the Treasury. Treasury plans to issue regulations on
IRAs. IRS officials told us that these new regulations would address
FMV for certain categories of hard-to-value unconventional assets. In its
October 2019 update of planned regulations, Treasury’s Office of Tax
Policy and IRS listed the IRA regulations. IRS officials told us that it
would be premature to modify instructions to custodians on how to
determine and document FMV for hard-to-value assets until the new
regulations are issued.
3. To assist IRA owners in addressing challenges
associated with investing their retirement savings in
unconventional assets, the Commissioner of IRS
should clarify the content of the model custodial
agreement to distinguish what has been reviewed and
approved by IRS and what has not. For example, IRS
could consider: (1) restricting custodians from stating
that the form has been “preapproved by the IRS” on
the form; (2) adding language to specify which articles
have been preapproved by the IRS and which have
not; and (3) limiting custodians from adding provisions
to the model form other than those preapproved by the
IRS.
Implemented. In April 2017, IRS revised custodial agreement Forms
5305, Traditional Individual Retirement Trust Account and 5305-A,
Traditional Individual Retirement Custodial Account to include language
consistent with our recommendation to clarify that only the first seven
articles of the forms are approved by IRS.
GAO-19-495: Individual Retirement Accounts: Formalizing Labor’s and IRS’s Collaborative Efforts Could Strengthen Oversight of
Prohibited Transactions (June 2019)
1. The Secretary of Labor should document internal
policies and procedures for managing the IRA
prohibited transaction exemption process.
Not implemented. The Department of Labor (DOL) agreed with this
recommendation and, as of August 2019, planned to create an internal
procedure manual formalizing the Office of Exemption Determinations’
administrative case processing procedures to help in passing along
institutional knowledge.
2. The Secretary of Labor, in consultation with the
Commissioner of Internal Revenue, should establish a
formal means, such as a memorandum of
understanding or other mechanism, to support and
guide DOL’s and IRS’s collaborative efforts to oversee
IRA prohibited transaction exemptions.
Not implemented. DOL agreed with this recommendation and plans to
periodically discuss all IRA exemption cases with IRS. As of August
2019, DOL planned to document its IRS communication process in its
forthcoming internal procedure manual.
3. The Commissioner of Internal Revenue, in
consultation with the Secretary of Labor, should
establish a formal means, such as a memorandum of
understanding or other mechanism, to support and
guide DOL’s and IRS’s collaborative efforts to oversee
IRA prohibited transaction exemptions.
Not implemented. IRS agreed with this recommendation and said it is
committed to discussing an appropriate mechanism, including periodic
meetings, to formalize collaboration on IRA prohibited transaction
exemptions. IRS planned to consider expanding its formal collaboration
with DOL as part of the next periodic update of the existing employee
plan memorandum of understanding. As of October 2019, IRS officials
said providing additional information about prohibited transaction rules
for IRA owners, as recommended in
GAO-15-16, could be a
collaboration opportunity.
Source: GAO. | GAO-20-210
Appendix II: IRS Information for IRA Owners
Investing in Unconventional Assets
Page 28 GAO-20-210 Individual Retirement Accounts
This appendix describes: what information for individual retirement
account (IRA) owners with unconventional assets can be found in
Publications 590-A and 590-B, what other Internal Revenue Service (IRS)
sources provide relevant information, and what information was not
readily available on the IRS website for the four compliance areas we
identified through prior work as likely to affect IRA owners with
unconventional assets.
1
The information below does not include the
Internal Revenue Code or detailed and technical resources published in
the weekly Internal Revenue Bulletin, such as tax regulations, revenue
rulings, and revenue procedures.
Publications 590-A and 590-B explain what types of IRA investments are
barred, such as collectibles, but the publication does not have additional
information that could be useful to IRA owners with allowable investments
in coins and bullion. The publications define collectibles as including
artworks, rugs, antiques, metals, gems, stamps, coins, alcoholic
beverages, and certain other tangible personal property.
2
The
publications explain that if a traditional IRA invests in collectibles, the
amount invested is considered distributed, and that the IRA owner could
be subject to an additional tax on early distributions. Publications 590-A
and 590-B further explain that an exception exists for IRA investments in
certain types of coins and bullion. However, the two-part publication does
not indicate that certain types of bullion must be stored by a bank or an
IRS-approved non-bank trustee.
3
The two-part publication also does not
mention that IRA investments in life insurance contracts are not
permitted.
4
1
Beginning for tax year 2014, IRS split Publication 590 into two parts. Publication 590-A,
Contributions to Individual Retirement Arrangements (IRAs), covers contributions to
traditional and Roth IRAs as well as the rules for rollover and conversion contributions.
Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs), covers
distributions from traditional and Roth IRAs as well as the rules for required minimum
distributions and IRA beneficiaries. At the time of our review, the latest Publications 590-A
and 590-B were those for tax year 2018.
2
Publications 590-A and 590-B do not provide additional information about the last type of
collectible—“certain other tangible personal property.” Other tangible personal property
refers to personal property specified by the Secretary of the Treasury. See 26 U.S.C
§408(m)(2).
3
See 26 U.S.C Section 408(m)(3).
4
See 26 U.S.C. Section 408(a)(3).
Appendix II: IRS Information for IRA Owners
Investing in Unconventional Assets
Barred investments
Appendix II: IRS Information for IRA Owners
Investing in Unconventional Assets
Page 29 GAO-20-210 Individual Retirement Accounts
Two IRS web pages listing frequently asked questions (FAQs) about
retirement plans contain additional information about bullion storage
requirements and IRA investments in life insurance contracts.
5
Both web
pages state that investing IRA funds in life insurance contracts and
collectibles are prohibited, and they also note the exception for certain
precious metals. One of the web pages further explains that allowable
bullion must be stored with a bank or an IRS-approved non-bank trustee.
6
Publications 590-A and 590-B define prohibited transactions in general
terms, list examples, and explain the consequences of engaging in a
prohibited transaction. The two-part publication also cautions that the risk
of engaging in a prohibited transaction in connection with an IRA account
may be increased when an IRA owner invests in nonpublicly traded
assets or assets that an IRA owner directly controls. However, the
publication does not provide any information about applying for an
exception to the prohibited transaction rules.
We found some limited information about exemptions to the prohibited
transaction rules on an IRS web page entitled “Retirement Plan
Investments FAQs.”
7
The web page explains that the Department of
Labor (DOL) has granted class exemptions for certain types of
investments under specific conditions, and that a plan sponsor may apply
to DOL to obtain an administrative exemption for a particular proposed
transaction that would otherwise be prohibited. However, the web page
5
IRS, “IRAs FAQs—Investments,”
https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-investments.
Accessed September 11, 2019. IRS, “Retirement Plan Investments FAQs”
https://www.irs.gov/retirement-plans/retirement-plan-investments-faqs. Accessed
December 3, 2019.
6
That web page—“IRAs FAQs—Investments,”
https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-investments,
also explains that the requirement applies to indirect acquisition of bullion, such as having
an IRA-owned limited liability company buy the bullion.
7
IRS, “Retirement Plan Investments FAQs,”
https://www.irs.gov/retirement-plans/retirement-plan-investments-faqs. Accessed
December 3, 2019. We found two other web pages under the IRS.gov category of
Retirement Plan Topics, but neither web page provides information about the Department
of Labor exemption process:
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-prohibite
d-transactions, and
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-pr
ohibited-transactions. Accessed November 21, 2019.
Prohibited transactions
Appendix II: IRS Information for IRA Owners
Investing in Unconventional Assets
Page 30 GAO-20-210 Individual Retirement Accounts
does not provide any links to DOL information such as a DOL publication
that explains the prohibited transactions exemption process.
8
In February 2018, IRS updated Publications 590-A and 590-B to include
information about IRAs with unrelated business income. Publications 590-
A and 590-B now explain that an IRA is subject to tax on unrelated
business income if the IRA carries on an unrelated trade or business.
Publications 590-A and 590-B state that the IRA trustee is required to file
a Form 990-T if an IRA has $1,000 or more of unrelated trade or business
gross income. For more information, Publications 590-A and 590-B direct
taxpayers to consult Publication 598, Tax on Unrelated Business Income
of Exempt Organizations.
9
Publication 598 lists IRAs as one of many exempt entities subject to taxes
on unrelated business income, and the requirement to file Form 990-T for
gross income of $1,000 or more. Publication 598 describes dozens of
activities by tax-exempt organizations that would be considered an
unrelated business; but the publication does not include any examples
specific to IRA investments that could also be considered unrelated
business activities and subject to taxes. Our search did not find additional
information on IRS.gov relating to IRAs and unrelated business income
taxes.
Publications 590-A and 590-B do not provide guidance about how to
accurately determine the FMV of hard-to-value unconventional assets.
IRS requires custodians to report (on Form 5498) an IRA’s FMV at year’s
end as well as some additional information for IRAs with unconventional
assets. The instructions for completing Form 5498 explain that IRA
custodians are responsible for ensuring that “all IRA assets (including
those not traded on established markets or not having a readily
determinable market value) are valued annually at their FMV.” However,
neither the form’s instructions nor Publications 590-A and 590-B provide
guidance or tips on how to determine the FMV of non-publicly traded or
other hard-to-value assets.
10
As we previously reported, some
8
DOL, Exemption Procedures Under Federal Pension Law. Available at
https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-
center/publications/exemption-procedures-under-federal-pension-law.pdf. Accessed
April 8, 2019.
9
IRS, Publication 598, Tax on Unrelated Business Income of Exempt Organizations,
Feb. 26, 2019.
10
IRS, 2019 Instructions for Forms 1099-R and 5498, Dec. 18, 2018.
Unrelated business income
Fair market value (FMV)
Appendix II: IRS Information for IRA Owners
Investing in Unconventional Assets
Page 31 GAO-20-210 Individual Retirement Accounts
unconventional assets may require a third-party appraisal to determine
their FMV.
11
One IRS web page titled, “Valuation of Plan Assets at Fair Market Value,”
provides some additional FMV information but it is intended more for the
valuing assets in employer-provided retirement benefits like traditional
pensions and 401(k) plans.
12
The web page states that an accurate
assessment of the FMV of retirement plan assets is essential for
complying with Internal Revenue Code requirements and avoiding
prohibited transactions. The web page also states that for defined
contribution plans like a 401(k) plan, investments must be valued at least
once per year in accordance with a consistent and uniform method. For
traditional pensions (defined benefit plans), tax regulations define FMV for
purposes of valuing plan assets as “the price at which the property would
change hands between a willing buyer and a willing seller, neither being
under any compulsion to buy or sell and both having reasonable
knowledge of relevant facts.”
13
The Department of the Treasury (Treasury) plans to issue regulations on
IRAs. IRS officials told us that these new regulations would address FMV
for certain categories of hard-to-value unconventional assets. IRS officials
also told us that it would be premature to publish new guidance for IRA
owners and custodians on the FMV of unconventional assets until the
new regulations are issued. In their October 2019 update of planned
guidance projects, Treasury’s Office of Tax Policy and IRS listed planned
IRA regulations.
14
11
See GAO-17-102.
12
IRS, “Valuation of Plan Assets at Fair Market Value,”
https://www.irs.gov/retirement-plans/valuation-of-plan-assets-at-fair-market-value.
Accessed December 3, 2019.
13
See 26 C.F.R. § 1.412(c)(2)-1(c).
14
Department of the Treasury, Office of Tax Policy and Internal Revenue Service, 2019-
2020 Priority Guidance Plan (released Oct. 8, 2019). See page 12, item 2. Regulations
under §§ 219, 408, 408A, and 4973 regarding IRAs. The Fall 2019 Unified Agenda of
Regulatory and Deregulatory Actions (published by the Office of Management and
Budget’s Office of Information and Regulatory Affairs) also lists regulations providing
guidance relating to IRAs as expected in June 2020.
Appendix III: Comments from the Internal
Revenue Service
Page 32 GAO-20-210 Individual Retirement Accounts
Appendix III: Comments from the Internal
Revenue Service
Appendix III: Comments from the Internal
Revenue Service
Page 33 GAO-20-210 Individual Retirement Accounts
Appendix III: Comments from the Internal
Revenue Service
Page 34 GAO-20-210 Individual Retirement Accounts
Appendix IV: GAO Contacts and Staff
Acknowledgments
Page 35 GAO-20-210 Individual Retirement Accounts
James R. McTigue, Jr., Director, Tax Issues, Strategic Issues, (202) 512-
9110 or [email protected]
Charles A. Jeszeck, Director, Education, Workforce, and Income Security
Issues, (202) 512-7215 or [email protected]
In addition to the contacts named above, MaryLynn Sergent and David
Lehrer (Assistant Directors), Ted Burik, Susan Chin, Steven Flint, Emily
Gruenwald, Mark Kehoe, Jungjin Park, and David Reed made key
contributions to this report. James Bennett, Amy Bowser, Jacqueline
Chapin, Edward J. Nannenhorn, Andrew J. Stephens, Walter Vance, and
Adam Wendel also provided support.
Appendix IV: GAO Contacts and Staff
Acknowledgments
GAO Contacts
Staff
Acknowledgments
(101303)
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