individual retirement accounts (iras) face new irs scrutiny

8/13/2019 Individual Retirement Accounts (IRAs) Face New IRS Scrutiny

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Tax Notes Newsletter

Individual Retirement Accounts (IRAs) Face New IRSScrutiny

By Louis LiBrandi, Doug Ruttenberg and Garrett Higgins

According to a report by the US Treasury Inspector General for Tax Administration,

the government [i.e., the Internal Revenue Service (IRS)] has not collected millions

of dollars in tax and penalties for the failure of IRA owners to properly comply with

the many complex tax rules applicable to these types of retirement accounts.

Because of the findings in the Inspector Generals Report, it appears the IRS is

turning its attention to IRA account owners. Recently the IRS has issued a change(discussed below) to one of the reporting forms that must be provided to an IRA

account holder. The IRS is also considering what other guidance and/or additional

reporting requirements it will issue or impose on custodians of IRAs and to IRA

account holders to ensure that the proper amount of contributions, valuing of the

IRA, and distribution requirements are being met.

The main areas that the IRS is expected to be looking at are:

1. Non-Traditional Investments (NTIs) held in self-directed IRAs2. Beneficiary designations and distribution calculations3. Unrelated Business Income Tax (UBIT) being generated by investments in

IRAs

The IRS has indicated they initially will be sending notices to custodians of IRA

accounts beginning in 2014. This will be followed with an examination program of

identified IRA account holders who meet the specific examination characteristics.

Lets take a closer look at the areasof scrutiny being considered by the IRS.

Non-Traditional Investments (NTIs)

Most individuals invest their IRA assets in taxable equities, mutual funds and taxable

bonds. More recently, non- traditional assets, such as investments in Master Limited

Partnerships, Real Estate and Closely-Held Businesses, have gained increasingpopularity as effective IRA Investments.

Beginning with the 2014 filing year, the IRS has issued a draft of a revised Form 5498.

The Form reports, among other information, the value of your assets in the IRA as of

the prior December 31. The draft form requests, for the first time, values for NTIs.

Subsequent versions of the Form will likely require identifying the type of asset held

by the IRA.

Louis LiBrandi

Principal

212.286.2600

[email protected]

Doug Ruttenberg

Partner

914.381.8900

[email protected]

Garrett Higgins

Partner

914.381.8900

[email protected]


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The question will be how these NTIs will be valued and what is the cost of valuing

these assets.

The prior value and the age of the IRA beneficiary are the factors for determining the

Required Minimum Distribution (RMD). If the value of the NTIs is not included or not

calculated correctly, then the RMD will not be calculated correctly. The taxpayercould be subject to an additional tax for failing to take the proper amount as a

distribution. The additional tax is 50% of the amount that should have been

distributed.

These NTIs must also have the proper custodial structure. For example, you cannot

own the NTI in your own name. If not held properly, the NTI would not be an eligible

IRA asset and would have to be distributed from the IRA. The taxpayer would be

subject to income tax and potential penalties on this distribution.

Beneficiary Designations and Distribution Calculations

The issues here are whether your IRA is being distributed to the proper beneficiary

and in the proper amount. The rules for distribution can be complex and depend on

who the beneficiary is and the age of the beneficiary. There are different rules for

spousal beneficiaries, non-spousal beneficiaries and where there are multiple

beneficiaries of the same IRA.

You also want to pay careful attention to your IRA beneficiaries. Do you want the full

amount of your IRA to go outright to a second spouse or to a minor child or

grandchild? You should review your beneficiary designations annually to make sure

they are in order and meet your wishes.

Unrelated Business Income Tax (UBIT)

In an effort to generate greater rates of return in a slowly recovering economy, IRA

owners have begun to invest in alternative type investments, such as oil and gas,

private equity, real estate and hedge funds. An IRA owners ventureinto these types

of investments can generate trade or business or debt-financed income which could

subject the IRA to UBIT and require the IRA to file federal and state income tax

returns when gross unrelated business income from all investments is greater than

$1,000. This income is separately reported on a Schedule K-1, Part III line item 20V or

the supplemental statements attached to it and is easily identifiable to an IRS agent.

Failure to file such returns can result in penalties and interest being imposed upon

the IRA. Since the UBIT rules are complex, it is recommended that IRA owners

identify all alternative investments they have invested IRA assets in and consult with

their tax advisors as to the IRAs exposure to UBIT.

For more information, please contact Lou LiBrandi ([email protected]), Doug

Ruttenberg ([email protected])or Garrett Higgins ([email protected]).

About OConnor Davies:

Contact:

New York, NY

212.286.2600

Harrison, NY

914.381.8900

Stamford, CT

203.323.2400

Paramus, NJ

201.712.9800

New Windsor, NY

845.220.2400

Wethersfield, CT

860.257.1870
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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IRS CIRCULAR 230 DISCLOSURE:To comply with IRS regulations, we are required to inform you that

unless expressly stated otherwise, any discussion of U.S. federal tax issues in this correspondence

(including any attachments) is not intended or written to be used, and cannot be used, (i) to avoid any

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individual retirement accounts (iras) face new irs scrutiny

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