The IRS is on high alert regarding any type of misuse or abuse with Checkbook IRA LLC accounts. If investors are considering a Checkbook IRA/LLC for retirement investment, they should be aware that the IRS sent an internal notice focusing on the danger of personally providing services to an IRA-owned LLC or other entity.
The internal IRS notice discusses the monetary value of accounting and management services provided by the owner to a retirement plan entity. Providing accounting services or facilities (including personal computer systems, home or business utility access, printing and office supplies) can result in a both an excess contribution and a prohibited transaction potentially subjecting the IRA and LLC to substantial taxes and penalties.
Providing non-reimbursed accounting to an IRA-LLC could result in a both an excess contribution and a prohibited transaction.
An internal IRS counsel alerted the IRS audit staff that there is a value of accounting and consulting services. When these services were provided by the account holders/taxpayers to the IRA-owned entity, the services represented a shift of value to the entity from the holder as an excess contribution to the plan.
Yet even worse than running into the excess contribution rules, Internal Revenue Code section 4975 specifically labels the act of providing services between an account holder and their plan as a Prohibited transaction. Per IRC 4975(1) General rule: For purposes of this section, the term “prohibited transaction” means any direct or indirect— (C) furnishing goods, services, or facilities between a plan and a disqualified person.
Although there are some exemptions for services provided to a retirement investment plan, they do not extend to services provided to entities owned by the plan.
Retirement investors should be careful when providing anything of value to a retirement plan and its assets. Providing services and/or facilities – such as accounting services, consulting services, facilities (including your home or office PC, supplies, electricity, storage, file cabinets, etc.) can result in a both an excess contribution and a prohibited transaction. Either of these can greatly shrink your retirement nest egg. Both can kill any successful retirement investing strategy.
If retirement investors want checkbook control of the IRA’s money and they plan to be the accountant and record-keeper for the Checkbook Control IRA LLC, they should be cautious. Hiring an external bookkeeper to provide these services may end up saving the investor and their retirement plan thousands in income taxes, penalties and interest.