What's in your IRA? The IRS Wants to Know.

Self-directed IRA administrators/custodians are now forced to provide current values for all IRA assets for IRS reporting purposes.  IRA holders have always been required to provide a valuation of their account assets, but the request has become a requirement due to the changes in the banking industry.  Some IRA account holders are not happy about this.

The FDIC, as a result of its increased diligence in auditing all banks, has lately focused on those banks acting as custodians for self-directed IRAs.  The audits are examining the risk assumed by banks while servicing both consumers and businesses.  The audits include IRAs, which are insured up to $250,000 per account.  

It is not surprising that the FDIC is looking at self-directed IRA bank custodians. When the IRA is self-directed, the IRA holder is responsible for following IRS rules. Investments such as “checkbook control” IRAs, real estate and some private placements can create questions regarding observance of the Prohibited Transaction rules. These types of investments also may complicate tasks such as asset valuation for the purpose of annual reporting, Roth conversions and “in-kind” distributions from the IRA. 

The IRS, in conjunction with the increased level of FDIC scrutiny, has made no mistake about their efforts to  step up their audit efforts of self-directed custodians and specifically Checkbook IRAs.  Among the list of audit items, the valuation of the IRA assets is prominent.  IRA custodians will be holding their IRA account holders to higher levels of diligence in providing asset valuation and documentation.  Several self-directed IRA industry leaders have already requested these valuations from account holders but have also gone the extra step of freezing or terminating custodial services to account holders that do not comply.

The “checkbook control” IRA is notorious for being the most vulnerable to abuse.  This is primarily due to the direct control of the IRA funds by the IRA holder but also due to the inability of some IRA holders to provide supportable documentation as to the value of the LLC.  It has been revealed that many IRA holders with “checkbook control” IRAs lack the experience for proper management of a legal entity and scant knowledge of the Prohibited Transaction rules. 

Self-directed IRAs will continue to come under IRS scrutiny due to the FDIC’s increased custodial bank audits .In the end, the question will not be:  Will certain self-directed IRA investments remain legal? The question will be:  Is the self-directed IRA owner held to the same standards applied to the securities industry?  And more specifically, Is the IRA owner providing fair market value for the asset? as well as Is the IRA holder benefiting from the IRA investment prior to distribution and taxation?

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