IRS Could Better Inform Taxpayers About IRAs Invested in Unconventional Assets, GAO Says

27 February 2020

The Government Accountability Office (GAO) has released a report related to individual retirement accounts (IRAs) invested in unconventional assets. The report examines (1) the extent to which the IRS offers guidance to help taxpayers understand the rules governing unconventional IRA assets; and, (2) the challenges faced by the IRS in enforcing those rules. Accordingly, the GAO identified and analyzed the IRS information to help taxpayers understand four compliance areas: (1) barred investments, (2) prohibited transactions, (3) unrelated business income, and (4) fair market value. Further, the 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.

Limited Information on IRAs Invested in Unconventional Assets

Upon investigation, the GAO found limited information about IRA owners with unconventional assets. Moreover, since only about 2 percent of IRAs were invested in unconventional assets, adding more pages to Publication 590- A, Contributions to Individual Retirement Arrangements, and Publication 590-B, Distributions from Individual Retirement Arrangements, was not practical. However, by assessing options for informing IRA owners investing in unconventional assets, the GOA found that the IRS could better help these IRA owners better comply by directing them to web pages with specialized information and technical regulations.

Additional Taxpayer or Custodian Disclosure

While 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. Newly compiled information show that IRS identified about 2 million IRAs that held certain types of hard-to-value assets as of 2016; however, only about 20 percent of the forms were missing fair market value amounts for these assets. This type of reporting alone may be inadequate for audit selection and identifying potentially abusive IRAs. In this regard, additional taxpayer or custodian disclosure of potentially abusive IRA transactions coupled with IRS analysis of reported details may help the IRS to select IRA owner tax returns to audit.