GAO Says IRS Could Better Help IRA Owners with Unconventional Assets Avoid Compliance Problems

The U.S. Government Accountability Office (GAO) has published a study of IRAs that include so-called “unconventional” investments, examples being real estate, virtual currency, precious metals, etc. The study focused on both the guidance that is available to owners of such IRA investments, and the IRS’ effectiveness in enforcing compliance when unconventional assets are held in IRAs. The GAO concluded that the IRS could do a better job on both fronts, as evidenced by the study’s title: IRS Could Better Inform Taxpayers about and Detect Noncompliance Related to Unconventional Assets.

Investing in unconventional assets within an IRA can present compliance challenges.  Challenges include potential investor conflicts of interest, which lead to IRA-disqualifying prohibited transactions, and determining such assets’ value, the reporting of which is an annual, ongoing responsibility for IRA trustees and custodians. Compliance issues also include specifically barred investments, and income generated within some investments that is taxable on a current-year basis.

The following GAO conclusions are worthy of special note.

  • IRS-provided information on unconventional assets in IRAs is generally limited to the agency’s Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs), and Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs), and is sparse in these publications. The GAO recommends more robust IRS resources, potentially to include web-based specialized information on such investments and their compliance requirements.
  • The GAO noted that “fragmented responsibility among IRS divisions creates challenges for examiners who need to share expertise and collaborate on IRA enforcement.” The IRS contended in its response to the GAO that limited information on unconventional assets now reported on information returns (IRS Form 5498, IRA Contribution Information) may be inadequate for audit selection in enforcement actions.

The IRS noted that roughly 2 million IRAs reported having such unconventional assets in 2016 (the latest tax year data available). Of these—as reported on IRS Form 5498—only about three-fourths provided valuations for these assets.