5 Total Action(s)
DOL agreed with GAO’s June 2019 recommendation and has taken action working with IRS to establish a formal coordination mechanism to support their shared oversight of IRA prohibited transaction rules. In August 2019, DOL agreed to contact IRS within 25 days of DOL’s Office of Exemption Determinations receiving an IRS prohibited transaction exemption application. DOL is to relay the nature of the exemption application while not identifying the specific application to avoid disclosure concerns. DOL documented the new coordination mechanism in its internal procedure guide issued in December 2020. If effectively implemented by DOL and IRS, the formal information sharing will help DOL determine if an IRA exemption would raise tax law issues for IRS.
IRS agreed with GAO’s June 2019 recommendation and has taken action working with DOL to establish a formal coordination mechanism to support their shared oversight of IRA prohibited transaction rules. In August 2019, DOL agreed to contact IRS within 25 days of DOL’s Office of Exemption Determinations receiving an IRS prohibited transaction exemption application. DOL is to relay the nature of the exemption application while not identifying the specific application to avoid disclosure concerns. DOL documented the new coordination mechanism in its internal procedure guide issued in December 2020. If effectively implemented by IRS and DOL, the formal information sharing will allow IRS to raise tax law issues for DOL consideration.
Using the coordination mechanism, IRS Office of Chief Counsel is responsible for coordinating with DOL on tax law issues. In July 2021, this office told GAO that it will reach out to other IRS units as needed. The information sharing from DOL, if effectively communicated within IRS, could help IRS identify emerging issues or trends in potential prohibited transactions marketed to IRA owners.
The Internal Revenue Service (IRS) agreed with GAO’s January 2020 recommendation and told GAO it was planning to provide more educational material and web resources to help individual retirement account (IRA) owners with investments in unconventional assets comply with tax laws. In June 2020, IRS reviewed Publications 590-A and 590-B and IRA-related websites, and identified steps to address areas where GAO identified limited information was available for IRA owners. For example, as of June 2021, IRS was planning to update its website to provide links to Department of Labor procedures for granting prohibited transaction exemptions.
As of July 2021, the Department of the Treasury and IRS were planning to issue additional proposed regulations on IRAs. IRS officials told GAO that these new regulations would address how to determine the value for certain categories of non-publicly-traded unconventional assets. IRS also was planning to determine if more information about storage requirements for precious metals owned in an IRA and IRA investments with the potential to create unrelated business income tax liabilities would be helpful.
Additional information and resources could help IRA owners better understand how IRA investment decisions and certain types of unconventional assets can increase their risks for noncompliance. Misunderstanding the rules governing IRAs could result in increased tax liability for taxpayers making unintentional errors and jeopardize their retirement savings.
The Internal Revenue Service (IRS) agreed with GAO’s January 2020 recommendation and took some steps to address it by reviewing two IRA compliance research projects. However, as of June 2021, IRS was planning no further evaluation of additional disclosure requirements based on two limited samples of IRA owner audits. Its October 2019 interim research project examining a sample of approximately 50 IRA owner cases revealed that audits detecting IRA prohibited transactions can result in substantial tax adjustments. In January 2021, IRS completed a compliance research project examining tax returns for approximately 50 IRA owners with certain hard-to-value assets and did not find any IRA-related noncompliance in the sample. Examiners on the latest research project suggested focusing on IRAs where the custodian allows direct control by the IRA owner over the assets. According to IRS officials, those arrangements are appealing to individuals who are more likely to intentionally engage in prohibited transactions.
Drawing on the two compliance research reports and examiner feedback, IRS did not determine any patterns of noncompliance and abusive schemes associated with certain types of IRA assets. Because the available research data did not indicate a relationship between schemes and particular asset types, IRS did not recommend requiring disclosure of IRA arrangements as a transaction of interest. Without information to identify a transaction or arrangement with enough specificity to capture abusive schemes, IRS determined that requiring additional IRA disclosures would unnecessarily burden taxpayers and generate an unmanageable number of reports to IRS. In April 2021, IRS shared the compliance research and evaluation results with the IRA cross-divisional team comprised of representatives from all four IRS operating divisions to identify, assess, and mitigate risks of IRA noncompliance.
Although its limited research indicated asset type information by itself is not feasible for additional disclosure requirements, IRS could build on examiner feedback about custodian arrangements to determine how to identify potentially abusive schemes. However, IRS has not reviewed custodian reporting patterns which could be useful for identifying IRAs under direct owner control. As of June 2021, IRS did not plan to reconvene the IRA cross-divisional team or conduct further IRA research which could identify IRA transactions or arrangements with greater potential for abuse. Continued consideration of additional disclosure of potentially abusive IRAs may help IRS select IRA owner tax returns for detailed review and better allocate limited resources for labor-intensive audits.
The Internal Revenue Service (IRS) agreed with GAO’s January 2020 recommendation and took action to educate SB/SE examiners responsible for auditing IRA owners that unconventional IRA assets may generate unrelated business income tax liability and require the IRA to file an income tax return. Specifically, IRS added information about the unrelated business income tax rule to the SB/SE IRA Frequently Asked Questions (FAQ) job aid.
The job aid explains which IRA asset types and information to review, and directs an examiner to contact SB/SE IRA program analysts and Counsel for additional information. It also explains how to refer a potential IRA tax filing case to the Tax Exempt/Government Entity division using the IRS specialist referral system. In January 2021, IRS posted the updated IRA job aid on its IRS-wide Knowledge Management intranet site for use by examiners. As a result, IRS is better positioned to share expertise for detecting unrelated business income unreported by an IRA.