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entitled 'Individual Retirement Accounts: IRS Could Bolster 
Enforcement on Multimillion Dollar Accounts, but More Direction from 
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United States Government Accountability Office: 
GAO: 

Report to the Chairman, Committee on Finance, United States Senate: 

October 2014: 

Individual Retirement Accounts: 

IRS Could Bolster Enforcement on Multimillion Dollar Accounts, but 
More Direction from Congress Is Needed: 

GAO-15-16: 

GAO Highlights: 

Highlights of GAO-15-16, a report to the Chairman, Committee on 
Finance, United States Senate. 

Why GAO Did This Study: 

In 2014, the federal government will forgo an estimated $17.45 billion 
in tax revenue from IRAs, which Congress created to ensure equitable tax
treatment for those not covered by employer-sponsored retirement plans.
Congress limited annual contributions to IRAs to prevent the tax-favored
accumulation of unduly large balances. But concerns have been raised 
about whether the tax incentives encourage new or additional saving. 
Congress is reexamining retirement tax incentives as part of tax 
reform.GAO was asked to measure IRA balances and assess IRS 
enforcement of IRA laws. 

This report (1) describes IRA balances in terms of reported FMV 
aggregated by taxpayers; (2) examines how IRA balances can become 
large; and (3) assesses how IRS ensures that taxpayers comply with IRA 
tax laws. To address these objectives, GAO analyzed 2011 IRS 
statistical data, reviewed IRS documentation and relevant literature, 
and interviewed government officials, financial industry stakeholders, 
and academics. GAO compared IRS enforcement plans and procedures with 
law and criteria for evaluating an enforcement program. 

What GAO Found: 

For tax year 2011 (the most recent year available), an estimated 43 
million taxpayers had individual retirement accounts (IRA) with a 
total reported fair market value (FMV) of $5.2 trillion. As shown in 
the table below, few taxpayers had aggregated balances exceeding $5 
million as of 2011. Generally, taxpayers with IRA balances greater 
than $5 million tend to have adjusted gross incomes greater than 
$200,000, be joint filers, and are age 65 or older. Large individual
and employer contributions sustained over decades and rolled over from 
an employer plan would be necessary to accumulate an IRA balance of 
more than $5 million. There is no total statutory limit on IRA 
accumulations or rollovers from employer defined contribution plans. 

Table: Estimated Taxpayers with IRA by Size of IRA Balance, Tax Year 
2011: 

IRA Balance: $1 million or less; 
Number of taxpayers: 
Estimate: 42,382,192; 
95% confidence interval: 42,094,009-42,670,375; 
Total IRA fair market value balances ($ Billions): 
Estimate: $4,092; 
95% confidence interval: $4,038-$4,147 

IRA Balance: More than $1 million to $2 million; 
Number of taxpayers: 
Estimate: 502,392; 
95% confidence interval: 470,897-533,887; 
Total IRA fair market value balances ($ Billions): 
Estimate: $674; 
95% confidence interval: $632-$717 

IRA Balance: More than $2 million to $3 million; 
Number of taxpayers: 
Estimate: 83,529; 
95% confidence interval: 72,632-94,426; 
Total IRA fair market value balances ($ Billions): 
Estimate: $198; 
95% confidence interval: $173-$224 

IRA Balance: More than $3 million to $5 million; 
Number of taxpayers: 
Estimate: 36,171; 
95% confidence interval: 30,811-41,531; 
Total IRA fair market value balances ($ Billions): 
Estimate: $133; 
95% confidence interval: $114-$153 

IRA Balance: More than $5 million to $10 million; 
Number of taxpayers: 
Estimate: 7,952; 
95% confidence interval: 6,120-9,783; 
Total IRA fair market value balances ($ Billions): 
Estimate: $52; 
95% confidence interval: $40-$64 

IRA Balance: More than $10 million to $25 million; 
Number of taxpayers: 
Estimate: 791; 
95% confidence interval: 596-985; 
Total IRA fair market value balances ($ Billions): 
Estimate: $11; 
95% confidence interval: $8-$13 

IRA Balance: More than $25 million; 
Number of taxpayers: 
Estimate: 314; 
95% confidence interval: 115-650; 
Total IRA fair market value balances ($ Billions): 
Estimate: $81; 
95% confidence interval: $8-$225 

Source: GAO analysis of IRS data. GAO-15-16. 

Notes: The taxpayer reflects a taxpaying unit including individuals as 
well as couples filing jointly which may have more than one IRA owner. 
The IRA balance aggregates the value of all IRAs owned, including 
inherited IRAs. 

[End of table] 

A small number of taxpayers has accumulated larger IRA balances, 
likely by investing in assets unavailable to most investors—initially 
valued very low and offering disproportionately high potential 
investment returns if successful. Individuals who invest in these 
assets using certain types of IRAs can escape taxation on investment 
gains. For example, founders of companies who use IRAs to invest in 
nonpublicly traded shares of their newly formed companies can realize 
many millions of dollars in tax-favored gains on their investment if the
company is successful. With no total limit on IRA accumulations, the 
government forgoes millions in tax revenue. The accumulation of these 
large IRA balances by a small number of investors stands in contrast 
to Congress's aim to prevent the tax-favored accumulation of balances 
exceeding what is needed for retirement. 

The Internal Revenue Service (IRS) has enforcement programs covering 
specific aspects of IRA noncompliance, such as excess contributions 
and undervalued assets. As recommended by an internal task team, IRS 
plans to collect data identifying nonpublicly traded assets comprising 
IRA investments. IRS expects the data will help it identify potential 
IRA noncompliance. However, research on those taxpayers and IRA assets 
at risk will hinge on getting resources to effectively compile and 
analyze the additional data. IRS officials said IRA valuation cases 
are audit-intensive and difficult to litigate because of the 
subjective nature of valuation. Additionally, the 3-year statute of 
limitations for assessing taxes owed can pose an obstacle for IRS 
pursuing noncompliant activity that spans years of IRA investment. 

What GAO Recommends: 

Congress should consider revisiting its legislative vision for the use 
of IRAs. GAO makes five recommendations to IRS, including approving 
plans to fully compile and digitize new data on nonpublicly traded IRA 
assets and seeking to extend the statute of limitations for IRA 
noncompliance. IRS generally agreed with GAO's recommendations. 

View GAO-15-16. For more information, contact James R. McTigue, Jr., 
at (202) 512-9110 or mctiguej@gao.gov or Charles A. Jeszeck at (202) 
512-7215 or jeszeckc@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Few Taxpayers Had Reported IRA Balances Greater Than $5 Million: 

Alternate Strategies Are Likely the Cause of Large IRA Balances That 
Congress May Not Have Intended: 

IRS Has Dedicated Resources to IRA Compliance but Faces Challenges 
with Nonpublicly Traded IRA Investments: 

Conclusions: 

Matter for Congressional Consideration: 

Recommendations for Executive Action: 

Agency Comments: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Illustration of Earnings and Tax Effects of Traditional 
and Roth Individual Retirement Accounts: 

Appendix III: Tables from Statistics of Income Data for Tax Year 2011: 

Appendix IV: Examples of Strategies to Accumulate Large Individual 
Retirement Accounts: 

Appendix V: Printable Figure 9 on Form 5498: 

Appendix VI: Comments from the Internal Revenue Service: 

Appendix VII: GAO Contacts and Staff Acknowledgments: 

Tables: 

Table 1: Estimated Number and Percent of Taxpayers with Individual 
Retirement Accounts (IRA) by Size of IRA Balance, Tax Year 2011: 

Table 2: Estimated Total and Percent of Individual Retirement Account 
(IRA) Fair Market Value Balances by Size of IRA Balance, Tax Year 2011: 

Table 3: Rates of Return Needed to Accumulate Individual Retirement 
Account (IRA) Balances of $1 million or $5 Million under Two 
Illustrative Contribution Scenarios, 1975-2011: 

Table 4: Investments That Can Generate Tens of Millions of Dollars in 
a Tax-Favored Retirement Account: 

Table 5: Annual Contribution Dollar Limits for Individual Retirement 
Plans (IRA) and Defined Contribution (DC) Plans, 1975-2014: 

Table 6: Assumed Contributions (Including Catch-up) from 1975 to 2011 
under Two Illustrative Scenarios: 

Table 7: Alternate Asset Allocation Assumptions and Ending Balances 
for the Maximum Combined Employer-Employee Contribution Scenario, 1980-
2011: 

Table 8: Criteria for Assessing Individual Retirement Account 
Enforcement: 

Table 9: Estimated Median IRA Balances by Size of Individual 
Retirement Account (IRA) Balance, Tax Year 2011*: 

Table 10: Estimated Percent of Taxpayers with Individual Retirement 
Account (IRA) Balances of $1 Million or Less and More Than $5 Million 
and IRA Balances by Adjusted Gross Income, Tax Year 2011*: 

Table 11: Estimated Percent of Total IRA Balances by Size of IRA 
Balance, by Adjusted Gross Income, Tax Year 2011: 

Table 12: Summary of Holdings and Transactions in Company Founder's 
Roth Individual Retirement Account (IRA): 

Table 13: Summary of Contributions and Distributions from a $1 Billion 
Private Equity Fund: 

Figures: 

Figure 1: Small Business/Self-Employed Examination Process: 

Figure 2: Estimated Percent of Taxpayers with Individual Retirement 
Account (IRA) Balances of $1 Million or Less and More Than $5 Million 
and Percent of IRA Balance, by IRA Type, Tax Year 2011: 

Figure 3: Estimated Percent of Taxpayers with Individual Retirement 
Account (IRA) Balances of $1 Million or Less and More Than $5 Million 
and IRA Balances, by Adjusted Gross Income, Tax Year 2011: 

Figure 4: Estimated Percent of Taxpayers with Individual Retirement 
Account (IRA) Balances of $1 Million or Less and More Than $5 Million 
by Filing Status, Tax Year 2011: 

Figure 5: Estimated Percent of Taxpayers Age 65 or Older by Individual 
Retirement Account (IRA) Balances of $1 Million or Less and More Than 
$5 Million, Tax Year 2011: 

Figure 6: For a Modest Initial Investment, Nonpublicly Traded Shares 
Can Generate a Large IRA: 

Figure 7: General Partners Grant Partnership Interests in Their 
Investment Funds: 

Figure 8: Profits Interest Can Be Held in an IRA or a Defined 
Contribution Plan: 

Figure 9: Types of Assets Individual Retirement Accounts Custodians 
Will Identify on Form 5498 Starting in Tax Year 2014: 

Figure 10: Beginning and After-Tax Ending Balances for $1,000 in Pre-
Tax Earnings in a Traditional IRA, Roth IRA and Taxable Accounts over 
a 20-Year Period: 

Figure 11: Founders Can Accumulate Large IRAs with Nonpublicly Traded 
Shares in Their Company: 

Figure 12: Key Employees of Private Equity Firms Can Accumulate Large 
Individual Retirement Accounts (IRA) with Profits Interests: 

Abbreviations: 

AGI: adjusted gross income: 

ATTI: Abusive Transactions and Technical Issues Program: 

AUR: Automated Underreporter Program: 

CIP: compliance initiative project: 

DB: defined benefit: 

DC: defined contribution: 

DOL: Department of Labor: 

ERISA: Employee Retirement Income Security Act of 1974: 

FMV: fair market value: 

IMT: Issue Management Team: 

IRA: individual retirement account: 

IRS: Internal Revenue Service: 

JCT: Joint Committee on Taxation: 

LB&I: Large Business and International Division: 

PwC: PricewaterhouseCoopers: 

S&P: Standard & Poor's SB/SESmall Business/Self-Employed Division: 

SEC: Securities and Exchange Commission: 

SEP: Simplified Employee Pension Plan: 

SIMPLE: Savings Incentive Match Plan for Employees: 

SOI: Statistics of Income: 

TE/GE: Tax-Exempt/Government Entities: 

TIGTA: Treasury Inspector General for Tax Administration: 

Treasury: Department of the Treasury: 

W&I: Wage and Investment Division: 

[End of section] 

United States Government Accountability Office: 
GAO:
441 G St. N.W. 
Washington, DC 20548: 

October 20, 2014: 

The Honorable Ron Wyden: 
Chairman: 
Committee on Finance: 
United States Senate: 

Dear Mr. Chairman, 

Enacted as part of the Employee Retirement Income Security Act of 1974 
(ERISA), individual retirement accounts (IRA) are a key vehicle for 
individuals to save for retirement. IRAs hold about 26 percent of all 
retirement assets, and more than 54 million taxpayers held an 
estimated $5 trillion in IRAs in 2010, according to the latest 
published analysis by the Internal Revenue Service (IRS).[Footnote 1] 
IRAs also are increasingly important as a way for individuals to roll 
over savings from pension plans. Most eligible taxpayers do not take 
advantage of IRAs as an opportunity to save for retirement. For 
example, the IRS estimated that of 145.6 million taxpayers eligible to 
contribute to an IRA in 2010, less than 8 percent contributed. 

In 2014, tax-preferred treatment for IRAs will result in the federal 
government forgoing an estimated $17.45 billion in net income tax 
revenue, according to estimates by the Department of the Treasury 
(Treasury).[Footnote 2] To limit the amount of federal revenue forgone 
and their use by higher-income individuals, IRAs are subject to a 
total annual contribution limit, as well as some income and other 
limits on eligibility. In addition, some IRA types require minimum 
distributions starting at age 70½. The tax code also imposes an 
additional tax on excess contributions and early withdrawals. However, 
the tax code does not place any total limit on how much can be 
accumulated in an IRA.[Footnote 3] 

Given the potential amount of forgone revenue for the federal 
government--as well as questions we have raised in the past about 
whether tax incentives encourage new or additional saving--the ongoing 
debate about reforming the tax code includes reexamining the tax 
treatment of retirement savings.[Footnote 4] Our 2005 publication, 
Understanding the Tax Reform Debate, describes long-standing criteria--
economic efficiency, equity, simplicity, transparency, and 
administrability--that can be used to evaluate tax policy.[Footnote 5] 
Our 2012 guide lays out a framework using these criteria to evaluate 
the performance of a tax expenditure, such as the beneficial tax 
treatment of IRAs under an income tax system.[Footnote 6] 

To better understand how balances accumulate in some IRAs, you asked 
us to review IRA account balances and IRS enforcement of IRA rules. 
This report (1) describes the number and types of taxpayers with IRAs 
and the size of IRA balances in terms of aggregate fair market value 
(FMV), adjusted gross income (AGI), filing status, and age; (2) 
examines how IRA balances can become large; and (3) assesses how IRS 
ensures that taxpayers comply with IRA tax laws. 

To describe the number and types of taxpayers with IRAs and the size 
of IRA balances in terms of FMV, we analyzed individual tax data for 
tax year 2011 (the most recent year available) from IRS's Statistics 
of Income (SOI). We analyzed these data by size of IRA FMV--as 
reported by IRA custodians to IRS--as well as other factors, including 
the type of IRA, taxpayers' adjusted gross income, age, and filing 
status. Because SOI samples tax returns, and taxpayers may have 
multiple IRAs, we aggregated IRA data (including inherited IRAs as IRS 
data do not readily identify inherited IRAs) by tax return. Our unit 
of analysis was the taxpaying unit, and a tax return, such as for a 
married couple filing jointly, may include more than one IRA owner. 
Our analysis of SOI statistical data is subject to sampling errors 
because the SOI data set is based on a sample of tax returns as filed. 
[Footnote 7] In addition, the data do not reflect IRS audit results. 
To assess the reliability of the statistical data we analyzed, we 
reviewed IRS documentation and interviewed agency officials familiar 
with the data. We determined that these data were sufficiently 
reliable for the purposes of this report. However, the IRS SOI sample 
may not provide a precise estimate of the number of taxpayers or other 
quantities when the number of taxpayers in a particular reporting 
group is very small.[Footnote 8] To give perspective on what might be 
considered a large IRA, we developed two contribution scenarios to 
illustrate how much a person and an employer could have contributed 
given statutory limits on contributions from 1975 to 2011. We 
calculated hypothetical accumulations using historical stock and bond 
market returns and interest rates as well as what return rates would 
be necessary to accumulate balances of $1 million or $5 million under 
each contribution scenario. 

To examine how IRA balances can become large, we conducted literature 
reviews on IRA investment strategies and held semistructured 
interviews with finance industry stakeholders, government officials, 
and academics. We selected interviewees through our literature reviews 
and through referrals from internal and external stakeholders for 
individuals with relevant legal, tax, and financial expertise. We also 
searched for documentary evidence of IRA investment strategies in 
publicly available filings with the Department of Labor (DOL) and the 
Securities and Exchange Commission (SEC). We could not determine how 
many IRAs used the strategies identified because IRS does not collect 
data on asset types held in IRAs. We then compared our findings from 
the literature reviews, interviews, and filing searches with our 
criteria on tax expenditures and tax policy, focusing primarily on 
whether the tax treatment is fair and equitable.[Footnote 9] 

To assess how IRS ensures that taxpayers with IRAs comply with IRA tax 
laws, we first developed criteria for evaluating an enforcement 
program on IRAs. Generally, the basis for the criteria included 
relevant laws, our previous work, and other organizations' work on 
good management practices.[Footnote 10] We also shared our criteria 
with IRS officials. The criteria we developed are as follows: 

* Enforcement programs should cover key IRA laws. 

* Enforcement procedures should take into account the cumulative tax-
revenue effect of an improperly valued asset that the taxpayer 
contributed to a plan. 

* Enforcement management should collect and use data that will enable 
examiners to accurately weigh the noncompliance risk of potentially 
misreported IRA values. 

* IRAs should be considered in making enforcement plans. 

* Examiners should be trained to identify potential IRA noncompliance. 

* IRS should collaborate with the appropriate agency on enforcing 
certain prohibited transactions that could lead to large, noncompliant 
IRAs. 

* Examination management should collaborate with staff in its own 
service and outreach functions to help the public better understand 
laws related to potential IRA investment. 

We then compared the criteria to documentation on IRS enforcement 
plans and procedures. We also collected information for the comparison 
from interviews with relevant IRS, Treasury, and DOL officials. 

For more detail on our methodology, see appendix I. 

We conducted this performance audit from June 2013 through October 
2014 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives. 

Background: 

IRAs serve dual roles by (1) providing a way for individuals not 
covered by a pension plan to save for retirement and (2) providing a 
place for retiring workers or individuals changing jobs to roll over, 
or transfer, their employer-sponsored pension plan balances. 

IRA Types: 

During the past 40 years, several types of IRAs with different 
features for individuals and small businesses have been authorized. 
Two types of IRAs are geared toward individuals--each with its own 
federal income tax benefits: [Footnote 11] 

* Traditional IRA: Eligible individuals may make tax-deductible 
contributions of earned income with taxes deferred on investment 
earnings until distribution at retirement. If either the taxpayer or 
his or her spouse is covered by an employer retirement plan, the 
individual may be eligible for only a partial deduction or no 
deduction at all, depending on the taxpayer's income and filing 
status. Individuals may make nondeductible contributions to receive 
the tax deferral on investment earnings. Individuals older than 70½ 
cannot contribute and must begin receiving required minimum 
distributions from these accounts.[Footnote 12] Generally, 
distributions are taxed as ordinary income. Individuals who made 
nondeductible contributions to their IRAs may receive a tax-free 
return of those amounts. Early withdrawals before age 59½, other than 
for specific exceptions, are subject to a 10 percent additional income 
tax. 

* Roth IRA: Enacted as part of the Taxpayer Relief Act of 1997, this 
type of IRA allows eligible individuals to make nondeductible 
contributions to these accounts but generally receive tax-free 
distributions.[Footnote 13] Annual Roth IRA contributions are limited 
based on a taxpayer's income and filing status. Since January 1, 2010, 
conversions--where a taxpayer pays taxes deferred on balances in a 
traditional IRA to transfer those amounts to a Roth IRA--are no longer 
subject to income eligibility rules.[Footnote 14] There are no age 
limits on contributing, and no distributions are required during the 
individual's lifetime. Withdrawals are generally tax-free after age 
59½, as long as the individual held the account for 5 years; early 
distributions other than for specific exceptions are subject to an 
additional 10 percent income tax on earnings. 

The dollar limit on all IRA contributions is adjusted annually for 
cost-of-living increases.[Footnote 15] For 2014, the maximum 
contribution for all traditional and Roth IRAs in total is $5,500. 
Individuals age 50 and older are eligible to make additional catch-up 
contributions of $1,000. Taxpayers age 70½ and older can contribute to 
a Roth IRA only. Any contribution exceeding the annual limit or made 
by an ineligible taxpayer is subject to a 6 percent excise tax on the 
amount of excess contributions. 

Two other types of IRAs are intended to encourage savings sponsored 
through small employers: [Footnote 16] 

* Simplified Employee Pension Plan (SEP) IRA: Enacted under the 
Revenue Act of 1978, this type of IRA was designed with fewer 
regulatory requirements than traditional employer pension plans to 
encourage small employers to offer pension plans to their workers. 
[Footnote 17] SEP IRAs allow employers to make tax-deductible 
contributions to their own and each eligible employee's accounts. SEP 
IRAs have higher contribution limits than other IRAs: $52,000 in 2014. 
Annual contributions are not mandatory, but as with pension plans, 
they must be based on a written allocation formula and cannot 
discriminate in favor of highly-compensated employees. 

* Savings Incentive Match Plan for Employees (SIMPLE) IRA: Enacted 
under the Small Business Job Protection Act of 1996, SIMPLE IRAs help 
employers with 100 or fewer employees more easily provide a retirement 
savings plan to their employees.[Footnote 18] In this plan, eligible 
employees can direct a portion of their salary, within limits, to a 
SIMPLE IRA and employers must either (1) match the employees' 
contribution up to 3 percent of the employee's compensation, or (2) 
make nonelective, 2 percent contributions of each employee's salary 
for all employees making at least $5,000 for the year. The employee 
salary reduction contribution limit for 2014 is $12,000.[Footnote 19] 
Employers can elect to permit catch-up contributions, which in 2014 
are limited to $2,500. 

Rollovers from Employer Plans: 

Individuals can roll over assets from employer retirement plans into 
traditional or Roth IRAs.[Footnote 20] Employers may sponsor two broad 
types of retirement plans: (1) defined benefit (DB) plans, which 
promise to provide benefits generally based on an employee's years of 
service and frequently are based on salary, regardless of the 
performance of the plans' investments, and (2) defined contribution 
(DC) plans, in which benefits are based on contributions and the 
performance of the investments in participants' individual accounts. 
Over the last three decades, employers have shifted from sponsoring DB 
plans to DC plans. The 401(k) plan is the predominant type of DC plan 
in the United States. Typically, 401(k) plans allow participants to 
specify the size of their contributions and direct those contributions 
to one or more investments among the options offered within the plan. 

In passing ERISA, Congress intended to harmonize the regulation of all 
tax-advantaged retirement plans, including IRAs, to prevent, among 
other things, "unjustifiable differences in tax treatment of corporate 
owner-employees and self-employed individuals under qualified plans." 
[Footnote 21] At the time, while DB plans were the dominant type of 
employer-sponsored retirement plan, Congress placed various limits on 
both DB and DC plans. For DB plans, benefits are limited to amounts 
needed to provide an annual benefit no larger than the lesser of a 
specific dollar amount or 100 percent of the participant's average 
compensation for the highest 3 consecutive calendar years.[Footnote 
22] For tax year 2014, the limit on the maximum annual benefit under a 
DB plan is $210,000. An individual receiving a lump sum distribution 
from a qualified plan may defer taxes by rolling the lump sum into a 
traditional IRA. 

Whereas DB plans have a limit on total benefits, DC plans (like IRAs) 
have annual contribution limits but no total limit on how much an 
account can accumulate. For DC plans, annual contributions are limited 
to the lesser of a specific dollar amount or 100 percent of the 
participant's compensation.[Footnote 23] For tax year 2014, the 
contribution limit on an employee's elective deferral is $17,500, and 
the overall contribution limit, which includes the total of all 
employer contributions and employee elective deferrals, is 
$52,000.[Footnote 24] Employees age 50 and older are eligible to make 
additional catch-up contributions of $5,500. Employees older than age 
70½ generally can continue contributing and, if their employer plan 
allows, delay required minimum distributions until retirement. 
Rollovers from employer plans such as 401(k) plans have become the 
predominant source of funds into IRAs.[Footnote 25] Tax-deferred 
balances may roll into a traditional IRA, and balances from a 
designated Roth account can roll directly into a Roth IRA.[Footnote 26] 

For employer plans, tax incentives are structured to strike a balance 
between encouraging employers to start and maintain voluntary, tax-
qualified pension plans and ensuring that lower-income employees 
receive an equitable share of the tax-subsidized benefits.[Footnote 
27] In addition to the annual limit on employee contributions, other 
statutory limits include, for example, a limit on the amount of 
compensation ($260,000 for 2014) that can be taken into account in 
determining qualified pension plan contributions or benefits.[Footnote 
28] One important requirement for tax-qualified pension plans of 
private employers is that contributions or benefits be apportioned in 
a nondiscriminatory manner between highly compensated employees or 
other workers. 

IRA Investments: 

IRA owners have wide latitude in the types of assets in which they can 
invest.[Footnote 29] IRA owners can choose to invest in publicly 
traded securities or assets in custody of a financial institution or 
custodian. As a way to invest in a wider range of assets, albeit with 
higher risk, some IRA owners choose to invest in nonpublicly traded 
alternative assets, such as real estate and private placement stock. 
[Footnote 30] Alternative assets may involve more direction of 
investment and activities by the IRA owner, limiting the typical role 
of the custodian. 

An IRA owner choosing to directly control IRA assets or invest in 
alternative investments must navigate the IRA tax laws and can face 
additional taxes for noncompliance. An IRA owner is not permitted to 
engage in certain prohibited transactions with the IRA. These 
transactions are prohibited to prevent misuse of an IRA to benefit the 
owner or other disqualified persons in a way other than as a vehicle 
to save for retirement.[Footnote 31] Such prohibited transactions 
specifically include, for example, borrowing money from an IRA, 
selling property to an IRA, using an IRA account as security for a 
loan, and buying property for personal use with IRA funds. If the IRA 
owner or beneficiary engages in a prohibited transaction, the IRA 
loses its status as an IRA. As a result, the account is treated as 
distributing all of its assets to the IRA owner at the FMV on the 
first day of the year in which the transaction occurred.[Footnote 32] 
The distribution may be subject to any additional income taxes 
associated with an early distribution and additional excise taxes. 
[Footnote 33] 

IRA custodians are responsible for ensuring that all IRA assets 
(including those not publicly traded) are valued annually at their FMV 
and are required to report the account's FMV at year-end to IRS. 
[Footnote 34] The FMV is the value reflecting contributions and 
rollovers into the IRA, distributions from the IRA, investment 
earnings (such as interest and dividends), and any change in the 
market value of assets held in the IRA. Nonpublicly traded assets do 
not have easily determined FMV. 

IRS Enforcement and Taxpayer Service: 

Multiple IRS units are responsible for enforcing IRA tax laws and 
conducting outreach activities to increase taxpayer understanding of 
the laws.[Footnote 35] Also, IRS and DOL share responsibility for 
overseeing prohibited transactions relating to IRAs. DOL defines the 
prohibited transactions and may grant exemptions.[Footnote 36] IRS 
assesses additional taxes for IRAs found to engage in prohibited 
transactions. 

Third-party reporting by IRA custodians provides information that 
taxpayers can use in preparing their tax returns and that IRS can use 
to identify noncompliant taxpayers.[Footnote 37] For every IRA, the 
custodian is required to submit a Form 5498 IRA Contribution 
Information to IRS. The form details the IRA type (traditional, SEP, 
SIMPLE, or Roth), total contributions, Roth conversions, rollovers, 
and FMV of the account.[Footnote 38] In IRA examinations, FMV may be 
essential in determining a plan or an IRA's compliance with the law, 
such as whether the contribution value causes a taxpayer to violate 
contribution limits. Custodians are also to report on Form 5498 
whether a taxpayer is subject to required minimum distributions for 
the coming year; custodians are not required to report the minimum 
amount calculated for each account. The custodian is also required to 
submit a Form 1099-R Distributions From Pensions, Annuities, 
Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., 
each year that indicates an IRA withdrawal took place and details the 
total distributions from the account during the calendar year. Form 
1099-R also provides information about the IRA distributions, such as 
whether the distributions were taken before age 59½.[Footnote 39] 

The IRS Wage and Investment division operates automated enforcement 
programs that check taxpayer reporting of IRA transactions. The math 
error program checks tax returns for conspicuous taxpayer errors as 
tax returns are processed.[Footnote 40] The automated underreporter 
program (AUR) identifies noncompliance with certain IRA deduction and 
distribution rules by matching custodians' Form 5498 and Form 1099-R 
information returns with taxpayers' income tax returns. AUR may ask 
taxpayers for additional information to reconcile discrepancies. Some 
AUR cases may be handled as correspondence examinations, while other 
IRA compliance issues, such as those with large asset values, may be 
referred for field examination.[Footnote 41] 

The IRS Small Business/Self-Employed (SB/SE) division conducts field 
examinations targeting more complex individual tax returns. Field 
examinations are IRS's most costly form of examination. Figure 1 shows 
SB/SE's process for examining returns. 

Figure 1: Small Business/Self-Employed Examination Process: 

[Refer to PDF for image: process illustration] 

Create inventory: 
IRS uses a computer scoring program called the discriminant function, 
as well as criteria from special projects and other priorities, to 
create a pool of returns for possible examination. 

Classification: 
From the pool of returns created in the previous step, revenue agents 
and tax compliance officers conduct a first-pass, in a procedure known 
as classification, to determine whether the return warrants 
examination. During this stage, issues with the potential for tax 
change are classified for examination. If the staff classifying the 
return find no issues, IRS may take no further action on that return. 

Return assignment: 
Examination office and field managers order returns from an exam 
planning office. The inventory created in the previous step is shipped 
to examination groups and assigned to examiners. Managers have the 
ability to dismiss cases that lack examination potential. 

Examination: 
Examiners review the assigned tax return by interviewing the 
taxpayers, their representatives, or both. Examiners are to review 
taxpayers' records and determine whether any additional taxes are owed. 

Source: GAO analysis of IRS information. GAO-15-16. 

[End of figure] 

Whereas SB/SE examines individual tax returns, the IRS Tax Exempt/ 
Government Entities division (TE/GE) has jurisdiction over employee 
plans (including employer-sponsored SEP and SIMPLE IRA plans) and 
requirements for rollovers from qualified employer plans into IRAs. If 
TE/GE examiners discover an individual tax issue, they may refer it to 
other examination offices, including SB/SE. 

IRS service activities aim to increase taxpayer understanding of and 
improve compliance with tax obligations, including IRA requirements, 
as well as deliver clear and focused outreach communications and 
education programs to assist taxpayer understanding of tax 
responsibilities and awareness of changing tax laws. IRS Publication 
590 Individual Retirement Arrangements (IRAs) (Publication 590) 
explains the requirements that taxpayers are to follow in contributing 
to, and receiving distributions from, traditional, Roth, and SIMPLE 
IRAs.[Footnote 42] 

Few Taxpayers Had Reported IRA Balances Greater Than $5 Million: 

Most Taxpayers with IRAs Have IRA Balances of $1 Million or Less: 

Of the 145 million married couples and individuals who filed 
individual income tax returns for tax year 2011, an estimated 43 
million, or 30 percent, had IRAs with an estimated total balance--in 
terms of FMV reported by custodians--of $5.2 trillion at the end of 
2011.[Footnote 43] About 99 percent of those taxpayers had aggregate 
IRA balances of $1 million or less and accounted for around 78 percent 
of the total balance. The median accumulated IRA balance for this 
group was around $34,000. Taxpayers with aggregated IRA balances 
exceeding $1 million, around 600,000 taxpayers, accounted for about 22 
percent of total balance and had a median of around $1.4 million. 

As seen in tables 1 and 2, less than 0.1 percent of taxpayers (about 
6,000 to 10,000 taxpayers) had aggregated IRA balances greater than $5 
million to $10 million but accounted for about 1 percent of the total 
balance. From around 700 to more than 1,000 taxpayers with IRA 
balances more than $10 million accounted for about 2 percent of the 
total balance.[Footnote 44] A number of taxpayers had IRA balances 
exceeding $25 million though our estimates varied widely from around 
115 to more than 600 taxpayers. Some of these taxpayers had very large 
aggregated balances (see appendix III, table 10 for estimated median 
IRA balances by size of IRA balance and their associated ranges). 
[Footnote 45] 

Table 1: Estimated Number and Percent of Taxpayers with Individual 
Retirement Accounts (IRA) by Size of IRA Balance, Tax Year 2011: 

IRA Balance: Total taxpayers with IRAs; 
Estimated number of taxpayers: 43,013,341; 
95% confidence interval: 42,725,706-43,300,975; 
Estimated percent of taxpayer with IRAs: 100%; 
95% confidence interval: 100%-100%. 

IRA Balance: $1 million or less; 
Estimated number of taxpayers: 42,382,192; 
95% confidence interval: 42,094,009-42,670,375; 
Estimated percent of taxpayer with IRAs: 98.5%; 
95% confidence interval: 98.5%-98.6%. 

IRA Balance: More than $1 million to $2 million; 
Estimated number of taxpayers: 502,392; 
95% confidence interval: 470,897-533,887; 
Estimated percent of taxpayer with IRAs: 1.2%; 
95% confidence interval: 1.1%-1.2%. 

IRA Balance: More than $2 million to $3 million; 
Estimated number of taxpayers: 83,529; 
95% confidence interval: 72,632-94,426; 
Estimated percent of taxpayer with IRAs: 0.2%; 
95% confidence interval: 0.2%-0.2%. 

IRA Balance: More than $3 million to $5 million; 
Estimated number of taxpayers: 36,171; 
95% confidence interval: 30,811-41,531; 
Estimated percent of taxpayer with IRAs: 0.1%; 
95% confidence interval: 0.1%-0.1%. 

IRA Balance: More than $5 million to $10 million; 
Estimated number of taxpayers: 7,952; 
95% confidence interval: 6,120-9,783; 
Estimated percent of taxpayer with IRAs: less than 0.1%; 
95% confidence interval: less than 0.1%-less than 0.1%. 

IRA Balance: More than $10 million to $25 million; 
Estimated number of taxpayers: 791; 
95% confidence interval: 596-985; 
Estimated percent of taxpayer with IRAs: less than 0.1%; 
95% confidence interval: less than 0.1%-less than 0.1%. 

IRA Balance: More than $25 million; 
Estimated number of taxpayers: 314; 
95% confidence interval: 115-650; 
Estimated percent of taxpayer with IRAs: less than 0.1%; 
95% confidence interval: less than 0.1%-less than 0.1%. 

Source: GAO analysis of IRS data from Forms 1040, U.S. Individual 
Income Tax Returns and Forms 5498 IRA Contribution Information. 
GAO-15-16. 

Notes: The taxpayer, as a taxpaying unit, may have more than one IRA 
owner. The IRA balance is the aggregate value for all IRAs (including 
inherited IRAs) owned by the taxpayer. We assumed all blank IRA fair 
market values are zero; the blank values could affect these estimates 
considerably. See appendix I for more details. Percentages may not 
total 100 percent due to rounding. 

[End of table] 

Table 2: Estimated Total and Percent of Individual Retirement Account 
(IRA) Fair Market Value Balances by Size of IRA Balance, Tax Year 2011: 

IRA Balance: Total taxpayers with IRAs; 
Estimated total IRA balances ($ billions): $5,241; 
95% confidence interval: $5,083-$5,399; 
Estimated percent of total IRA balances: 100%; 
95% confidence interval: 100%-100%. 

IRA Balance: $1 Million or less; 
Estimated total IRA balances ($ billions): $4,092; 
95% confidence interval: $4,038-$4,147; 
Estimated percent of total IRA balances: 78.1%; 
95% confidence interval: 75.8%-80.3%. 

IRA Balance: More than $1 Million to $2 million; 
Estimated total IRA balances ($ billions): $674; 
95% confidence interval: $632-$717; 
Estimated percent of total IRA balances: 12.9%; 
95% confidence interval: 12.1%-13.7%. 

IRA Balance: More than $2 million to $3 million; 
Estimated total IRA balances ($ billions): $198; 
95% confidence interval: $173-$224; 
Estimated percent of total IRA balances: 3.8%; 
95% confidence interval: 3.3%-4.3%. 

IRA Balance: More than $3 million to $5 million; 
Estimated total IRA balances ($ billions): $133; 
95% confidence interval: $114-$153; 
Estimated percent of total IRA balances: 2.5%; 
95% confidence interval: 2.2%-2.9%. 

IRA Balance: More than $5 million to $10 million; 
Estimated total IRA balances ($ billions): $52; 
95% confidence interval: $40-$64; 
Estimated percent of total IRA balances: 1.0%; 
95% confidence interval: 0.8%-1.2%. 

IRA Balance: More than $10 million to $25 million; 
Estimated total IRA balances ($ billions): $11; 
95% confidence interval: $8-$13; 
Estimated percent of total IRA balances: 0.2%; 
95% confidence interval: 0.2%-0.3%. 

IRA Balance: More than $25 million; 
Estimated total IRA balances ($ billions): $81; 
95% confidence interval: $8-$225; 
Estimated percent of total IRA balances: 1.5%; 
95% confidence interval: less than 0.2%-4.2%. 

Source: GAO analysis of IRS data from Forms 1040, U.S. Individual 
Income Tax Returns and Forms 5498 IRA Contribution Information. 
GAO-15-16. 

Notes: The taxpayer, as a taxpaying unit, may have more than one IRA 
owner. The IRA balance is the aggregate value for all IRAs (including 
inherited IRAs) owned by the taxpayer. We assumed the blank IRA fair 
market values are zero; the blank values could affect these estimates 
considerably. See appendix I for details. Percentage may not total 100 
percent due to rounding. 

[End of table] 

To characterize taxpayers with IRAs by IRA type, adjusted gross income 
(AGI), filing status, and age, we compare two subgroups of taxpayers--
those with IRA balances of $1 million or less, which comprised 99 
percent of all taxpayers with IRAs, and those with IRA balances of 
more than $5 million. We do not report on taxpayers with IRA balances 
greater than $1 million to $5 million to avoid disclosure of taxpayer 
information. 

Taxpayers held about 87 percent of the total balance in traditional 
IRAs, around $4.4 trillion to $4.7 trillion, while the proportion of 
total balance held in Roth IRAs was 7 percent, around $359 billion to 
$378 billion. Those held in other employer-sponsored SEP and SIMPLE 
IRAs, around 6 percent, accounted for the remaining value. Figure 2 
shows a breakdown of IRA types by taxpayers with IRA balances of $1 
million or less and those with balances of more than $5 million. 

Figure 2: Estimated Percent of Taxpayers with Individual Retirement 
Account (IRA) Balances of $1 Million or Less and More Than $5 Million 
and Percent of IRA Balance, by IRA Type, Tax Year 2011: 

[Refer to PDF for image: 2 vertical bar graphs] 

Confidence levels are indicated on each graph: 

Taxpayers with IRA balances $1 million or less: 

IRA type: Traditional IRAs: 
Taxpayers with IRAs: 81%; 
IRA balance: 85%. 

IRA type: Roth IRAs: 
Taxpayers with IRAs: 32%; 
IRA balance: 8%. 

IRA type: Other IRAs: 
Taxpayers with IRAs: 13%; 
IRA balance: 7%. 

Taxpayers with IRA balances more than $5 million: 

IRA type: Traditional IRAs: 
Taxpayers with IRAs: 96%; 
IRA balance: 92%. 

IRA type: Roth IRAs: 
Taxpayers with IRAs: 37%; 
IRA balance: 8%. 

IRA type: Other IRAs: 
Taxpayers with IRAs: 9%; 
IRA balance: 1%[A]. 

Source: GAO analysis of IRS data. GAO-15-16. 

Notes: As taxpayers can have more than one type of IRA, the type of 
IRAs do not sum to 100 percent. All percent estimates have margins of 
error at the 95 percent confidence level or plus or minus 10 percent 
points or less. We assumed all the blank IRA fair market values are 
zeros; the blank values could affect our estimates considerably. See 
appendix I for more details. 

[A] The distributions for these estimates are so skewed that the usual 
estimation methods do not produce an accurate lower bound. 

[End of figure] 

Taxpayers with IRA Balances Exceeding $5 Million Have Higher AGI: 

For those taxpayers with IRA balances of $1 million or less, most 
(around 90 percent) have AGI of $200,000 or less.[Footnote 46] For 
those with IRA balances of more than $5 million, most (about 90 
percent) have AGI greater than $200,000. However our estimates for 
this subgroup are imprecise as seen in the wide confidence intervals 
in figure 3. 

Figure 3: Estimated Percent of Taxpayers with Individual Retirement 
Account (IRA) Balances of $1 Million or Less and More Than $5 Million 
and IRA Balances, by Adjusted Gross Income, Tax Year 2011: 

[Refer to PDF for image: horizontal bar graph] 

Confidence levels are indicated on each graph: 

Adjusted gross income: $0 or less; 
Taxpayers with IRA balances $1 million or less: 
Taxpayers with IRAs: 1%; 
IRA balance: 1%; 
Taxpayers with IRA balances more than $5 million: 
Taxpayers with IRAs: [A]; 
IRA balance: [A]. 

Adjusted gross income: $1 to $20,000; 
Taxpayers with IRA balances $1 million or less: 
Taxpayers with IRAs: 13%; 
IRA balance: 7%; 
Taxpayers with IRA balances more than $5 million: 
Taxpayers with IRAs: [A]; 
IRA balance: [A]. 

Adjusted gross income: $20,001 to $50,000; 
Taxpayers with IRA balances $1 million or less: 
Taxpayers with IRAs: 24%; 
IRA balance: 16%; 
Taxpayers with IRA balances more than $5 million: 
Taxpayers with IRAs: [A]; 
IRA balance: [A]. 

Adjusted gross income: $50,001 to $100,000; 
Taxpayers with IRA balances $1 million or less: 
Taxpayers with IRAs: 32%; 
IRA balance: 31%; 
Taxpayers with IRA balances more than $5 million: 
Taxpayers with IRAs: 3%; 
IRA balance: 2%[B]. 

Adjusted gross income: $100,001 to $200,000; 
Taxpayers with IRA balances $1 million or less: 
Taxpayers with IRAs: 21%; 
IRA balance: 29%; 
Taxpayers with IRA balances more than $5 million: 
Taxpayers with IRAs: 4%; 
IRA balance: 2%[B]. 

Adjusted gross income: $200,001 to $500,000; 
Taxpayers with IRA balances $1 million or less: 
Taxpayers with IRAs: 7%; 
IRA balance: 12%; 
Taxpayers with IRA balances more than $5 million: 
Taxpayers with IRAs: 36%; 
IRA balance: 63%. 

Adjusted gross income: $500,001 to $1,000,000; 
Taxpayers with IRA balances $1 million or less: 
Taxpayers with IRAs: 1%; 
IRA balance: 2%; 
Taxpayers with IRA balances more than $5 million: 
Taxpayers with IRAs: 26%; 
IRA balance: 11%[B]. 

Adjusted gross income: Greater than $1,000,000; 
Taxpayers with IRA balances $1 million or less: 
Taxpayers with IRAs: 1%; 
IRA balance: 1%; 
Taxpayers with IRA balances more than $5 million: 
Taxpayers with IRAs: 29%; 
IRA balance: 20%. 

Source: GAO analysis of IRS data. GAO-15-16. 

Notes: See appendix III, tables 11 and 12 for the 95th percent 
confidence intervals associated with these estimates. We assumed all 
the blank IRA fair market values are zeros; the blank values could 
affect our estimates considerably. See appendix I for details. 

[A] Estimates suppressed due to small cell counts. 

[B] The distributions for these estimates are so skewed that the usual 
estimation methods do not produce an accurate lower bound. 

[End of figure] 

Taxpayers with IRA Balances Greater than $5 Million Tend to be Joint 
Filers and Age 65 or Older: 

Joint filers comprised a larger proportion of taxpayers with IRA 
balances greater than $5 million in comparison to those with IRA 
balances of $1 million or less. Joint filers also accounted for a 
larger share of the IRA balance with about 90 percent of the IRA 
balance for those with balances more than $5 million, as shown in 
figure 4. 

Figure 4: Estimated Percent of Taxpayers with Individual Retirement 
Account (IRA) Balances of $1 Million or Less and More Than $5 Million 
by Filing Status, Tax Year 2011: 

[Refer to PDF for image: 2 vertical bar graphs] 

Confidence levels are indicated on each graph: 

Taxpayers with IRS balances $1 million or less: 

Filing status: Single; 
Taxpayers with IRAs: 33%; 
IRA balance: 24%. 

Filing status: Married filing joint; 
Taxpayers with IRAs: 59%; 
IRA balance: 71%. 

Filing status: Other; 
Taxpayers with IRAs: 8%; 
IRA balance: 5%. 

Taxpayers with IRA balances more than $5 million: 

Filing status: Single; 
Taxpayers with IRAs: 10%; 
IRA balance: 5%. 

Filing status: Married filing joint; 
Taxpayers with IRAs: 84%; 
IRA balance: 90%. 

Filing status: Other; 
Taxpayers with IRAs: 6%; 
IRA balance: 4%. 

Source: GAO analysis of IRS data. GAO-15-16. 

Notes: All percent estimates have margins of error at the 95 percent 
confidence level or plus or minus 11 percent points or less. We 
assumed all the blank IRA fair market values are zeros; the blank 
values could affect our estimates considerably. See appendix I for 
details. 

[A] The distributions for these estimates are so skewed that the usual 
estimation methods do not produce an accurate lower bound. 

[End of figure] 

Those who are age 65 and older--and have had more years to accumulate 
funds in IRAs--comprised at least 86 percent of taxpayers with 
balances greater than $5 million and about 90 percent of the total IRA 
balance for the group. This age group comprised a smaller percent, 
about 27, of taxpayers with balances of $1 million or less, but has a 
disproportionate share of the total IRA balance for the group, as 
shown in figure 5. 

Figure 5: Estimated Percent of Taxpayers Age 65 or Older by Individual 
Retirement Account (IRA) Balances of $1 Million or Less and More Than 
$5 Million, Tax Year 2011: 

[Refer to PDF for image: 2 vertical bar graphs] 

Confidence levels are indicated on each graph: 

Taxpayers with IRS balances $1 million or less: 

Taxpayer's age: Under age 65; 
Taxpayers with IRAs: 73%; 
IRA balance: 56%. 

Taxpayer's age: Ages 65 and older: 
Taxpayers with IRAs: 27%; 
IRA balance: 44%. 

Taxpayers with IRA balances more than $5 million: 

Taxpayer's age: Under age 65; 
Taxpayers with IRAs: 14%; 
IRA balance: 10%[A]. 

Taxpayer's age: Ages 65 and older: 
Taxpayers with IRAs: 86%; 
IRA balance: 90%. 

Source: GAO analysis of IRS data. GAO-15-16. 

Notes: Taxpayers were classified in the age 65 and older group if the 
filer, spouse, or both were age 65 or older. All percent estimates 
have margins of error at the 95 percent confidence level or plus or 
minus 10 percent points or less. We assumed all the blank IRA fair 
market values are zeros; the blank values could affect our estimates 
considerably. See appendix I for details. 

[A] The distributions for these estimates are so skewed that the usual 
estimation methods do not produce an accurate lower bound. 

IRA Balances Greater Than $5 Million Could Be Considered Large Based 
on What Individuals Typically Contribute. 

[End of figure] 

While there is no total limit on IRA or DC plan accumulations, 
scenarios illustrating the maximum annual contributions by an 
individual and employer over time can shed light on what could be 
considered a large IRA (see appendix I for the statutory annual 
contributions limits and more detailed scenario descriptions). 
[Footnote 47] Table 3 illustrates total contributions by an individual 
assuming (1) maximum contributions every year since IRAs were created 
under ERISA, and (2) maximum employer and employee contributions since 
401(k) plans were created.[Footnote 48] These scenarios represent the 
upper bounds on allowable contributions and do not represent how much 
individuals and employers typically contribute. Some may not have 
sufficient income to even approach the employee limit or might not 
have an employer able or willing to provide additional contributions 
up to the maximum combined employee plus employer limit. For 2011, the 
limit for combined employer-employee contributions, (including catch-
up contributions for those who are age 50 and older) totaled $54,500, 
with the employee contribution limit (also including catch-up 
contributions) being $22,000. Few, if any, individuals would sustain 
maximum contributions for more than three decades, given that in 
practice, few individuals contribute the maximum to an IRA or employer 
DC plan in any given year. Further, few, if any, individuals would be 
employed by employers who made matching and additional contributions 
for more than three decades at a level high enough to reach the 
combined employee plus employer limit. Our previous work estimated 
that only one-tenth of 1 percent of plan participants had 
contributions at or above the combined employer-employee contribution 
limit for 2010.[Footnote 49] Nonetheless, to illustrate possible 
accumulations under these upper bounds for contributions, the 
scenarios shown in table 3 assume all contributions are invested in a 
broad stock market index--specifically, the Standard & Poor's (S&P) 
500--and are not intended to represent how individuals typically 
invest. We also looked at other illustrative investment allocations, 
shown in appendix I. The scenarios do not reflect any withdrawals or 
investment fees. 

Table 3: Rates of Return Needed to Accumulate Individual Retirement 
Account (IRA) Balances of $1 million or $5 Million under Two 
Illustrative Contribution Scenarios, 1975-2011: 

Scenario: Maximum IRA contributions; (1975-2011)[B]; 
Total contributions: $99,500; 
Balance invested in S&P 500 portfolio: $353,379; 
S&P 500 rate of return[A]: Geometric mean: 8.2%; 
S&P 500 rate of return[A]: Dollar-weighted: 7.1%; 
Dollar-weighted rate of return to accumulate $1 million[A]: 11.6%; 
Dollar-weighted rate of return to accumulate $5 million[A]: 18.0%. 

Scenario: Maximum combined employer-employee contributions; 
(1980-2011)[C]; 
Total contributions: $1,185,350; 
Balance invested in S&P 500 portfolio: $3,959,753; 
S&P 500 rate of return[A]: Geometric mean: 8.0%; 
S&P 500 rate of return[A]: Dollar-weighted: 6.9%; 
Dollar-weighted rate of return to accumulate $1 million[A]: n.a.[D]; 
Dollar-weighted rate of return to accumulate $5 million[A]: 8.0%. 

Source: GAO analysis based on statutory contribution limits. 
GAO-15-16. 

Notes: All scenarios reflect contributions by an individual with catch-
up contributions beginning in 2002. Scenario results do not reflect 
investment or administrative fees and expenses. Likewise, the 
scenarios do not reflect any withdrawals or employer plan loans over 
the period. The contributions and returns reported above are for the 
specific time periods of 1975-2011 for IRA accounts and 1980-2011 for 
DC accounts. For the maximum combined employer-employee contribution 
scenario, we looked at a range of possible asset allocations in 
addition to the one shown in table 3 of a 100-percent investment in 
the S&P 500. As shown in appendix 1, ending balances of the additional 
scenarios ranged from $7.1 million for a 100-percent bond allocation 
to a high of $8.6 million for a glide path allocation starting at 70 
percent invested in the S&P 500 and ending with 30 percent invested in 
the S&P 500. We also calculated the DC contribution scenario with the 
investment returns equal to historical interest rates reported by the 
Social Security trustees for special issue government-bonds as a proxy 
for a safer investment strategy, which resulted in an ending balance 
of $3.4 million. 

[A] The S&P 500 rate of return is calculated as the geometric mean 
(sometimes referred to as the compounded annual growth rate) on a time-
weighted basis, which means that each year's rate of return receives 
equal weighting in calculating the mean. We calculated the dollar-
weighted return, which takes into account the intersection of the 
timing of cash flows into or out of the account and the timing of the 
investment returns. For example, because new money is being 
contributed to the account every year, a rate of return in a later 
year is more important than a rate of return in an earlier year 
because more money is at stake in the later years. The dollar-weighted 
annual rate of return adjusts for this and thereby measures the actual 
performance of the account under the given investment strategy. For 
more information on alternative return measures, see GAO, Pension Plan 
Valuation: Views on Using Multiple Measures to Offer a More Complete 
Financial Picture, GAO-14-264 (Washington, D.C.: Sept. 30, 2014.) 

[B] The IRA scenario reflects maximum allowable contributions to a 
traditional IRA. For a Roth IRA, the maximum contributions for 1998 to 
2011 would be $57,000. 

[C] This scenario reflects the upper bound on contributions to a 
single employer DC plan. Our prior work has shown that about one-tenth 
of one percent of DC plan participants contributed at or above the 
combined employer-employee contribution limit for 2010. 

[D] N/A = not applicable. Contributions alone accumulated from 1980 to 
2011 are more than $1 million. 

[End of table] 

As shown in table 3 above, it would take double-digit rates of return--
in excess of the S&P 500 return over the period--to achieve a balance 
of $1 million or more assuming an individual made only IRA 
contributions. Accounting for the maximum possible combined employer-
employee contributions and no withdrawals, the DC plan scenario with 
investment sustained over more than three decades could accumulate an 
individual account balance of more than $5 million; however, as 
already noted, such a level of contributions is rare, and such a 
sustained level is improbable. Moreover, an accumulation of more than 
$5 million looks large in comparison to what can be substantial 
rollovers of lump sum payouts from an employer DB plan.[Footnote 50] 
For 2011, the maximum lump sum payable to a 65-year-old DB participant 
would have ranged from $2.3 million to $2.6 million, depending on the 
interest rate factors used in the lump sum calculations. Finally, as 
discussed above, we found few taxpayers (including married couples 
filing jointly) with IRA balances greater than $5 million. For all of 
these reasons, one could consider an IRA balance accumulated by one 
individual greater than $5 million to be large. 

Historically, IRS has collected annual FMV as reported by custodians 
for each IRA annually but no data on what type of assets are held in 
IRAs.[Footnote 51] As a result, we could not describe the composition 
of assets held in IRAs using the available IRS SOI data.[Footnote 52] 
IRS officials pointed out that an individual may have a larger IRA 
balance by inheriting a large IRA. The IRS IRA data do not readily 
identify inherited IRAs, so we could not describe how many taxpayers 
had inherited IRA balances as of 2011.[Footnote 53] 

Alternate Strategies Are Likely the Cause of Large IRA Balances That 
Congress May Not Have Intended: 

Investments with Low Initial Values Not Available to Most Investors 
Help a Small Number of Individuals Accumulate Large IRA Balances: 

Our interviews with industry stakeholders and review of publicly 
available filings with the SEC and DOL indicate that a small number of 
individuals with access to certain types of nonpublicly traded shares 
in companies or a particular type of partnership interest, as shown in 
table 4, can generate IRA balances far exceeding $10 million. This is 
in contrast to the vast majority of IRA owners with balances well 
under $1 million. Although IRS data at present do not provide 
information on the investment strategies of IRA owners or the assets 
in their accounts, we found that an IRA owner would need to 
participate in a DC plan and sustain large contributions over decades 
to generate an IRA greater than $5 million. As we have previously 
found, IRA owners face many challenges in trying to accumulate even 
modest retirement savings, such as the pressure to draw down their 
savings for nonretirement expenses like purchasing a home or paying 
college tuition for their children or medical bills.[Footnote 54] This 
is a strong indicator that the individuals able to accumulate such 
large balances have not done so through steady contributions and 
investments in publicly traded stocks, bonds, and mutual funds. 
Instead, these individuals likely use alternate strategies involving 
investments not available to most taxpayers. In addition to access, to 
generate a large IRA, investments must have a low initial value and 
the potential for unusually high investment returns. The low initial 
value of these investments: (1) allows the individual to purchase a 
quantity within IRA contribution limits sufficient to generate tens of 
millions of dollars if the investments are successful; and (2) 
protects the individual against financial loss, given the increased 
likelihood that these investments end up worthless. For example, 
according to SEC documents, the founders of one prominent technology 
company issued nonpublicly traded shares in the newly created company 
for an initial value, or par value, of $0.000001 per share.[Footnote 
55] 

Table 4: Investments That Can Generate Tens of Millions of Dollars in 
a Tax-Favored Retirement Account: 

Nonpublicly traded shares: 
May be issued by the founders of a new company for a very low initial 
price. They may also be created for an existing company whose shares 
are taken off public stock exchanges for instance when the company is 
bought by a private equity fund. According to industry stakeholders, 
private equity funds sometimes reorganize the existing shares of 
companies they purchase into multiple share classes, some of which 
have a low initial value and higher risk than other share classes. 

Partnership interests: 
Can be similar to shares and are issued by companies that operate as 
partnerships. Partnerships typically grant two types of partnership 
interests: 
I. Capital interests to outside investors, known as limited partners, 
in exchange for cash investments in the partnership; 
II. Profits interests to key employees in exchange for services, 
ideas, and expertise that benefit the partnership. In some cases, a 
profits interest is also referred to as a carried interest. 

Source: GAO analysis of IRS guidance and industry publications. 
GAO-15-16. 

Note: The initial value of a capital interest is higher than that of 
profits interest because it reflects the outside investors' cash 
investment in a fund. The holder of a capital interest has a right to 
get any of his or her remaining initial investment back in the event 
the fund is unsuccessful. However, the holder of a profits interest 
has a right only to future profits generated by the fund if it is a 
success. 

[End of table] 

Nonpublicly traded shares and partnership interests can generally be 
accessed directly by only a small number of individuals, in part 
because all offers and sales of securities must be registered under 
the Securities Act of 1933, unless an exemption from registration is 
available. The most commonly used exemption limits the investors who 
can purchase securities in the offering to accredited investors and 
"sophisticated" investors who are able to evaluate the risks and 
merits of the investment and bear its economic risk.[Footnote 56] Even 
among this select group, only a small number of individuals can use 
nonpublicly traded shares and partnership interests to generate a 
large IRA. For example, only the founders of successful companies and 
some of their initial employees and investors have access to 
nonpublicly traded shares issued at the creation of the company, at 
which time these shares can be valued at less than $0.01 apiece. Given 
the risks associated with starting new companies, most founders are 
unlikely to see their initial investment grow to a balance of tens of 
millions. However, founders of successful companies may accumulate 
large returns disproportionate to the amount they initially paid for 
shares in their own company. 

Most investors are unlikely to have access to these investments when 
their value is low enough to accumulate such disproportionate 
investment returns. This is because few investors are likely to be 
founders of companies or key employees in private equity firms and 
hedge funds. However, some individuals who do not meet the 
requirements to invest directly in private equity funds and hedge 
funds may still be able to invest in them indirectly if they are 
participants in large public or private sector DB plans. We found in 
2012 that an increasing percentage of large DB plans have invested in 
private equity funds and hedge funds in recent years.[Footnote 57] 
Still, because pension benefits from such plans are generally set 
based on a participant's salary and years of service, unusually high 
returns from such investments are unlikely to result in greater 
pension plan benefits.[Footnote 58] 

Accumulating Nonpublicly Traded Shares in an IRA: 

According to a number of industry stakeholders, individuals may in 
some cases purchase nonpublicly traded shares using funds they 
accumulated in an IRA through contributions and rollovers from 
employer-sponsored plans. Figure 6 demonstrates an instance in which, 
according to SEC documents, one of the founders of a successful 
technology company used a Roth IRA to purchase at least 4 million 
nonpublicly traded shares of his newly created company.[Footnote 59] 
For an example of how nonpublicly traded shares can generate a large 
IRA balance for the founder of a successful company based on this 
instance, see appendix IV. 

Figure 6: For a Modest Initial Investment, Nonpublicly Traded Shares 
Can Generate a Large IRA: 

[Refer to PDF for image: illustration] 

1. A new company issues nonpublicly traded shares for less than a 
penny. One of the company's founders makes an after-tax contribution 
to a Roth IRA and uses it to buy 4 million shares. 

2. To raise money, the founders sell some of their nonpublicly traded 
shares to private investors for a higher price that reflects the 
company's successful startup. 

3. After years of growth, the company goes public. The founder can 
then register to sell the remaining shares in his Roth IRA at a higher 
price on public stock exchanges. 

4. The founder's Roth IRA holds both the proceeds of his sales and his 
remaining publicly traded shares, which now sell for well over the 
company's initial public offering price. Because the founder paid 
taxes on his initial contribution to the Roth, no taxes are due on any 
gains or distributions from the Roth IRA. 

Source: GAO analysis of publicly available SEC documents, IRS taxpayer 
guidance, industry publications, and finance articles and market data. 
GAO-15-16. 

[End of figure] 

Similarly, employees of private equity firms may have access to 
nonpublicly traded shares in companies the fund purchases, referred to 
as portfolio companies. In some cases, after taking the existing 
shares of a portfolio company off public stock exchanges, the private 
equity firm will restructure them into multiple share 
classes.[Footnote 60] In what one industry stakeholder referred to as 
the "cheap stock model," these share classes include a preferred share 
class with a higher initial value and a riskier common share class 
with a lower initial value.[Footnote 61] As with the nonpublicly 
traded shares issued by company founders, individuals may be able to 
purchase a quantity of the riskier share class in an IRA within 
contribution limits sufficient to produce substantial investment 
returns if the portfolio company is later sold for a sizable profit. 

According to five industry stakeholders who advise them, private 
equity firms can use very aggressive ratios to split the value of 
portfolio companies between share classes.[Footnote 62] According to 
one industry stakeholder, the use of an aggressive ratio can result in 
a risky share class with a liquidation value as low as zero.[Footnote 
63] Although risky, these shares can increase in value very quickly, 
suggesting to some that their initial value may have been 
inappropriate. For example, in one publicly reported private equity 
transaction, employees of the private equity firm used their IRAs to 
purchase about $25,000 worth of low-valued, nonpublicly traded shares 
the fund created for a portfolio company. The shares were worth nearly 
$14 million when the private equity firm brought the portfolio company 
back onto public stock exchanges less than 2 years later. The 
employees eventually sold their shares for more than $23 million, 
realizing more than 1,000 times their initial investment.[Footnote 64] 
However, one industry stakeholder who advises private equity firms 
said it would be difficult for IRS to prove these shares were 
inappropriately valued, because, for each risky share the employees 
purchased, they also purchased a share from a less risky higher-priced 
share class. Taken together, these shares may more accurately reflect 
the portfolio company's value. 

Generating Large IRAs through a Profits Interest (Carried Interest): 

Carried interest is another means by which key employees of private 
equity firms and hedge funds can generate large IRA balances.[Footnote 
65] According to one industry stakeholder who advises wealthy clients, 
including key employees of private equity firms, access to profits 
interests was likely the chief determinant of an individual's ability 
to accumulate a large IRA balance. He added that the rest of his 
clients, even those whose wealth surpasses $100 million, were unlikely 
to have an IRA exceeding $5 million because of the IRA contribution 
limits. The share of profits paid by outside investors, known as 
limited partners, to the general partner as a performance fee is 
referred to as the general partner's carried interest in a fund. The 
general partner typically distributes a portion of this fee, referred 
to as an investment fund's "carry," to a few key employees by first 
granting them a profits interest in the fund (see fig. 7). A profits 
interest has the potential to provide a key employee investment 
returns that are disproportionate to his or her invested capital if 
the fund is a success, according to six industry stakeholders who 
represent private equity firms and hedge funds or advise private 
equity professionals. If, on the other hand, a fund does not generate 
a minimum rate of return for its outside investors, profits interests 
may expire without generating any money for the key employee. For an 
example of how carried interest can generate a large IRA balance, see 
appendix IV. 

Figure 7: General Partners Grant Partnership Interests in Their 
Investment Funds: 

[Refer to PDF for image: illustration] 

1. General partner establishes a new private equity fund by investing 
5 percent of its planned value and recruiting outside investors to 
become “limited partners” by investing the remaining 95 percent. 

2. General partner grants partnership interests to limited partners 
and to key employees at the firm. The type of partnership interests 
varies according to the holder's role in the fund.[A] 

3. General partner uses fund's money to purchase portfolio companies, 
and works with the key employees to increase the value of those 
companies. When the fund matures, the general partner sells the 
companies for a profit. 

4. The funds's assets are divided according to partnership interests. 
The limited partner's initial investment, plus a return of about 8 
percent is usually paid first. The general partner takes a share of 
the rest of the profits as a “carried interest,” and distributes a 
portion to key employees.[B] 

Source: GAO analysis of industry publications and interviews with 
industry stakeholders. GAO-15-16. 

Note: Terms vary for funds offered by private equity firms and hedge 
funds. For example, the amount of capital contributed by the general 
partner and the timing for distributing profits may vary by fund. This 
figure does not take into account other fees charged by private equity 
firms and hedge funds such as management fees charged to outside 
investors. Industry stakeholders refer to the "two and twenty" fee 
structure as a guideline. This structure consists of a 2 percent 
management fee and a 20 percent performance fee called carried 
interest charged to outside investors. 

[A] Outside investors get capital interests in exchange for their 
investment in the fund. Capital interests give outside investors a 
right to profits generated by the fund. Profits distributed to a 
capital interest are generally proportionate to the amount invested, 
less fees and expenses. Key employees, on the other hand, get profits 
interests in exchange for their ideas, expertise, and work to make the 
fund successful. Profits interests give key employees a right to 
profits generated by the fund if the fund is a success. But profits 
interests do not give key employees a right to any of the initial 
capital used to start the fund. Because profits interests represent an 
investment of effort and expertise rather than money, their initial 
purchase price can be low, making profits interests uniquely suited to 
the contribution limits of tax-favored retirement accounts. The low 
purchase price means that returns from a profits interest can be 
substantially disproportionate to the money needed to purchase them, 
and consequently much higher than other types of investments. 

[B] The general partner usually takes 20 percent of a successful 
fund's profits as a carried interest, although this amount is 
negotiated with outside investors and can vary. 

[End of figure] 

Profits interests in a private equity fund or hedge fund can have a 
low initial value because they do not necessarily represent a cash 
investment to the fund by key employees. Instead, they represent an 
agreement that key employees will provide expertise, ideas, and work 
to make the fund a success in exchange for a share of the profits from 
the fund. IRS provided guidance on treatment for the receipt of a 
profits interest for services, saying that the grant of a profits 
interest is generally not a taxable event.[Footnote 66] Some industry 
stakeholders may have taken this to mean that profits interests can 
have an initial value of as low as $0.00, referred to as a liquidation 
value. 

As with nonpublicly traded shares, key employees at private equity 
firms and hedge funds may use IRAs to purchase profits interests from 
the general partner. According to an industry stakeholder who advises 
private equity professionals in estate planning, key employees may 
first accumulate profits interests in a DC plan, such as a 401(k) or 
profit sharing plan, then subsequently roll over the assets of their 
employer-based account into an IRA (see fig. 8). A rollover to an IRA 
can include both cash and noncash assets, such as a profits interest 
that is not done yielding distributions of carried interest. According 
to DOL officials, ERISA does not necessarily prohibit an employer from 
contributing a profits interest to the DC plan of its employees, 
although Internal Revenue Code requirements administered by IRS may 
restrict or regulate these types of transactions.[Footnote 67] 

Figure 8: Profits Interest Can Be Held in an IRA or a Defined 
Contribution Plan: 

[Refer to PDF for image: illustration] 

1. General partner grants or sells profits interest to key employee, 
making him/her eligible for a share of the general partner's carried 
interest in a fund. 

If the profits interest is purchased with an IRA: 
Employee uses IRA funds to buy profits interest. Contributions to Roth 
IRAs and, in some cases, traditional IRAs, are taxed.[A] 

If the profits interest is put directly into an employer-sponsored 
retirement plan: 
General partner puts profits interest directly into employee's 
retirement plan, in either a traditional or Roth account. 
Contributions to Roth, and in some cases, traditional accounts are 
taxed.[A] 

2. If the fund is successful, general partner distributes some of the 
profits as carried interest. 

If the profits interest is purchased with an IRA: 
Distributions of carried interest go directly into the IRA and are not 
taxed until withdrawn from a traditional IRA, and never taxed in a 
Roth IRA[B]. 

If the profits interest is put directly into an employer-sponsored 
retirement plan: 
Distributions of carried interest can be rolled over from a 
traditional account to a traditional IRA and would be taxed when 
withdrawn. Distributions rolled over from a Roth account to a Roth IRA 
would never be taxed.[B] 

Source: GAO analysis of publicly available IRS guidance, industry 
publications, and interviews with industry stakeholders. GAO-15-16. 

[A] Individuals covered by employer-sponsored plans may deduct only a 
portion of contributions to a traditional IRA from their taxable 
income, depending on their income and filing status. In some 
instances, contributions to a traditional 401(k) account may exceed 
the participant's elective deferral limit but contributions may not 
exceed the lesser of 100 percent of the participant's compensation or 
an overall contribution limit. 

[B] Qualified distributions from a Roth IRA that meet certain 
requirements are generally tax free. To be considered qualified, the 
IRA owner must, among other things, hold his or her investments for at 
least 5 years and reach age 59½ before taking a distribution. 

[End of figure] 

Alternate Strategies Raise Concerns but Are Difficult for IRS to 
Address: 

A number of industry stakeholders we interviewed expressed concerns 
that individuals who invest in nonpublicly traded shares or profits 
interests using IRAs and DC plans may undervalue these assets, thus 
substantially increasing their tax benefits. According to one industry 
stakeholder who advises clients on using IRAs to invest in alternative 
assets, individuals can manipulate contribution limits by grossly 
undervaluing investments at the time the individual uses an IRA to 
purchase them. Two industry stakeholders who advise wealthy clients or 
who research carried interest arrangements told us that IRA balances 
exceeding $10 million are a strong indication that assets may have 
been inappropriately valued. For example, company founders may have 
extensive knowledge of a company's value based on its future assets 
and liabilities. 

It is often difficult for IRS to pursue cases of potential abuse based 
on inappropriately valued assets. First, in response to a 
congressional inquiry, IRS said it generally requires individuals to 
assess the FMV of assets in IRAs rather than use a liquidation value 
or other valuation method.[Footnote 68] However, IRS guidance implies 
that individuals can use the liquidation value of a profits interest 
for certain tax purposes. One industry stakeholder also noted that 
individuals can use case law to support very low valuations of 
nonpublicly traded shares and profits interests.[Footnote 69] Second, 
according to IRS officials, valuation can be subjective and IRS may 
expend resources and ultimately conclude that the taxpayer's valuation 
is reasonable. Third, the statute of limitations for IRS to pursue 
cases is generally only 3 years, which poses certain obstacles to 
pursuing noncompliant activity that spans years of IRA investment. 
[Footnote 70] For example, as we have previously found, the long-term 
nature of private equity investment requires lengthy financial 
commitments and delayed financial returns. A private equity fund may 
not begin making profits for 4 or more years.[Footnote 71] For 
examples of the time that may in some cases be needed to realize 
disproportionately large investment returns from such investments, see 
appendix IV. 

Identifying Carried Interest in DC Plans and IRAs Is Difficult: 

Due to a lack of information in publicly available filings by private 
equity firms and hedge funds, we could not determine the extent to 
which key employees use DC plans or IRAs to invest in profits 
interests and thus shelter their portion of the general partner's 
carried interest from taxation. However, one industry stakeholder who 
values carried interest arrangements told us that he has been asked in 
one or two cases to value carried interest held in a profit sharing 
plan. We could not determine from publicly available filings with SEC 
and DOL if private equity firms and hedge funds enable key employees 
to invest in profits interests using DC plans.[Footnote 72] Of the 60 
private equity firms and hedge funds we reviewed, about half did not 
include in their filings with DOL a description of the assets held in 
their employer-sponsored plans.[Footnote 73] 

Of the filings that did include a description of assets held in the 
employer-sponsored plan, we found four hedge funds and one private 
equity firm whose employees were substantially invested in their 
employer's investment funds (see sidebar). However, we could not 
determine if these were investments in profits interests that would 
yield disproportionately large investment returns in the form of 
carried interest, or if they were investments in capital interests on 
terms similar to those of outside investors.[Footnote 74] In 2014, we 
found that there were challenges regarding the usefulness, 
reliability, and comparability of plan asset information on Form 
5500s--the annual report that employee benefit plans file with DOL. 
[Footnote 75] These challenges, identified by Form 5500 stakeholders, 
included a lack of detailed information on plan assets for filers with 
fewer than 100 participants that are not required to file a Schedule 
H, which is a part of Form 5500 detailing a plan's assets.[Footnote 
76] We recommended, among other things, that DOL and other agencies 
responsible for administering Form 5500 revise Schedule H to provide 
more transparency into plan investments.[Footnote 77] 

Side bar: 

Hedge Funds and a Private Equity Firm that Allow Their Employees to 
Invest in Their Own Funds: 

Hedge fund 401(k) profit sharing plan; ($18 million in assets); 
Employees invest more than 53 percent of plan assets in the employer's 
funds. 

Hedge fund 401(k); ($75 million in assets); Employees invest more than 
90 percent of plan assets in the employer's funds. 

Hedge fund IRA plan; ($103 million in assets); Employees may invest 
100 percent of their contributions in the employer's funds. 

Hedge fund 401(k) profit sharing plan; ($123 million in assets); 
Employees invest almost 97 percent of plan assets in the employer's 
funds. 

Private equity fund profit sharing plan; ($191 million in assets); 
Employees invest almost 28 percent of plan assets in the employer's 
funds. 

Source: GAO analysis of four hedge funds' and one private equity 
firm's Form 5500 filings with the Department of Labor, December 31, 
2012. GAO-15-16. 

[End of side bar] 

Drawing on public filings with the SEC we determined that the private 
equity firm and hedge funds enabling employees to invest in their own 
funds charge their outside investors a performance fee that amounts to 
a carried interest in these funds. But, despite recently expanded 
reporting requirements by SEC on private equity firms and hedge funds, 
we could not determine how general partners distribute carried 
interest among various partnership interests, such as those held by 
employees investing in employer-sponsored plans.[Footnote 78] Although 
the private equity firm and hedge funds disclosed that they held a 
carried interest in their funds, they did not disclose the general 
partner's internal distribution of this carried interest among key 
employees (see appendix IV for an example of how a key employee can 
invest in a portion of the general partner's carried interest through 
a profits interest). Absent increased transparency in filings with DOL 
documenting the assets held in employer plans and information about 
how the profits of private equity firms and hedge funds are 
distributed among various types of partnership interests, IRS will 
have difficulty assessing the kinds of assets being rolled into IRAs. 

Given the difficultly and uncertainty IRS faces in selecting and 
pursuing potential instances of noncompliance based on valuation, a 
few individuals can realize tax advantages from IRAs that 
substantially exceed those available to the vast majority of 
investors. According to IRS officials, any additional information 
about assets that have been rolled over into IRAs would be helpful. 
IRS officials told us that expanded information could reduce the 
considerable time and cost of pursuing cases of potential 
noncompliance based on the valuation of assets in IRAs. DOL filings 
for employer-sponsored plans in some instances do not contain any 
detail on the assets held by a plan. However, even when a description 
of assets is included, neither DOL nor SEC filings include information 
on whether the general partner distributes carried interest to profits 
interests held by key employees in a DC plan. This information could 
help IRS understand the potential investment returns that could have 
been expected to accrue to a profits interest rolled into an IRA and 
thus determine if the initial valuation of the profits interest was 
appropriate. Without this additional detail it will continue to be 
hard for IRS to determine the magnitude of investment returns a 
profits interest held in an IRA could reasonably be expected to 
generate. Such information could be used to determine how assets in 
IRAs might appropriately have been initially valued. Our prior work 
has shown that an important feature that helped DB plan sponsors 
successfully address the challenges of investing in private equity 
funds and hedge funds includes the transparent disclosure of fees such 
as carried interest.[Footnote 79] 

Congress Likely Did Not Intend IRAs to Result in Tax-Favored 
Accumulations of Funds beyond Those Reasonably Necessary to Support 
Individuals in Retirement: 

Congress enacted ERISA to promote opportunities for individuals to 
accumulate resources for their retirement and IRAs were originally 
authorized largely to ensure equitable tax treatment for individuals 
without access to an employer-sponsored plan. Congress envisioned that 
these individuals would be the most likely to establish and rely on 
IRAs. IRAs provide a way for individuals not covered by employer-
sponsored plans to save for retirement and give retiring workers or 
individuals changing jobs a way to preserve assets from employer-
sponsored DC plans by allowing them to roll over, or transfer plan 
assets into IRAs. Prior to this, individuals not covered by an 
employer-sponsored plan could not save for retirement under the 
favorable tax treatment afforded to participants of employer-sponsored 
plans. This resulted in inequitable tax treatment of individuals not 
covered by employer-sponsored plans. Congress cited the need, on the 
basis of equitable tax treatment, to create IRAs and grant these 
individuals a limited tax deduction on their retirement savings. 
[Footnote 80] Similarly, the Taxpayer Relief Act of 1997 created Roth 
IRAs, which extended tax incentives to individuals who, based on their 
income, were ineligible to make tax deductible contributions to 
traditional IRAs. It extended retirement tax incentives to individuals 
who made just enough that they could not benefit from the 
deductibility of contributions to traditional IRAs. 

Since Congress created traditional and Roth IRAs, they have become the 
key retirement savings vehicles for many individuals not covered by 
employer-sponsored plans, including small business owners and 
independent contractors. But a small number of individuals have found 
IRAs, and in particular Roth IRAs, to be an advantageous investment 
vehicle for purchasing disproportionately profitable assets at a low 
initial value, or transferring such assets from employer-sponsored 
plans, without paying more than a nominal amount of tax on their 
gains. The use of IRAs permits these individuals to accumulate far 
more in resources, under favorable tax treatment, than may be 
reasonably necessary to support them in retirement. 

Through ERISA, Congress also amended the Internal Revenue Code to 
impose certain limits on employer-sponsored plans seeking preferential 
tax treatment.[Footnote 81] Specifically, Congress established a limit 
on benefit payments from employer-sponsored DB plans and contribution 
limits on DC plans.[Footnote 82] Congress established similar 
contribution limits on IRAs. Congress imposed these limits to prevent 
the tax-favored accumulation of balances "completely out of proportion 
to the reasonable needs of individuals for a dignified level of 
retirement income."[Footnote 83] 

Forty years after the enactment of ERISA, some in Congress continue to 
be concerned with the fairness of tax-favored retirement balances. In 
a 2012 letter to IRS, some members of Congress expressed concern that 
strategies for accumulating large IRAs by using very low valuations 
might be widespread among certain higher-income individuals. Members 
of Congress also noted the opportunity to address inequities stemming 
from the inappropriate use of retirement tax benefits presented by 
Congress's current efforts to reform the broader tax code. In a 2012 
hearing on tax reform and tax-favored retirement accounts, the 
Chairman of the House Ways and Means Committee stressed the importance 
of increasing participation in retirement accounts by low-and middle-
income taxpayers, and ensuring that retirement tax benefits are 
effectively and appropriately targeted. 

We have long recommended greater scrutiny of tax expenditures, such as 
the deferral of taxation on retirement savings in traditional DC plans 
and IRAs and the ability to essentially pay taxes up front on 
contributions to designated Roth accounts in DC plans and to Roth 
IRAs, in exchange for tax-free investment earnings and distributions. 
[Footnote 84] We developed criteria to assist policymakers in 
assessing tax expenditures.[Footnote 85] These criteria include the 
following. 

* Identifying the tax expenditure's purpose, a necessary first step in 
assessing its performance. 

* Considering the fairness and equity of the tax expenditure. For 
example the criteria include determining who benefits from the tax 
expenditure, and whether taxpayers with different abilities to pay 
receive different benefits from the tax expenditure.[Footnote 86] 

* Determining the budget consequences of the tax expenditure, or, how 
much the tax expenditure costs the government in forgone tax revenue. 
Specifically, the criteria suggest policymakers consider options for 
limiting revenue losses from the tax expenditure, for example, by 
capping the aggregate amount taxpayers can claim. 

In the absence of changes by Congress to current tax incentives for 
retirement savings, certain individuals with the resources to do so 
will likely continue to engage in sophisticated investment strategies 
that effectively change their DC plan or IRA from an account for 
modest retirement savings into a tax-advantaged investment vehicle for 
accumulating significant wealth. This will be done through investments 
unavailable to most taxpayers. IRS officials reported in 2012 that 
long-term revenue losses to the federal government from IRA abuses had 
increased significantly since 2004, when IRS first created an Issue 
Management Team (IMT) to address this issue. IRS officials warned 
that, without legislative change, certain IRA strategies could 
conceivably result in thousands of families living for generations 
without the need to contribute to retirement accounts or pay federal 
income tax. In discussions with industry stakeholders and government 
officials, a number of proposals have been raised to address the 
accumulation of large IRAs. Two approaches are restricting the types 
of assets that can be held in IRAs or imposing a minimum valuation 
requirement on assets in IRAs. For example, a minimum required 
purchase price of one dollar per share could prevent the founders of 
companies from purchasing millions of nonpublicly traded shares within 
IRA contribution limits. Additionally, a limit on the amount of 
accumulations allowed in DC plans and IRAs is another approach. 
Similarly, Treasury officials have proposed limiting contributions to 
IRAs once a certain level of savings has been achieved. 

IRS Has Dedicated Resources to IRA Compliance but Faces Challenges 
with Nonpublicly Traded IRA Investments: 

IRS Relies on the Automated Underreporter Program and Field 
Examinations to Enforce IRA Tax Laws and Has Targeted Abusive IRA 
Transactions: 

Within the Wage and Investment (W&I) division, the Automated 
Underreporter Program (AUR) covers a broad range of taxpayers with 
IRAs and is IRS's primary means of detecting noncompliance with 
contribution and distribution requirements.[Footnote 87] In tax year 
2010 (the last full available year), AUR assessed additional taxes of 
$88 million for about 226,000 tax returns with IRA discrepancies. IRS 
continues to take action aimed at noncompliance by taxpayers who fail 
to take required minimum distributions or contribute more than the 
allowable limits. In addition to outreach efforts targeting these 
rules, W&I held two tests sending taxpayers soft notices--letters that 
require no action on the taxpayer's part but encourage the taxpayer to 
check his or her return for errors. These tests were intended to 
improve IRA compliance without IRS having to invest audit resources. 
The December 2013 test reminded taxpayers that they need to take a 
required distribution, and the February 2014 test targeted taxpayers 
who made excess contributions. As of October 2014, IRS was collecting 
test data, such as whether taxpayers plan to correct the errors, for 
use in evaluating future soft notice efforts or whether other 
compliance activities are needed. 

IRS's Small Business/Self-Employed (SB/SE) division uses field 
examinations to pursue more complex tax return cases, including those 
that could involve the multimillion dollar IRA strategies described 
above. In fiscal year 2013, field examiners audited IRA issues on 
1,588 returns and recommended $3.3 million in additional taxes, 
representing 0.3 percent of SB/SE examinations and 1.1 percent of 
total tax adjustments for that year. SB/SE training for new revenue 
agents and tax compliance officers covers specifics on enforcing IRA 
tax laws. Examiner job aides, also called lead sheets, emphasize 
investigating all of the taxpayers' contributions over time to 
determine if the taxpayers are noncompliant with their reporting. 
IRS's Engineering Department, which is part of the Large Business and 
International (LB&I) division, also provides in-house expertise on 
valuation issues and can be called upon when IRS discovers a valuation 
issue during an examination. SB/SE examination officials have 
developed additional guidance on IRAs for examiners' continuing 
professional education. 

SB/SE also has conducted special compliance initiative projects (CIP) 
to identify patterns of IRA noncompliance and better allocate 
examination resources and education efforts. Since 2007, CIPs have 
targeted excess contributions, early distributions, and taxes owed on 
Roth IRA conversions. 

Also led by SB/SE examiners, the Abusive Transactions and Technical 
Issues (ATTI) Program has targeted abusive schemes using IRAs. ATTI 
generally gets leads for investigating individuals involved in IRA 
schemes from investigations and monitoring of promoters who market tax 
shelters. In 2012 (the last full year of available data), ATTI 
examined 95 taxpayers and assessed additional taxes totaling $15 
million in IRA-related cases. Two types of abusive IRA transactions 
that IRS examination officials said they have focused on include: 

* Roth IRA "stuffing": This scheme involves shifting value through 
transactions that disguise Roth IRA contributions exceeding annual IRA 
limits, such as selling receivables at less than fair market value to 
a Roth IRA. In 2004, IRS determined that this abusive tax avoidance 
shelter is a listed transaction that taxpayers must report to IRS. 
[Footnote 88] Because IRA stuffing can involve improper valuation, 
IRS's efforts in this area have the potential to detect abuse in asset 
valuation in the strategies that stakeholders told us could lead to 
multimillion dollar IRAs. In a 2012 briefing document, IRS examination 
officials said that noncompliance using this approach "could 
conceivably result in thousands of families living for generations 
without the need to contribute or pay federal income tax. IRS 
continues to monitor taxpayer attempts at Roth IRA stuffing. 

* Self-dealing within an IRA: These are prohibited transactions in 
which a taxpayer in control of the IRA's asset management ultimately 
benefits from the asset before retirement in violation of tax laws. 
[Footnote 89] Examples are having the IRA purchase a beachfront home 
as a rental, but the taxpayer uses it for herself, or an IRA owner 
drawing a salary from an IRA-invested business. 

Other IRS enforcement programs do not target IRA noncompliance but may 
refer IRA-related cases for field examination. Within LB&I, the Global 
High Wealth industry unit targets individual taxpayers with assets or 
earnings of tens of millions of dollars and, in looking at their 
complete financial picture and the enterprises they control, may 
notice possible noncompliance with a taxpayer's IRA. Similarly, IRS 
Estate and Gift tax examiners may detect possible IRA noncompliance in 
reviewing a decedent's estate tax return. IRS enforcement officials 
from SB/SE and TE/GE said that reliance on referrals from one division 
to another requires coordination, without which IRS may be vulnerable 
to noncompliance that spans division expertise. For example, asset 
valuation issues may originate in an employer DC plan before being 
rolled over to an IRA. TE/GE examiners would be responsible for 
valuation issues within a DC plan, and it may be many years before the 
noncompliance is discovered by an examiner auditing an individual tax 
return. 

In 2008, IRS chartered an IMT--including representatives from SB/SE 
and TE/GE--to develop IRS-wide strategies and solutions to curb the 
proliferation of IRA abuse and potentially clarify and strengthen IRA 
tax laws. In 2009, the IMT suggested collecting additional data from 
custodians holding IRAs with hard-to-value nonpublic assets as an 
immediate step supporting a longer term strategy recommending 
legislative changes, among other things, to limit the types of IRA 
investments. By 2012, without progress on having IRS's legislative 
proposals considered by Treasury, the IMT developed an interim 
strategy for IRS to move forward with increased data collection and 
draw more attention to IRA noncompliance. 

IRS Plans to Collect Data to Identify IRAs with Riskier Nonpublic 
Assets, and Examiner Use Depends on Digitizing the Data: 

IRS plans to evaluate more data on hard-to-value IRA assets that would 
help to refine its enforcement efforts. For tax year 2014 (to be filed 
in 2015), IRS Form 5498 has new boxes for custodians to report the 
portion of the IRA FMV attributable to nonmarket assets as well as a 
box with codes describing the type of nonmarket assets, as shown in 
figure 9. Also for tax year 2014, custodians are to report similar 
information on Form 1099-R identifying distributions of IRA assets 
that do not have a readily available FMV. The new reporting is 
optional for 2014, and IRS plans to require custodians to provide the 
information for tax year 2015 (to be filed in 2016). As of September 
2014, IRS officials said that they will continue to assess comments 
from stakeholders about the form changes, but IRS does not anticipate 
changes to the timeline. 

Figure 9: Types of Assets Individual Retirement Accounts Custodians 
Will Identify on Form 5498 Starting in Tax Year 2014: 

[Refer to PDF for image: interactive graphic] 

Directions: 
IRS says it will use boxes 15a and 15b highlighted in red below to 
ensure that IRA fair market values are accurately reported. Rollover 
box 15b to view the codes custodians will use to identify their assets. 

Source: GAO summary of IRS information; PhotoDisc and IRS (images). 
GAO-15-16. 

[End of figure] 

SB/SE examination officials said that the new Form 5498 data will help 
them better identify taxpayers with IRAs invested in nonpublicly 
traded assets. They said the data also will help them review the 
history of FMV reported. 

Efficient use of the new Form 5498 and 1099-R data for examination 
case selection hinges on IRS's ability to compile and analyze the new 
information on nonpublicly traded assets types and FMV. Custodians, 
like other third-party reporters, must file electronically if they 
submit 250 or more of one kind of information return.[Footnote 90] A 
specialty custodian submitting fewer than 250 forms currently may file 
on paper. An IRS Submissions Processing official told us about 1,400 
custodians submitted only paper forms in tax year 2012. As previously 
reported, IRS historically has limited the use of electronically filed 
data for classification to only the types of data that are transcribed 
from paper-filed returns to assure that paper-filed returns are 
treated the same as electronic returns[Footnote 91] Unless the new 
information is available electronically--most commonly achieved 
through data transcription--IRS classifiers will not be able to fully 
use the new information, undercutting IRS's intention to more 
systematically identify IRAs with greater risk of noncompliance. 

W&I's Submission Processing office has requested transcription of the 
new IRA asset-type reporting that will be mandatory for 2015 forms to 
be filed in 2016. IRS prioritizes transcribing data based on a number 
of factors, such as physical capacity, as well as resources and 
funding. In June 2014, we reported that IRS faces budget uncertainty 
and indications are that its funding will be constrained for the 
foreseeable future.[Footnote 92] As of October 2014, IRS has not 
finalized plans for making the data available electronically. The cost 
of transcribing the new data would be relatively small, as IRS 
estimated that about 9,000 Form 5498 submissions were filed on paper 
in 2013 out of more than 118 million filings.[Footnote 93] A similarly 
small percentage of Form 1099-R filings go to IRS on paper. IRS 
estimated for us that the annual labor cost for transcribing the forms 
would be $2,322 to $12,210.[Footnote 94] However, noncompliance with 
IRA rules can result in sizable revenue losses if IRA transactions are 
misreported continuously over many years. 

Custodian and taxpayer behavior could change because of heightened 
attention on nonpublic IRA assets with the new reporting and the 
potential for greater IRS scrutiny. Some custodians already restrict 
IRAs to holding only publicly traded investments, and the additional 
reporting for alternative assets may dissuade other custodians from 
holding IRAs with such assets. Furthermore, taxpayers who want to 
manipulate valuations will have less room to do so, since custodians 
will still report on the type of asset in the account. Increased 
reporting on alternative assets by custodians to IRS may encourage 
better compliance by some taxpayers. According to IRS examination and 
Chief Counsel officials, however, custodians may not always be able to 
get accurate asset information about IRAs if the IRA owner has day-to-
day investment control, which could lead to unreliable Form 5498 
reporting of asset types and FMV. It may be difficult to apply general 
penalties to custodians for third-party misreporting if the IRA owner 
is the source of the inaccurate FMV data. 

IRS Has Tried to Address Challenges in Auditing the Valuation of 
Nonpublic IRA Assets and Detecting Prohibited Transactions: 

SB/SE examination officials said IRA noncompliance is difficult to 
pursue for a variety of reasons. First, some IRA cases--including the 
large-dollar IRA accumulation strategies cited by financial industry 
stakeholders--are about valuation issues. IRS officials said these 
issues are expensive to audit and often must be pursued through 
litigation in court. For example, IRS examination officials said that 
determining that an asset was undervalued cannot be made without 
expensive auditing and litigation. Each case requires extensive 
resources, including significant time of examiners, engineers, 
appraisers, appeals officers, and attorneys and fees to obtain 
appraisals from external contractors, according to examination 
officials. Examination and Chief Counsel officials said that valuation 
cases are a matter of opinion, and typically involve taxpayers with 
lots of resources. Taxpayers can find appraisers who will value assets 
in an IRA the way they want, and IRS faces difficulty in that it has 
to procure and present its expert testimony about the valuation. An 
improper valuation made many years prior to its discovery by SB/SE 
also may fall outside the 3-year examination statute of limitations 
discussed above.[Footnote 95] 

Another challenge is uncertainty about how DOL and the courts might 
rule on a particular set of facts in potential prohibited transaction 
cases or the exemptions to prohibited transaction rules that DOL might 
grant. IRS examination and Chief Counsel officials said that in their 
informal consultation process, they have a good working relationship 
with DOL, and DOL officials generally agreed with this 
characterization. However, IRS Chief Counsel officials said "things 
can get complicated" between DOL setting the rules and IRS enforcing 
them during audits, as IRS may not be sure whether DOL thinks a 
particular transaction is legitimate.[Footnote 96] DOL also may grant 
exemptions to employer-sponsored IRA plans that IRS otherwise could 
have deemed noncompliant. When possible prohibited transactions arise 
during examination that might require DOL input, IRS examination 
officials reach out to DOL through TE/GE to ensure that IRS 
understands the ruling on the transaction correctly.[Footnote 97] As 
with valuation, the statute of limitations poses obstacles to pursing 
prohibited transactions. According to IRS, abuses frequently are not 
reflected on any filed tax return and are difficult to detect within 
the general 3-year statute of limitation period. When certain 
prohibited transactions occur, the IRA loses its tax-favored status 
and is treated as distributing all of its assets at the FMV on the 
first day of the year when the prohibited transaction occurred. Once 
IRS examiners detect a prohibited transaction, the taxpayer can 
dispute when the income should have been reported. 

There are few judicial opinions regarding prohibited transactions, 
according to IRS officials. They also said that the 2013 Tax Court 
ruling in Peek v. Commissioner (see text box) sets a useful precedent 
for increased IRS enforcement of the prohibited transaction in more 
complex, higher dollar value cases.[Footnote 98] Building on Peek, 
SB/SE is working on honing procedures for examiners to use in 
determining whether an IRA case may have violated prohibited 
transactions that are similar to the Peek case. IRS examination 
officials said that the process would help IRS make decisions about 
the validity of transactions without having to go to DOL for every 
case. They said that Peek will help them more confidently identify 
prohibited transactions and encourage custodians as well as IRA owners 
and their advisors to be more aware of what is noncompliant. As of 
September 2014, IRS said the fact-pattern was an ongoing effort. 

Text box: 

Peek v. Commissioner Summary: 

Two individuals, Lawrence Peek and Darrell Fleck, each established 
traditional IRAs, rolled over funds from existing retirement accounts, 
set up a new corporation, and sold all of the stock of the corporation 
to the IRAs. They then used the funds from the sale of the stock to 
buy the assets of a business and executed personal loan guaranties 
with respect to that purchase. Thereafter, Peek and Fleck converted 
their traditional IRAs into Roth IRAs funded by the same stock. The 
Roth IRAs subsequently sold the now-significantly appreciated stock of 
the corporation and treated the gain as deferred. IRS asserted 
deficiencies against Peek and Fleck on the grounds that the loan 
guaranties were prohibited transactions. The Tax Court agreed and held 
that Internal Revenue Code § 4975(c)(1)(B) prohibits taxpayers from 
making loan guaranties either directly to their IRAs or indirectly to 
their IRAs through an entity owned by the IRAs. The Court further held 
that the IRAs ceased to qualify as IRAs when the prohibited 
transactions originally occurred and therefore the Roth IRAs were also 
void because the prohibited transaction continued as to those 
accounts. The Court also upheld accuracy-related penalties imposed by 
IRS. 

Peek and Fleck appealed the Tax Court decision. As of October, 10, 
2014, the case before the Tenth Circuit Court of Appeals was still 
pending. 

Source: Peek v. Commission 140 T.C. 216 (2013). GAO-15-16. 

[End of text box] 

In 2009, the IMT proposed several legislative changes to address 
enforcement challenges IRS encounters in auditing IRA activity. These 
include: (1) limiting the types of investments IRAs can make to 
publicly traded or otherwise marketable securities with a readily 
ascertainable fair market value; (2) expanding the definition under 
"disqualified person" to address work performed by the IRA 
beneficiary's siblings on behalf of the IRA-owned entity or operation; 
and (3) expanding the statute of limitations in Internal Revenue Code 
Sec. 6501 to 6 years for all IRA activity.[Footnote 99] The team's 
2009 legislative recommendations were approved by the Service-wide 
Compliance Strategy Executive Steering Committee in 2010.[Footnote 
100] In 2012, the issue management team met again to study abusive IRA 
trends and continued to recommend legislative change. As of September 
2014, no further action has taken place. Ultimately, Treasury has to 
review all tax legislative proposals and presents the administration's 
tax proposals for congressional consideration. In the fiscal year 2014 
and 2015 budgets, Treasury proposed an overall cap on tax-favored 
retirement saving accumulations.[Footnote 101] 

As IRS begins collecting data on nonpublic IRA assets from Form 5498, 
it will be positioned to quantify the number of IRAs and associated 
FMV held in hard-to-value asset types with greater compliance risk. As 
discussed above, the new asset-type data--if available electronically--
will help IRS in selecting examination cases. IRS examination 
officials said that research using the new data could aid in 
developing the business case for further action to address 
noncompliance. Specifically, additional research by IRS could help to 
evaluate the feasibility of the proposals to require greater 
disclosure of potentially undervalued asset types as transactions of 
interest or require reporting of prohibited transactions as listed 
transactions. Moving forward with a service-wide strategy to target 
enforcement efforts would hinge on IRS first conducting the research 
to understand how many taxpayers and the reported amounts of IRA 
assets are at risk of noncompliance. 

IRS Outreach and Education Increase Taxpayer Understanding of Complex 
IRA Rules but Are Not Explicit about the Risk of Alternative 
Investment Noncompliance: 

IRS has included taxpayer service and outreach in its strategies to 
improve compliance with IRA tax laws. As we reported in 2008, 
financial industry organizations and advisor representatives we 
interviewed complimented IRS Publication 590 Individual Retirement 
Arrangements (IRAs) (Publication 590) for translating the many 
complicated IRA contribution and distributions rules into "plain 
English" to help taxpayers comply.[Footnote 102] IRS continues to 
target outreach to help taxpayers understand minimum distribution 
requirements and IRA contribution limits. 

Insights about noncompliance detected by enforcement can help IRS 
identify opportunities to educate taxpayers on how to better comply. 
IRS has a system for examiners to communicate issues to IRS's external 
communication office, Communication and Stakeholder Outreach. ATTI 
chairs an emerging issues team that meets quarterly to address new 
compliance risks and may identify issues for the communications 
office. Research identifying the numbers and types of custodians and 
taxpayers holding hard-to-value assets could also help IRS target 
outreach activities and strategies for improving compliance with IRA 
asset valuation and prohibited transaction requirements. For example, 
IRS could provide notices targeting custodians and taxpayers with 
nonpublic IRA assets with a reminder about their responsibilities and 
the potential tax consequences of engaging in self-dealing and other 
prohibited transactions. 

Examination officials said one challenge in educating the public is a 
promoter industry that advertises IRAs with alternative assets that 
also give taxpayers "checkbook access" (i.e., more control over IRA 
investment choices compared to other IRAs). These promoters might not 
disclose the compliance risks and responsibilities taxpayers take on 
when investing in nonpublicly traded assets. The promoters' 
advertising may leave less sophisticated taxpayers at risk for 
unintentional noncompliance with IRA laws. IRS guidance targeting 
attention on the compliance responsibilities and risks inherent in 
investing in nonpublic IRA assets and directly controlling IRA assets 
could help taxpayers make more informed decisions. In 2009, IRS issued 
a revised publication explicitly warning that it does not approve or 
endorse particular types of assets for IRAs.[Footnote 103] Targeted at 
protecting taxpayers from fraudulent IRA sales pitches, this notice 
advises taxpayers to proceed with caution when encouraged to invest in 
a general partnership or limited liability company. Publication 590 
describes what prohibited transactions are but does not make the 
explicit connection that certain asset types pose greater potential 
for prohibited transactions. As a result, some taxpayers may be 
unaware that certain IRA investment decisions have greater risks for 
committing prohibited transactions that could trigger loss of their 
IRAs' tax-favored status. In contrast, for custodians, the IRS 
instructions for Forms 5498 and 1099-R plainly state that nonpublic 
assets and assets under IRA owner control have a greater potential for 
prohibited transactions. General reminders are a low cost way to draw 
attention and caution taxpayers about the compliance risks associated 
with certain IRA choices. 

Conclusions: 

Congress envisioned IRAs as a moderate tax benefit to help individuals 
not covered by employer-sponsored plans to obtain income sufficient 
for a secure retirement, not as a vehicle for accumulating significant 
tax-preferred wealth. Without further consideration from Congress, 
individuals with these limited, occupationally related opportunities 
to engage in sophisticated investment strategies may accumulate 
considerable tax-preferred wealth in IRAs. The result is a revenue 
loss to the federal government through a circumvention of the 
longstanding rationale for IRA contribution limits. However, Congress 
can reorient existing laws to address the excesses of these 
strategies, so that all taxpayers have similar opportunities to reap 
the benefits of IRAs. Congress could, for example, address the build-
up of unnecessarily large IRAs in a variety of ways: by limiting the 
types of investments held in IRAs, enforcing standards such as a 
minimum required value for investments in an IRA, or by setting a 
ceiling on accumulations in an IRA and requiring an immediate 
distribution of balances above that ceiling. Without such a 
readjustment, the intended broad-based tax benefits of IRAs will 
continue to be skewed towards a select group of investors. 

With respect to individual taxes, IRS has dedicated enforcement 
resources to identifying taxpayers who may be building IRA balances 
improperly. It is critical to collect data on alternative IRA assets 
with a higher risk of noncompliance, given that the valuation issues 
at the heart of the strategies to build large IRAs pose high costs for 
IRS enforcement and carry a risk of IRS failing to prove wrongdoing in 
court. Moving forward, IRS has the opportunity to use the data to 
further research IRA noncompliance, such as whether IRAs invested in 
nonpublicly traded shares are predicated on noncompliance, as industry 
stakeholders we spoke with allege. Such research is a necessary step 
toward designating strategies leading to high-dollar IRAs as 
problematic and targeting examination resources efficiently. 
Positioning IRS to take full advantage of the new Form 5498 data 
hinges on IRS digitizing the data for compliance case selection and 
examination. While IRS estimates capturing the data for the relatively 
few paper filing would add small costs to processing the forms, the 
benefits--in terms of less forgone revenue, a greater perception of a 
fair tax system, and better use of enforcement resources--would 
outweigh those costs. 

Existing data from DOL and SEC on employer-sponsored plans and the 
performance fees charged by private equity firms and hedge funds 
provide information that could also assist IRS in assessing the 
valuation of assets in IRAs. We previously recommended that DOL and 
others improve the usefulness, reliability, and comparability of Form 
5500 data in part by providing more transparency into assets held in 
employer-sponsored plans. Providing this information is important 
because it helps regulators better understand the types of assets held 
in tax-favored retirement accounts. If DOL were required to improve 
the transparency of assets held in employer-sponsored plans, IRS could 
have better information on where the assets in a large IRA may have 
originated. In addition, data about how private equity firms and hedge 
funds distribute their carried interest could also be of use to IRS as 
it decides whether to move forward with a case against an IRA owner 
based on valuation. 

The new asset-type data also gives IRS more information about IRAs at 
greater risk for self-dealing abuse and other prohibited transactions. 
As IRS increases it examination presence, evidence on the obstacles 
encountered in pursuing prohibited transactions and noncompliant 
activity engaged in for years may demonstrate whether it would be 
worthwhile to change the current 3-year statute of limitations for tax 
assessment with regard to IRAs. 

In an environment where less-sophisticated taxpayers can be lured by 
"checkbook access" to IRAs invested in unconventional assets, IRS has 
an opportunity to warn taxpayers about the added responsibilities and 
compliance risks inherent in investing and managing alternative assets 
in IRAs. Current IRA guidance aimed at taxpayers does not acknowledge 
the greater risks for committing prohibited transactions--even though 
Form 5498 instructions for custodians plainly make this point. Without 
an explicit caution, taxpayers may continue to make un-informed 
decisions about IRA investments that put them at a greater risk of 
noncompliance and loss of their IRAs' tax-favored status. 

Matter for Congressional Consideration: 

To promote retirement savings without creating permanent tax-favored 
accounts for a small segment of the population, Congress should 
consider revisiting the use of IRAs to accumulate large balances and 
consider ways to improve the equity of the existing tax expenditure on 
IRAs. Options could include limits on (1) the types of assets 
permitted in IRAs, (2) the minimum valuation for an asset purchased by 
an IRA, or (3) the amount of assets that can be accumulated in IRAs 
and employer-sponsored plans that get preferential tax treatment. 

Recommendations for Executive Action: 

We are making five recommendations to the Commissioner of Internal 
Revenue. 

To improve IRS's ability to detect and pursue noncompliance associated 
with undervalued assets sheltered in IRAs and prohibited transactions, 
we recommend that the Commissioner of Internal Revenue: 

* Approve plans to fully compile and digitize the new data from 
electronic and paper-filed Form 5498s to ensure the efficient use of 
the information on nonpublicly traded IRA assets. 

* Conduct research using the new Form 5498 data to identify IRAs 
holding nonpublic asset types, such as profits interests in private 
equity firms and hedge funds, and use that information for an IRS-wide 
strategy to target enforcement efforts. 

* Work in consultation with the Department of the Treasury on a 
legislative proposal to expand the statute of limitations on IRA 
noncompliance to help IRS pursue valuation-related misreporting and 
prohibited transactions that may have originated outside the current 
statute's 3-year window. 

To help taxpayers better understand compliance risks associated with 
certain IRA choices and improve compliance, we recommend that the 
Commissioner of Revenue: 

* Building on research data on IRAs holding nonpublic assets, identify 
options to provide outreach targeting taxpayers with nonpublic IRA 
assets and their custodians, such as reminder notices that engaging in 
prohibited transactions can result in loss of the IRA's tax-favored 
status. 

* Add an explicit caution in Publication 590 Individual Retirement 
Arrangements (IRAs) for taxpayers about the potential risk of 
committing a prohibited transaction when investing in nonpublicly 
traded assets or directly controlling IRA assets. 

Agency Comments: 

We provided a draft of this report to the Secretary of the Treasury, 
the Commissioner of Internal Revenue, the Secretary of Labor, and the 
Chair of the SEC for comment. In a September 18, 2014, letter (see 
app. VI), the IRS Deputy Commissioner for Services and Enforcement 
generally agreed with our recommendations. On October 2, 2014, the 
Associate Director and Chief Counsel for SEC's Division of Investment 
Management voiced various legal and other concerns regarding 
implementation of a recommendation, designed to assist the IRS for tax 
reporting purposes, to expand reporting requirements on private equity 
firms and hedge funds to require disclosure of a general partner's 
agreements for distributing carried interest. As a result, we 
redirected the recommendation to IRS as part of an existing 
recommendation that IRS conduct research using new Form 5498 data on 
non-public IRA assets. We shared the revised recommendation with IRS 
officials, who continued to agree with it. IRS, Treasury, SEC, and the 
Department of Labor provided separate technical comments, which we 
incorporated in our report where appropriate. 

In the IRS letter, the Deputy Commissioner emphasized that rules 
governing IRAs can be complicated for both the IRS and taxpayers. The 
Deputy Commissioner also highlighted efforts that IRS has undertaken 
to conduct enforcement, such as the AUR program and compliance 
initiative projects. The Deputy Commissioner acknowledged that IRA 
noncompliance can span IRS units and that the issue management team 
allowed cross-functional coordination to address noncompliance. 

IRS agreed with our assessment that digitizing IRA information return 
data could improve case selection. However, the Deputy Commissioner 
said that IRS is faced with competing funding priorities and will 
continue to evaluate the priority of digitizing additional Form 5498 
information. 

IRS also agreed to conduct research using the new Form 5498 data to 
identify IRAs holding nonpublic assets and use the information for an 
IRS-wide strategy to target enforcement efforts. The Deputy 
Commissioner said that the SB/SE Abusive Transactions and Technical 
Issues function has begun to develop research objectives to refine 
enforcement efforts using the additional information that IRS will 
obtain from the revised Form 5498 data. 

The Deputy Commissioner agreed that legislation to extend the period 
of limitations for assessment of tax associated with IRA noncompliance 
would remove an obstacle to IRS efforts to pursue identified IRA 
noncompliance. The Deputy Commissioner added that IRS will discuss 
with Treasury proposals regarding the statute of limitations on 
assessing tax associated with IRA noncompliance. 

The Deputy Commissioner said IRS agreed to build on research data on 
IRAs holding nonpublic assets to identify options to provide outreach, 
such as reminder notices. The Deputy Commissioner said that as IRS 
analyzes the data, it will identify options to provide targeted 
outreach to taxpayers with IRAs holding such assets to increase 
awareness of prohibited transaction rules and penalties for failure to 
comply with these rules. 

The Deputy Commissioner agreed with our recommendation to add an 
explicit caution in Publication 590 for taxpayers about the risk of 
committing a prohibited transaction when investing in nonpublicly 
traded assets or directly controlling IRA assets. 

As arranged with your office, unless you publicly announce its 
contents earlier, we plan no further distribution of this report until 
30 days from the date of this letter. At that time, we will send 
copies to Secretary of the Treasury, Secretary of Labor, IRS and SEC. 
In addition, the report will be available at no charge on the GAO 
website at [hyperlink, http://www.gao.gov]. 

If you or your staff has any questions about this report, please 
contact James R. McTigue, Jr. at (202) 512-9110 or Charles A. Jeszeck 
at (202) 512-7215. You may also reach us by email at mctiguej@gao.gov 
or jeszeckc@gao.gov. Contact points for our offices of Congressional 
Relations and Public Affairs are on the last page of this report. GAO 
staff members who made major contributions to this report are listed 
in appendix VII. 

Sincerely yours, 

Signed by: 

James R. McTigue, Jr. 
Director, Tax Issues: 
Strategic Issues: 

Signed by: 

Charles A. Jeszeck: 
Director, Education, Workforce, and Income Security: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

This report: (1) describes the number and types of taxpayers with 
individual retirement accounts (IRA) and the size of IRA balances in 
terms of aggregate fair market value (FMV), adjusted gross income 
(AGI), filing status and age; (2) examines how IRA balances can become 
large; and (3) assesses how the Internal Revenue Service (IRS) ensures 
that taxpayers with IRAs comply with IRA tax laws. 

Measuring IRA Balances and What Is Considered Large: 

To describe the taxpayers with IRAs by the accumulated balances in 
terms of FMV, AGI, filing status and age, we used an Internal Revenue 
Service (IRS) Statistics of Income (SOI) sample of individual income 
tax returns for tax year 2011 (the most recent year available) as well 
as IRS "IRA Contribution Information" Form 5498 data associated with 
the SOI sample. Our analysis of SOI statistical data is subject to 
sampling errors because the SOI data are based on a sample of tax 
returns as filed.[Footnote 104] In addition, the data do not reflect 
IRS audit results. The SOI sample of individual income tax returns 
does not include those who do not file a return. However, some IRA 
custodians submitted Form 5498s on nonfilers. An IRS official said SOI 
attempts to include additional information on nonfilers by sampling 
documents, including Form 5498s, which have no associated individual 
income tax returns. Form 5498 filings without a matching return were 
sampled at approximately 1: 1,000. In 2011, about 3,800 nonfilers were 
sampled, none of whom had unusually large IRA balances. 

We aggregated the total FMV for all IRAs associated with a return 
(including inherited IRAs as IRS data do not readily identify 
inherited IRAs) to obtain an accumulated IRA balance. We used the 
taxpayers as our unit of analysis. Taxpayers filing joint returns are 
treated as a single unit and the IRAs owned by both spouses are 
aggregated. Our analysis of SOI data is subject to errors from 
sampling as well as from the small sample of returns with higher IRA 
balances. About 99 percent of taxpayers with IRAs have accumulated 
balances of $1 million or less. However our group of interest was that 
small group of taxpayers with large IRA balances and estimates based 
on this small group may not be precise and have very wide associated 
confidence intervals. Because of the skewness of the distribution for 
taxpayers with IRA balances greater than $25 million, we used a 
statistical technique referred to as bootstrapping or resampling to 
estimate the confidence interval. 

About 5 percent of the estimated taxpayers with IRAs had at least one 
associated IRA with blank FMV information. We treated the blank FMVs 
as zeros. If these IRAs did not, in fact, have zero balances, they 
could affect our estimates' upper bound considerably. However, IRS 
officials told us they generally treat blank FMVs as zeros based on 
their understanding of IRA custodians filing practice. We compared 
Form 5498 information for particular IRA owners to information from 
their income tax and Form 1099R information returns. Working with IRS, 
we identified a number of reasons why blank FMVs could be zeros such 
as: (1) the entire account balance was distributed; (2) the balance 
was rolled over to another IRA; (3) the owner of the IRA was deceased 
and IRA assets were transferred to a beneficiary; (4) tax year 
contributions were made to a new IRA account for a prior calendar year. 

In addition to the number of taxpayers and FMVs for their aggregated 
IRAs, we presented the data for two separate groups: 1) those with IRA 
balances of $1 million or less and 2) those with IRA balances of more 
than $5 million and the confidence intervals associated with the 
estimates. We do not report on taxpayers with IRA balances greater 
than $1 million to $5 million to avoid disclosure of taxpayer 
information. 

We compared the two groups on three types of IRAs--traditional, Roth, 
and other IRAs that included employer-sponsored SEP and SIMPLE IRAs. 
We used eight categories of AGI, which is the individual's gross 
income minus adjustments that include deductions for trade or business 
expenses, losses from the sale or exchange of property, contributions 
to pension and other retirement plans and alimony payments. Our AGI 
categories were: 

* $0 or less, 

* $1 to $20,000, 

* $20,001 to $50,000, 

* $50,001 to $100,000, 

* $100,001 to $200,000, 

* $200,001 to $500,000, 

* $500,001 to $1,000,000, and: 

* Greater than $1,000,000. 

About 1 percent to 2 percent of the taxpayers reported zero AGI. We 
did not use the modified AGI used to determine eligibility for IRA 
contributions which added certain items such as foreign housing 
expenses and student loan deductions back to the AGI. For the filing 
status comparison, we used three categories--single, married filing 
jointly and others, which included married filers who were filing 
separately, head of household, and qualifying widow(er). For the 
comparison of age we used 2 categories: those younger than age 65 and 
those age 65 and older. As our unit of analysis was the taxpaying 
unit, our age-65-and-older category included the filer, spouse, or 
both who were age 65 or older. To assess the reliability of the data 
we used, we reviewed IRS documentation and interviewed agency 
officials familiar with the data. We determined that these data were 
sufficiently reliable for the purposes of this report. However, the 
IRS SOI sample may not provide a precise estimate of the number of 
taxpayers or other quantities when the number of taxpayers in a 
particular reporting group is very small.[Footnote 105] 

To provide perspective on what might be considered a large IRA, we 
illustrated how much an individual could potentially accumulate in an 
IRA based on the statutory limits on annual contributions (see table 
5) Specifically, we developed one scenario assuming maximum IRA 
contributions from 1975 through 2011 (the same year as our SOI 
analysis). Given that rollovers from employer plans have become the 
predominant source of funds into IRAs, we also developed a second 
scenario assuming the maximum combined employer and employee 
contributions from 1980 to 2011.[Footnote 106] For simplicity, the 
defined contribution (DC) plan scenario assumed an individual 
participating in a single employer plan and rolling over a DC balance 
into a newly established IRA in 2011.[Footnote 107] Both scenarios 
also assumed maximum catch-up contribution for individuals age 50 and 
older beginning in 2002. Table 6 shows the assumed contributions for 
the IRA and DC plan scenarios. The two scenarios are intended to 
illustrate the upper bound on total contributions over time based on 
the statutory annual limits for each type of tax-preferred retirement 
account and do not reflect how much individuals typically choose to 
contribute.[Footnote 108] Our scenarios illustrate balances 
accumulated by an individual in an IRA or DC plan. For a married 
couple filing jointly, both spouses in concept could contribute at the 
statutory maximum.[Footnote 109] 

Table 5: Annual Contribution Dollar Limits for Individual Retirement 
Plans (IRA) and Defined Contribution (DC) Plans, 1975-2014: 

Year: 1975; 
IRA[A]: 
Annual contributions: 1,500; 
Catch-up[C]: N/A; 
DC plan[B]: 
Employee elective deferral[D]: N/A; 
Combined employee and employer contributions: N/A; 
Catch-up[C,D]: N/A. 

Year: 1976; 
IRA[A]: 
Annual contributions: 1,500; 
Catch-up[C]: N/A; 
DC plan[B]: 
Employee elective deferral[D]: N/A; 
Combined employee and employer contributions: N/A; 
Catch-up[C, D]: N/A. 

Year: 1977; 
IRA[A]: 
Annual contributions: 1,500; 
Catch-up[C]: N/A; 
DC plan[B]: 
Employee elective deferral[D]: N/A; 
Combined employee and employer contributions: N/A; 
Catch-up[C, D]: N/A. 

Year: 1978; 
IRA[A]: 
Annual contributions: 1,500; 
Catch-up[C]: N/A; 
DC plan[B]: 
Employee elective deferral[D]: N/A; 
Combined employee and employer contributions: N/A; 
Catch-up[C, D]: N/A. 

Year: 1979; 
IRA[A]: 
Annual contributions: 1,500; 
Catch-up[C]: N/A; 
DC plan[B]: 
Employee elective deferral[D]: N/A; 
Combined employee and employer contributions: N/A; 
Catch-up[C, D]: N/A. 

Year: 1980; 
IRA[A]: 
Annual contributions: 1,500; 
Catch-up[C]: N/A; 
DC plan[B]: 
Employee elective deferral[D]: N/A; 
Combined employee and employer contributions: 36,875; 
Catch-up[C, D]: N/A. 

Year: 1981; 
IRA[A]: 
Annual contributions: 1,500; 
Catch-up[C]: N/A; 
DC plan[B]: 
Employee elective deferral[D]: N/A; 
Combined employee and employer contributions: 41,500; 
Catch-up[C, D]: N/A. 

Year: 1982; 
IRA[A]: 
Annual contributions: 2,000; 
Catch-up[C]: N/A; 
DC plan[B]: 
Employee elective deferral[D]: N/A; 
Combined employee and employer contributions: 45,475; 
Catch-up[C, D]: N/A. 

Year: 1983; 
IRA[A]: 
Annual contributions: 2,000; 
Catch-up[C]: N/A; 
DC plan[B]: 
Employee elective deferral[D]: N/A; 
Combined employee and employer contributions: 30,000; 
Catch-up[C, D]: N/A. 

Year: 1984; 
IRA[A]: 
Annual contributions: 2,000; 
Catch-up[C]: N/A; 
DC plan[B]: 
Employee elective deferral[D]: N/A; 
Combined employee and employer contributions: 30,000; 
Catch-up[C, D]: N/A. 

Year: 1985; 
IRA[A]: 
Annual contributions: 2,000; 
Catch-up[C]: N/A; 
DC plan[B]: 
Employee elective deferral[D]: N/A; 
Combined employee and employer contributions: 30,000; 
Catch-up[C, D]: N/A. 

Year: 1986; 
IRA[A]: 
Annual contributions: 2,000; 
Catch-up[C]: N/A; 
DC plan[B]: 
Employee elective deferral[D]: N/A; 
Combined employee and employer contributions: 30,000; 
Catch-up[C, D]: N/A. 

Year: 1987; 
IRA[A]: 
Annual contributions: 2,000; 
Catch-up[C]: N/A; 
DC plan[B]: 
Employee elective deferral[D]: 7,000; 
Combined employee and employer contributions: 30,000; 
Catch-up[C, D]: N/A. 

Year: 1988; 
IRA[A]: 
Annual contributions: 2,000; 
Catch-up[C]: N/A; 
DC plan[B]: 
Employee elective deferral[D]: 7,313; 
Combined employee and employer contributions: 30,000; 
Catch-up[C, D]: N/A. 

Year: 1989; 
IRA[A]: 
Annual contributions: 2,000; 
Catch-up[C]: N/A; 
DC plan[B]: 
Employee elective deferral[D]: 7,627; 
Combined employee and employer contributions: 30,000; 
Catch-up[C, D]: N/A. 

Year: 1990; 
IRA[A]: 
Annual contributions: 2,000; 
Catch-up[C]: N/A; 
DC plan[B]: 
Employee elective deferral[D]: 7,979; 
Combined employee and employer contributions: 30,000; 
Catch-up[C, D]: N/A. 

Year: 1991; 
IRA[A]: 
Annual contributions: 2,000; 
Catch-up[C]: N/A; 
DC plan[B]: 
Employee elective deferral[D]: 8,475; 
Combined employee and employer contributions: 30,000; 
Catch-up[C, D]: N/A. 

Year: 1992; 
IRA[A]: 
Annual contributions: 2,000; 
Catch-up[C]: N/A; 
DC plan[B]: 
Employee elective deferral[D]: 8,728; 
Combined employee and employer contributions: 30,000; 
Catch-up[C, D]: N/A. 

Year: 1993; 
IRA[A]: 
Annual contributions: 2,000; 
Catch-up[C]: N/A; 
DC plan[B]: 
Employee elective deferral[D]: 8,994; 
Combined employee and employer contributions: 30,000; 
Catch-up[C, D]: N/A. 

Year: 1994; 
IRA[A]: 
Annual contributions: 2,000; 
Catch-up[C]: N/A; 
DC plan[B]: 
Employee elective deferral[D]: 9,240; 
Combined employee and employer contributions: 30,000; 
Catch-up[C, D]: N/A. 

Year: 1995; 
IRA[A]: 
Annual contributions: 2,000; 
Catch-up[C]: N/A; 
DC plan[B]: 
Employee elective deferral[D]: 9,240; 
Combined employee and employer contributions: 30,000; 
Catch-up[C, D]: N/A. 

Year: 1996; 
IRA[A]: 
Annual contributions: 2,000; 
Catch-up[C]: N/A; 
DC plan[B]: 
Employee elective deferral[D]: 9,500; 
Combined employee and employer contributions: 30,000; 
Catch-up[C, D]: N/A. 

Year: 1997; 
IRA[A]: 
Annual contributions: 2,000; 
Catch-up[C]: N/A; 
DC plan[B]: 
Employee elective deferral[D]: 9,500; 
Combined employee and employer contributions: 30,000; 
Catch-up[C, D]: N/A. 

Year: 1998; 
IRA[A]: 
Annual contributions: 2,000; 
Catch-up[C]: N/A; 
DC plan[B]: 
Employee elective deferral[D]: 10,000; 
Combined employee and employer contributions: 30,000; 
Catch-up[C, D]: N/A. 

Year: 1999; 
IRA[A]: 
Annual contributions: 2,000; 
Catch-up[C]: N/A; 
DC plan[B]: 
Employee elective deferral[D]: 10,000; 
Combined employee and employer contributions: 30,000; 
Catch-up[C, D]: N/A. 

Year: 2000; 
IRA[A]: 
Annual contributions: 2,000; 
Catch-up[C]: N/A; 
DC plan[B]: 
Employee elective deferral[D]: 10,500; 
Combined employee and employer contributions: 30,000; 
Catch-up[C, D]: N/A. 

Year: 2001; 
IRA[A]: 
Annual contributions: 2,000; 
Catch-up[C]: N/A; 
DC plan[B]: 
Employee elective deferral[D]: 10,500; 
Combined employee and employer contributions: 35,000; 
Catch-up[C, D]: N/A. 

Year: 2002; 
IRA[A]: 
Annual contributions: 3,000; 
Catch-up[C]: 500; 
DC plan[B]: 
Employee elective deferral[D]: 11,000; 
Combined employee and employer contributions: 40,000; 
Catch-up[C, D]: 1,000. 

Year: 2003; 
IRA[A]: 
Annual contributions: 3,000; 
Catch-up[C]: 500; 
DC plan[B]: 
Employee elective deferral[D]: 12,000; 
Combined employee and employer contributions: 40,000; 
Catch-up[C, D]: 2,000. 

Year: 2004; 
IRA[A]: 
Annual contributions: 3,000; 
Catch-up[C]: 500; 
DC plan[B]: 
Employee elective deferral[D]: 13,000; 
Combined employee and employer contributions: 41,000; 
Catch-up[C, D]: 3,000. 

Year: 2005; 
IRA[A]: 
Annual contributions: 4,000; 
Catch-up[C]: 500; 
DC plan[B]: 
Employee elective deferral[D]: 14,000; 
Combined employee and employer contributions: 42,000; 
Catch-up[C, D]: 4,000. 

Year: 2006; 
IRA[A]: 
Annual contributions: 4,000; 
Catch-up[C]: 1,000; 
DC plan[B]: 
Employee elective deferral[D]: 15,000; 
Combined employee and employer contributions: 44,000; 
Catch-up[C, D]: 5,000. 

Year: 2007; 
IRA[A]: 
Annual contributions: 4,000; 
Catch-up[C]: 1,000; 
DC plan[B]: 
Employee elective deferral[D]: 15,500; 
Combined employee and employer contributions: 45,000; 
Catch-up[C, D]: 5,000. 

Year: 2008; 
IRA[A]: 
Annual contributions: 5,000; 
Catch-up[C]: 1,000; 
DC plan[B]: 
Employee elective deferral[D]: 15,500; 
Combined employee and employer contributions: 46,000; 
Catch-up[C, D]: 5,000. 

Year: 2009; 
IRA[A]: 
Annual contributions: 5,000; 
Catch-up[C]: 1,000; 
DC plan[B]: 
Employee elective deferral[D]: 16,500; 
Combined employee and employer contributions: 49,000; 
Catch-up[C, D]: 5,500. 

Year: 2010; 
IRA[A]: 
Annual contributions: 5,000; 
Catch-up[C]: 1,000; 
DC plan[B]: 
Employee elective deferral[D]: 16,500; 
Combined employee and employer contributions: 49,000; 
Catch-up[C, D]: 5,500. 

Year: 2011; 
IRA[A]: 
Annual contributions: 5,000; 
Catch-up[C]: 1,000; 
DC plan[B]: 
Employee elective deferral[D]: 16,500; 
Combined employee and employer contributions: 49,000; 
Catch-up[C, D]: 5,500. 

Year: 2012; 
IRA[A]: 
Annual contributions: 5,000; 
Catch-up[C]: 1,000; 
DC plan[B]: 
Employee elective deferral[D]: 17,000; 
Combined employee and employer contributions: 50,000; 
Catch-up[C, D]: 5,500. 

Year: 2013; 
IRA[A]: 
Annual contributions: 5,500; 
Catch-up[C]: 1,000; 
DC plan[B]: 
Employee elective deferral[D]: 17,500; 
Combined employee and employer contributions: 51,000; 
Catch-up[C, D]: 5,500. 

Year: 2014; 
IRA[A]: 
Annual contributions: 5,500; 
Catch-up[C]: 1,000; 
DC plan[B]: 
Employee elective deferral[D]: 17,500; 
Combined employee and employer contributions: 52,000; 
Catch-up[C, D]: 5,500. 

Source: GAO analysis of legislation and Internal Revenue Service 
publications. GAO-15-16. 

Notes: Generally, individual contributions to an IRA or DC plan are 
limited to the lesser of a specific dollar amount or 100 percent of 
taxable compensation for the year. For a married couple filing a joint 
tax return, combined IRA contributions cannot exceed the taxable 
compensation reported on the joint return regardless of which spouse 
earned the compensation. Compensation generally includes wages, 
salaries, professional fees, bonuses, and other amounts taxpayers 
receive for providing personal services and from commissions, self-
employment income, alimony and separate maintenance payments taxpayers 
receive, and nontaxable combat pay. Taxable compensation does not 
include earnings and profits from property, pension or annuity income, 
deferred compensation received, income from partnerships for which the 
taxpayer did not provide services that are material income-producing 
factors, and any amounts excluded from income, such as foreign earned 
income and housing costs. N/A = Not applicable. 

[A] Under the Employee Retirement Income Security Act of 1974, the 
contribution limit was originally the lesser of $1,500 or 15 percent 
of the individual's compensation for individuals not covered by 
employer plans. Pub. L. No. 93-406, § 2002(a), 88 Stat. 829, 958(Sept. 
2, 1974). The Economic Recovery Tax Act of 1981 increased the 
contribution limit to the lesser of $2,000 or 100 percent of the 
individual's compensation and allowed contributions by those covered 
by employer plans. Pub. L. No. 97-34, § 311, 95 Stat. 172, 274-283 
(Aug. 13, 1981). The Tax Reform Act of 1986 restricted eligibility for 
tax-deductible contributions for individuals covered by employer plans 
depending on income and filing status. Pub. L. No. 99-514, § 1101(a), 
100 Stat. 2085, 2411-13 (Oct. 22, 1986). The Taxpayer Relief Act of 
1997 established and allowed after-tax contributions to Roth IRAs. 
Pub. L. No. 105-34, § 302(a), 111 Stat. 788, 825-28 (Aug. 5, 1997). 
The Economic Growth and Tax Relief Reconciliation Act of 2001 
increased the contribution limit in years beginning in 2002 and 
indexed the limit for inflation (in $500 increments) beginning in 2008 
through years beginning in 2010. Pub. L. No. 107-16, §§ 601(a) and 
901, 115 Stat. 38, 94-95 and 150 (June 7, 2001). The Pension 
Protection Act of 2006 made indexing for contribution limits 
permanent. Pub. L. No. 109-280, § 811, 120 Stat. 780, 996 (Aug. 17, 
2006). 

[B] Provisions establishing the most predominant type of DC plan, the 
401(k) plan, became effective pursuant to the Revenue Act of 1978. 
Pub. L. No. 95-600, § 135, 92 Stat. 2763, 2785-87 (Nov. 6, 1978). The 
Tax Equity and Fiscal Responsibility Act of 1982 reduced the maximum 
allowable annual contribution to a DC plan to the lesser of $30,000 or 
25 percent of compensation and suspended all cost of living 
adjustments until 1986. Pub. L. No. 97-324, § 235(a), 96 Stat. 324, 
505 (Sept. 3, 1982). The Tax Reform Act of 1986 imposed a limit on 
employee elective tax-deferred contributions, but maintained the 
overall annual contribution limit of $30,000 for all employer and 
employee contributions. Pub. L. No. 99-514, § 1105(a), 100 Stat. 2085, 
2417-19 (Oct. 22, 1986). The Economic Growth and Tax Relief 
Reconciliation Act of 2001 increased the contribution limit and the 
employees elective deferral for years beginning in 2002 and indexed 
the limit for elective deferrals for inflation (in $500 increments) 
beginning in 2007 through 2010. Pub. L. No. 107-16, §§ 611(b,) (d), 
and 901, 115 Stat. 38, 97-98 and 150 (June 7, 2001). The Pension 
Protection Act of 2006 made indexing for contribution limits 
permanent. Pub. L. No.109-280, § 811, 120 Stat. 780, 996 (Aug. 17, 
2006). 

[C] Catch-up contributions for individuals age 50 and older were first 
allowed in 2002 pursuant to the Economic Growth and Tax Relief 
Reconciliation Act of 2001. Pub. L. No. 107-16, §§ 601(a) and 631(a), 
115 Stat. 38, 94, 111-12 (June 7, 2001). Catch-up provisions were made 
permanent pursuant to the Pension Protection Act of 2006. Pub. L. No. 
109-280, § 811, 120 Stat. 780, 996 (Aug. 17, 2006). 

[D] The statutory elective deferral and catch-up contribution limits 
apply to employees who participate in 401(k), 403(b), most 457 plans, 
and the Thrift Savings Plan for federal employees. In addition to the 
statutory limits, employers may set plan-specific limits, in part, to 
ensure that the plans they sponsor pass statutory and regulatory 
requirements, such as the requirement that contributions or benefits 
not be skewed too heavily in favor of highly compensated employees. 

[End of table] 

Table 6: Assumed Contributions (Including Catch-up) from 1975 to 2011 
under Two Illustrative Scenarios: 

Year: 1975; 
IRA maximum contributions, 1975-2011[A]: 1,500; 
Maximum employer and employee contributions, 1980-2011[B]: N/A. 

Year: 1976; 
IRA maximum contributions, 1975-2011[A]: 1,500; 
Maximum employer and employee contributions, 1980-2011[B]: N/A. 

Year: 1977; 
IRA maximum contributions, 1975-2011[A]: 1,500; 
Maximum employer and employee contributions, 1980-2011[B]: N/A. 

Year: 1978; 
IRA maximum contributions, 1975-2011[A]: 1,500; 
Maximum employer and employee contributions, 1980-2011[B]: N/A. 

Year: 1979; 
IRA maximum contributions, 1975-2011[A]: 1,500; 
Maximum employer and employee contributions, 1980-2011[B]: N/A. 

Year: 1980; 
IRA maximum contributions, 1975-2011[A]: 1,500; 
Maximum employer and employee contributions, 1980-2011[B]: 36,875. 

Year: 1981; 
IRA maximum contributions, 1975-2011[A]: 1,500; 
Maximum employer and employee contributions, 1980-2011[B]: 41,500. 

Year: 1982; 
IRA maximum contributions, 1975-2011[A]: 2,000; 
Maximum employer and employee contributions, 1980-2011[B]: 45,475. 

Year: 1983; 
IRA maximum contributions, 1975-2011[A]: 2,000; 
Maximum employer and employee contributions, 1980-2011[B]: 30,000. 

Year: 1984; 
IRA maximum contributions, 1975-2011[A]: 2,000; 
Maximum employer and employee contributions, 1980-2011[B]: 30,000. 

Year: 1985; 
IRA maximum contributions, 1975-2011[A]: 2,000; 
Maximum employer and employee contributions, 1980-2011[B]: 30,000. 

Year: 1986; 
IRA maximum contributions, 1975-2011[A]: 2,000; 
Maximum employer and employee contributions, 1980-2011[B]: 30,000. 

Year: 1987; 
IRA maximum contributions, 1975-2011[A]: 2,000; 
Maximum employer and employee contributions, 1980-2011[B]: 30,000. 

Year: 1988; 
IRA maximum contributions, 1975-2011[A]: 2,000; 
Maximum employer and employee contributions, 1980-2011[B]: 30,000. 

Year: 1989; 
IRA maximum contributions, 1975-2011[A]: 2,000; 
Maximum employer and employee contributions, 1980-2011[B]: 30,000. 

Year: 1990; 
IRA maximum contributions, 1975-2011[A]: 2,000; 
Maximum employer and employee contributions, 1980-2011[B]: 30,000. 

Year: 1991; 
IRA maximum contributions, 1975-2011[A]: 2,000; 
Maximum employer and employee contributions, 1980-2011[B]: 30,000. 

Year: 1992; 
IRA maximum contributions, 1975-2011[A]: 2,000; 
Maximum employer and employee contributions, 1980-2011[B]: 30,000. 

Year: 1993; 
IRA maximum contributions, 1975-2011[A]: 2,000; 
Maximum employer and employee contributions, 1980-2011[B]: 30,000. 

Year: 1994; 
IRA maximum contributions, 1975-2011[A]: 2,000; 
Maximum employer and employee contributions, 1980-2011[B]: 30,000. 

Year: 1995; 
IRA maximum contributions, 1975-2011[A]: 2,000; 
Maximum employer and employee contributions, 1980-2011[B]: 30,000. 

Year: 1996; 
IRA maximum contributions, 1975-2011[A]: 2,000; 
Maximum employer and employee contributions, 1980-2011[B]: 30,000. 

Year: 1997; 
IRA maximum contributions, 1975-2011[A]: 2,000; 
Maximum employer and employee contributions, 1980-2011[B]: 30,000. 

Year: 1998; 
IRA maximum contributions, 1975-2011[A]: 2,000; 
Maximum employer and employee contributions, 1980-2011[B]: 30,000. 

Year: 1999; 
IRA maximum contributions, 1975-2011[A]: 2,000; 
Maximum employer and employee contributions, 1980-2011[B]: 30,000. 

Year: 2000; 
IRA maximum contributions, 1975-2011[A]: 2,000; 
Maximum employer and employee contributions, 1980-2011[B]: 30,000. 

Year: 2001; 
IRA maximum contributions, 1975-2011[A]: 2,000; 
Maximum employer and employee contributions, 1980-2011[B]: 35,000. 

Year: 2002; 
IRA maximum contributions, 1975-2011[A]: 3,500; 
Maximum employer and employee contributions, 1980-2011[B]: 41,000. 

Year: 2003; 
IRA maximum contributions, 1975-2011[A]: 3,500; 
Maximum employer and employee contributions, 1980-2011[B]: 42,000. 

Year: 2004; 
IRA maximum contributions, 1975-2011[A]: 3,500; 
Maximum employer and employee contributions, 1980-2011[B]: 44,000. 

Year: 2005; 
IRA maximum contributions, 1975-2011[A]: 4,500; 
Maximum employer and employee contributions, 1980-2011[B]: 46,000. 

Year: 2006; 
IRA maximum contributions, 1975-2011[A]: 5,000; 
Maximum employer and employee contributions, 1980-2011[B]: 49,000. 

Year: 2007; 
IRA maximum contributions, 1975-2011[A]: 5,000; 
Maximum employer and employee contributions, 1980-2011[B]: 50,000. 

Year: 2008; 
IRA maximum contributions, 1975-2011[A]: 6,000; 
Maximum employer and employee contributions, 1980-2011[B]: 51,000. 

Year: 2009; 
IRA maximum contributions, 1975-2011[A]: 6,000; 
Maximum employer and employee contributions, 1980-2011[B]: 54,500. 

Year: 2010; 
IRA maximum contributions, 1975-2011[A]: 6,000; 
Maximum employer and employee contributions, 1980-2011[B]: 54,500. 

Year: 2011; 
IRA maximum contributions, 1975-2011[A]: 6,000; 
Maximum employer and employee contributions, 1980-2011[B]: 54,500. 

Year: Total contributions; 
IRA maximum contributions, 1975-2011[A]: $99,500; 
Maximum employer and employee contributions, 1980-2011[B]: $1,185,350. 

Source: GAO analysis. GAO-15-16. 

Notes: Totals reflect maximum contributions under each scenario and do 
not reflect any investment returns, investment expenses, or 
administrative fees. N/A = Not applicable. 

[A] The IRA scenario reflects maximum allowable contributions 
(including the catch-up limit for those age 50 and older) to a 
traditional IRA. Individuals may contribute to a traditional IRA, a 
Roth IRA or both, but the total annual IRA contribution for all IRAs 
cannot exceed the lesser of the annual amount or total taxable 
compensation. For a Roth IRA, the maximum contributions for 1998 to 
2011 would be $57,000. 

[B] This scenario reflects the upper bound on annual contributions 
(including the catch-up limit for those age 50 and older) to a single 
employer DC plan. Our prior work has shown that few contribute at this 
level in any given year. For example, about one-tenth of one percent 
of DC plan participants contributed at or above the combined employer-
employee contribution limit for 2010. 

[End of table] 

To illustrate how much an individual could accumulate under each 
scenario, we reviewed historical stock returns, specifically the 
Standard & Poor's 500 broad stock index return. Intended to illustrate 
possible accumulations based on the upper bounds on contributions, the 
two contribution scenarios assuming 100 percent investment in the 
stock market are not intended to represent how individuals typically 
choose to invest. As shown in table 7, we also looked at a range of 
other possible asset allocations: (1) a 70-percent investment in the 
S&P 500 and a 30-percent investment in corporate bonds; (2) a glide 
path starting with a 70-percent investment in the S&P 500 and a 30-
percent investment in corporate bonds, and shifting over time to end 
with a 30-percent investment in the S&P 500 and a 70-percent 
investment in corporate bonds; (3) a 30-percent investment in the S&P 
500 and a 70-percent investment in corporate bonds; and (4) a 100-
percent investment in corporate bonds. For the asset allocations with 
a mix of stocks and bonds, the portfolio was rebalanced annually. We 
also calculated the DC contribution scenario with investment returns 
equal to historical interest rates reported by the Social Security 
trustees for special-issue government bonds as a proxy for an 
accumulation with a less aggressive investment allocation.[Footnote 
110] The scenarios do not reflect any investment or administrative 
fees and expenses.[Footnote 111] Likewise, the scenarios do not 
reflect any leakage from withdrawals or employer plan loans over the 
period.[Footnote 112] We also calculated the rate of return necessary 
to accumulate a balance of $1 million or $5 million under each 
scenario. 

Table 7: Alternate Asset Allocation Assumptions and Ending Balances 
for the Maximum Combined Employer-Employee Contribution Scenario, 1980-
2011: 

Asset allocation: 100 percent S&P 500 stock investment; 
Ending balance: $7.27 million. 

Asset allocation: Mix of 70 percent S&P 500 and 30 percent in 
corporate bonds[A]; 
Ending balance: $7.88 million. 

Asset allocation: Glide path starting with 70-percent investment in 
the S&P 500 and 30-percent investment in corporate bonds, and shifting 
over time to end with 30-percent investment in the S&P 500 and 70 
percent investment in corporate bonds[A]; 
Ending balance: $8.59 million. 

Asset allocation: Mix of 30 percent S&P 500 and 70 percent in 
corporate bonds[A]; 
Ending balance: $7.74 million. 

Asset allocation: 100 percent investment in corporate bonds; 
Ending balance: $7.08 million. 

Asset allocation: Investment returns equal to historical interest 
rates for Social Security; 
Ending balance: $3.38 million. 

Source: GAO analysis. GAO-15-16. 

Note: This scenario reflects the upper bound on annual contributions 
(including the catch-up limit for those age 50 and older) to a single 
employer DC plan. Our prior work has shown that few contribute at this 
level in any given year. For example, about one-tenth of one percent 
of DC plan participants contributed at or above the combined employer-
employee contribution limit for 2010. 

[A] For the asset allocations with a mix of stocks and bonds, the 
portfolio was rebalanced annually. 

[End of table] 

How IRAs Can Become Large: 

To examine how IRA balances can become large, we conducted literature 
reviews on IRA investment strategies and held semistructured 
interviews with more than 60 finance industry stakeholders, government 
officials, and academics. We conducted initial literature reviews on 
general topics and key words related to IRAs, contribution limits, and 
tax policy. We selected a first round of interviewees from these 
literature reviews and from referrals from GAO stakeholders who have 
conducted work on retirement, finance, and tax policy. We sought 
referrals for additional interviews from our first round of 
interviewees, as well as from more targeted literature reviews based 
on our initial reviews. 

We also searched for documentary evidence of the IRA investment 
strategies we identified through our interviews and literature 
reviews. We could not determine IRA investment strategies from IRS 
data because the IRS does not collect data on asset types held in 
IRAs. Given this limitation, we searched publicly available filings 
with the Securities and Exchange Commission, such as the Form S-1 
filed by companies seeking to conduct an initial public offering of 
their stock on public markets, to research the number of nonpublicly 
traded shares beneficially owned by directors, executive officers, and 
holders of more than five percent of any class of the company's voting 
securities. These individuals often comprise the company's founders. 
We also searched publicly available Form 5500 filings with the 
Department of Labor (DOL) for the employer-sponsored DC retirement 
plans of selected private equity firms and hedge funds, primarily 
401(k) and profit sharing plans. Specifically, we searched the filings 
of private equity firms and hedge funds that (1) reported holding 
partnership interests; (2) are members of the Private Equity Growth 
Capital Council, an advocacy, communications, and research 
organization and resource center for the private equity industry; or 
(3) are cited in the Forbes list of the highest earning hedge fund 
managers and traders of 2013. The findings of this analysis cannot be 
generalized to the entire population of private equity firms and hedge 
funds operating in the United States but provides insights into one 
potential alternate strategy for accumulating large IRAs. 

Our framework for evaluating the performance of tax expenditures draws 
on long-standing criteria we have described--economic efficiency, 
equity, simplicity, transparency, and administrability--that can be 
used to evaluate tax policy.[Footnote 113] In our review, we focus 
primarily on (1) the extent to which strategies a few individuals may 
use to accumulate large IRA balances align with the intended purpose 
of IRAs; (2) whether tax treatment of individuals who may engage in 
these strategies is fair and equitable, and (3) the consequences for 
the federal budget of these IRA strategies. 

To provide context for how certain types of nonpublicly traded shares 
and partnership interests can generate IRA balances of tens of 
millions of dollars, we constructed two examples. The first example 
demonstrates how a company founder can invest in nonpublicly traded 
shares of a newly created company using an IRA, and how these 
nonpublicly traded shares can grow in value if the company raises 
capital from outside investors and becomes a publicly traded 
corporation. The second example demonstrates how a key employee at a 
private equity firm can invest in a particular type of partnership 
interest called a profits interest using an IRA or DC plan, and how 
these profits interests can grow in value if the private investment 
partnership is successful. 

Assessing IRS Enforcement: 

To assess IRS's examinations of IRA rules and provisions, we developed 
criteria for evaluating an enforcement program on IRAs. Generally, the 
basis for the criteria included relevant laws and our previous work on 
tax administration and policy as well as our previous work and other 
organizations' work on good management practices.[Footnote 114] From 
our research, we concluded that the seven criteria in table 7 were 
appropriate. We shared the criteria with IRS examination officials. In 
response to the officials' comments, we considered potential resource 
and budget limitations in applying the criteria. 

To apply the criteria, we collected documentation on IRS enforcement 
procedures, such as relevant sections of the Internal Revenue Manual 
and other IRS publications on guidance for IRA compliance. We also 
interviewed relevant IRS enforcement officials with Small Business/ 
Self-Employed (SB/SE); Wage and Investment (W&I); the SB/SE Lead 
Development Center; Large Business and International Global High 
Wealth industry; National Research Program; IRS Chief Counsel; 
Research, Analysis and Statistics; Estate and Gift Tax; and Tax Forms 
and Publications. We then compared the findings of our research with 
the criteria. Table 8 summarizes our determination of how IRS 
performed on the criteria. 

Table 8: Criteria for Assessing Individual Retirement Account 
Enforcement: 

Criteria: Enforcement should cover key IRA laws; 
Basis of criteria: IRS is charged with enforcing laws, and the laws on 
IRA contributions, distributions, rollovers, and conversions are part 
of its responsibility; 
Criteria addressed if: IRS shows evidence that it operates programs 
that can address these laws, as shown by program procedures or other 
documentation. In applying this criterion, we will consider the 
importance IRS gives to IRA issues relative to other enforcement 
concerns, given resource limitations; 
Summary of the basis for assessment: 
* W&I's automated underreporter program checks for compliance with 
contributions and distributions using matching of taxpayer and third-
party filings; 
* SB/SE's Abusive Tax and Technical Issues (ATTI) team examines 
activity that may not comply with IRA laws; 
* SB/SE conducts field examinations, which can cover IRAs, according to 
the IRS's Internal Revenue Manual for all examinations[A]; 
* IRS has or has had special compliance projects targeting specific 
aspects of IRA noncompliance, such as for conversions and rollovers. 

Criteria: Enforcement procedures should take into account the 
cumulative tax-revenue effect of an improperly valued asset that the 
taxpayer contributed to a plan; 
Basis of criteria: IRAs may gain value over time. What starts as small 
noncompliance may grow into large noncompliance over the life of the 
investment; 
Criteria addressed if: Examination procedures or guidance direct 
examination staff to review the value of an IRA investment at the time 
a contribution is made and if examiners have guidance or assistance 
for determining the value of an asset in an IRA; 
Summary of the basis for assessment: 
* IRS examiner guidance generally instructs staff on reviewing 
valuation; 
* SB/SE job aides on IRAs instruct examiners to review valuation; 
* Engineering Department provides examination with assistance on 
valuation issues. Examiner guidance directs examiners to use 
Engineering Department for assistance; 
* IRS is limited in looking back on IRA issues because of the 3-year 
statute of limitations. 

Criteria: Enforcement management should collect and use data that will 
enable examiners to accurately weigh the noncompliance risk of 
potentially misreported IRA values; 
Basis of criteria: 
* GAO/AIMD-00-21.3.1, Standards for Internal Control in the Federal 
Government. In particular, that information should be recorded and 
communicated to management and other who need it in a form and within 
a time frame that enables them to carry out their responsibilities.
* Our 2012 guide for evaluating tax expenditures, GAO-13-167SP, 
stating that tax expenditures should be “simple, transparent, and 
administrable;” 
Criteria addressed if: IRS designs forms to enable the collection of 
data from tax forms that classifiers and examiners could use to 
efficiently and accurately determine whether a particular return is at 
risk of violating the key IRA rules described in the first criterion; 
Summary of the basis for assessment: 
* IRS collects information from custodians on IRA fair market values, 
rollovers, and conversions from Forms 5498 and 1099-R; 
* Starting in tax year 2014 and required for 2015, custodians are to 
report information on IRA asset types, which will help show what types 
of assets an IRA contains and help examiners weigh the risk of 
noncompliance. Plans to fully compile and digitize the information from 
both electronic and paper-filed returns have not been finalized. 

Criteria: IRAs should be considered in making enforcement plans; 
Basis of criteria: 
* OMB Circular A-11, on strategic planning, particularly on how 
executives should use the Strategic Plan to provide guidance to agency 
components for planning their program implementation; 
Criteria addressed if: IRS documentation shows that IRS describes IRAs 
in strategic planning documents such as its budget, strategic plan, 
division program letter, or similar planning tools. The criterion also 
could be addressed if IRS uses relevant data (such as examination 
results), if available, in making decisions about and allocating 
resources for IRA enforcement; 
Summary of the basis for assessment: 
* IRS explicitly has emphasized IRAs as an examination priority in 
multiple, agency-wide planning documents. For example, IRS's Fiscal 
Year 2015 budget describes the soft notice pilots for encouraging 
compliances with IRAs, an initiative to address prohibited 
transactions in IRAs, and requests increased funds for enforcement of 
employee retirement plans, which can be rolled into IRAs; 
* Other IRS strategic priorities could overlap with IRA compliance. 
For example, IRS's strategic plan mentions tax exempt retirement 
programs and financial instruments, which can feed into IRAs; 
* Treasury also lists as priorities enforcement on early distributions 
from retirement plans and offering additional guidance to facilitate 
rollovers and other issues relating to lifetime income from retirement 
plans; 
* IRS has a service-wide process for assessing the risk emerging 
issues, which may include IRA noncompliance. As part of this process, 
IRS developed a task team to study and make recommendations on how to 
better conduct enforcement on IRA noncompliance. The task team 
included representation from across IRS; 
* IRS examination management uses data to manage its workload, 
including the Lead Development Center database. Through this kind of 
data, IRS could measure progress toward goals, such as examination 
rates and tax changes. 

Criteria: Examiners should be trained to identify IRA potential 
compliance issues; 
Basis of criteria: GAO framework on training, GA0-04-546G; 
Criteria addressed if: Examiner training and guidance materials cover 
the key IRA rules identified in the first criterion, as well as the 
cumulative effect of long-term IRA noncompliance; 
Summary of the basis for assessment: 
* Training modules for new examiners covers IRA issues; 
* Examiners job aides provide direction on examining IRA issues; 
* New continuing professional education training covers prohibited 
transactions related to IRAs. 

Criteria: IRS should collaborate with the appropriate agency on 
enforcing laws on certain prohibited transactions that could lead to 
large, noncompliant IRAs; 
Basis of criteria: GAO framework for collaboration in GAO-06-15; 
and GAO-12-1022; 
Criteria addressed if: IRS shows documentation on how the agencies 
have agreed on an approach to share information and interpretations or 
rulings related to prohibited transactions that could lead to large 
IRAs; 
Summary of the basis for assessment: 
* Memorandum of understanding and an addendum to the memorandum exist 
that establishes procedures for IRS to communicate with DOL; 
* IRS is working on procedures to streamline its interaction with DOL, 
building off fact patterns similar to those in Peek v. Commissioner. 
IRS officials said they have kept DOL informed about their plans. 

Criteria: Examination management should collaborate with its own 
service and outreach functions to help the public better understand 
laws related to potential IRA investment; 
Basis of criteria: 
* IRS strategic plan and examination plan; 
* Project Management Institute standards; 
Criteria addressed if: IRS shows that procedures are in place for the 
examination and service functions to help inform each other about IRA 
compliance issues. Additionally, current guidance should reflect the 
issues identified in examination; 
Summary of the basis for assessment: 
* W&I has conducted a pilot program sending letters to certain 
taxpayers warning them of possible noncompliance; 
* IRS has a pamphlet warning taxpayers to be aware of IRA schemes; 
* IRS made IRA noncompliance one of its "Dirty Dozen Tax Scams" Most 
recently in 2011; 
* IRS publishes guidance directed at custodians or tax professionals 
to help encourage compliance with IRA rules. This guidance can go 
beyond simply filling out the lines on IRA information forms. For 
example, the 5498/1099-R instructions caution that investing in "non-
marketable securities (i.e. alternative assets) raises compliance 
risks; 
* Prohibited transaction rules, which are complex rules even for 
pension plan sponsors and their service providers, are covered on 
irs.gov and discussed in Publication 590. However, guidance in 
Publication 590 does not explicitly caution that nonpublic IRA assets 
are more susceptible to prohibited transactions than publicly 
traded assets; 
* The ATTI team meets quarterly to address new or potentially new 
issues that could pose a compliance risk. If the issue is appropriate 
for outreach, the team contacts the correct office. 

Source: GAO analysis. GAO-15-16. 

[End of table] 

We used statistics from several databases in our work on assessing IRS 
enforcement, including the Audit Information Management System, 
Examination Operational Automation Database, Publication 6961 data, 
Information Return Program Case Analysis System, and Lead Development 
Center database. To ensure the data's reliability, we reviewed 
documentation on the databases and, where necessary, interviewed 
agency officials. We determined that these data were sufficiently 
reliable for the purposes of this report. 

We conducted this performance audit from June 2013 through October 
2014 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: Illustration of Earnings and Tax Effects of Traditional 
and Roth Individual Retirement Accounts: 

Figure 10 shows the benefits a taxpayer might receive for investing in 
a tax-advantaged traditional or Roth individual retirement account 
(IRA) compared to taxable account or investments, given certain 
assumptions in four different types of investments: a traditional IRA, 
a Roth IRA, an investment or account that is taxed annually at 
ordinary income tax rates, and an investment that is subject to 
capital gains tax rules. The figure uses a simplified model to show 
the after-tax rates of return that result from these scenarios over a 
20-year period.[Footnote 115] Each case assumes earnings of $1,000 
before taxes for contribution in year 1 and distribution of the 
accumulated balance in year 20. Investment earnings over the 20-year 
period are assumed to be a constant pretax 5 percent. Assuming a 
constant federal ordinary income tax rate of 25 percent, the 
traditional IRA and Roth IRA achieve similar results although the tax 
benefits have different paths. For the traditional IRA, the individual 
can invest a $1,000 tax-deductible contribution in year 1, and taxes 
on the contribution and investment earnings are deferred until 
distribution. For the Roth IRA, the individual can invest $750 after 
tax with investment earnings tax-exempt at later distribution. While 
the amount contributed to the account is greater in the first year for 
the traditional IRA owner, the amount that is available for the 
taxpayer for consumption after taxes on distribution is the same for 
the traditional owner and the Roth owner. The traditional IRA owner 
puts the tax saving in the account to grow to ultimately pay the tax 
on the account; the Roth owner pays the tax upfront and has no further 
tax liability. For both Roth and traditional IRA accounts, the after-
tax rate of return is 5 percent. In contrast, the taxable account, 
which is subject to taxes on both the original earnings contributed as 
well as the annual investment earnings, has an annual after-tax rate 
of return of 3.75 percent. If an investment were held outside of a 
retirement account and subject to capital gains taxes only, there 
would be no initial deduction of amounts invested. Similar to the case 
of a traditional IRA account where tax on income is deferred until 
distribution, no capital gains tax would be owed until the asset was 
sold and gain was realized, which in the example happens at the end of 
the 20-year period. Upon sale, any gain would be subject to the 
capital gains tax rate. The capital gains tax rate is generally lower 
than the ordinary income tax rate that is applied to distributions 
from a traditional IRA. As a result of the deferral of tax until sale 
and the preferential capital gains tax rate, the after-tax rate of 
return for the capital gains asset would be 4.5 percent, less than if 
the asset were held in an IRA of either type but higher than if the 
investment had been made in a taxable account where income earned was 
taxed annually at ordinary income tax rates. 

Figure 10: Beginning and After-Tax Ending Balances for $1,000 in Pre-
Tax Earnings in a Traditional IRA, Roth IRA and Taxable Accounts over 
a 20-Year Period[A]: 

[Refer to PDF for image: vertical bar graph] 

Traditional IRA: 
Annual after-tax rate of return: 5.0%; 
Beginning balance: $1,000; 
Distribution, 20 years later: $1,990. 

Roth IRA: 
Annual after-tax rate of return: 5.0%; 
Beginning balance: $750; 
Distribution, 20 years later: $1,990. 

Taxable account: 
Annual after-tax rate of return: 3.75%; 
Beginning balance: $750; 
Distribution, 20 years later: $1,566. 

Capital gains treatment: 
Annual after-tax rate of return: 4.5%; 
Beginning balance: $750; 
Distribution, 20 years later: $1,804. 

Source: GAO analysis. GAO-15-16. 

Notes: Assumptions include a constant pre-tax rate of return on 
investment of 5 percent and a tax rate on ordinary income of 25 
percent, no distributions until year 20, and the taxpayer is not 
subject to 10 percent early withdrawal additional tax in year 20. 

[A] For $1,000 in earnings pretax, the individual is assumed to make a 
tax-deductible contribution of $1,000 to the traditional IRA. For the 
Roth IRA, the income taxable account, and the capital gains treatment, 
the individual contributes $750 after taxes. 

[End of figure] 

The simplified example above showed how contributions to traditional 
and Roth accounts can earn the same rate of return after taxes if tax 
rates do not change over time. If tax rates vary over time, this 
equivalence may not hold. For example, if an individual or household 
is subject to a relatively high tax rate when a contribution is made 
and a low tax rate when earnings are distributed, a traditional 
account would result in a higher rate of return. On the other hand, if 
tax rates are low when a contribution to a Roth account is made and 
rates are higher when funds are distributed, the Roth account would 
result in a higher rate of return.[Footnote 116] 

[End of section] 

Appendix III: Tables from Statistics of Income Data for Tax Year 2011: 

This appendix shows the confidence intervals for our analysis of the 
Statistics of Income (SOI) data about individual retirement accounts 
(IRA). 

Table 9: Estimated Median IRA Balances by Size of Individual 
Retirement Account (IRA) Balance, Tax Year 2011[A]: 

IRA Balance: Total Taxpayer with IRAs; 
Estimated median IRA balance ($1000): 36; 
95% confidence interval: 35-36. 

IRA Balance: $1 Million or Less; 
Estimated median IRA balance ($1000): 34; 
95% confidence interval: 33-35. 

IRA Balance: Greater than $1 million to $2 million; 
Estimated median IRA balance ($1000): 1,282; 
95% confidence interval: 1,258-1,311. 

IRA Balance: Greater than $2 million to $3 million; 
Estimated median IRA balance ($1000): 2,303; 
95% confidence interval: 2,235-2,362. 

IRA Balance: Greater than $3 million to $5 million; 
Estimated median IRA balance ($1000): 3,618; 
95% confidence interval: 3,521-3,658. 

IRA Balance: Greater than $5 million to $10 million; 
Estimated median IRA balance ($1000): 6,044; 
95% confidence interval: 5,782-6,455. 

IRA Balance: Greater than $10 million to $25 million; 
Estimated median IRA balance ($1000): 12,073; 
95% confidence interval: 11,469-12,559. 

IRA Balance: Greater than $25 million; 
Estimated median IRA balance ($1000): 69,237; 
95% confidence interval: 26,822-418,573. 

Source: GAO analysis of IRS data from Forms 1040, U.S. Individual 
Income Tax Returns; Forms 5498 IRA Contribution Information. 
GAO-15-16. 

Notes: 

[A] The taxpayer, as a taxpaying unit, may have more than one IRA 
owner. The IRA balance is the aggregate value for all IRAs (including 
inherited IRAs) associated with the taxpayer. We assumed the blank IRA 
fair market values are zero; the blank values could affect these 
estimates considerably. See appendix I for more details. 

[End of table] 

Table 10: Estimated Percent of Taxpayers with Individual Retirement 
Account (IRA) Balances of $1 Million or Less and More Than $5 Million 
and IRA Balances by Adjusted Gross Income, Tax Year 2011:[A] 

IRA balance: $1 Million or less; 

Adjusted gross income: 0 or less; 
Estimated percent of taxpayers: 1.5; 
95% confidence interval: 1.4-1.6. 

Adjusted gross income: $1 to $20,000; 
Estimated percent of taxpayers: 13.3; 
95% confidence interval: 13.0-13.6. 

Adjusted gross income: $20,000 to $50,000; 
Estimated percent of taxpayers: 24.0; 
95% confidence interval: 23.6-24.4. 

Adjusted gross income: $50,000 to $100,000; 
Estimated percent of taxpayers: 32.0; 
95% confidence interval: 31.6-32.4. 

Adjusted gross income: $100,000 to $200,000; 
Estimated percent of taxpayers: 21.2; 
95% confidence interval: 20.9-21.5. 

Adjusted gross income: $200,000 to $500,000; 
Estimated percent of taxpayers: 6.5; 
95% confidence interval: 6.4-6.6. 

Adjusted gross income: $500,000 to $1,000,000; 
Estimated percent of taxpayers: 1.0; 
95% confidence interval: 1.0-1.1. 

Adjusted gross income: Greater than $1,000,000; 
Estimated percent of taxpayers: 0.5; 
95% confidence interval: 0.5-0.5. 

IRA balance: Greater than $5 Million; 

Adjusted gross income: 0 or less; 
Estimated percent of taxpayers: [A]; 
95% confidence interval: [A]-[A]. 

Adjusted gross income: $1 to $20,000; 
Estimated percent of taxpayers: [A]; 
95% confidence interval: [A]-[A]. 

Adjusted gross income: $20,000 to $50,000; 
Estimated percent of taxpayers: [A]; 
95% confidence interval: [A]-[A]. 

Adjusted gross income: $50,000 to $100,000; 
Estimated percent of taxpayers: 2.7; 
95% confidence interval: 0.5-13.6. 

Adjusted gross income: $100,000 to $200,000; 
Estimated percent of taxpayers: 4.2; 
95% confidence interval: 0.9-17.8. 

Adjusted gross income: $200,000 to $500,000; 
Estimated percent of taxpayers: 35.6; 
95% confidence interval: 25.2-47.5. 

Adjusted gross income: $500,000 to $1,000,000; 
Estimated percent of taxpayers: 25.9; 
95% confidence interval: 18.5-35.0. 

Adjusted gross income: Greater than $1,000,000; 
Estimated percent of taxpayers: 29.4; 
95% confidence interval: 23.4-36.3. 

Source: GAO analysis of IRS data from Forms 1040, U.S. Individual 
Income Tax Returns; Forms 5498 IRA Contribution Information. 
GAO-15-16. 

Notes: 

[A] Estimates suppressed due to small cell counts. 

[B] The taxpayer, as a taxpaying unit, may have more than one IRA 
owner. The IRA balance is the aggregate value for all IRAs (including 
inherited IRAs) associated with the taxpayer. We assumed the blank IRA 
fair market values are zero; the blank values could affect these 
estimates considerably. See appendix I for more details. We do not 
report on taxpayers with IRA balances greater than $1 million to $5 
million to avoid disclosure of taxpayer information. 

[End of table] 

Table 11: Estimated Percent of Total IRA Balances by Size of IRA 
Balance, by Adjusted Gross Income, Tax Year 2011: 

IRA balance: $1 Million or less; 

Adjusted gross income: 0 or less; 
Estimated percent of total IRA balances: 1; 
95% confidence interval: 1-1. 

Adjusted gross income: $1 to $20,000; 
Estimated percent of total IRA balances: 7; 
95% confidence interval: 7-8. 

Adjusted gross income: $20,000 to $50,000; 
Estimated percent of total IRA balances: 16; 
95% confidence interval: 15-17. 

Adjusted gross income: $50,000 to $100,000; 
Estimated percent of total IRA balances: 31; 
95% confidence interval: 30-31. 

Adjusted gross income: $100,000 to $200,000; 
Estimated percent of total IRA balances: 29; 
95% confidence interval: 28-29. 

Adjusted gross income: $200,000 to $500,000; 
Estimated percent of total IRA balances: 12; 
95% confidence interval: 12-13. 

Adjusted gross income: $500,000 to $1,000,000; 
Estimated percent of total IRA balances: 2; 
95% confidence interval: 2-3. 

Adjusted gross income: Greater than $1,000,000; 
Estimated percent of total IRA balances: 1; 
95% confidence interval: 1-1. 

IRA balance: Greater than $5 Million; 

Adjusted gross income: 0 or less; 
Estimated percent of total IRA balances: [A]; 
95% confidence interval: [A]-[A]. 

Adjusted gross income: $1 to $20,000; 
Estimated percent of total IRA balances: [A]; 
95% confidence interval: [A]-[A]. 

Adjusted gross income: $20,000 to $50,000; 
Estimated percent of total IRA balances: [A]; 
95% confidence interval: [A]-[A]. 

Adjusted gross income: $50,000 to $100,000; 
Estimated percent of total IRA balances: 2; 
95% confidence interval: [B]-5. 

Adjusted gross income: $100,000 to $200,000; 
Estimated percent of total IRA balances: 2; 
95% confidence interval: IRA balance: [B]-5. 

Adjusted gross income: $200,000 to $500,000; 
Estimated percent of total IRA balances: 63; 
95% confidence interval: 27-99. 

Adjusted gross income: $500,000 to $1,000,000; 
Estimated percent of total IRA balances: 11; 
95% confidence interval: [B]-23. 

Adjusted gross income: Greater than $1,000,000; 
Estimated percent of total IRA balances: 20; 
95% confidence interval: 0-39. 

Source: GAO analysis of IRS data from Forms 1040, U.S. Individual 
Income Tax Returns; Forms 5498 IRA Contribution Information. 
GAO-15-16. 

Notes: The taxpayer, as a taxpaying unit, may have more than one IRA 
owner. The IRA balance is the aggregate value for all IRAs (including 
inherited IRAs) associated with the taxpayer. We assumed the blank IRA 
fair market values are zero; the blank values could affect these 
estimates considerably. See appendix I for more details. We do not 
report on taxpayers with IRA balances greater than $1 million to $5 
million to avoid disclosure of taxpayer information. 

[A] Estimates suppressed due to small cell counts. 

[B] The distributions for these estimates are so skewed that the usual 
estimation methods do not produce an accurate lower bound. 

[End of table] 

[End of section] 

Appendix IV: Examples of Strategies to Accumulate Large Individual 
Retirement Accounts: 

The two examples below demonstrate how a small number of individuals 
could generate large individual retirement account (IRA) balances by 
leveraging their access to nonpublicly traded shares and profits 
interests. 

Example 1: Nonpublicly Traded Shares: 

Figure 11 illustrates an example of how founders of successful 
companies can generate IRA balances of tens of millions dollars by 
investing in nonpublicly traded shares in their newly created company. 
The example is based on Securities and Exchange Commission (SEC) 
filings detailing the transactions of a technology company founder and 
assumes the following: [Footnote 117] 

* In 2008, the founders of a newly created company authorize the 
issuance of up to 100 million shares with an initial value of $0.00125 
per share.[Footnote 118] 

* One company founder opens a Roth IRA with an after-tax contribution 
of $5,000, and uses the Roth IRA to purchase 4 million nonpublicly 
traded shares in the company. 

* The following year, the company raises money by selling nonpublicly 
traded shares to a private equity fund that focuses on venture capital 
opportunities (venture capital firm) for $10 per share. As part of 
this transaction, the company founder sells 1,000,000 shares from her 
Roth IRA. The founders stipulate that they will retain an "additional 
consideration" in these shares if the outside investors can someday 
sell them for more than $30 per share. Specifically, the company 
founder will receive 20 percent of the profits above $30 per share. 

* In 2012, the company offers shares to outside investors through an 
initial public offering of shares at a price of $25 per share. 

* By 2014, the company has enjoyed continuing success and its shares 
trade on public stock exchanges at $60 per share. The founder retires 
and sells the remaining shares in her Roth IRA. Additionally, the 
outside investors of the venture capital firm sell the shares they 
purchased in 2009 for $60 per share. 

Figure 11: Founders Can Accumulate Large IRAs with Nonpublicly Traded 
Shares in Their Company: 

[Refer to PDF for image: illustration with 4 pie-charts] 

1. An entrepreneur puts $5,000 in a Roth IRA and uses it to buy 4 
million shares in a new company she helps to found. 

2. One year later, she sells 1 million of those 4 million shares to a 
venture capital firm for $10 a share. 
Profit from selling 1 million shares: $10 million; 
Value of 3 million unsold shares: $30 million. 

3. Three years later, the founder's growing company has an initial 
public offering and sells stock for $25 a share. 
Previous profit: $10 million; 
Value of 3 million unsold shares: $75 million. 

4. Two years later, with the company's stock trading at $60 a share, 
the entrepreneur sells her remaining 3 million shares. 
Previous profit: $10 million; 
“Additional consideration” from sale in Step 2[A]: $6 million; 
Profit from sale of 3 million shares: $180 million. 

Source: GAO analysis of publicly available filings with the U.S. 
Securities and Exchange Commission (SEC). GAO-15-16. 

[A] In 2009, as part of an effort to raise money for the company, the 
founder sells 1 million shares of nonpublicly traded shares from her 
Roth IRA to outside investors at a price of $10 per share. The 
founders stipulate that they will retain an additional consideration 
in these shares--specifically, 20 percent of the profits above $30 per 
share--if the outside investors can someday sell them for more than 
$30 per share. In 2014, the outside investors sell their now publicly 
traded shares for $60 per share and get $60 million, $30 million of 
which is subject to the founder's additional consideration. As a 
result, the founder realizes a profit of $6 million from the outside 
investors' sale. 

[End of figure] 

Table 12: Summary of Holdings and Transactions in Company Founder's 
Roth Individual Retirement Account (IRA): 

Year: 2008; 
Description: Founder contributes to a Roth IRA; 
Amount: $5,000; 
Nonpublicly traded shares issued by company, initial value per share; 
Amount: $0.00125; 
Number of shares founder purchases using funds in Roth IRA; 
Amount: 4 million. 

Year: 2009; 
Description: Number of nonpublicly traded shares sold to outside 
investors from Roth IRA; 
Amount: 1 million; 
Sale price of nonpublicly traded shares to outside investors, per 
share; 
Amount: $10; 
Founder's proceeds from sale; 
Amount: $10 million; 
Potential value of remaining shares in Roth IRA, based on sale price; 
Amount: $30 million. 

Year: 2012; 
Description: Sale price of publicly traded shares in initial public 
offering, per share; 
Amount: $25; 
Potential value of remaining shares in Roth IRA, based on initial 
public offering; 
Amount: $75 million. 

Year: 2014; 
Description: Number of remaining shares founder sells from Roth IRA on 
public exchanges; 
Amount: 3 million; 
Founder's proceeds from sale of publicly traded shares; 
Amount: $180 million; 
Founder's proceeds from additional consideration in outside investors' 
sale of publicly traded shares; 
Amount: $6 million; 
Total Assets in founder's Roth IRA at the end of 2014; 
Amount: $196 million. 

Source: GAO analysis of publicly available filings with the U.S. 
Securities and Exchange Commission. GAO-14-678. 

[End of table] 

Example 2: Profits Interest: 

Figure 12 illustrates an example of how a key employee of a private 
equity firm can generate an IRA balance of tens of millions of dollars 
by investing in a profits interest that gives him or her the right to 
a portion of the general partner's carried interest in a successful 
fund. The example assumes the following about a general partner entity 
consisting of 10 key employees: 

* In 2004, the general partner of a private equity firm that focuses 
on buy-out opportunities contributes $10 million to start a new $1 
billion buy-out fund.[Footnote 119] The general partner raises the 
rest of the capital needed to start the fund from outside investors, 
known as limited partners. 

* The general partner negotiates a performance target that needs to be 
met in order to get paid for managing the fund. If the general partner 
meets this performance target, the limited partners pay the general 
partner a performance fee equal to 20 percent of the fund's total 
profits, called the general partner's carried interest in the fund. 
[Footnote 120] 

* One key employee of the private equity firm rolls over $500,000 from 
a former employer's 401(k) plan to an IRA and uses it to purchase a 
profits interest in the general partner. In exchange, the general 
partner will distribute 5 percent of its carried interest to the key 
employee if the fund is successful. 

* The general partner and key employees successfully invest in 
portfolio companies over a 10-year period and exceed the performance 
target set for the limited partners. 

* On the last day of the fund, the general partner distributes initial 
contributions and 80 percent of the fund's profits to the limited 
partners.[Footnote 121] 

* The general partner retains its initial contributions and 20 percent 
of the fund's profits as a carried interest. The general partner then 
distributes 5 percent of this carried interest to the key employee's 
IRA. 

Figure 12: Key Employees of Private Equity Firms Can Accumulate Large 
Individual Retirement Accounts (IRA) with Profits Interests: 

[Refer to PDF for image: illustration with 5 pie-charts] 

General partner: 
$10 million investment grows to $488.9 million: 
Original investment: $10 million; 
Total: $478.9 million: 
20% of fund's profits as “carried interest.” 

Key employee of private equity firm: 
Key employee uses $500,000 in an IRA to purchase a profits interest 
that grants the employee 5 percent of any profits the general partner 
takes as a carried interest. 
Cost of profits interest: $500,000; 
Distributed into employee's IRA: $23.9 million. 

Outside investors: 
$990 million investment grows to $2.91 billion: 
80% of fund's profits as return on investment: $1.92 billion. 

Source: GAO analysis of industry publications and interviews with 
industry stakeholders. GAO-15-16. 

[End of figure] 

Table 13: Summary of Contributions and Distributions from a $1 Billion 
Private Equity Fund: 

Year: 2004; 
Description: General partner's contribution to the fund; 
Amount: $10 million; 
Outside investors' contribution to the fund; 
Amount: $990 million; 
Beginning fund balance; 
Amount: $1 billion. 

Year: 2014; 
Description: Profits from investments in portfolio companies; 
Amount: $2.4 billion; 
Initial contributions; 
Amount: $1.0 billion; 
Ending fund balance; 
Amount: $3.4 billion. 

Year: 2014; 
Description: Limited partners get: 
Their initial contribution back; 
Amount: $990 million; 
80 percent of the fund's profits; 
Amount: $1.92 billion; 
Total distribution to limited partners; 
Amount: $2.91 billion. 

Year: 2014; 
Description: General partner gets: 
Their initial contribution back; 
Amount: $10 million; 
20 percent of the fund's profits as a carried interest; 
Amount: $478.9 million; 
Total distribution to general partner; 
Amount: $488.9 million. 

Year: 2014; 
Description: The key employee's IRA receives a distribution 
of 5 percent of the general partner's carried interest; 
Amount: $23.9 million. 

Source: GAO analysis of industry publications and interviews with 
industry stakeholders. GAO-14-678. 

[End of table] 

[End of section] 

Appendix V: Printable Figure 9 on Form 5498: 

The figure below is a printable version of figure 9 found earlier in the
report. 

[Refer to PDF for image: interactive graphic] 

Directions: IRS says it will use boxes 15a and 15b highlighted in red 
below to ensure that IRA fair market values are accurately reported. 
Rollover box 15b to view the codes custodians will use to identify 
their assets: 

Custodians will use the following codes for certain specified assets 
in this box: 

A. Stock or other ownership interest in a corporation that is not 
readily tradable on an established securities market. 

B. Short or long-term debt obligation that is not traded on an 
established securities market. 

C. Ownership interest in a limited liability company similar entity 
(unless the interest is traded on an established securities market). 

D. Real estate. 

E. Ownership interest in a partnership, trust, or similar entity 
(unless the interest is traded on an established securities market). 

F. Option contract or similar product that is not offered for trade on 
an established option exchange. 

G. Other asset that does not have a readily available fair market 
value. 

H. More than two types of assets (listed in A through G) are held in 
this IRA. 

Source: GAO summary of IRS information; PhotoDisc and IRS (images). 
GAO-15-16. 

[End of figure] 

[End of section] 

Appendix VI: Comments from the Internal Revenue Service: 

Department of The Treasury: 
Deputy Commissioner: 
Internal Revenue Service: 
Washington, D.C. 20224: 

September 18, 2014: 

James R. McTigue Jr. 
Director, Tax Issues: 
United States Government Accountability Office: 
Washington, DC 20548: 

Dear Mr. McTigue: 

Thank you for the opportunity to review your draft report entitled, 
"Individual Retirement Accounts: IRS Could Bolster Enforcement on 
Multi-Million Dollar Accounts, but More Direction from Congress Is 
Needed." As noted in your report, individual retirement accounts 
(IRAs) serve important objectives to provide a mechanism for 
individuals who are not covered by employer-sponsored plans to save 
for retirement and for individuals who are retiring or changing jobs 
to roll over their employer-sponsored plan balances. The rules 
governing IRAs can be complicated for both the IRS and taxpayers. We
appreciate your acknowledgment of our efforts to deliver clear and 
focused outreach, communications and educational programs to assist 
taxpayers to understand IRA rules, including our successful 
translation of the complicated contribution and distribution rules
into "plain English" in Publication 590. 

We also appreciate your recognition of our Service-wide enforcement 
efforts. Our Wage and Investment Division is using the Automated 
Underreporter program and math error authority to detect non-
compliance with the contribution and distribution rules, while 
exploring other cost-effective measures to maximize compliance, such 
as sending soft notices to taxpayers who appear not to be in 
compliance with their reporting requirements and explaining the IRA 
rules and how they may correct their errors. The Small Business/Self 
Employed Division (SB/SE) has conducted Compliance Initiative Projects 
to identify patterns of non-compliance to better allocate examination 
resources and education efforts and has focused enforcement efforts to 
address promoters of abusive IRA schemes and their clientele. In 
addition, the Large Business & International Global High Wealth and 
the SB/SE Estate and Gift personnel also address IRA issues. We have 
developed specialized training, job aids and continuing professional 
education materials to maximize our agents' efficiency and develop their
expertise. 

IRA non-compliance can span IRS divisions and we have minimized this 
risk through on-going cross-functional coordination. We created an 
Issue Management Team (IMT) with personnel from Tax Exempt & 
Government Entities, SB/SE, Chief Counsel and others to develop a 
Service-wide strategy to address IRA non-compliance. The coordination 
developed through this IMT continues to allow efficient communication
and resolution of cross-functional issues. As you observed, the 
Service continues to explore administrative options such as revising 
Form 5498, IRA Contribution Information, to collect additional 
information on non-marketable assets. Additional information may be 
used to develop more effective strategies for identifying and 
examining non-compliance and to provide more refined understanding of 
the nature of IRA non-compliance. 

We appreciate the valuable feedback you have provided. Responses to 
your specific recommendations are enclosed. If you have questions, 
please contact me, or a member of your staff may contact Shenita 
Hicks, Director, Examination, Small Business/Self-Employed Division at 
(240) 613-2849. 

Sincerely, 

Signed by: 

John M. Dalrymple: 
Deputy Commissioner for Services and Enforcement: 

Enclosure: 

GAO Recommendations and IRS Responses to GAO Draft Report: Individual 
Retirement Accounts: IRS Could Bolster Enforcement on Multi-Million 
Dollar Accounts, but More Direction from Congress Is Needed: 

To improve IRS's ability to detect and pursue noncompliance associated 
with undervalued assets sheltered in IRAs and prohibited transactions, 
we recommend that the Commissioner of Internal Revenue: 

Recommendation 1: 

Approve plans to fully compile and digitize the new data from 
electronic and paper-filed Form 5498s to ensure the efficient use of 
the information on nonpublicly traded IRA assets. 

Comment: 

The IRS agrees with your assessment that full use of the new data on 
Forms 5498 on nonpublicly traded assets could improve case selection; 
however, the IRS is faced with competing funding priorities in our 
current fiscal climate. We will explore a variety of alternatives for 
using this new data and evaluate these alternatives relative to our 
other funding needs. 

Recommendation 2: 

Conduct research using the new Form 5498 data to identify IRAs holding 
nonpublic asset types, such as profits interests in private equity 
firms and hedge funds, and use that information for an IRS-wide 
strategy to target enforcement efforts. 

Comment: 

The SB/SE Abusive Transactions and Technical Issues function already 
has begun to develop research objectives to refine our enforcement 
efforts using the additional information that we will obtain from the 
revised Form 5498 data on nonmarketable assets. 

Recommendation 3: 

Work in consultation with the Department of the Treasury on a 
legislative proposal to expand the statute of limitations on IRA 
noncompliance to help IRS pursue valuation-related misreporting and 
prohibited transactions that may have originated outside the current 
statute's 3-year window. 

Comment: 

The IRS agrees that legislation to extend the period of limitations 
for assessment of tax associated with IRA non-compliance would remove 
an obstacle to our efforts to pursue identified IRA non-compliance. We 
will discuss with the Department of Treasury the findings and 
recommendations in your report and consult with them, as appropriate, 
to maximize the administrability and efficiency for the Service, 
taxpayers and custodians of any legislation proposed, including any 
proposal regarding the statute of limitations on assessing tax 
associated with IRA non-compliance. 

To help taxpayers better understand compliance risks associated with 
certain IRA choices and improve compliance, we recommend that the 
Commissioner of Internal Revenue: 

Recommendation 4: 

Building on research data on IRAs holding nonpublic assets, identify 
options to provide outreach targeting taxpayers with nonpublic IRA 
assets and their custodians, such as reminder notices that engaging in 
prohibited transactions can result in loss of the IRA's tax-favored 
status. 

Comment: 

We concur with this recommendation. As we analyze data on IRAs holding 
non-marketable assets, we will identify options to provide targeted 
outreach to taxpayers with IRAs holding such assets to increase 
awareness of prohibited transaction rules and penalties for failure to 
comply with these rules. 

Recommendation 5: 

Add an explicit caution in Publication 590 Individual Retirement 
Arrangements (IRAs) for taxpayers about the potential risk of 
committing a prohibited transaction when investing in nonpublicly 
traded assets or directly controlling IRA assets. 

Comment: 

We concur with this recommendation. We will revise Publication 590 to 
include an explicit caution to taxpayers of the potential risk of 
committing a prohibited transaction when investing in nonpublicly 
traded assets or in directly controlling IRA assets. 

[End of section] 

Appendix VII: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

James R. McTigue, Jr., Director, Tax Issues, Strategic Issues, (202) 
512-9110 or mctiguej@gao.gov: 

Charles A. Jeszeck, Director, Education, Workforce, and Income 
Security Issues, (202) 512-7215 or jeszeckc@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Tamara Cross and MaryLynn 
Sergent (Assistant Directors), Eric Gorman and Tom Moscovitch 
(analysts in charge), Amy Bowser, Bertha Dong, Monika Gomez, Gene 
Kuehneman, Ed Nannenhorn, Albert Sim, Walter Vance, Sonya Vartivarian, 
and Craig Winslow made key contributions to this report. Also 
contributing to this report were James Bennett, Joanna Berry, Rachel 
DeMarcus, Ellen Grady, David Lin, Donna Miller, Karen O'Conor, Stewart 
Small, Frank Todisco, and Kathleen van Gelder. 

[End of section] 

Footnotes: 

[1] U.S. retirement assets generally are composed of assets in IRAs, 
defined contribution plans, defined benefit plans, and annuity at life 
insurance companies. Board of Governors of the Federal Reserve System, 
Financial Accounts of the Untied States: Flow of Funds, Balance 
Sheets, and Integrated Macroeconomic Accounts First Quarter 2014 (June 
5, 2014). Also see, Victoria L. Bryant and Jon Gober, "Accumulation 
and Distribution of Individual Retirement Arrangements," 2010 
Statistics of Income Bulletin (Fall 2013). 

[2] See Office of Management and Budget, Fiscal Year 2015 Analytical 
Perspectives: Budget of the U.S. Government (Washington, D.C.: 2014). 
The revenue loss is measured as the tax revenue that the government 
does not currently collect on contributions and earnings amounts, 
offset by the taxes paid by those who are currently receiving 
retirement benefits. The Joint Committee on Taxation (JCT) estimates 
that IRAs will result in about $17.6 billion in revenue losses in 
2014. Revenue loss estimates do not represent the amount of revenue 
that would be gained from repealing a tax expenditure because repeal 
would probably change taxpayer behavior in some way that would affect 
revenue. Treasury also estimates that the present value of the revenue 
effects (net of future tax payments) from exclusions on traditional 
IRA contributions and earnings, Roth earnings and distributions, and 
nondeductible IRA earnings for calendar year 2013 was $1.7 billion, 
$3.4 billion, and $150 million respectively. 

[3] Under the U.S. Bankruptcy Code, a debtor may be able to exempt 
from the federal bankruptcy estate funds in an IRA up to a certain 
limit indexed for inflation. 11 U.S.C. § 522(d)(12) and (n). That 
limit was increased to $1,245,475 in February 2013. 

[4] GAO, Individual Retirement Accounts: Government Actions Could 
Encourage More Employers to Offer IRAs to Employees, [hyperlink, 
http://www.gao.gov/products/GAO-08-590] (Washington, D.C.: June 4, 
2008) and Private Pensions: Some Key Features Lead to an Uneven 
Distribution of Benefits, [hyperlink, 
http://www.gao.gov/products/GAO-11-333] (Washington, D.C.: Mar. 30, 
2011). 

[5] GAO, Understanding the Tax Reform Debate: Background, Criteria, & 
Questions, [hyperlink, http://www.gao.gov/products/GAO-05-1009SP] 
(Washington, D.C.: September 2005). This report describes how the 
criteria can be used to evaluate tax policy. In developing the report, 
we relied on government studies, academic articles, and the advice of 
tax experts to provide us with information on the issues surrounding 
the tax reform debate. 

[6] GAO, Tax Expenditures: Background and Evaluation Criteria and 
Questions [hyperlink, http://www.gao.gov/products/GAO-13-167SP] 
(Washington, D.C.: Nov. 29, 2012). This guide outlines a series of 
questions and criteria that can be used to evaluate tax expenditures--
reductions in a taxpayer's tax liability that are the result of 
special exemptions and exclusions from taxation, deductions, credits, 
deferrals of tax liability, or preferential tax rates. To develop the 
questions, we reviewed our prior work on tax expenditures, tax reform, 
results-oriented government, and program evaluation, and interviewed 
experts in tax policy and program evaluation. 

[7] All percentage estimates derived from samples used in this report 
have 95 percent confidence intervals that are within plus or minus 1 
percentage point of the estimates themselves, unless otherwise 
specified. All other estimates in this report have 95 percent 
confidence intervals that are within plus or minus 15 percent of the 
estimates themselves, unless otherwise specified. 

[8] Estimates based on the small group of taxpayers we studied may 
have very wide confidence intervals. Our estimates related to the 
larger IRA balances are less precise as the number of filers in these 
categories decreased. About 5 percent of the estimated taxpayers with 
IRAs had at least one associated IRA with blank FMV information. We 
treated the blank FMVs as zeros. If these IRAs did not, in fact, have 
zero balances, they could affect our estimates' upper bound 
considerably. See appendix I for more details. 

[9] For a summary of our equity criterion, see [hyperlink, 
http://www.gao.gov/products/GAO-13-167SP]. This report draws on 
[hyperlink, http://www.gao.gov/products/GAO-05-1009SP], which 
summarizes other criteria that we have reported should be considered 
in evaluating tax policy. These criteria include economic efficiency 
as well as simplicity, transparency, and administrability. 

[10] For prior audits of IRS enforcement of IRA tax laws, see Treasury 
Inspector General for Tax Administration (TIGTA), A Service-wide 
Strategy Is Needed to Address Growing Noncompliance With Individual 
Retirement Account Contribution and Distribution Requirements, 2010-40-
043 (Washington, D.C.: Mar. 29, 2010); GAO, Individual Retirement 
Accounts: Additional IRS Actions Could Help Taxpayers Facing 
Challenges in Complying with Key Tax Rules, [hyperlink, 
http://www.gao.gov/products/GAO-08-654] (Washington, D.C.: Aug. 14, 
2008); and TIGTA, Individual Retirement Account Contributions and 
Distributions Are Not Adequately Monitored to Ensure Tax Compliance, 
2008-40-087 (Washington, D.C.: Mar. 28, 2008). 

[11] For a simplified illustration of the tax effects of traditional 
and Roth IRAs, as well as a comparison with a taxable investment 
account, see appendix II. 

[12] Failure to take the required minimum is subject to an excise tax 
on the IRA owner equal to 50 percent of the required amount not 
distributed. 

[13] Pub. L. No.105-34, § 302, 111 Stat. 788, 825-29 (Aug. 5, 1997) 
codified as amended at 26 U.S.C. § 408A. 

[14] Roth conversions were previously subject to an income limit of 
$100,000. For conversions in 2010 only, a taxpayer had the choice of 
reporting converted amounts as taxable income in 2010 or half in 2011 
and half in 2012. According to IRS SOI estimates, the amount converted 
to Roth IRAs rose to an estimated $64.8 billion in 2010, surpassing 
Roth annual contributions for the first time. 

[15] Table 5 in appendix I shows the contribution limits by year. 

[16] Employers may also set up payroll deduction IRA programs. Through 
these programs, individuals may establish either traditional or Roth 
IRAs, and contribute to these accounts through voluntary deductions 
from their pay, which are forwarded by the employer to the 
individual's IRA. See GAO, Individual Retirement Accounts: Government 
Actions Could Encourage More Employers to Offer IRAs to Employees, 
[hyperlink, http://www.gao.gov/products/GAO-08-590] (Washington, D.C.: 
June 4, 2008). 

[17] Pub.L. No. 95-600, § 152, 93 Stat. 2763, 2797-2800 (Nov. 6, 1978) 
codified as amended at 26 U.S.C. § 408(k). 

[18] Pub. L. No. 104-188, § 1421, 110 Stat. 1755, 1792-1800 (Aug. 20, 
1996) codified as amended at 26 U.S.C. § 408(p). 

[19] For employees who participate in other employer plans during the 
year, the overall total salary reduction contribution limit for all 
plans is $17,500 ($23,000 for individuals age 50 or older) in 2014. 

[20] Rolling employer retirement balances into an IRA is one of 
several options available and may not be the best choice depending on 
an individual's circumstances. See GAO, 401(k) Plans: Labor and IRS 
Could Improve the Rollover Process for Participants, [hyperlink, 
http://www.gao.gov/products/GAO-13-30] (Washington, D.C.: Mar. 7, 
2013). 

[21] S. Rep. No. 93-383 at 4 (1973). 

[22] 26 U.S.C. § 415(b)(1). Actuarial assumptions and computations are 
required to figure these contributions. 

[23] 26 U.S.C. § 415(c)(1). 

[24] Table 5 in appendix I shows the contribution limits by year. 

[25] [hyperlink, http://www.gao.gov/products/GAO-13-30]. 

[26] NonRoth employer plans balances can be rolled into a Roth IRA, 
and the rollover amount is subject to the same rules for converting a 
traditional IRA to a Roth IRA. 

[27] The Internal Revenue Code establishes requirements that private 
pension plans must satisfy, including minimum coverage and benefits, 
to qualify for favorable tax treatment. Employers that sponsor these 
tax-qualified plans are entitled to a deduction (within limits) for 
the contributions they make. Contributions are not included in an 
employee's income until benefits are received. Small employers with 
fewer than 100 employees may also qualify for a federal tax credit for 
costs associated with starting a new pension plan. 

[28] There is also a statutory limit on the total amount of tax-
deductible contributions that an employer may make to certain types of 
plans. 

[29] Assets specifically restricted for IRA investment are life 
insurance and collectibles, such as artwork, rugs, antiques, metals, 
gems, stamps, coins, and alcoholic beverages. 

[30] Employer plans can also invest in alternative assets. See GAO, 
Defined Benefit Pension Plans: Recent Developments Highlight 
Challenges of Hedge Fund and Private Equity Investing. [hyperlink, 
http://www.gao.gov/products/GAO-12-324] (Washington, D.C.: Feb. 16, 
2012). 

[31] Disqualified persons include, for example, an IRA fiduciary, a 
person providing services, and members of the IRA owner's family 
(spouse, ancestor, lineal descendant, and any spouse of a lineal 
descendant). 26 U.S.C. § 4975(e)(2). A fiduciary is anyone who 
exercises discretionary authority or discretionary control in managing 
an IRA or exercises any authority or control in managing or disposing 
of its assets; provides investment advice to an IRA for a fee or has 
the responsibility to do so; and has any discretionary authority or 
discretionary responsibility in administering an IRA. 29 U.S.C. § 
1002(21).The IRA owner and the IRA's beneficiaries are considered 
disqualified persons for purposes of the prohibited transaction rules. 

[32] 26 U.S.C. § 408(e)(2). 

[33] If a disqualified person other than the IRA owner engages in a 
prohibited transaction, that person may be liable for a 15 percent 
excise tax on the amount of the prohibited transaction and a 100 
percent additional tax if the transaction is not corrected. 26 U.S.C. 
§ 4975(a) and (b). 

[34] Treasury regulations define FMV for purposes of valuation of plan 
assets as "the price at which the property would change hands between 
a willing buyer and a willing seller, neither being under any 
compulsion to buy or sell and both having reasonable knowledge of 
relevant facts." 26 C.F.R. § 1.412(c)(2)-1(c). 

[35] IRS also has offices to address criminal activity by taxpayers 
(Criminal Investigations) and misconduct by certain practitioners 
(Office of Professional Responsibility) that may overlap with IRA 
issues but neither of these programs performs examinations on 
individual income taxes. 

[36] See section 102 of the Reorganization Plan No. 4 of 1978 (43 Fed. 
Reg. 47,713). 

[37] For more on IRS's automated matching of IRA transactions reported 
on tax returns to custodian reporting, see [hyperlink, 
http://www.gao.gov/products/GAO-08-654]. 

[38] To view the 2014 Form 5498, visit [hyperlink, 
http://www.irs.gov/pub/irs-pdf/f5498.pdf]. 

[39] To view the 2014 Form 1099-R, visit [hyperlink, 
http://www.irs.gov/pub/irs-pdf/f1099r.pdf]. 

[40] In 2008, we suggested that Congress expand IRS math error 
authority to automatically correct tax returns for taxpayers younger 
than age 50 incorrectly claiming catch up contributions and taxpayers 
older than age 70½ improperly deducting IRA contributions. See GAO, 
Tax Administration: IRS's 2008 Filing Season Generally Successful 
Despite Challenges, although IRS Could Expand Enforcement during 
Returns Processing, [hyperlink, 
http://www.gao.gov/products/GAO-09-146] (Washington, D.C.: Dec. 12, 
2008). Congress has not taken action on this suggestion as of October 
2014. 

[41] Correspondence examinations are conducted through mail, while 
field examination, in which IRS meets with taxpayers or the taxpayers' 
representatives, are done face to face. 

[42] Publication 560 explains rules for employer-sponsored SEP and 
SIMPLE IRA plans in more detail. 

[43] We use taxpayer to denote the taxpaying unit including 
individuals, heads of household, and married couples filing a joint 
return. IRAs owned by dependents are aggregated with the filer's IRA. 
Taxpayers included those filing a return but reporting no taxable 
income--for example those with incomes below a certain threshold. We 
report aggregated IRA balances for taxpayers as individuals can own 
more than one IRA. The aggregate balance includes inherited IRAs, as 
IRS data do not readily identify inherited IRAs. We estimated 
taxpayers with IRA balances of $1 million or less had an average of 
three IRAs whereas those with IRA balances over $5 million had about 
five to six IRAs on average. We did not include information about IRA 
owners who did not file an individual income tax return. However we 
have no evidence from the IRA dataset that there were IRA owners with 
unusually large IRA balances who did not file an income tax return for 
2011. 

[44] Both the numbers and percentages have been rounded as some of 
these estimates may have very wide confidence intervals, particularly 
estimates related to the fewer taxpayers with larger IRA balances. 
Additionally, about 5 percent of taxpayers with IRAs had at least one 
associated IRA with no FMV information, which we treated as zeros. If 
these IRAs did not, in fact, have zero FMVs, they could affect our 
estimates' upper bound considerably. See appendix I for more details. 

[45] The very large aggregated balances are reflected in the 
difference between the estimated median and mean FMVs where the median 
is about a quarter of the mean for this group. The large discrepancy 
between the median and mean indicates that a small number of taxpayers 
with very large IRA balances are raising the mean well above the 
median. 

[46] AGI is the individual's gross income minus adjustments to income. 
These adjustments include deductions for trade or business expenses, 
losses from the sale or exchange of property, contribution to pensions 
and other retirement, as well as alimony paid. About 1 percent to 2 
percent of the taxpayers reported zero AGI. However, to determine 
eligibility for Roth IRA contributions or deductions for contributions 
to a traditional IRA, a modified AGI, in which certain items such as 
foreign housing exclusion and student loan interest deductions are 
added back to the AGI, is used. 

[47] The scenarios illustrate balances accumulated by an individual in 
an IRA or DC plan. In contrast, for our analysis of IRA balances using 
SOI estimates, we examined aggregate IRA balances by taxpaying unit. A 
tax return could include more than one person, such as a married 
couple filing a joint return. 

[48] Both scenarios assume catch-up contributions for those age 50 and 
older beginning in 2002. 

[49] GAO, Private Pensions: Pension Tax Incentives Update, [hyperlink, 
http://www.gao.gov/products/GAO-14-334R] (Washington, D.C.: Mar. 20, 
2014). 

[50] Some DB plans allow participants to receive a lump sum payment in 
place of what would otherwise be regular benefit payments. In 2011, 
the total limit on an annual DB benefit payment was $195,000. 

[51] As discussed further below, IRS plans to collect additional IRA 
data beginning in 2014. 

[52] Other studies we reviewed provided snapshots of IRA asset 
allocation but did not contain complete information, such as IRAs 
invested in nonpublicly traded alternative assets held by specialty 
custodians. See, Holden, Sarah, and Daniel Schrass, "The IRA Investor 
Profile: Roth IRA Investors' Activity, 2007-2012," ICI Research Report 
(Washington, D.C.: June 2014); Holden, Sarah, and Steven Bass, "The 
IRA Investor Profile: Traditional IRA Investors' Activity, 2007-2012." 
ICI Research Report (Washington, D.C.: March 2014); and Employee 
Benefit Research Institute, "IRA Asset Allocation, 2011," EBRI Notes, 
Vol. 34, No. 10 (October 2013). 

[53] The Obama Administration in its fiscal year 2014 and 2015 budgets 
proposed limiting tax deferrals beyond the taxpayer and spouse's 
lifetime by requiring distribution within 5 years for IRAs inherited 
by nonspousal beneficiaries. According to Treasury's estimates, the 
fiscal year 2015 budget proposal would generate an estimated $5.2 
billion from 2015 through 2024. JCT estimated that the 
Administration's 2015 proposal would generate about $5 billion for the 
same period. 

[54] See GAO, Unemployed Older Workers: Many Experience Challenges 
Regaining Employment and Face Reduced Retirement Security, [hyperlink, 
http://www.gao.gov/products/GAO-12-445] (Washington, D.C.: Apr. 25, 
2012). 

[55] Par value refers to the value initially assigned to a stock or 
bond when it is issued. Founders of newly created companies register 
the par value of their nonpublicly traded shares with the state in 
which they are incorporated. Par value does not necessarily correspond 
with the price paid, if any, by founders of a company for newly issued 
nonpublicly traded shares in their company. 

[56] SEC defines individual accredited investors in Rule 501(a) of 
Regulation D as any person who comes within certain categories, or who 
the issuer of the securities reasonably believes comes within certain 
categories, at the time of the sale of the securities to that person. 
Some of these categories include: (i) any director, executive officer, 
or general partner of the issuer of the securities being offered or 
sold, or any director, executive officer, or general partner of a 
general partner of that issuer; (ii) any natural person whose 
individual net worth, or joint net worth with that person's spouse 
exceeds $1,000,000 (subject to the provisions in Rule 501(a)(5) 
regarding how to calculate net worth; for example, the person's 
primary residence shall not be included as an asset); and (iii) any 
natural person who had an individual income in excess of $200,000 in 
each of the two most recent years or joint income with that person's 
spouse in excess of $300,000 in each of those years and has a 
reasonable expectation of reaching the same income level in the 
current year. We found in 2013 that an individual accredited investor 
is generally an investor who possesses knowledge and experience in 
finance and business matters to evaluate the risks and merits of 
prospective investments or one who the issuer of such investments 
reasonably believes meets this description. See GAO, Securities and 
Exchange Commission: Alternative Criteria for Qualifying as An 
Accredited Investor Should Be Considered, [hyperlink, 
http://www.gao.gov/products/GAO-13-640] (Washington, D.C.: July 18, 
2013). We found in 2008 that most hedge funds restrict their sales to 
accredited investors, which exempt their offerings from certain 
registration requirements. See GAO, Hedge Funds: Regulators and Market 
Participants Are Taking Steps to Strengthen Market Discipline, but 
Continued Attention Is Needed, [hyperlink, 
http://www.gao.gov/products/GAO-08-200] (Washington, D.C.: Jan. 24, 
2008). 

[57] Specifically, we found that the percentage of large DB plans (as 
measured by total plan assets) investing in hedge funds grew from 47 
percent in 2007 to 60 percent in 2010, while the percentage of large 
plans investing in private equity increased from 80 percent to 92 
percent, in both cases continuing a decade-long upward trend. See GAO, 
Defined Benefit Pension Plans: Recent Developments Highlight 
Challenges of Hedge Fund and Private Equity Investing, [hyperlink, 
http://www.gao.gov/products/GAO-12-324] (Washington, D.C.: Feb. 16, 
2012). 

[58] Additionally, investment returns for limited partners, who hold 
capital interests in a partnership are generally commensurate to the 
amount they invest. Further, as we found in 2012, large DB plan 
investments in private equity and hedge funds represent a relatively 
small percentage of total plan assets. See [hyperlink, 
http://www.gao.gov/products/GAO-12-324]. However, these plans' 
widespread participation in private equity and hedge funds highlights 
the importance of having transparent information on, among other 
things, the fees they charge their limited partners. Such information 
is needed to help plan sponsors carry out their fiduciary 
responsibilities to participants, such as the requirement to invest 
with the care, skill, and diligence of a prudent person familiar with 
such matters. Private sector pension plan investment decisions must 
comply with ERISA, which includes fiduciary standards based on the 
principal of a "prudent man standard of care." 29 U.S.C. § 1104. 
Public sector plans, such as those at the state, county, and municipal 
levels, are not subject to most ERISA requirements applicable to 
private sector pension plans. To receive preferential tax treatment, 
however, to the extent they operate through a trust format, they must 
follow IRS requirements applicable to such trusts. 

[59] SEC documents indicate that the initial value, or par value, of 
these nonpublicly traded shares was $0.000001 per share. As a result, 
the founder could have paid as little as $4 from after-tax 
contributions to purchase almost 4 million shares. In contrast, from 
2000 through June of 2014, companies charged an average of $14.50 per 
share through initial public offerings, when companies first offer 
shares to the general public, often primarily to institutional and 
high net-worth investors. At this price, four million shares would 
cost an investor about $58 million before commissions or fees, well in 
excess of annual IRA contribution limits. 

[60] According to two industry stakeholders, private equity firms 
generally use these shares as an incentive to hire and retain managers 
of the portfolio company, but may also make shares available to their 
own employees.More recently, private equity funds appear to have been 
restructuring portfolio companies' shares as stock options rather than 
splitting them into various classes of nonpublicly traded shares. For 
example, according to a 2013 PricewaterhouseCoopers (PwC) study of 
portfolio company compensation, 70 percent of the incentives offered 
to portfolio company management come in the form of stock options. See 
PwC: Driving Portfolio Company Performance in a Changing Private 
Equity Environment (2013). 

[61] Preferred shares have a higher initial value because holders of 
this share class are more likely to be repaid if the portfolio company 
is not successful. Additionally, holders of preferred shares are the 
first to receive proceeds from the private equity fund's sale of the 
portfolio company. In contrast, the riskier common shares can end up 
worthless if the private equity fund sells the portfolio company for 
less than it paid. But if the portfolio company is sold for a higher 
price than expected, holders of the riskier common shares may receive 
the bulk of any additional proceeds once preferred share holders have 
received their proceeds. 

[62] According to two industry stakeholders, private equity firms 
currently use a ratio of about 4: 1 to split the value of a portfolio 
company between preferred and common share classes, respectively. This 
means about 80 percent of the company's value would be assigned to the 
preferred share class and the remainder to the common share class. In 
some instances in the 1990's, private equity funds used ratios as high 
as 9: 1, which one industry stakeholder said would have been seen as 
"pushing the envelope" at the time. Another industry stakeholder said 
that today, a ratio this high would likely be challenged as 
aggressively devaluing the riskier common share class. 

[63] Liquidation value is the value of a business or of an asset when 
it is sold in liquidation, as opposed to being sold in the ordinary 
course of business. Liquidation price is usually below the market 
price. 

[64] Mark Maremont, "Bain Gave Staff Way to Swell IRAs by Investing in 
Deals," Wall Street Journal, Mar. 29, 2012 (New York City). 

[65] In this report, we refer to private equity firms and hedge funds 
that are organized as partnerships typically consisting of: (1) a 
general partner, an entity that is responsible for management of the 
fund, and; (2) outside investors, commonly referred to as limited 
partners. Although there is no universally accepted definition of 
hedge funds, the term is commonly used to describe pooled investment 
vehicles that are privately organized and often engage in active 
trading of various types of securities, commodity futures, options 
contracts, and other investment vehicles. Likewise, there is no 
commonly accepted definition of private equity funds, but such funds 
are generally privately managed pools of capital that invest in 
companies, many of which are not listed on a stock exchange. 
Strategies of private equity funds vary, but most funds target either 
venture capital or buy-out opportunities. Venture capital funds invest 
in young companies that often are developing a new product or 
technology. Buy-out funds generally invest in larger established 
companies and attempt to add value. For both venture capital and buy-
out strategies, investors hope to profit when the company is 
eventually sold, either when offered to the public or when sold to 
another investor or company. See [hyperlink, 
http://www.gao.gov/products/GAO-12-234] and GAO, Defined Benefit 
Pension Plans: Guidance Needed to Better Inform Plans of the 
Challenges and Risks of Investing in Hedge Funds and Private Equity, 
[hyperlink, http://www.gao.gov/products/GAO-08-692] (Washington, D.C.: 
Aug. 14, 2008). 

[66] IRS Rev. Proc. 93-27, 1993-27 C.B. 343 and Rev. Proc. 2001-43, 
2001-2 C.B. 191. 

[67] According to DOL officials, the general partner must meet 
contractual obligations to contribute cash to the retirement plan 
before granting profits interests to key employees. DOL spells out 
rules under which employers can make in-kind contributions, that is, 
contributions other than cash. 29 C.F.R. § 2509.94-3. 

[68] Treasury regulations generally define FMV for the purposes of 
valuation of plan assets as, "the price at which the property would 
change hands between a willing buyer and a willing seller, neither 
being under any compulsion to buy or sell and both having reasonable 
knowledge of relevant facts." 26 C.F.R. § 1.412(c)(2)-1(c). 

[69] For example, in Campbell v. Commissioner, the Eighth Circuit 
Court of Appeals overturned a decision by the U.S. Tax Court and held 
that an individual who is granted a profits interest does not need to 
recognize any income if the profits interest does not have a readily 
ascertainable value. 943 F.2d 815, 823 (8th Cir. 1991). 

[70] Generally, IRS has 3 years from the date a return is filed 
(whether the return is filed on time or not) to make an assessment of 
tax liability. 26 U.S.C. § 6501(a). The statute of limitations is 
extended in certain situations. For example, if a taxpayer submits a 
false or fraudulent tax return or otherwise engages in a willful 
attempt to evade a tax, the tax may be assessed at any time after the 
return is filed. 26 U.S.C. § 6501(c)(1), (2). Also, IRS and the 
taxpayer may agree to extend the statute of limitations for 
assessment. 26 U.S.C. § 6501(c)(4). Other extensions are authorized 
when the taxpayer fails to file a tax return, omits a certain amount 
of gross income from the return, or fails to report a listed 
transaction. 26 U.S.C. §§ 6501(c)(3), (10) and (e)(1). A listed 
transaction is a transaction that is the same as, or substantially 
similar to, one that IRS has determined to be a tax avoidance 
transaction and identified by IRS notice or other form of published 
guidance. 

[71] See [hyperlink, http://www.gao.gov/products/GAO-12-324]. 

[72] Profit sharing plans and 401(k) plans governed by ERISA and the 
Internal Revenue Code may generally satisfy annual reporting 
requirements by filing a Form 5500 Annual Return/Report of Employee 
Benefit Plan (Form 5500) and its accompanying schedules. Plans with 
100 or more participants are generally required to file Schedule H 
(Financial Information) detailing, among other things, information 
about the plan's assets. Plans filing Schedule H are also generally 
required to attach the report of an independent qualified public 
accountant detailing information about the plan and a "Schedule of 
Assets (Held at End of Year)" listing assets held by the plan. In 
contrast, plans with less than 100 participants may be eligible to 
file Schedule I (Financial Information-Small Plan), with less detailed 
information on plan assets, in place of Schedule H. Also, certain 
plans with fewer than 100 participants that invest only in eligible 
assets may file the Short Form Annual Report/Report of Small Employee 
Benefit Plan (Form 5500-SF), which is a simplified annual report form, 
instead of the Form 5500. Form 5500-SF filers generally are not 
required to file schedules or attachments, such as the Schedule H and 
attached schedule of assets. Employers that offer SEP IRA and SIMPLE 
IRA plans generally do not have to file Form 5500s. 

[73] DOL officials told us that Form 5500-SF filers are prohibited 
from allowing participants to invest directly in nonpublicly traded 
shares or profits interests. They said it was conceivable that 
participants might be able to invest in these types of assets 
indirectly through the use of Common Collective Trusts, but that this 
was unlikely. Small plans that directly invest in or allow 
participants to invest directly in nonpublicly traded shares or 
profits interests would be required to file the Form 5500 and the 
Schedule I. 

[74] DOL officials reviewed filings for two of the hedge funds and 
pointed out possible mistakes in the filings. For example, both filers 
reported that their plan did not hold hard-to-value assets, which DOL 
officials said was unlikely given that assets in both plans were 
substantially invested in the employer's own funds. Only one of the 
five filers we reviewed reported holding hard-to-value assets. This 
raises questions about the possibility that private equity firms and 
hedge funds, including those that file Form 5000-SF, may not be aware 
of, or complying with, filing requirements with respect to investments 
in nonpublicly traded shares and profits interests. 

[75] GAO, Private Pensions: Targeted Revisions Could Improve 
Usefulness of Form 5500 Information, [hyperlink, 
http://www.gao.gov/products/GAO-14-441] (Washington, D.C.: June 5, 
2014). 

[76] We reported that only 12.5 percent of all plans that filed a Form 
5500 in 2011 included a Schedule H. See [hyperlink, 
http://www.gao.gov/products/GAO-14-441]. 

[77] In comments on that report, DOL officials did not say whether 
they agreed or disagreed with our recommendation, but did identify 
actions underway to address our recommendation. 

[78] Some private equity fund and hedge fund managers will remain 
exempt from registration with SEC. For example, certain fund managers 
with less than $150 million in assets under management will not be 
required to register with the SEC. See Exemptions for Advisers to 
Venture Capital Funds, Private Fund Advisors with Less than $150 
Million in Assets Under Management, and Foreign Private Advisers 
(final rule), 76 Fed. Reg. 39,646 (July 6, 2011). 

[79] Specifically, we interviewed representatives of 22 public and 
private sector DB plans to determine what steps they had taken, if 
any, to address the challenges of investing in private equity funds 
and hedge funds particularly given ongoing market volatility in the 
years following the financial market events of 2008. The DB plan 
representatives we contacted took significant steps to improve the 
terms of their investments, including negotiating lower fees or more 
advantageous fee terms, and obtaining greater liquidity or 
transparency. See [hyperlink, http://www.gao.gov/products/GAO-12-324]. 

[80] See S. Rep. No. 93-383 at 27 (1973): H.R. Rep. No. 93-807 at 4 
(1974). 

[81] 26 U.S.C. §415. 

[82] Prior to ERISA, DC plans were often referred to as salary 
reduction plans. In response to controversy over proposed regulations 
that would have altered their tax treatment, ERISA effectively froze 
the tax treatment of such plans in anticipation of more specific 
legislative action to deal with them. Pub. L. No. 93-406, § 2006, 88 
Stat. 829, 992-93 (Sept. 2, 1974). That legislative action came four 
years later in the form of the Revenue Act of 1978, which created 
401(k) plans--now the dominant type of retirement plan offered by 
private sector employers. But the relevant provision did not take full 
effect until January 1, 1980. Pub. L. No. 95-600, § 135.92 Stat. 2763, 
2785-87 (Nov. 6, 1978). 

[83] H.R. Rep. No. 93-807 at 112. 

[84] See GAO, Government Performance and Accountability: Tax 
Expenditures Represent a Substantial Federal Commitment and Need to Be 
Reexamined, [hyperlink, http://www.gao.gov/products/GAO-05-690] 
(Washington, D.C.: Sep. 23, 2005). Tax expenditures are special tax 
credits, deductions, exclusions, exemptions, deferrals, and 
preferential tax rates that can substantially reduce federal tax 
revenues. 

[85] [hyperlink, http://www.gao.gov/products/GAO-13-167SP]. 

[86] The equity criterion also asks whether the tax expenditure 
results in different benefits for similarly situated taxpayers. 
Additionally, our framework includes criteria such as how the tax 
expenditure relates to other federal programs and how evaluation of 
the tax expenditure should be managed. A review of retirement tax 
expenditures for DC plans and IRAs should include all aspects of the 
tax expenditure evaluation framework. 

[87] For more details on our methodology, see appendix I. 

[88] Internal Revenue Service, "Abusive Roth IRA Transactions," 
Internal Revenue Bulletin No. 2004-4, Notice 2004-8 (Jan. 26, 2004). 

[89] "Self-dealing" specifically refers to the prohibited transactions 
set forth in 26 U.S.C. § 4975(c)(1)(D)-(F). 

[90] 26 C.F.R. § 301.6011-2(b)(1). IRS is generally prohibited from 
requiring those filing less than 250 returns annually from filing 
electronically. 26 U.S.C.§ 6011(e)(2)(A). Each type of information 
return is considered a separate return for determining the 250 
threshold. 26 C.F.R. § 301.6011-2(c)(1)(iii). 

[91] See GAO, Partnerships and S Corporations: IRS Needs to Improve 
Information to Address Tax Noncompliance, [hyperlink, 
http://www.gao.gov/products/GAO-14-453] (Washington, D.C.: May 14, 
2014); Tax Administration: IRS Could Improve Examinations by Adopting 
Certain Research Program Practices, [hyperlink, 
http://www.gao.gov/products/GAO-13-480] (Washington, D.C.: May 24, 
2013); and E-Filing Tax Returns: Penalty Authority and Digitizing More 
Paper Return Data Could Increase Benefits, [hyperlink, 
http://www.gao.gov/products/GAO-12-33] (Washington, D.C.: Oct. 5, 
2011). 

[92] See GAO, IRS 2015 Budget Long-Term Strategy and Return on 
Investment Data Needed to Better Manage Budget Uncertainty and Set 
Priorities, [hyperlink, http://www.gao.gov/products/GAO-14-605] 
(Washington D.C.: June 12, 2014) 

[93] Internal Revenue Service, Calendar Year Projections of 
Information and Withholding Documents for the United States and IRS 
Campuses, Publication 6961 (Washington, D.C.: 2014). 

[94] The range is partly attributable to the different transcription 
systems that IRS could use. A W&I program analyst said that the 
estimates are for direct costs only and are dependent on programming 
changes being made to accommodate the record layout for transcription. 
IRS also estimates that it would cost as much as $38,000 in necessary 
programming for the transcription. 

[95] There is a 6-year statute of limitations for assessment if the 
taxpayer omits gross income in an amount that exceeds 25 percent of 
the gross income reflected on the return. Even if a substantial error 
is identified, the IRS generally will not go back more than the last 
six years. Also, the clock for the statute of limitations does not 
begin to run until all required tax returns are filed. As discussed 
below, IRS has considered legislative action to extend the statute of 
limitations to 6 years for all IRA activity. 

[96] For example, IRS Chief Counsel officials said IRS has not 
completed an audit in which the founder stock purchase facts were 
present. DOL retains the ultimate authority to interpret whether such 
a transaction would constitute a prohibited transaction. 

[97] For employer plans, IRS has a memorandum of understanding with 
DOL established in 2003 setting out procedures for collaborating and 
coordinating in carrying out their joint oversight of prohibited 
transactions. An addendum issued in October 2013 added detail to the 
procedures for communicating and making referrals. 

[98] 140 T.C. 216 (2013). 

[99] The IMT also suggested changing rules about the duties and role 
of custodians with respect to appraisals and due diligence. In 
addition, the IMT suggested exploring custodian penalties either under 
existing code sections or through new legislation. 

[100] This Executive Steering Committee is a forum to develop a 
unified cross-divisional approach to compliance strategies needing 
collaboration, including emerging issue and abusive tax avoidance 
transactions. 

[101] According to Treasury's estimates, the Obama Administration's 
fiscal year 2015 proposal limiting the total accrual for tax-favored 
retirement benefits would generate an estimated $28.4 billion from 
2015 through 2024. However, the Joint Committee on Taxation estimated 
that the Administration's 2015 proposal would generate about $4.3 
billion for a similar period. 

[102] [hyperlink, http://www.gao.gov/products/GAO-08-654]. 

[103] IRS, An Important Message for Taxpayers with IRAs, Publication 
3125 (10-2009), Catalog Number 26091B. 

[104] All percentage estimates derived from samples used in this 
report have 95 percent confidence intervals that are within plus or 
minus 1 percentage point of the estimates themselves, unless otherwise 
specified. All other estimates in this report have 95 percent 
confidence intervals that are within plus or minus 15 percent of the 
estimates themselves, unless otherwise specified. 

[105] Estimates based on the small group of taxpayers we studied may 
have very wide confidence intervals. Our estimates related to the 
larger IRA balances are less precise as the number of filers in these 
categories decreased. 

[106] The predominant type of defined contribution (DC) plan, the 
401(k) plan, became available in 1980. Prior to 1987, DC plans had a 
single limit on employer and employee contributions. The Tax Reform 
Act of 1986 imposed a limit on employee deferral contributions, but 
still maintained the total limit on annual contributions. 

[107] An individual with multiple employers could participate in more 
than one employer DC plan. Also, an individual could roll over a lump 
sum distribution from an employer DC plan. 

[108] GAO, Private Pensions: Pension Tax Incentives Update,[hyperlink, 
http://www.gao.gov/products/GAO-14-334R] (Washington, D.C.: Mar. 20, 
2014); Private Pensions: Some Key Features Lead to an Uneven 
Distribution of Benefits, [hyperlink, 
http://www.gao.gov/products/GAO-11-333] (Washington, D.C.: Mar. 30, 
2011); and Private Pensions: Issues of Coverage and Increasing 
Contribution Limits for Defined Contribution Plans, [hyperlink, 
http://www.gao.gov/products/GAO-01-846] (Washington, D.C: Sept. 17, 
2001). 

[109] For our analysis of IRA balances using SOI estimates, we 
examined aggregate IRA balances by taxpaying unit. A tax return could 
include more than one person, such as a married couple filing a joint 
return. 

[110] We previously calculated the IRA contribution scenario showing 
investment returns equal to historical interest rates reported by the 
Social Security trustees for special issue government bonds. See GAO, 
Individual Retirement Accounts: Preliminary Information on IRA 
Balances Accumulated as of 2011, [hyperlink, 
http://www.gao.gov/products/GAO-14-878T] (Washington, D.C.: Sept. 16, 
2014). 

[111] Fees charged for such services as investment management, 
recordkeeping, consulting, and customer service, can also reduce 
accumulated savings. GAO, 401(k) Plans: Increased Educational Outreach 
and Broader Oversight May Help Reduce Plan Fees, [hyperlink, 
http://www.gao.gov/products/GAO-12-325] (Washington, D.C.: Apr. 24, 
2012). An additional 1 percent annual charge for fees could reduce an 
individual account balance by 17 percent over a 20 year period. GAO, 
Private Pensions: Changes Needed to Provide 401(k) Plan Participants 
and the Department of Labor Better Information on Fees, [hyperlink, 
http://www.gao.gov/products/GAO-07-21] (Washington, D.C.: Nov. 16, 
2006). DC plan fees can range from an average of 0.15 to 1.33 percent 
of assets depending on the size of the plan. GAO, 401(k) Plans: 
Increased Educational Outreach and Broader Oversight May Help Reduce 
Plan Fees, [hyperlink, http://www.gao.gov/products/GAO-12-325] 
(Washington, D.C.: Apr. 24, 2012). 

[112] As with retirement plans, leakages from IRA accounts may occur 
when IRA owners use their accumulated savings prior to retirement for 
nonretirement purposes thereby reducing the accumulated balances. GAO, 
401(k) Plans: Policy Changes Could Reduce the Long-term Effects of 
Leakage on Workers' Retirement Savings, [hyperlink, 
http://www.gao.gov/products/GAO-09-715] (Washington, D.C.: Aug. 28, 
2009). 

[113] GAO, Tax Expenditures: Background and Evaluation Criteria and 
Questions [hyperlink, http://www.gao.gov/products/GAO-13-167SP] 
(Washington, D.C.: Nov. 29, 2012). This guide outlines a series of 
questions and criteria that can be used to evaluate tax expenditures--
reductions in a taxpayer's tax liability that are the result of 
special exemptions and exclusions from taxation, deductions, credits, 
deferrals of tax liability, or preferential tax rates. To develop the 
questions, we reviewed our prior work on tax expenditures, tax reform, 
results-oriented government, and program evaluation, and interviewed 
experts in tax policy and program evaluation. Also, see GAO, 
Understanding the Tax Reform Debate: Background, Criteria, & 
Questions, [hyperlink, http://www.gao.gov/products/GAO-05-1009SP] 
(Washington, D.C.: September 2005). This report describes how the 
criteria can be used to evaluate tax policy. In developing the report, 
we relied on government studies, academic articles, and the advice of 
tax experts to provide us with information on the issues surrounding 
the tax reform debate. 

[114] For prior audits of IRS enforcement of IRA tax laws, see 
Treasury Inspector General for Tax Administration (TIGTA), A Service-
wide Strategy Is Needed to Address Growing Noncompliance With 
Individual Retirement Account Contribution and Distribution 
Requirements, 2010-40-043 (Washington, D.C.: Mar. 29, 2010); 
[hyperlink, http://www.gao.gov/products/GAO-08-654]; and TIGTA, 
Individual Retirement Account Contributions and Distributions Are Not 
Adequately Monitored to Ensure Tax Compliance, 2008-40-087 
(Washington, D.C.: Mar. 28, 2008. See also [hyperlink, 
http://www.gao.gov/products/GAO-13-167SP]; Managing for Results: Key 
Considerations for Implementing Interagency Collaborative Mechanisms, 
[hyperlink, http://www.gao.gov/products/GAO-12-1022] (Washington, 
D.C.: Sept. 27, 2012); Tax Gap: IRS Could Do More to Promote 
Compliance by Third Parties with Miscellaneous Income Reporting 
Requirements, [hyperlink, http://www.gao.gov/products/GAO-09-238] 
(Washington, D.C.: Jan. 28, 2009); Results-Oriented Government: 
Practices That Can Help Enhance and Sustain Collaboration among 
Federal Agencies, [hyperlink, http://www.gao.gov/products/GAO-06-15] 
(Washington, D.C.: Oct. 21, 2005); and [hyperlink, 
http://www.gao.gov/products/GAO-05-1009SP]. 

[115] Our model, including the tax and return assumptions, is based on 
a similar example produced in Brady, Peter. Investment Company 
Institute, The Tax Benefits and Revenue Costs of Tax Deferral 
(Washington, D.C.: September 2012), as well as a Joint Committee on 
Taxation (JCT) publication, JCT, Present Law and Background Relating 
to the Tax Treatment of Retirement Savings, JCX-32-12 (Washington, D. 
C.: Apr. 13, 2012). 

[116] For further discussion, see JCT, Present Law and Background 
Relating to the Tax Treatment of Retirement Savings, JCX-32-12, 
(Washington, D.C.: Apr. 13, 2012), 68-71. 

[117] The example is based in part on a filing of SEC Form S-1, which 
requires disclosure of the number of shares beneficially owned at the 
time of the offering by directors, executive officers, and holders of 
more than 5 percent of any class of the company's voting securities. 
According to SEC officials, disclosure regarding an individual's Roth 
IRA is not explicitly required on Form S-1. 

[118] This example assumes no fees, trading costs, or commissions on 
transactions. 

[119] This contribution establishes the general partner as a partner 
in the fund and gives the general partner the right to performance 
fees negotiated with outside investors. These performance fees can be 
disproportionately larger than general partner's investment if the 
fund is successful. In other words, the general partner's contribution 
is to a large extent an investment of key employees' ideas, expertise, 
and work to make the fund a success rather than an investment of 
capital. If, on the other hand, the fund is not a success, the general 
partner may not receive any performance fees. For this reason, the 
general partner's contribution is referred to as a profits interest in 
the fund. According to an industry stakeholder. the general partner 
may also make a larger investment in the fund on the same terms as 
other outside investors, or limited partners. 

[120] This example assumes no fees other than the general partner's 
carried interest in the fund. For example, private equity firms 
generally charge fees both to outside investors for managing the fund 
and to portfolio companies for providing advisory services. 

[121] For simplicity, we assume no distributions until the last day of 
the investment fund. In practice, the timing of distributions varies. 

[End of section] 

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