They’re BACK! … GAO conducting a third study of SDIRA marketplace

Recent News, Self Directed IRA, Tax, ,

Earlier this week, I had my third official interview with the Government Accountability Office (GAO).  First, a little history…I was first contacted by the GAO in late 2013, for a study they had been asked to conduct ((by Senator Ron Wyden, D-OR) on so-called “Large Balance IRAs” (a real “eye of the beholder” term!).  This first study was published in November 2014 and discussed methods that IRA owners have used to grow “large IRAs” – and how the IRS and Congress could potentially police the marketplace more effectively.  The official title of the first report was comically long (“IRS Could Bolster Enforcement on Multimillion Dollar Accounts, but More Direction from Congress Is Needed“), but it does appear that the IRS is now focusing a bit more on these types of accounts (particularly large “Roth IRAs”), whether because of this study or not.

I was interviewed for the second GAO study in 2015, but it was not published until early 2017, under the equally brief title “Improved Guidance Could Help Account Owners Understand the Risks of Investing in Unconventional Assets“.  This study focused less on the “size” of the account, but instead on the unique legal/tax considerations involved when investing “self-directed” retirement accounts into non-traditional assets (e.g., real estate, private equity, lending, etc.).  Example legal and tax considerations include things like: prohibited transactions, unrelated business taxable income (UBTI), valuation problems (particularly when a “required minimum distribution” is required), etc.

The third iteration of the GAO’s work is going to focus on difficulties that the IRS has in enforcing the tax laws in this area.  This third study is somewhat contradictory to the second study, because the second GAO report took a sympathetic view as it relates to self-directed IRA accountholders – i.e., “we understand the rules aren’t clear, and we think that the IRS and/or Congress should give you more guidance” – but the third study appears to be developing a strategy for the IRS to attack these accounts – i.e., “people don’t know what they are doing, go get’m!”

My interview this week with the GAO included four GAO Analysts and two GAO attorneys, which pretty closely mirrors the interview I had in 2015 – i.e., the GAO appears to be committing significant resources to this project.  My general statements to the GAO were the same as they were in 2013 and 2015, i.e., although there is a fair amount of legal/tax “noncompliance” in the self-directed IRA marketplace, that is mostly because there is a lack of information and IRS guidance.  For this reason, I believe that the IRS (and Congress) need to first provide more certainty regarding the applicable legal/tax rules, before then deciding to drop the hammer on non-compliance.