The Internal Revenue Service needs to update its IRA publications to better explain “unconventional” IRA investments and the related tax consequences and potential schemes associated with them, the Government Accountability Office said.
In its 40-page report, released Wednesday, the GAO states that unconventional IRA investments — such as real estate, certain precious metals, private equity and virtual currency — “can introduce risks to account owners who assume greater responsibility for navigating the complex rules that govern tax-favored retirement savings.”
IRS enforces tax rules relating to IRAs and can assess additional taxes, GAO states.
GAO said that the IRS needs to:
- Assess options for updating its IRA publications to provide more information for taxpayers with unconventional assets;
- Evaluate the feasibility of requiring disclosure for high-risk IRA asset types associated with abusive tax schemes; and
- Develop auditor resources (such as training materials or job aids) that explain how IRAs with unconventional assets can generate unrelated business income tax.
IRS generally agreed with GAO’s recommendations.
IRS Publications 590-A and 590-B serve as a general handbook for millions of taxpayers with IRAs.
However, GAO said the two-part publication provides limited information for IRA owners with unconventional assets surrounding complex tax rules in four compliance areas: barred investments, prohibited transactions, unrelated business income and fair market value.
GAO found other limited information about these topics on IRS’ website.
“With only about 2% of IRAs invested in unconventional assets, adding more pages to Publications 590-A and 590-B may not be practical,” GAO said. “By assessing options for informing IRA owners investing in unconventional assets, such as directing them to web pages with specialized information and technical regulations, IRS could better help them comply. Noncompliance involving unconventional IRA assets is difficult to detect and time consuming for IRS to pursue.”
Said GAO: “Whereas IRS relies on automated enforcement for IRAs invested in conventional assets held by custodians and trustees, enforcement for IRAs invested in unconventional assets or under IRA owner control requires labor-intensive audits of individual taxpayers.”
— Check out IRS Readies for Tax Time on ThinkAdvisor.