A Little Peek at New IRS IRA Reporting Requirements

Speak of the devil, while I just did a blog on new IRA reporting requirements for 2015, the IRS has come out with a “DRAFT” copy of a newly-proposed Form 5498.  The primary (if not sole) purpose of this draft form, and what will be a final revised Form 5498, is to ascertain and report the FMV (Fair Market Valuation) of “hard to value” assets within an IRA.

Your self-directed IRA custodians will be providing you further information on this new requirement in 2015, but there is no reason why one shouldn’t take a look at the draft Form 5498 so you can see what changes will most likely be made.  As noted in the previous post, this new form will ask for more detailed information on such assets within the plan, and you should prepare accordingly.  It would not be unreasonable to believe that the IRS is now desiring more detailed information for, at minimum, two reasons:

1)  to correctly determine the FMV of IRA plans that are taking distributions or RMDs (Required Minimum Distributions), and

2)  to identify self-directed IRA owners

Why Identify IRA Account Owners?

Unfortunately, there are people who have self-directed IRAs who play games with the rules.  Even for those individuals who are trying to do things right, they may have inadvertently entered into a transaction that is an IRS Prohibited Transaction.  As the IRS has very tough financial penalties (think full distribution (taxes on entire amount) and penalty tax if under 59.5 years of age) for Prohibited Transactions within IRA, it is not out of the realm of possibilities that self-directed IRAs may be subject to audit.  As has been noted before, IRAs are “low hanging fruit” just ready for the pickins.

As most of you who are self-directed IRA account owners already know, current and past reporting requirements dictated that the custodian only provide a numerical value for the assets of the IRA, not a breakdown by category.  In an IRA LLC, where the IRA account owner may also be the LLC manager, the custodian relies upon you to provide an FMV of the IRA LLC.

However, effective in 2015, the custodians of self-directed IRA LLCs (specifically) will need you to provide not only a value of your IRA LLC, but also a breakdown of the assets owned by the IRA LLC.  Some examples on what is currently drafted:

Box 15b-A –Stock or other ownership interest in a corporation that is not readily tradable on an established securities market;

Box 15b-B — Short or long-term debt obligation that is not traded on an established securities market;

Box 15b-C — Ownership interest in a limited liability company or similar entity (note from John…this is the IRA LLC membership interests);

Box 15b-D — Real estate (note from John…this is probably the most popular investment category of IRA LLCs);

Box 15b-E — Ownership interest in a partnership, trust, or similar entity (unless the interest is traded on an established securities market);

Box 15b-F — Option contract or similar product that is not offered for trade on an established option exchange;

Box 15b-G — Other asset that does not have a readily available FMV (note from John…this is a “catch-all” category); and

Box 15b-H — More than two types of assets (listed in A through G) are held in this IRA.

Get prepared for the new requirements.  If one is operating, administering and record-keeping their IRA or IRA LLC is a compliant manner, they should have no concerns related to this new reporting.  It is incumbent upon you as the IRA account owner and, possibly, IRA LLC account manager to always operate your IRA in compliance with all IRS regulations.

As always, this information is intended to be educational in nature.  It is not intended, nor should it be interpreted as, any form of tax, legal, financial or investment advice.  You must always consult with your respective professional in all such matters.