Getting in trouble with self-directed IRA?

[Dmitriy Fomichenko]

One of CPAs we work with sent me their client who have gotten themselves in some trouble with their self-directed IRA.

The client opened self-directed IRA with IRA Resources Trust Company. Then he created an LLC with him and his spouse owning 75% of the LLC and his SD IRA owning the remaining 25%. The LLC was a newly created entity at the time. Client personally created the LLC, paid applicable fees with his personal funds, and used generic Operating Agreement. The custodian reviewed and approved this transaction and authorized transfer of funds from his IRA to the LLC. Then he reimbursed himself for the LLC setup fee from the LLC's checking account.

Next, instead of the LLC purchasing a property using the cash in the bank and getting a non-recourse loan, the client purchased the property in his personal name, got a conventional residential loan, and used money in the LLC for down payment. They are now in the process of quit-claiming the property from their personal names to the LLC.

What do you think?