Hard-to-Value Assets in Self-Directed IRAs on IRS Audit Radar

Effective in 2015, it became mandatory that self-directed IRA custodians reveal to the government the types of hard-to-value assets held inside self-directed IRAs. These types of assets include LLCs (commonly referred to as a single member IRA LLC) that are funded with self-directed IRA funds. This same rule also applies to distributions from self-directed IRAs; therefore, this new law will especially affect those who are required to take required minimum distributions (RMDs). 

The way the above will be communicated to the IRS is through the issuance of Form 5498. All IRA custodians are required to annually file this form with the IRS and a states the prior year's ending value of the account and whether an RMD is required in the coming year. This new rule is being enforced starting wit the Form 5498s that will be issued in 2016 which will report the IRA information for the prior year (in this case 2015). The Form 5498 has added boxes where the self-directed IRA custodian is required to list the assigned code for assets such as LLCs and real estate that are considered hard-to-value assets. 

This new form 5498 reporting of hard-to-value assets in self-directed IRAs is for the purpose of the IRS deciphering which self-directed IRAs to start auditing more closely. On a side note, are not subject to Form 5498 reporting so self-directed IRA holders may want to consider transferring their self-directed IRAs to a solo 401k plan. Solo 401k plans are subject to reporting the total value of the account on Form 5500-EZ once the values reaches $250,000 and even then just the total value is reported not the types of assets held in the solo 401k plan.

In sum, going forward self-directed IRA owners better be armed with valuations that support the value of hard-to-value assets held inside their self-directed IRAs, especially those who are taking distributions or are subject to required minimum distributions, and are processing Roth IRA conversions as Form 1099R is also now subject to the same hard-to-value asset reporting codes.

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