Got your email Bryan. Our company has fairly extensive experience with the IRS and auditing of self-directed IRAs. I can say we have never had one of our products fail however, there have been failures on the part of the IRA holders or their advisors.
Before I answer the question I'd like to give some background; the basic reason people fail at transactions is that they fail to seek competent advice from a practitioner who has walked through the fire unlike those who speak theoretically about IRS actions. As with so many posts I see there is no shortage of repeated opinion. And these opinions range from their CPA to Uncle Bob the guy who does their annual tax reports (certainly he is a great source).
First the IRS. The IRS has very few auditors that understand SDIRAs and because of that, their personal opinion and their boss' slant has a great influence as to the direction the audit takes. For example, we had a client who had a very straight deal and the auditor assumed she was taking personal advantage. In this case it did not matter if she had a custodial account or an IRA LLC this guy was out for blood. And then we have had client's CPA submit a 1065 return for multi-member IRA LLC improperly causing an audit. If he had just come to us and asked about the filing procedures the audit never would have occurred.
Second the example deal itself. Using the information above as a point of reference the biggest danger you have is being audited on your personal deal itself and the auditor (if they are experienced enough) back tracking to the source. You will be asked under oath as to where the funds came from and required to give all pertaining information. Your IRA LLC operating agreement and/or your loan agreements will be scrutinized for authorization or intent of prohibited transactions and the IRA reporting mechanisms/paths will followed. So now you have what was once disguised open for review. This is where the $1,000 IRA LLCs fall short.
So your agreements and paper trail better be clean and avoid any opportunity for bread crumbs. If at all possible have the loan protected by collateral.
The short answer is, it depends on the interpretation of the auditor or the regional SDIRA IRS auditor whether there is evidence of self-dealing. In both examples I described neither had prohibited transactions but their audits were a results of auditors following the trail or bad practice by your CPA.
I submit this is why investors should consider spending over $2,000 on an IRA LLC with a firm that has gone through the fire and has seen the IRS in action and wiped their brow when each and every platform has passed scrutiny rather than relying on your CPA/attorney who studies the code for the first time and guess at the appropriate language. Unfortunately, relying on custodians for guidance will often result in a different answer every time you call and when you do need help you are on your own.
The moral of the story is find someone that can provide real experience and understands the mechanics and motivations before you you rely on posts that are often repeats of third or fourth hand information.
