The Government Accountability Office (GAO) published its final report on Individual Retirement Accounts (IRAs), offering some recommendations for Congress and the IRS on so-called “mega” IRAs.
As had the agency’s preliminary reports on IRAs, the new report notes that a small number of taxpayers has accumulated larger IRA balances. But this time it offers an explanation for those situations, noting that they likely occurred by account holders investing in assets “unavailable to most investors” that were initially valued very low and “offering disproportionately high potential investment returns if successful.”
The report notes that, for example, founders of companies who use IRAs to invest in non-publicly traded shares of their newly formed companies “…can realize many millions of dollars in tax-favored gains on their investment if the company is successful.” The GAO also notes that, with no total limit on IRA accumulations, the government forgoes millions in tax revenue, and that the accumulation of these large IRA balances by a small number of investors “stands in contrast to Congress’s aim to prevent the tax-favored accumulation of balances exceeding what is needed for retirement.”
GAO Recommendations
The GAO report includes recommendations for Congress, specifically revisiting the use of IRAs to accumulate large balances and consider ways to improve the equity of the existing tax expenditure on IRAs. The report says that options could include limits on:
As had the agency’s preliminary reports on IRAs, the new report notes that a small number of taxpayers has accumulated larger IRA balances. But this time it offers an explanation for those situations, noting that they likely occurred by account holders investing in assets “unavailable to most investors” that were initially valued very low and “offering disproportionately high potential investment returns if successful.”
The report notes that, for example, founders of companies who use IRAs to invest in non-publicly traded shares of their newly formed companies “…can realize many millions of dollars in tax-favored gains on their investment if the company is successful.” The GAO also notes that, with no total limit on IRA accumulations, the government forgoes millions in tax revenue, and that the accumulation of these large IRA balances by a small number of investors “stands in contrast to Congress’s aim to prevent the tax-favored accumulation of balances exceeding what is needed for retirement.”
GAO Recommendations
The GAO report includes recommendations for Congress, specifically revisiting the use of IRAs to accumulate large balances and consider ways to improve the equity of the existing tax expenditure on IRAs. The report says that options could include limits on:
- the types of assets permitted in IRAs;
- the minimum valuation for an asset purchased by an IRA; or
- the amount of assets that can be accumulated in IRAs and employer sponsored plans that get preferential tax treatment.
- Approve plans to fully compile and digitize the new data from electronic and paper-filed Form 5498s to ensure the efficient use of the information on non-publicly traded IRA assets.
- Conduct research using the new Form 5498 data to identify IRAs holding non-public asset types, such as profits interests in private equity firms and hedge funds, and use that information for an IRS-wide strategy to target enforcement efforts.
- Work in consultation with the Department of the Treasury on a legislative proposal to expand the statute of limitations on IRA noncompliance to help IRS pursue valuation-related misreporting and prohibited transactions that may have originated outside the current statute's 3-year window.
- Building on research data on IRAs holding non-public assets, identify options to provide outreach targeting taxpayers with nonpublic IRA assets and their custodians, such as reminder notices that engaging in prohibited transactions can result in loss of the IRA's tax-favored status.
- Add an explicit caution in Publication 590 Individual Retirement Arrangements (IRAs) for taxpayers about the potential risk of committing a prohibited transaction when investing in non-publicly traded assets or directly controlling IRA assets.
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