Few Taxpayers Had Reported IRA Balances Greater Than $5 Million

		Most Taxpayers with IRAs Have IRA Balances of $1 Million or Less

Of the 145 million married couples and individuals who filed individual  income tax returns for tax year 2011, an estimated 43 million, or 30  percent, had IRAs with an estimated total balance—in terms of FMV  reported by custodians—of $5.2 trillion at the end of 2011.percent of those taxpayers had aggregate IRA balances of $1 million or  less and accounted for around 78 percent of the total balance. For those with IRA balances  of more than $5 million, most (about 90 percent) have AGI greater than  $200,000. IRA Balances Greater Than $5 Million Could Be Considered Large Based on What Individuals Typically Contribute

While there is no total limit on IRA or DC plan accumulations, scenarios  illustrating the maximum annual contributions by an individual and  employer over time can shed light on what could be considered a large  IRA (see appendix I for the statutory annual contributions limits and more  detailed scenario descriptions). Alternate Strategies Are Likely the Cause of Large IRA Balances That Congress May Not Have Intended

		Investments with Low Initial Values Not Available to Most Investors Help a Small Number of Individuals Accumulate Large IRA Balances

Our interviews with industry stakeholders and review of publicly available  filings with the SEC and DOL indicate that a small number of individuals  with access to certain types of nonpublicly traded shares in companies or  a particular type of partnership interest, as shown in table 4, can generate  IRA balances far exceeding $10 million. Most investors are unlikely to have access to these investments when  their value is low enough to accumulate such disproportionate investment  returns. Third, the statute of limitations for IRS to pursue  cases is generally only 3 years, which poses certain obstacles to pursuing  noncompliant activity that spans years of IRA investment. Congress Likely Did Not Intend IRAs to Result in Tax-Favored Accumulations of Funds beyond Those Reasonably Necessary to Support Individuals in Retirement

Congress enacted ERISA to promote opportunities for individuals to  accumulate resources for their retirement and IRAs were originally  authorized largely to ensure equitable tax treatment for individuals without  access to an employer-sponsored plan. This resulted in inequitable tax treatment of  individuals not covered by employer-sponsored plans. Congress established similar contribution limits on IRAs. In  discussions with industry stakeholders and government officials, a  number of proposals have been raised to address the accumulation of  large IRAs. For example, asset valuation issues may  originate in an employer DC plan before being rolled over to an IRA. IRS Plans to Collect Data to Identify IRAs with Riskier Nonpublic Assets, and Examiner Use Depends on Digitizing the Data

IRS plans to evaluate more data on hard-to-value IRA assets that would  help to refine its enforcement efforts. SB/SE examination officials said that the new Form 5498 data will help  them better identify taxpayers with IRAs invested in nonpublicly traded  assets. Recommendations for Executive Action

We are making five recommendations to the Commissioner of Internal  Revenue. To improve IRS’s ability to detect and pursue noncompliance associated  with undervalued assets sheltered in IRAs and prohibited transactions,  we recommend that the Commissioner of Internal Revenue:
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 nonpublicly traded IRA assets. The Deputy Commissioner agreed that legislation to extend the period of  limitations for assessment of tax associated with IRA noncompliance  would remove an obstacle to IRS efforts to pursue identified IRA  noncompliance. Appendix I: Objectives, Scope, and Methodology

This report: (1) describes the number and types of taxpayers with  individual retirement accounts (IRA) and the size of IRA balances in terms  of aggregate fair market value (FMV), adjusted gross income (AGI), filing  status and age; (2) examines how IRA balances can become large; and  (3) assesses how the Internal Revenue Service (IRS) ensures that  taxpayers with IRAs comply with IRA tax laws. These individuals often comprise  the company’s founders. Assessing IRS Enforcement

To assess IRS’s examinations of IRA rules and provisions, we developed  criteria for evaluating an enforcement program on IRAs.
Why GAO Did This Study

In 2014, the federal government will forgo an estimated $17.45 billion in tax revenue from IRAs, which Congress created to ensure equitable tax treatment for those not covered by employer-sponsored retirement plans. Congress limited annual contributions to IRAs to prevent the tax-favored accumulation of unduly large balances. But concerns have been raised about whether the tax incentives encourage new or additional saving. Congress is reexamining retirement tax incentives as part of tax reform.GAO was asked to measure IRA balances and assess IRS enforcement of IRA laws.
This report (1) describes IRA balances in terms of reported FMV aggregated by taxpayers; (2) examines how IRA balances can become large; and (3) assesses how IRS ensures that taxpayers comply with IRA tax laws. To address these objectives, GAO analyzed 2011 IRS statistical data, reviewed IRS documentation and relevant literature, and interviewed government officials, financial industry stakeholders, and academics. GAO compared IRS enforcement plans and procedures with law and criteria for evaluating an enforcement program.

What GAO Found

For tax year 2011 (the most recent year available), an estimated 43 million taxpayers had individual retirement accounts (IRA) with a total reported fair market value (FMV) of $5.2 trillion. As shown in the table below, few taxpayers had aggregated balances exceeding $5 million as of 2011. Generally, taxpayers with IRA balances greater than $5 million tend to have adjusted gross incomes greater than $200,000, be joint filers, and are age 65 or older. Large individual and employer contributions sustained over decades and rolled over from an employer plan would be necessary to accumulate an IRA balance of more than $5 million. There is no total statutory limit on IRA accumulations or rollovers from employer defined contribution plans.
A small number of taxpayers has accumulated larger IRA balances, likely by investing in assets unavailable to most investors—initially valued very low and offering disproportionately high potential investment returns if successful. Individuals who invest in these assets using certain types of IRAs can escape taxation on investment gains. For example, founders of companies who use IRAs to invest in nonpublicly 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. With no total limit on IRA accumulations, the government forgoes millions in tax revenue. 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.
The Internal Revenue Service (IRS) has enforcement programs covering specific aspects of IRA noncompliance, such as excess contributions and undervalued assets. As recommended by an internal task team, IRS plans to collect data identifying nonpublicly traded assets comprising IRA investments. IRS expects the data will help it identify potential IRA noncompliance. However, research on those taxpayers and IRA assets at risk will hinge on getting resources to effectively compile and analyze the additional data. IRS officials said IRA valuation cases are audit-intensive and difficult to litigate because of the subjective nature of valuation. Additionally, the 3-year statute of limitations for assessing taxes owed can pose an obstacle for IRS pursuing noncompliant activity that spans years of IRA investment.

What GAO Recommends

Congress should consider revisiting its legislative vision for the use of IRAs. GAO makes five recommendations to IRS, including approving plans to fully compile and digitize new data on nonpublicly traded IRA assets and seeking to extend the statute of limitations for IRA noncompliance. IRS generally agreed with GAO's recommendations.