Full Extent of Retirement Account Investment in Unconventional Assets Is Unknown, but Custodians Reported Nearly Half a Million Accounts Invested in Unconventional Assets in 2015

		Federal Government Collects Limited Data on Unconventional Asset Holdings in Retirement Accounts

To date, federal data collection efforts capture limited information on the  unconventional asset holdings in IRAs and solo 401(k) plans, making  their overall prevalence unknown. For tax year 2015,  IRS began requiring IRA custodians to report selected information on  unconventional asset holdings in IRAs. As of November 2016, IRS has  not provided a date on when the new IRA asset type data will be available  for further analysis. IRAs made up the vast majority of accounts and assets reported, and  solo 401(k) plans constitute less than 1 percent of reported accounts and  assets. Retirement Account Owners Investing in Unconventional Assets Are Responsible for Account Management and Compliance

Transferring existing retirement savings to a new account or plan that  allows investment in unconventional assets expands the roles and  responsibilities of account owners for managing aspects of their  accounts. For example, all 20  custodial agreements we reviewed required individuals to agree to be  responsible for directing their investments; and oversee the selection,  management, monitoring, and retention of all investments in the account. Our analysis of  custodian documentation found that assets like promissory notes or  precious metals require minimal documentation from the account owner,  while other assets, such as real estate or private equity, can require the  account owner to provide considerable documentation before a purchase  can be made. IRA Owners with Unconventional Assets Can Face Challenges with Tax Liability, Valuation, and Distribution, and IRS Provides Limited Guidance to Assist Them

		Certain IRA Transactions Can Trigger Loss of Tax- Favored Status or Generate Immediate Tax Liability

			Loss of Tax-Favored Status

IRA owners who invest in unconventional assets take on a heightened  risk of engaging in a prohibited transaction and losing tax-favored status  for their retirement savings. Examples  include using an IRA to invest in an active business or using debt to  finance a portion of an asset’s purchase. IRA custodians need to monitor IRA investments for UBTI and pay any  applicable taxes from the IRA, but we found custodians often delegated  the responsibility for monitoring for tax liability to the account owner. Difficulty Obtaining Fair Market Value for Hard-to- Value Assets Can Heighten the Risk of IRA Noncompliance and Fraud

IRA owners who invest in unconventional assets may face challenges  meeting their responsibilities to provide updated FMV information to their  custodian to meet IRS’s annual FMV reporting requirement because  some unconventional assets are inherently hard to value. As a result, the FMV  reported to IRS may not reflect a nonpublicly traded asset’s current value. IRS Provides Limited Guidance to Account Owners Who Invest Their Retirement Savings in Unconventional Assets

Current IRS guidance provides little information to help IRA owners  understand their expanded responsibilities and potential challenges  associated with investing in unconventional assets. Fair market value. Recommendations for Executive Action

To assist IRA owners in addressing challenges associated with investing  their retirement savings in unconventional assets, we recommend that the  Commissioner of Internal Revenue take the following three actions:
Provide guidance to IRA owners on the potential for IRA transactions  involving certain unconventional assets to generate unrelated  business taxable income subject to taxation in the current tax year  and subsequent years. Appendix I: Objectives, Scope, and Methodology

The objectives for this study were to determine: (1) what is known about  the prevalence of retirement accounts that invest in unconventional  assets; (2) how these accounts are managed, and; (3) what challenges, if  any, are associated with the administration of these types of retirement  accounts. For all  objectives, we reviewed pertinent federal laws, regulations, and guidance  on the use of retirement account savings, as well as recent federal and  state enforcement actions against entities involved with these types of  retirement accounts. To identify challenges associated with administering retirement  accounts that invest in unconventional accounts, we analyzed investor  complaint data from three federal agencies and two independent  organizations. Next, to learn about the approximate number and value as well as types  of retirement accounts held under custody at the end of calendar year  2015, we conducted a survey data collection effort from the 26 custodians  that we had identified from available sources.
Why GAO Did This Study

Federal law places few restrictions on the types of investments allowable in tax-favored retirement accounts, such as IRAs or employer-sponsored 401(k) plans. Recent federal and state investigations and litigation have raised questions as to whether investing in unconventional assets may jeopardize the accounts' tax-favored status, placing account owners' retirement security at risk. GAO was asked to examine issues related to the potential risks and responsibilities associated with investments in unconventional assets.
GAO examined: (1) what is known about the prevalence of accounts that invest in unconventional assets; (2) how these accounts are managed; and (3) what challenges are associated with administering these retirement accounts. GAO reviewed relevant federal laws, regulations, and guidance; analyzed data collected from the retirement industry; analyzed available industry documents; and reviewed 334 related consumer complaints collected from three federal agencies and two independent entities.

What GAO Found

Federal data collection efforts to date have captured little information on retirement accounts holding unconventional assets—such as real estate, precious metals, private equity, and virtual currency—making the prevalence of such accounts unknown. In tax year 2015, the Internal Revenue Service (IRS) began requiring that custodians or trustees of individual retirement accounts (IRA)—including banks or other institutions approved to hold account assets—report selected information on unconventional assets in their clients' accounts to IRS. As of November 2016, IRS plans to begin compiling the new IRA asset data in 2017, but has not specified when the new IRA asset data will be available for analysis. Seventeen of the 26 custodians, who GAO identified as allowing retirement accounts with unconventional assets and who participated in GAO's data collection effort, reported having nearly half a million of these accounts in their custody at the end of calendar year 2015. IRAs made up the vast majority of accounts and assets reported.
An IRA owner's decision to invest in unconventional assets can expand their role and responsibilities substantially. GAO's review of industry documents found that individuals wanting to invest in unconventional assets through their IRA generally agree to be responsible for overseeing the selection, management, and monitoring of account investments and shoulder the consequences of most decisions affecting their accounts. For example, owners of such accounts assume a fiduciary role, which makes them assume greater responsibility for overseeing the selection, management, and monitoring of account investments, and shoulder the consequences of most decisions affecting their accounts.
Current IRS guidance provides little information to help IRA owners understand their expanded responsibilities and potential challenges associated with investing in unconventional assets. Targeted IRS guidance for these IRA owners may help them navigate the potential compliance challenges associated with certain types of unconventional assets. For example, GAO found that some IRA owners can experience challenges in the following areas:
Monitoring for ongoing federal tax liability : IRA owners are not always aware of the need to monitor the gross income from certain unconventional assets in their accounts for ongoing federal tax liability. For example, IRA owners who invest in active businesses or debt-financed properties need to monitor their accounts for ongoing tax liability that must be paid from the IRA. Failure to do so can result in underpayment penalties.
Obtaining annual fair market valuations for nonpublicly traded assets : IRA owners investing in hard-to-value unconventional assets can face challenges meeting their responsibilities to provide updated fair market value information to their custodian to meet IRS's annual reporting requirement. Failure to provide an updated fair market value in a timely manner can result in a custodian prematurely distributing account assets to the owner at a fair market value that is not current, potentially incorrect, and which could lead to a loss of tax-favored status for their retirement savings.

What GAO Recommends

GAO is making three recommendations to the Commissioner of Internal Revenue to, among other things, improve guidance for account owners with unconventional assets on monitoring for ongoing federal tax liability and to clarify how to determine the fair market value of hard-to-value unconventional assets. IRS generally agreed with these recommendations.