IRS Requires Additional Reporting on Your IRA?

New, Expanded Reporting Requirements That May Affect Your IRA:

  • The 5498 form which reports annual contributions and the fair market value of the assets in the IRA.

  • The 1099-R that reports any distributions from the IRA to the IRS each year.

Additions to Form 5498

New boxes (15a & 15b) have been added to  Form 5498 for 2014 to report on those “non-traditional” assets held within the IRA that are routinely ”NOT traded on established securities markets” or as the IRS defines it “assets not having a readily available FMV”.  Box 15a will be used to report the fair market value of the non-traditional assets which are coded and reported in 15b.

Assets Established by the New Codes

  1. Private stock or other ownership interest in a corporation
  2. Short or long term debt obligations(promissory notes)
  3. Ownership interest in a limited liability company(LLC) or similar entity
  4. Real estate
  5. Ownership interest in a partnership, trust, or similar entity
  6. Option contracts
  7. Other assets that do not have a readily available fair market value
  8. If more than 2 different assets types are in the account (up to 2 codes(A thru G) may be entered into box 15b)

Reporting Requirements

Custodians/Administrators are required to report, to the IRS and the client, any distributions taken from IRAs using Form 1099-R. The amount distributed and the type of distribution with other information is reported.  The new reporting requirements add code “K” to the list of possible “types of distribution” codes to record in box 7 of the form.

Code K

The new code “K” is used to report distributions of IRA assets not having a readily available fair market valuation as indicated previously. 

This new code will be used in conjunction with the distribution codes for normal or early distributions from pre tax accounts, such as traditional IRAs, conversions to Roth IRAs, death distributions to beneficiaries, disability,  rollover distribution from and IRA to a 401k or other qualified employer plan, etc.  If the distribution is an asset with readily available fair market value such as cash code “K” will not be used.

Reasons for the New Codes

The use of these new codes will make it easier for the IRS to identify and target these transactions for audit to make sure an appropriate value was reported for taxation purposes.

The changes spot light the importance of providing accurate fair market values for the non-traditional assets and all pertinent documentation on how the value was established. 

Audit Information

This information will be critical in an audit environment. This additional information will also allow the IRS to better understand what percentage of IRAs hold “non-traditional” assets, as well as the types of assets held and distributed. 

This will allow the IRS to more efficiently focus their audit personnel and programs. The IRS said in a statement e-mailed to Kiplinger’s Retirement Report October 2012.

 “We are developing a plan to reduce noncompliance with IRA contribution and minimum distribution requirements, and we are on track to complete it by October 15,”

This may have been the IRS original intent but undoubtedly it will raise the audit profile for self-directed IRAs. This is unsettling at the least, even for those who diligently follow the rules.

The true impact is yet to be felt with all the new responsibilities and new personnel in the IRS. These requirements are optional for 2014 but most likely will be mandatory for 2015.

Rules & Regulations

The new requirements will bring more regulatory pressure on fair market valuation and asset type determination reporting.  It is important that you continue to work with knowledgeable administrators such as CamaPlan and take advantage of the resources provided so you know and understand the rules and regulations. 

Stay Out of Trouble With the IRS

Education and working with the right professionals is your best defense and the easiest way to stay out of trouble with the IRS.  Take advantage of the CamaPlan free education and other resources.

Carl Fischer is a founder of CamaPlan and a Certified IRA Services Professional (CISP). CamaPlan is a third party administrator of self-directed IRAs with offices located outside Philadelphia and in central Florida.

More Information

For more information on this subject reference IRS “Instructions for Forms 1099-R and 5498”

This article is not intended to render tax, legal, accounting, investment, or other professional advice. If tax, legal, accounting, investment, or other similar expert assistance is required, the services of a competent professional should be sought.