One of the dirty little secrets about self directed IRAs is that most of their owners have made a mistake or two with the investments. The only real saving grace was that nobody (Ok, I mean the IRS) knows the IRA is a self directed IRA with some sort of strange investment, as the only reporting for an IRA, the form 5498, only shows the fair market value of the IRA investments. The 5498 doesn’t break out the type of investments held by the IRA.
Put on your seat beats that is all going to change as of 2014. The IRS released a draft of the instructions for a new form 5498, the reporting form for IRAs. In the draft instructions, 5498 will now list a code for the type of asset the IRA owns.
Own an LLC inside your IRA? That will now be reported on the 5498 as code C. Buying options on real estate? That is going to be code F. Have an asset that is hard to value? We got you covered as well, that is going to be code G.
Lets be realistic about these codes. If your custodian files a form with the IRS telling them the assets are hard to value, what do you think the IRS is going to do? Yep, audit you.
With the trillions of dollars locked away in IRAs, the IRS would be idiots to ignore the shenanigans that are going on with self directed IRAs. You can bet they are going to ramp up audits, and when they find out all the mistakes, well, they’ll probably devote even more resources to these easy pickings.