IRS Urged to Crack Down on Multimillion-Dollar IRAs

The Internal Revenue Service is being urged to bolster its enforcement efforts on multimillion-dollar Individual Retirement Accounts in a new government report that also encourages Congress to provide more direction.

The report, from the Government Accountability Office, found that for tax year 2011, an estimated 43 million taxpayers had IRAs with a total reported fair market value of $5.2 trillion.

Relatively few taxpayers had aggregated balances exceeding $5 million as of 2011 (the most recent year available), the GAO noted. 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.

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, the GAO noted. But concerns have been raised about whether the tax incentives encourage new or additional saving. Congress is re-examining retirement tax incentives as part of tax reform. The GAO was asked to measure IRA balances and assess IRS enforcement of IRA laws.

Former Massachusetts governor Mitt Romney gained notoriety during the 2012 presidential campaign when his outsize IRA was disclosed, and when the GAO released a preliminary report on its findings in September (see Romney-Sized IRAs Get Scrutiny as U.S. Studies Tax Breaks).

Senate Finance Committee Chairman Ron Wyden, D-Ore., issued a statement following the release of the GAO report on so-called “mega IRAs.” The GAO found that for tax year 2011, roughly 600,000 taxpayers had IRA accounts worth more than $1 million, and about 9,000 taxpayers had IRAs worth more than $5 million. Those figures stand in stark contrast to most Americans, who had a median IRA account balance of about $21,000, Wyden pointed out. The Finance Committee held a hearing on this and other retirement savings issues in September. 

“The state of retirement savings in the U.S. is completely out of whack,” Wyden said in a statement. “On one hand you’ve got people sheltering millions of dollars in mega IRAs, while at the same time nearly a third of Americans have nothing set aside for retirement. It’s abundantly clear that America needs a better system and tax code that supports retirement planning for all Americans. I’m committed to working with Treasury and the IRS to implement GAO’s recommendations and help prevent additional abuse and fraud in the tax code.”

In response to the report, Wyden sent a letter to Treasury Secretary Jack Lew and IRS Commissioner John Koskinen requesting they move forward on implementing GAO’s recommendations. Continuing his push to increase and protect existing retirement savings, Wyden also sent a letter to the GAO requesting a review of self-directed IRAs, which may be a growing target for fraud.

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, the GAO noted.

“Individuals who invest in these assets using certain types of IRAs can escape taxation on investment gains,” said the report. “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 GAO pointed out. “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,” said the GAO.

The Internal Revenue Service has enforcement programs covering specific aspects of IRA noncompliance, such as excess contributions and undervalued assets, the GAO pointed out. As recommended by an internal task team, the IRS plans to collect data identifying nonpublicly traded assets comprising IRA investments.

The IRS anticipates 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, the GAO noted.

IRS officials said IRA valuation cases are audit-intensive and difficult to litigate because of the subjective nature of valuation. In addition, the three-year statute of limitations for assessing taxes owed can pose an obstacle for IRS pursuing noncompliant activity that spans years of IRA investment.

The GAO recommended that Congress should consider revisiting its legislative vision for the use of IRAs. The GAO made 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.

The IRS generally agreed with the GAO's recommendations. “IRA noncompliance can span IRS divisions and we have minimized this risk through ongoing cross-functional coordination,” wrote John Dalrymple, the IRS’s deputy commissioner for services in enforcement, in response to the report.

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