self directed ira
Client formed a self directed ira that owned an llc. client set up a rollover ira (the “self directed ira” was also a rollover ira) and rolled the funds from the llc into a rollover ira for investment purposes. (llc never did any business) He then transferred the monies out of the rollover ira back into the llc. The custodian for the rollover ira sent a 1099R, reporting the transfer as an early distribution. Taxpayer filed its tax return designating the “distribution” as a rollover. IRS is now requesting an explanation as to why the distribution was not reported as taxable. No LLC returns were filed as the LLC never had income. None of the original amounts rolled into either IRAs was used personally and the value currently (the tax year in question was 2012)is close to the amount rolled into the original IRA. Has there been a disqualifying event here?
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Permalink Submitted by Alan - IRA critic on Wed, 2014-08-13 03:46
The LLC should be owned by the IRA and the LLC purchases the desired investments. Removal of the funds from the LLC triggered the 1099R reporting an IRA distribution. Self directed IRA rules are very complex and things must be done in the correct order which does not include pulling assets out of the LLC and then returning them to the LLC. If a proper 60 day rollover had taken place, the IRA receiving the rollover would have issued a 5498. The IRS matches the 1099R and the 5498 and without a 5498 the evidence of a valid rollover is missing and that is what triggered the IRS inquiry. Client apparently did not run these transactions by the self directed IRA custodian. There may also be other tax issues regarding reporting for the LLC if funds were distributed from the IRA.
Permalink Submitted by Peter Hall on Wed, 2014-08-13 12:13
The LLC was formed in 2006. The IRA made the investment in the LLC at the same time. The LLC rolled the monies into the rollover IRA in 2008. Might that have been the point of an improper transaction and what affect would the statute of limitations have on that transaction.? The IRA dropped in value and then came back to the original amount in 2012. That was when the IRA was transferred back into the LLC. Also, each year, the client reported the value of the LLC/ IRA to the custodian. In 2010, the original custodian, Trust Company of America transfered the LLC ownership to IRA Services Trust Company. There were no other distributions from the IRA other than the transfer to the LLC. What would be the best approach to respond to the IRS inquiry?