Paying for appraisals of IRA holdings.
From an earlier post I had missed the part:
Alan-iracritic – Wed, 2013-08-14 19:24.
“…an appraisal or analysis needs to be done and paid for by your IRA.”
As a consequence I paid for the appraisal with non IRA money. Do I need to withdraw from the IRA? It happened this year.
TIA
Permalink Submitted by Dave Haynie on Fri, 2014-10-31 21:05
Hmmm…I guess no interest, but I got an answer from Slott’s webinair yesterday so I’ll answer my own question based on that.This is a failed IRA. Per the webinair they gave this situation a spcific answer. When I went to IRS Pub 590 the only thing I could find is that only fees charged by the IRA trustee can be paid for with money outside the IRA. Thus the appraiser being a third party must be paid for by the IRA.In my case, since it’s the same year, I’m going to have the IRA custodian pay the fee then have the appraiser refund the original payment. I confirmed that they would be willing to do this.What I don’t know is if this is an acceptable remedy to the IRS or if once I paid the fee outside the IRA there is no recovery? Any opinions out there???
Permalink Submitted by mk foss on Sat, 2014-11-01 00:01
The prohibited transactions rules are tough and once you violate them, I believe that you’re stuck. Your solution might work but you won’t know for certain unless it’s found by IRS or someone else. A Florida bankruptcy court (In re: Ernest W. Willis,Debtor) held that an IRA was not exempt from creditor’s claims because the creditors discovered that he had disqualified his IRA through prohibited transactions even though the IRS never found them.
Permalink Submitted by Joe Luby on Mon, 2014-11-03 19:55
I respectfully disagree with the notion that paying for the appraisal with non-IRA funds constitutes a prohibited transaction (“PT”). First, it does not meet the definition of a PT per Section 4975, in my opinion. Second, you are not personally benefitting from the IRA by paying for an appraisal which is required to meet the IRS reporting obligations and which does not impace the value of the IRA assets themselves. There is no place in the tax code or regulations related to IRAs that indicate it is the IRA’s responsibility to obtain or pay for an appraisal of its own assets. In fact, just the contrary. The rules require that the IRA trustee/custodian determine the annual FMV of the IRA assets for reporting purposes. However, in actual practice the majority of self-directed IRA trustees (those that typcially hold alternative, hard-to-value type assets) attempt to impose this requirement on the IRA owner and demand that the IRA owner provide an annual valuation update to the trustee. Many require such updates to be in the form of an appraisal performed by a third-party. None that I’m aware of mandate that such an appraisal be paid for by the IRA. Rather, they simply insist that the IRA owner obtain an appraisal and provide it to the trustee by a certain date. If using non-IRA funds to pay for this administrative cost in order to meet IRS reporting obligations, and which neither adds to nor detracts from the value of the IRA assets, constituted a prohibited transaction, then a huge number of self-directed IRAs have been incurring such consequences for years at the specific direction of their trustees/custodians. Paying for information pertaining to the value of assets held in the IRA can also help an IRA owner determine whether to do a Roth conversion (among other planning transactions and scenarios) and assist their advisor (CPA, attorney, or financial advisor) whom the IRA owner may also pay for number-crunching type services to advise on the merits of the conversion or other transaction(s). No one would argue that such fees (the appraisal or the professional advisor costs) in such a circumstance would be required to come from the IRA in order to avoid a PT. An appraisal for reporting purposes is an administrative cost stemming from holding a non-traditional asset in the IRA which is akin to the trustee/custodian fees related to holding such an asset and has no bearing on the investment itself (i.e., it cannot be considered a “stealth” IRA contribution). Assume a trustee that obtained the valuations as required and such service was included in their overall annual trustee fee. To make the argument that the appraisal fee must come from the IRA would mean that said trustee would have to break its trustee fees down into components and specifically charge the portion related to the valuation to the IRA while giving the IRA owner the choice of how to pay the remainder of the fee. This doesn’t make sense considering that obtaining the valuation is specifically a duty imposed on the trustee by the regulations (i.e., it is a trustee/custodian duty as part of administering the IRA properly).