No. Client should challenge the IRA custodian’s statement value and the 5498 or equivalent form notifying client and the IRS of the year end value of the account. The custodian is responsible for determining an accurate FMV for all IRA assets at year end. If the client were to reduce the RMD based on client’s FMV determination, then appealed the custodian’s value, if the appeal was rejected later and client made up the shortfall and self reported it on Form 5329, the IRS would probably approve the penalty waiver request.

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Technically, the burden to obtain an accurate year-end fair market value (FMV) is on the trustee/custodian.  They are the ones responsible for accurately reporting said FMV on Form 5498 and Form 1099-R, if applicable.  They are the ones subject to penalty for failing to provide accurate information on either of these IRS forms.  And again, technically speaking, they do not have leeway in the level of effort needed to obtain an accurate FMV.  They are expected to expend whatever amount of effort is necessary to obtain accurate data to meet their reporting obligations.  That being said, however, the industry has done a very good job of avoiding this obligation and placing the onus on the IRA owner to obtain updated FMVs for hard-to-value assets.  And there is nothing wrong with requiring the IRA owner obtain an appraisal, for example.  However, the final approval or acceptance of the appraisal as the FMV to be reported on the applicable forms is the responsibility of the trustee/custodian (i.e., they are the ones subject to penalty if the valuation is invalid).  Thus, in a situation where the trustee/custodian requests that the IRA owner obtain an appraisal and the IRA owner fails to do so, the trustee/custodian is not suddenly relieved of its duty to determine the appropriate FMV and report the same as mandated.

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I am familiar with the cases referenced.  Those cases did not address the trustee/custodian actions specifically (i.e., there was no ruling related to the obligations of the trustee/custodian with regard to FMV reporting).  The cases involved IRA owners that failed to properly report taxable IRA distributions in the year required even though a 1099-R had been issued.  The IRA owners’ arguments as to FMV came very late in the game, so to speak, and should have happened before the distribution occurred or immediately thereafter.  There is a common theme to these cases (and others that never make it to court but with which I am familiar) where the IRA owner ignores pertinent documents and reporting requirements which compounds their problems.  Also, in most of the cases that make it to court, the IRS has an interest in ensuring that the IRA assets are valued at their highest amount.  Thus, where the trustee/custodian has issued a Form 1099-R reflecting $100,000, for example, and the IRA owner argues that it was really only $25,000, the IRS has no motivation to agree with the reduced value.  They would rather keep the onus on the IRA owner to disprove the reported valuation received from the trustee/custodian.  Tellingly, the IRS publication “Instructions for Forms 1099-R and 5498” contains a caution notice to trustees/custodians which states: “CAUTION – Trustees and custodians are responsible for ensuring that all IRA assets (including those not traded on established markets or with otherwise readily determinable market value) are valued annually at their fair market value.”  As noted in my prior post, the penalties for failing to file accurate information on Forms 5498 and 1099-R fall on the trustees/custodians, not the IRA owners.  We are in full agreement, I believe, that the IRA owner should address valuation concerns with the trustee/custodian as the first line of defense.  In many cases, IRA owners may have very good cases against their IRA trustees/custodians for reporting invalid valuations, but most are not aware of it.  Assume an IRA that buys $100,000 of a particular publicly-traded stock and an IRA trustee/custodian that continually reports the FMV of said stock as $100,000 for several years without regard to daily market fluctuations in the share price.  No one would dispute that the trustee/custodian is in violation of its reporting obligations.  However, when a trustee/custodian does the exact same thing with an alternative asset, many in the industry believe that they are acting in line with the regulations and that the FMV reporting burden shifted to the IRA owner.  But it did not.  The IRA owner is never at liberty to create and file his/her own Form 5498 or 1099-R.  He/she is instead at the mercy of the trustee/custodian to report accurate FMVs as the rules pertaining to IRA trustees/custodians require. 

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