IRA Prohibited Transaction Fallout
We know that when an IRA engages in a prohibited transaction with its owner it’s treated as having distributed all of it’s assets at their fair market values on the first day of the year.
We’ve discovered that a PT occurred several years ago and assume that the required/proper reporting is to file amended income tax returns for the PT year and all subsequent years showing the deemed distribution of BOY assets (in the PT year) plus reporting all investment income and realized gains as additional income but also reversing any actual distributions previously reported as taxable.
For purposes of reporting the long or short term character of realized gains and losses do we use the deemed distribution date as the date of acquisition?
Does the IRA custodian have to file corrected 1099-Rs and 5498s?
Any other disclosures/reporting required?
Thanks
Permalink Submitted by Alan - IRA critic on Tue, 2018-01-30 01:15
Did not locate a citation, but using 1/1 of the prohibited transaction year as the acquisition date of IRA investments held on that date in the IRA is the only date that makes sense. Acquisitions after 1/1 in the IRA would use the actual acquisition date for purposes of ST or LT holding status. In other words, the IRA is just treated as a taxable account starting 1/1. Since many prohibited transaction are not exposed until a considerable time as passed, a reconstrutive mess is created, and I do not think that the IRA custodian is going to issue 1099B forms for all investment sales back to that 1/1 date. 5498 forms are also not corrected for subsequent changes such as return of excess contributions. 1099R forms are different, since it appears more critical to rescind any such reported distributions done after the 1/1 total distribution 1099R. Many of these prohibited transaction have a 6 year SOL, and it is not clear how far back custodians will go to clean up prior 1099R reporting.