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Owners of self-directed IRAs must be very careful with the IRAs’ investments…


Owners of self-directed IRAs must be very careful with the IRAs’ investments, as this case shows. Two individuals formed a new firm and directed their IRAs to buy all of the stock. The company that the IRAs owned then purchased a business for cash and a note that was secured by the personal guaranties of the IRA owners.

The guaranties by the IRA owners violate the prohibited transaction rules, according to the Tax Court. That means the IRAs are terminated for tax purposes, and the owners wound up having to pay a substantial tax bill (Peek, 140 TC No. 12).

The moral of the story: Be sure that you get good legal advice in advance if you are planning to have your IRA invest in nonpublicly traded stock and the like.


Funding for the IRS will remain very tight. Congress will be stingy until the agency can prove that it has been able to clean up its act.

So expect fewer examinations. The current trend toward single-issue audits by mail and away from face-to-face exams with agents will continue at full throttle.

Poorer customer service. Anticipate longer waits if you’re trying to call IRS.

And a decline in respect for the tax system. That may embolden people to be more fast and loose with the Service, leading to a dip in voluntary compliance.

Estate Taxes

Relief is on the way for estates that made late portability elections. According to an IRS official, the agency is weighing issuing private rulings granting additional time to elect portability. Under this rule, when one spouse dies, any unused estate and gift tax exemption passes to the surviving spouse. We expect that the Service will rule favorably on late elections. Many executors did not realize that the election must be made on a timely filed estate tax return, even if total assets are less than the normal filing threshold for Form 706 … $5 million for deaths in 2011, $5.12 million for 2012 and $5.25 million for estates of decedents who die in 2013.

Benefit Plans

Hardship distributions from 401(k) plans can be hit with the 10% penalty if the recipient hasn’t reached age 59½, the Tax Court says. In addition, withdrawals that are made on account of hardship are taxed (Mayer, TC Summ. Op. 2013-39).

The IRS has a helpful chart listing withdrawals that escape the penalty, such as a series of substantially equal payments that last for the longer of five years or until age 59½ and withdrawals that are made to cover large medical expenses. The chart also notes which exceptions apply to 401(k)s and other qualified plans, those only for IRAs, SIMPLEs and SARSEPs, and which ones apply to all plans. Go here here to view the complete list.


The Service will not have access to taxpayer medical records as the agency enforces the penalty on people who don’t have health insurance after 2013.

Insurance companies will send a report of coverage to IRS and taxpayers, listing the names, addresses and tax ID numbers of all individuals with coverage. If an employer self-insures, the employer will make the report. No medical history will be listed. The Service will then check to make sure that uncovered individuals have paid the penalty, which is capped at $95 a person for 2014. And remember, IRS can enforce the penalty only by docking tax refunds. It can’t use liens or levies.

Tax-related identity theft may result in even slower refunds next year, according to IRS officials. Fraudsters are taking stolen Social Security numbers and quickly filing for fake refunds. Victims learn that their identities have been stolen only after their true return filing is rejected. The number of such cases is skyrocketing. Efforts IRS took this year to stop refund fraud slowed down payment of valid refunds, but the problem has continued to grow. So if the Service implements stricter controls to combat fraudulent refunds, the waiting time for refunds will only get longer.

The Service is continuing to aggressively pursue offshore tax evasion. Its latest project involves working with tax authorities in Australia and the U.K. to target foreign trusts and companies that are organized in offshore tax havens such as Singapore, the Cook Islands, the British Virgin Islands and the Caymans. The three countries will share information on the individual owners of these entities as well as on the advisers who assisted in establishing the offshore structures.

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