Individual Retirement Accounts: IRS Could Bolster Enforcement on Multimillion Dollar Accounts, but More Direction from Congress Is Needed
Released: 2014-11-19T00:00:00

Letter

Background

IRAs serve dual roles by (1) providing a way for individuals not covered by a pension plan to save for retirement and (2) providing a place for retiring workers or individuals changing jobs to roll over, or transfer, their employer-sponsored pension plan balances.

IRA Types

During the past 40 years, several types of IRAs with different features for individuals and small businesses have been authorized. Two types of IRAs are geared toward individuals—each with its own federal income tax benefits:

Traditional IRA: Eligible individuals may make tax-deductible contributions of earned income with taxes deferred on investment earnings until distribution at retirement. If either the taxpayer or his or her spouse is covered by an employer retirement plan, the individual may be eligible for only a partial deduction or no deduction at all, depending on the taxpayer’s income and filing status. Individuals may make nondeductible contributions to receive the tax deferral on investment earnings. Individuals older than 70½ cannot contribute and must begin receiving required minimum distributions from these accounts. Generally, distributions are taxed as ordinary income. Individuals who made nondeductible contributions to their IRAs may receive a tax-free return of those amounts. Early withdrawals before age 59½, other than for specific exceptions, are subject to a 10 percent additional income tax.

Roth IRA: Enacted as part of the Taxpayer Relief Act of 1997, this type of IRA allows eligible individuals to make nondeductible contributions to these accounts but generally receive tax-free distributions. Annual Roth IRA contributions are limited based on a taxpayer’s income and filing status. Since January 1, 2010, conversions—where a taxpayer pays taxes deferred on balances in a traditional IRA to transfer those amounts to a Roth IRA—are no longer subject to income eligibility rules.contributing, and no distributions are required during the individual’s lifetime. Withdrawals are generally tax-free after age 59½, as long as the individual held the account for 5 years; early distributions other than for specific exceptions are subject to an additional 10 percent income tax on earnings.

There are no age limits on The dollar limit on all IRA contributions is adjusted annually for cost-of- living increases. For 2014, the maximum contribution for all traditional and Roth IRAs in total is $5,500. Individuals age 50 and older are eligible to make additional catch-up contributions of $1,000. Taxpayers age 70½ and older can contribute to a Roth IRA only. Any contribution exceeding the annual limit or made by an ineligible taxpayer is subject to a 6 percent excise tax on the amount of excess contributions.

Two other types of IRAs are intended to encourage savings sponsored through small employers:

Simplified Employee Pension Plan (SEP) IRA: Enacted under the Revenue Act of 1978, this type of IRA was designed with fewer regulatory requirements than traditional employer pension plans to encourage small employers to offer pension plans to their workers. SEP IRAs allow employers to make tax-deductible contributions to their own and each eligible employee’s accounts. SEP IRAs have higher contribution limits than other IRAs: $52,000 in 2014. Annual contributions are not mandatory, but as with pension plans, they must be based on a written allocation formula and cannot discriminate in favor of highly-compensated employees.

Savings Incentive Match Plan for Employees (SIMPLE) IRA: Enacted under the Small Business Job Protection Act of 1996, SIMPLE IRAs help employers with 100 or fewer employees more easily provide a retirement savings plan to their employees. In this plan, eligible employees can direct a portion of their salary, within limits, to a SIMPLE IRA and employers must either (1) match the employees’ contribution up to 3 percent of the employee’s compensation, or (2) make nonelective, 2 percent contributions of each employee’s salary for all employees making at least $5,000 for the year. The employee salary reduction contribution limit for 2014 is $12,000.which in 2014 are limited to $2,500.

Rollovers from Employer Plans

Individuals can roll over assets from employer retirement plans into traditional or Roth IRAs.retirement plans: (1) defined benefit (DB) plans, which promise to provide benefits generally based on an employee’s years of service and frequently are based on salary, regardless of the performance of the plans’ investments, and (2) defined contribution (DC) plans, in which benefits are based on contributions and the performance of the investments in participants’ individual accounts. Over the last three decades, employers have shifted from sponsoring DB plans to DC plans. The 401(k) plan is the predominant type of DC plan in the United States. Typically, 401(k) plans allow participants to specify the size of their contributions and direct those contributions to one or more investments among the options offered within the plan.

Employers may sponsor two broad types of In passing ERISA, Congress intended to harmonize the regulation of all tax-advantaged retirement plans, including IRAs, to prevent, among other things, “njustifiable differences in tax treatment of corporate owner- employees and self-employed individuals under qualified plans.” At the time, while DB plans were the dominant type of employer-sponsored retirement plan, Congress placed various limits on both DB and DC plans. For DB plans, benefits are limited to amounts needed to provide an annual benefit no larger than the lesser of a specific dollar amount or 100 percent of the participant’s average compensation for the highest 3 consecutive calendar years.maximum annual benefit under a DB plan is $210,000. An individual receiving a lump sum distribution from a qualified plan may defer taxes by rolling the lump sum into a traditional IRA.

For tax year 2014, the limit on the Whereas DB plans have a limit on total benefits, DC plans (like IRAs) have annual contribution limits but no total limit on how much an account can accumulate. For DC plans, annual contributions are limited to the lesser of a specific dollar amount or 100 percent of the participant’s compensation. For tax year 2014, the contribution limit on an employee’s elective deferral is $17,500, and the overall contribution limit, which includes the total of all employer contributions and employee elective deferrals, is $52,000. Employees age 50 and older are eligible to make additional catch-up contributions of $5,500. Employees older than age 70½ generally can continue contributing and, if their employer plan allows, delay required minimum distributions until retirement. Rollovers from employer plans such as 401(k) plans have become the predominant source of funds into IRAs. Tax-deferred balances may roll into a traditional IRA, and balances from a designated Roth account can roll directly into a Roth IRA.

For employer plans, tax incentives are structured to strike a balance between encouraging employers to start and maintain voluntary, tax- qualified pension plans and ensuring that lower-income employees receive an equitable share of the tax-subsidized benefits. In addition to the annual limit on employee contributions, other statutory limits include, for example, a limit on the amount of compensation ($260,000 for 2014) that can be taken into account in determining qualified pension plan contributions or benefits. One important requirement for tax-qualified pension plans of private employers is that contributions or benefits be apportioned in a nondiscriminatory manner between highly compensated employees or other workers.

IRA Investments

IRA owners have wide latitude in the types of assets in which they can invest. IRA owners can choose to invest in publicly traded securities or assets in custody of a financial institution or custodian. As a way to invest in a wider range of assets, albeit with higher risk, some IRA owners choose to invest in nonpublicly traded alternative assets, such as real estate and private placement stock. Alternative assets may involve more direction of investment and activities by the IRA owner, limiting the typical role of the custodian.

An IRA owner choosing to directly control IRA assets or invest in alternative investments must navigate the IRA tax laws and can face additional taxes for noncompliance. An IRA owner is not permitted to engage in certain prohibited transactions with the IRA. These transactions are prohibited to prevent misuse of an IRA to benefit the owner or other disqualified persons in a way other than as a vehicle to save for retirement. Such prohibited transactions specifically include, for example, borrowing money from an IRA, selling property to an IRA, using an IRA account as security for a loan, and buying property for personal use with IRA funds. If the IRA owner or beneficiary engages in a prohibited transaction, the IRA loses its status as an IRA. As a result, the account is treated as distributing all of its assets to the IRA owner at the FMV on the first day of the year in which the transaction occurred. The distribution may be subject to any additional income taxes associated with an early distribution and additional excise taxes.

IRA custodians are responsible for ensuring that all IRA assets (including those not publicly traded) are valued annually at their FMV and are required to report the account’s FMV at year-end to IRS. The FMV is the value reflecting contributions and rollovers into the IRA, distributions from the IRA, investment earnings (such as interest and dividends), and any change in the market value of assets held in the IRA. Nonpublicly traded assets do not have easily determined FMV.

IRS Enforcement and Taxpayer Service

Multiple IRS units are responsible for enforcing IRA tax laws and conducting outreach activities to increase taxpayer understanding of the laws. Also, IRS and DOL share responsibility for overseeing prohibited transactions relating to IRAs. DOL defines the prohibited transactions and may grant exemptions. IRS assesses additional taxes for IRAs found to engage in prohibited transactions.

Third-party reporting by IRA custodians provides information that taxpayers can use in preparing their tax returns and that IRS can use to identify noncompliant taxpayers. For every IRA, the custodian is required to submit a Form 5498 IRA Contribution Information to IRS. The form details the IRA type (traditional, SEP, SIMPLE, or Roth), total contributions, Roth conversions, rollovers, and FMV of the account. In IRA examinations, FMV may be essential in determining a plan or an IRA’s compliance with the law, such as whether the contribution value causes a taxpayer to violate contribution limits. Custodians are also to report on Form 5498 whether a taxpayer is subject to required minimum distributions for the coming year; custodians are not required to report the minimum amount calculated for each account. The custodian is also required to submit a Form 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., each year that indicates an IRA withdrawal took place and details the total distributions from the account during the calendar year. Form 1099- R also provides information about the IRA distributions, such as whether the distributions were taken before age 59½.

The IRS Wage and Investment division operates automated enforcement programs that check taxpayer reporting of IRA transactions. The math error program checks tax returns for conspicuous taxpayer errors as tax returns are processed. The automated underreporter program (AUR) identifies noncompliance with certain IRA deduction and distribution rules by matching custodians’ Form 5498 and Form 1099-R information returns with taxpayers’ income tax returns. AUR may ask taxpayers for additional information to reconcile discrepancies. Some AUR cases may be handled as correspondence examinations, while other IRA compliance issues, such as those with large asset values, may be referred for field examination.

The IRS Small Business/Self-Employed (SB/SE) division conducts field examinations targeting more complex individual tax returns. Field examinations are IRS’s most costly form of examination. Figure 1 shows SB/SE’s process for examining returns.

Whereas SB/SE examines individual tax returns, the IRS Tax Exempt/Government Entities division (TE/GE) has jurisdiction over employee plans (including employer-sponsored SEP and SIMPLE IRA plans) and requirements for rollovers from qualified employer plans into IRAs. If TE/GE examiners discover an individual tax issue, they may refer it to other examination offices, including SB/SE.

IRS service activities aim to increase taxpayer understanding of and improve compliance with tax obligations, including IRA requirements, as well as deliver clear and focused outreach communications and education programs to assist taxpayer understanding of tax responsibilities and awareness of changing tax laws. IRS Publication 590 Individual Retirement Arrangements (IRAs) (Publication 590) explains the requirements that taxpayers are to follow in contributing to, and receiving distributions from, traditional, Roth, and SIMPLE IRAs.

Few Taxpayers Had Reported IRA Balances Greater Than $5 Million

Most Taxpayers with IRAs Have IRA Balances of $1 Million or Less

Of the 145 million married couples and individuals who filed individual income tax returns for tax year 2011, an estimated 43 million, or 30 percent, had IRAs with an estimated total balance—in terms of FMV reported by custodians—of $5.2 trillion at the end of 2011.percent of those taxpayers had aggregate IRA balances of $1 million or less and accounted for around 78 percent of the total balance. The median accumulated IRA balance for this group was around $34,000. Taxpayers with aggregated IRA balances exceeding $1 million, around 600,000 taxpayers, accounted for about 22 percent of total balance and had a median of around $1.4 million.

As seen in tables 1 and 2, less than 0.1 percent of taxpayers (about 6,000 to 10,000 taxpayers) had aggregated IRA balances greater than $5 million to $10 million but accounted for about 1 percent of the total balance. From around 700 to more than 1,000 taxpayers with IRA balances more than $10 million accounted for about 2 percent of the total balance. A number of taxpayers had IRA balances exceeding $25 million though our estimates varied widely from around 115 to more than 600 taxpayers. Some of these taxpayers had very large aggregated balances (see appendix III, table 10 for estimated median IRA balances by size of IRA balance and their associated ranges).

To characterize taxpayers with IRAs by IRA type, adjusted gross income (AGI), filing status, and age, we compare two subgroups of taxpayers— those with IRA balances of $1 million or less, which comprised 99 percent of all taxpayers with IRAs, and those with IRA balances of more than $5 million. We do not report on taxpayers with IRA balances greater than $1 million to $5 million to avoid disclosure of taxpayer information.

Taxpayers held about 87 percent of the total balance in traditional IRAs, around $4.4 trillion to $4.7 trillion, while the proportion of total balance held in Roth IRAs was 7 percent, around $359 billion to $378 billion. Those held in other employer-sponsored SEP and SIMPLE IRAs, around 6 percent, accounted for the remaining value. Figure 2 shows a breakdown of IRA types by taxpayers with IRA balances of $1 million or less and those with balances of more than $5 million.

Taxpayers with IRA Balances Exceeding $5 Million Have Higher AGI

For those taxpayers with IRA balances of $1 million or less, most (around 90 percent) have AGI of $200,000 or less. For those with IRA balances of more than $5 million, most (about 90 percent) have AGI greater than $200,000. However our estimates for this subgroup are imprecise as seen in the wide confidence intervals in figure 3.

Taxpayers with IRA Balances Greater than $5 Million Tend to be Joint Filers and Age 65 or Older

Joint filers comprised a larger proportion of taxpayers with IRA balances greater than $5 million in comparison to those with IRA balances of $1 million or less. Joint filers also accounted for a larger share of the IRA balance with about 90 percent of the IRA balance for those with balances more than $5 million, as shown in figure 4.

Those who are age 65 and older—and have had more years to accumulate funds in IRAs—comprised at least 86 percent of taxpayers with balances greater than $5 million and about 90 percent of the total IRA balance for the group. This age group comprised a smaller percent, about 27, of taxpayers with balances of $1 million or less, but has a disproportionate share of the total IRA balance for the group, as shown in figure 5.

IRA Balances Greater Than $5 Million Could Be Considered Large Based on What Individuals Typically Contribute

While there is no total limit on IRA or DC plan accumulations, scenarios illustrating the maximum annual contributions by an individual and employer over time can shed light on what could be considered a large IRA (see appendix I for the statutory annual contributions limits and more detailed scenario descriptions). Table 3 illustrates total contributions by an individual assuming (1) maximum contributions every year since IRAs were created under ERISA, and (2) maximum employer and employee contributions since 401(k) plans were created. These scenarios represent the upper bounds on allowable contributions and do not represent how much individuals and employers typically contribute. Some may not have sufficient income to even approach the employee limit or might not have an employer able or willing to provide additional contributions up to the maximum combined employee plus employer limit. For 2011, the limit for combined employer-employee contributions, (including catch-up contributions for those who are age 50 and older) totaled $54,500, with the employee contribution limit (also including catch- up contributions) being $22,000. Few, if any, individuals would sustain maximum contributions for more than three decades, given that in practice, few individuals contribute the maximum to an IRA or employer DC plan in any given year. Further, few, if any, individuals would be employed by employers who made matching and additional contributions for more than three decades at a level high enough to reach the combined employee plus employer limit. Our previous work estimated that only one-tenth of 1 percent of plan participants had contributions at or above the combined employer-employee contribution limit for 2010. Nonetheless, to illustrate possible accumulations under these upper bounds for contributions, the scenarios shown in table 3 assume all contributions are invested in a broad stock market index—specifically, the Standard & Poor’s (S&P) 500—and are not intended to represent how individuals typically invest. We also looked at other illustrative investment allocations, shown in appendix I. The scenarios do not reflect any withdrawals or investment fees.

As shown in table 3 above, it would take double-digit rates of return—in excess of the S&P 500 return over the period—to achieve a balance of $1 million or more assuming an individual made only IRA contributions.

Accounting for the maximum possible combined employer-employee contributions and no withdrawals, the DC plan scenario with investment sustained over more than three decades could accumulate an individual account balance of more than $5 million; however, as already noted, such a level of contributions is rare, and such a sustained level is improbable. Moreover, an accumulation of more than $5 million looks large in comparison to what can be substantial rollovers of lump sum payouts from an employer DB plan. For 2011, the maximum lump sum payable to a 65-year-old DB participant would have ranged from $2.3 million to $2.6 million, depending on the interest rate factors used in the lump sum calculations. Finally, as discussed above, we found few taxpayers (including married couples filing jointly) with IRA balances greater than $5 million. For all of these reasons, one could consider an IRA balance accumulated by one individual greater than $5 million to be large.

Historically, IRS has collected annual FMV as reported by custodians for each IRA annually but no data on what type of assets are held in IRAs. As a result, we could not describe the composition of assets held in IRAs using the available IRS SOI data. IRS officials pointed out that an individual may have a larger IRA balance by inheriting a large IRA. The IRS IRA data do not readily identify inherited IRAs, so we could not describe how many taxpayers had inherited IRA balances as of 2011.

Alternate Strategies Are Likely the Cause of Large IRA Balances That Congress May Not Have Intended

Investments with Low Initial Values Not Available to Most Investors Help a Small Number of Individuals Accumulate Large IRA Balances

Our interviews with industry stakeholders and review of publicly available filings with the SEC and DOL indicate that a small number of individuals with access to certain types of nonpublicly traded shares in companies or a particular type of partnership interest, as shown in table 4, can generate IRA balances far exceeding $10 million. This is in contrast to the vast majority of IRA owners with balances well under $1 million. Although IRS data at present do not provide information on the investment strategies of IRA owners or the assets in their accounts, we found that an IRA owner would need to participate in a DC plan and sustain large contributions over decades to generate an IRA greater than $5 million. As we have previously found, IRA owners face many challenges in trying to accumulate even modest retirement savings, such as the pressure to draw down their savings for nonretirement expenses like purchasing a home or paying college tuition for their children or medical bills. This is a strong indicator that the individuals able to accumulate such large balances have not done so through steady contributions and investments in publicly traded stocks, bonds, and mutual funds. Instead, these individuals likely use alternate strategies involving investments not available to most taxpayers. In addition to access, to generate a large IRA, investments must have a low initial value and the potential for unusually high investment returns. The low initial value of these investments: (1) allows the individual to purchase a quantity within IRA contribution limits sufficient to generate tens of millions of dollars if the investments are successful; and (2) protects the individual against financial loss, given the increased likelihood that these investments end up worthless. For example, according to SEC documents, the founders of one prominent technology company issued nonpublicly traded shares in the newly created company for an initial value, or par value, of $0.000001 per share.

Nonpublicly traded shares and partnership interests can generally be accessed directly by only a small number of individuals, in part because all offers and sales of securities must be registered under the Securities Act of 1933, unless an exemption from registration is available. The most commonly used exemption limits the investors who can purchase securities in the offering to accredited investors and “sophisticated” investors who are able to evaluate the risks and merits of the investment and bear its economic risk. Even among this select group, only a small number of individuals can use nonpublicly traded shares and partnership interests to generate a large IRA. For example, only the founders of successful companies and some of their initial employees and investors have access to nonpublicly traded shares issued at the creation of the company, at which time these shares can be valued at less than $0.01 apiece. Given the risks associated with starting new companies, most founders are unlikely to see their initial investment grow to a balance of tens of millions. However, founders of successful companies may accumulate large returns disproportionate to the amount they initially paid for shares in their own company.

Most investors are unlikely to have access to these investments when their value is low enough to accumulate such disproportionate investment returns. This is because few investors are likely to be founders of companies or key employees in private equity firms and hedge funds. However, some individuals who do not meet the requirements to invest directly in private equity funds and hedge funds may still be able to invest in them indirectly if they are participants in large public or private sector DB plans. We found in 2012 that an increasing percentage of large DB plans have invested in private equity funds and hedge funds in recent years. Still, because pension benefits from such plans are generally set based on a participant’s salary and years of service, unusually high returns from such investments are unlikely to result in greater pension plan benefits.

Accumulating Nonpublicly Traded Shares in an IRA

According to a number of industry stakeholders, individuals may in some cases purchase nonpublicly traded shares using funds they accumulated in an IRA through contributions and rollovers from employer-sponsored plans. Figure 6 demonstrates an instance in which, according to SEC documents, one of the founders of a successful technology company used a Roth IRA to purchase at least 4 million nonpublicly traded shares For an example of how nonpublicly of his newly created company. traded shares can generate a large IRA balance for the founder of a successful company based on this instance, see appendix IV.

SEC documents indicate that the initial value, or par value, of these nonpublicly traded shares was $0.000001 per share. As a result, the founder could have paid as little as $4 from after-tax contributions to purchase almost 4 million shares. In contrast, from 2000 through June of 2014, companies charged an average of $14.50 per share through initial public offerings, when companies first offer shares to the general public, often primarily to institutional and high net-worth investors. At this price, four million shares would cost an investor about $58 million before commissions or fees, well in excess of annual IRA contribution limits.

According to two industry stakeholders, private equity firms currently use a ratio of about 4:1 to split the value of a portfolio company between preferred and common share classes, respectively. This means about 80 percent of the company’s value would be assigned to the preferred share class and the remainder to the common share class. In some instances in the 1990’s, private equity funds used ratios as high as 9:1, which one industry stakeholder said would have been seen as “pushing the envelope” at the time. Another industry stakeholder said that today, a ratio this high would likely be challenged as aggressively devaluing the riskier common share class. it would be difficult for IRS to prove these shares were inappropriately valued, because, for each risky share the employees purchased, they also purchased a share from a less risky higher-priced share class. Taken together, these shares may more accurately reflect the portfolio company’s value.

Generating Large IRAs through a Profits Interest (Carried Interest)

Carried interest is another means by which key employees of private equity firms and hedge funds can generate large IRA balances. According to one industry stakeholder who advises wealthy clients, including key employees of private equity firms, access to profits interests was likely the chief determinant of an individual’s ability to accumulate a large IRA balance. He added that the rest of his clients, even those whose wealth surpasses $100 million, were unlikely to have an IRA exceeding $5 million because of the IRA contribution limits. The share of profits paid by outside investors, known as limited partners, to the general partner as a performance fee is referred to as the general partner’s carried interest in a fund. The general partner typically distributes a portion of this fee, referred to as an investment fund’s “carry,” to a few key employees by first granting them a profits interest in the fund (see fig. 7). A profits interest has the potential to provide a key employee investment returns that are disproportionate to his or her invested capital if the fund is a success, according to six industry stakeholders who represent private equity firms and hedge funds or advise private equity professionals. If, on the other hand, a fund does not generate a minimum rate of return for its outside investors, profits interests may expire without generating any money for the key employee. For an example of how carried interest can generate a large IRA balance, see appendix IV.

Profits interests in a private equity fund or hedge fund can have a low initial value because they do not necessarily represent a cash investment to the fund by key employees. Instead, they represent an agreement that key employees will provide expertise, ideas, and work to make the fund a success in exchange for a share of the profits from the fund. IRS provided guidance on treatment for the receipt of a profits interest for services, saying that the grant of a profits interest is generally not a taxable event.Some industry stakeholders may have taken this to mean that profits interests can have an initial value of as low as $0.00, referred to as a liquidation value.

As with nonpublicly traded shares, key employees at private equity firms and hedge funds may use IRAs to purchase profits interests from the general partner. According to an industry stakeholder who advises private equity professionals in estate planning, key employees may first accumulate profits interests in a DC plan, such as a 401(k) or profit sharing plan, then subsequently roll over the assets of their employer- based account into an IRA (see fig. 8). A rollover to an IRA can include both cash and noncash assets, such as a profits interest that is not done yielding distributions of carried interest. According to DOL officials, ERISA does not necessarily prohibit an employer from contributing a profits interest to the DC plan of its employees, although Internal Revenue Code requirements administered by IRS may restrict or regulate these types of transactions.

A number of industry stakeholders we interviewed expressed concerns that individuals who invest in nonpublicly traded shares or profits interests using IRAs and DC plans may undervalue these assets, thus substantially increasing their tax benefits. According to one industry stakeholder who advises clients on using IRAs to invest in alternative assets, individuals can manipulate contribution limits by grossly undervaluing investments at the time the individual uses an IRA to purchase them. Two industry stakeholders who advise wealthy clients or who research carried interest arrangements told us that IRA balances exceeding $10 million are a strong indication that assets may have been inappropriately valued. For example, company founders may have extensive knowledge of a company’s value based on its future assets and liabilities.

It is often difficult for IRS to pursue cases of potential abuse based on inappropriately valued assets. First, in response to a congressional inquiry, IRS said it generally requires individuals to assess the FMV of assets in IRAs rather than use a liquidation value or other valuation method. However, IRS guidance implies that individuals can use the liquidation value of a profits interest for certain tax purposes. One industry stakeholder also noted that individuals can use case law to support very low valuations of nonpublicly traded shares and profits interests. Second, according to IRS officials, valuation can be subjective and IRS may expend resources and ultimately conclude that the taxpayer’s valuation is reasonable. Third, the statute of limitations for IRS to pursue cases is generally only 3 years, which poses certain obstacles to pursuing noncompliant activity that spans years of IRA investment. For example, as we have previously found, the long-term nature of private equity investment requires lengthy financial commitments and delayed financial returns. A private equity fund may not begin making profits for 4 or more For examples of the time that may in some cases be needed to years.realize disproportionately large investment returns from such investments, see appendix IV.

Identifying Carried Interest in DC Plans and IRAs Is Difficult

Due to a lack of information in publicly available filings by private equity firms and hedge funds, we could not determine the extent to which key employees use DC plans or IRAs to invest in profits interests and thus shelter their portion of the general partner’s carried interest from taxation. However, one industry stakeholder who values carried interest arrangements told us that he has been asked in one or two cases to value carried interest held in a profit sharing plan. We could not determine from publicly available filings with SEC and DOL if private equity firms and hedge funds enable key employees to invest in profits interests using DC plans. Of the 60 private equity firms and hedge funds we reviewed, about half did not include in their filings with DOL a description of the assets held in their employer-sponsored plans.

Of the filings that did include a description of assets held in the employer- sponsored plan, we found four hedge funds and one private equity firm whose employees were substantially invested in their employer’s investment funds (see sidebar). However, we could not determine if these were investments in profits interests that would yield disproportionately large investment returns in the form of carried interest, or if they were investments in capital interests on terms similar to those of outside investors. In 2014, we found that there were challenges regarding the usefulness, reliability, and comparability of plan asset information on Form 5500s—the annual report that employee benefit plans file with DOL. These challenges, identified by Form 5500 stakeholders, included a lack of detailed information on plan assets for filers with fewer than 100 participants that are not required to file a Schedule H, which is a part of Form 5500 detailing a plan’s assets. We recommended, among other things, that DOL and other agencies responsible for administering Form 5500 revise Schedule H to provide more transparency into plan investments.

Drawing on public filings with the SEC we determined that the private equity firm and hedge funds enabling employees to invest in their own funds charge their outside investors a performance fee that amounts to a carried interest in these funds. But, despite recently expanded reporting requirements by SEC on private equity firms and hedge funds, we could not determine how general partners distribute carried interest among various partnership interests, such as those held by employees investing in employer-sponsored plans. Although the private equity firm and hedge funds disclosed that they held a carried interest in their funds, they did not disclose the general partner’s internal distribution of this carried interest among key employees (see appendix IV for an example of how a key employee can invest in a portion of the general partner’s carried interest through a profits interest). Absent increased transparency in filings with DOL documenting the assets held in employer plans and information about how the profits of private equity firms and hedge funds are distributed among various types of partnership interests, IRS will have difficulty assessing the kinds of assets being rolled into IRAs.

Given the difficultly and uncertainty IRS faces in selecting and pursuing potential instances of noncompliance based on valuation, a few individuals can realize tax advantages from IRAs that substantially exceed those available to the vast majority of investors. According to IRS officials, any additional information about assets that have been rolled over into IRAs would be helpful. IRS officials told us that expanded information could reduce the considerable time and cost of pursuing cases of potential noncompliance based on the valuation of assets in IRAs. DOL filings for employer-sponsored plans in some instances do not contain any detail on the assets held by a plan. However, even when a description of assets is included, neither DOL nor SEC filings include information on whether the general partner distributes carried interest to profits interests held by key employees in a DC plan. This information could help IRS understand the potential investment returns that could have been expected to accrue to a profits interest rolled into an IRA and thus determine if the initial valuation of the profits interest was appropriate. Without this additional detail it will continue to be hard for IRS to determine the magnitude of investment returns a profits interest held in an IRA could reasonably be expected to generate. Such information could be used to determine how assets in IRAs might appropriately have been initially valued. Our prior work has shown that an important feature that helped DB plan sponsors successfully address the challenges of investing in private equity funds and hedge funds includes the transparent disclosure of fees such as carried interest.

Congress Likely Did Not Intend IRAs to Result in Tax-Favored Accumulations of Funds beyond Those Reasonably Necessary to Support Individuals in Retirement

Congress enacted ERISA to promote opportunities for individuals to accumulate resources for their retirement and IRAs were originally authorized largely to ensure equitable tax treatment for individuals without access to an employer-sponsored plan. Congress envisioned that these individuals would be the most likely to establish and rely on IRAs. IRAs provide a way for individuals not covered by employer-sponsored plans to save for retirement and give retiring workers or individuals changing jobs a way to preserve assets from employer-sponsored DC plans by allowing them to roll over, or transfer plan assets into IRAs. Prior to this, individuals not covered by an employer-sponsored plan could not save for retirement under the favorable tax treatment afforded to participants of employer-sponsored plans. This resulted in inequitable tax treatment of individuals not covered by employer-sponsored plans. Congress cited the need, on the basis of equitable tax treatment, to create IRAs and grant these individuals a limited tax deduction on their retirement savings.Similarly, the Taxpayer Relief Act of 1997 created Roth IRAs, which extended tax incentives to individuals who, based on their income, were ineligible to make tax deductible contributions to traditional IRAs. It extended retirement tax incentives to individuals who made just enough that they could not benefit from the deductibility of contributions to traditional IRAs.

Since Congress created traditional and Roth IRAs, they have become the key retirement savings vehicles for many individuals not covered by employer-sponsored plans, including small business owners and independent contractors. But a small number of individuals have found IRAs, and in particular Roth IRAs, to be an advantageous investment vehicle for purchasing disproportionately profitable assets at a low initial value, or transferring such assets from employer-sponsored plans, without paying more than a nominal amount of tax on their gains. The use of IRAs permits these individuals to accumulate far more in resources, under favorable tax treatment, than may be reasonably necessary to support them in retirement.

Through ERISA, Congress also amended the Internal Revenue Code to impose certain limits on employer-sponsored plans seeking preferential tax treatment. Specifically, Congress established a limit on benefit payments from employer-sponsored DB plans and contribution limits on DC plans. Congress established similar contribution limits on IRAs. Congress imposed these limits to prevent the tax-favored accumulation of balances “completely out of proportion to the reasonable needs of individuals for a dignified level of retirement income.”

Forty years after the enactment of ERISA, some in Congress continue to be concerned with the fairness of tax-favored retirement balances. In a 2012 letter to IRS, some members of Congress expressed concern that strategies for accumulating large IRAs by using very low valuations might be widespread among certain higher-income individuals. Members of Congress also noted the opportunity to address inequities stemming from the inappropriate use of retirement tax benefits presented by Congress’s current efforts to reform the broader tax code. In a 2012 hearing on tax reform and tax-favored retirement accounts, the Chairman of the House Ways and Means Committee stressed the importance of increasing participation in retirement accounts by low- and middle-income taxpayers, and ensuring that retirement tax benefits are effectively and appropriately targeted.

We have long recommended greater scrutiny of tax expenditures, such as the deferral of taxation on retirement savings in traditional DC plans and IRAs and the ability to essentially pay taxes up front on contributions to designated Roth accounts in DC plans and to Roth IRAs, in exchange for tax-free investment earnings and distributions. We developed criteria to assist policymakers in assessing tax expenditures. These criteria include the following.

Identifying the tax expenditure’s purpose, a necessary first step in assessing its performance.

Considering the fairness and equity of the tax expenditure. For example the criteria include determining who benefits from the tax expenditure, and whether taxpayers with different abilities to pay receive different benefits from the tax expenditure.

Determining the budget consequences of the tax expenditure, or, how much the tax expenditure costs the government in forgone tax revenue. Specifically, the criteria suggest policymakers consider options for limiting revenue losses from the tax expenditure, for example, by capping the aggregate amount taxpayers can claim.

In the absence of changes by Congress to current tax incentives for retirement savings, certain individuals with the resources to do so will likely continue to engage in sophisticated investment strategies that effectively change their DC plan or IRA from an account for modest retirement savings into a tax-advantaged investment vehicle for accumulating significant wealth. This will be done through investments unavailable to most taxpayers. IRS officials reported in 2012 that long- term revenue losses to the federal government from IRA abuses had increased significantly since 2004, when IRS first created an Issue Management Team (IMT) to address this issue. IRS officials warned that, without legislative change, certain IRA strategies could conceivably result in thousands of families living for generations without the need to contribute to retirement accounts or pay federal income tax. In discussions with industry stakeholders and government officials, a number of proposals have been raised to address the accumulation of large IRAs. Two approaches are restricting the types of assets that can be held in IRAs or imposing a minimum valuation requirement on assets in IRAs. For example, a minimum required purchase price of one dollar per share could prevent the founders of companies from purchasing millions of nonpublicly traded shares within IRA contribution limits. Additionally, a limit on the amount of accumulations allowed in DC plans and IRAs is another approach. Similarly, Treasury officials have proposed limiting contributions to IRAs once a certain level of savings has been achieved.

IRS Has Dedicated Resources to IRA Compliance but Faces Challenges with Nonpublicly Traded IRA Investments

IRS Relies on the Automated Underreporter Program and Field Examinations to Enforce IRA Tax Laws and Has Targeted Abusive IRA Transactions

Within the Wage and Investment (W&I) division, the Automated Underreporter Program (AUR) covers a broad range of taxpayers with IRAs and is IRS’s primary means of detecting noncompliance with contribution and distribution requirements. In tax year 2010 (the last full available year), AUR assessed additional taxes of $88 million for about 226,000 tax returns with IRA discrepancies. IRS continues to take action aimed at noncompliance by taxpayers who fail to take required minimum distributions or contribute more than the allowable limits. In addition to outreach efforts targeting these rules, W&I held two tests sending taxpayers soft notices—letters that require no action on the taxpayer’s part but encourage the taxpayer to check his or her return for errors. These tests were intended to improve IRA compliance without IRS having to invest audit resources. The December 2013 test reminded taxpayers that they need to take a required distribution, and the February 2014 test targeted taxpayers who made excess contributions. As of October 2014, IRS was collecting test data, such as whether taxpayers plan to correct the errors, for use in evaluating future soft notice efforts or whether other compliance activities are needed.

IRS’s Small Business/Self-Employed (SB/SE) division uses field examinations to pursue more complex tax return cases, including those that could involve the multimillion dollar IRA strategies described above. In fiscal year 2013, field examiners audited IRA issues on 1,588 returns and recommended $3.3 million in additional taxes, representing 0.3 percent of SB/SE examinations and 1.1 percent of total tax adjustments for that year. SB/SE training for new revenue agents and tax compliance officers covers specifics on enforcing IRA tax laws. Examiner job aides, also called lead sheets, emphasize investigating all of the taxpayers’ contributions over time to determine if the taxpayers are noncompliant with their reporting. IRS’s Engineering Department, which is part of the Large Business and International (LB&I) division, also provides in-house expertise on valuation issues and can be called upon when IRS discovers a valuation issue during an examination. SB/SE examination officials have developed additional guidance on IRAs for examiners’ continuing professional education.

SB/SE also has conducted special compliance initiative projects (CIP) to identify patterns of IRA noncompliance and better allocate examination resources and education efforts. Since 2007, CIPs have targeted excess contributions, early distributions, and taxes owed on Roth IRA conversions.

Also led by SB/SE examiners, the Abusive Transactions and Technical Issues (ATTI) Program has targeted abusive schemes using IRAs. ATTI generally gets leads for investigating individuals involved in IRA schemes from investigations and monitoring of promoters who market tax shelters. In 2012 (the last full year of available data), ATTI examined 95 taxpayers and assessed additional taxes totaling $15 million in IRA-related cases. Two types of abusive IRA transactions that IRS examination officials said they have focused on include:

Roth IRA “stuffing”: This scheme involves shifting value through transactions that disguise Roth IRA contributions exceeding annual IRA limits, such as selling receivables at less than fair market value to a Roth IRA. In 2004, IRS determined that this abusive tax avoidance shelter is a listed transaction that taxpayers must report to IRS. Because IRA stuffing can involve improper valuation, IRS’s efforts in this area have the potential to detect abuse in asset valuation in the strategies that stakeholders told us could lead to multimillion dollar IRAs. In a 2012 briefing document, IRS examination officials said that noncompliance using this approach “could conceivably result in thousands of families living for generations without the need to contribute or pay federal income tax. IRS continues to monitor taxpayer attempts at Roth IRA stuffing.

Self-dealing within an IRA: These are prohibited transactions in which a taxpayer in control of the IRA’s asset management ultimately benefits from the asset before retirement in violation of tax laws. Examples are having the IRA purchase a beachfront home as a rental, but the taxpayer uses it for herself, or an IRA owner drawing a salary from an IRA-invested business.

Other IRS enforcement programs do not target IRA noncompliance but may refer IRA-related cases for field examination. Within LB&I, the Global High Wealth industry unit targets individual taxpayers with assets or earnings of tens of millions of dollars and, in looking at their complete financial picture and the enterprises they control, may notice possible noncompliance with a taxpayer’s IRA. Similarly, IRS Estate and Gift tax examiners may detect possible IRA noncompliance in reviewing a decedent’s estate tax return. IRS enforcement officials from SB/SE and TE/GE said that reliance on referrals from one division to another requires coordination, without which IRS may be vulnerable to noncompliance that spans division expertise. For example, asset valuation issues may originate in an employer DC plan before being rolled over to an IRA. TE/GE examiners would be responsible for valuation issues within a DC plan, and it may be many years before the noncompliance is discovered by an examiner auditing an individual tax return.

In 2008, IRS chartered an IMT—including representatives from SB/SE and TE/GE—to develop IRS-wide strategies and solutions to curb the proliferation of IRA abuse and potentially clarify and strengthen IRA tax laws. In 2009, the IMT suggested collecting additional data from custodians holding IRAs with hard-to-value nonpublic assets as an immediate step supporting a longer term strategy recommending legislative changes, among other things, to limit the types of IRA investments. By 2012, without progress on having IRS’s legislative proposals considered by Treasury, the IMT developed an interim strategy for IRS to move forward with increased data collection and draw more attention to IRA noncompliance.

IRS Plans to Collect Data to Identify IRAs with Riskier Nonpublic Assets, and Examiner Use Depends on Digitizing the Data

IRS plans to evaluate more data on hard-to-value IRA assets that would help to refine its enforcement efforts. For tax year 2014 (to be filed in 2015), IRS Form 5498 has new boxes for custodians to report the portion of the IRA FMV attributable to nonmarket assets as well as a box with codes describing the type of nonmarket assets, as shown in figure 9. Also for tax year 2014, custodians are to report similar information on Form 1099-R identifying distributions of IRA assets that do not have a readily available FMV. The new reporting is optional for 2014, and IRS plans to require custodians to provide the information for tax year 2015 (to be filed in 2016). As of September 2014, IRS officials said that they will continue to assess comments from stakeholders about the form changes, but IRS does not anticipate changes to the timeline.

SB/SE examination officials said that the new Form 5498 data will help them better identify taxpayers with IRAs invested in nonpublicly traded assets. They said the data also will help them review the history of FMV reported.

Efficient use of the new Form 5498 and 1099-R data for examination case selection hinges on IRS’s ability to compile and analyze the new information on nonpublicly traded assets types and FMV. Custodians, like other third-party reporters, must file electronically if they submit 250 or more of one kind of information return. A specialty custodian submitting fewer than 250 forms currently may file on paper. An IRS Submissions Processing official told us about 1,400 custodians submitted only paper forms in tax year 2012. As previously reported, IRS historically has limited the use of electronically filed data for classification to only the types of data that are transcribed from paper-filed returns to assure that paper- filed returns are treated the same as electronic returns Unless the new information is available electronically—most commonly achieved through data transcription—IRS classifiers will not be able to fully use the new information, undercutting IRS’s intention to more systematically identify IRAs with greater risk of noncompliance.

W&I’s Submission Processing office has requested transcription of the new IRA asset-type reporting that will be mandatory for 2015 forms to be filed in 2016. IRS prioritizes transcribing data based on a number of factors, such as physical capacity, as well as resources and funding. In June 2014, we reported that IRS faces budget uncertainty and indications As of are that its funding will be constrained for the foreseeable future.October 2014, IRS has not finalized plans for making the data available electronically. The cost of transcribing the new data would be relatively small, as IRS estimated that about 9,000 Form 5498 submissions were filed on paper in 2013 out of more than 118 million filings. A similarly small percentage of Form 1099-R filings go to IRS on paper. IRS estimated for us that the annual labor cost for transcribing the forms would be $2,322 to $12,210. However, noncompliance with IRA rules can result in sizable revenue losses if IRA transactions are misreported continuously over many years.

Custodian and taxpayer behavior could change because of heightened attention on nonpublic IRA assets with the new reporting and the potential for greater IRS scrutiny. Some custodians already restrict IRAs to holding only publicly traded investments, and the additional reporting for alternative assets may dissuade other custodians from holding IRAs with such assets. Furthermore, taxpayers who want to manipulate valuations will have less room to do so, since custodians will still report on the type of asset in the account. Increased reporting on alternative assets by custodians to IRS may encourage better compliance by some taxpayers. According to IRS examination and Chief Counsel officials, however, custodians may not always be able to get accurate asset information about IRAs if the IRA owner has day-to-day investment control, which could lead to unreliable Form 5498 reporting of asset types and FMV. It may be difficult to apply general penalties to custodians for third-party misreporting if the IRA owner is the source of the inaccurate FMV data.

IRS Has Tried to Address Challenges in Auditing the Valuation of Nonpublic IRA Assets and Detecting Prohibited Transactions

SB/SE examination officials said IRA noncompliance is difficult to pursue for a variety of reasons. First, some IRA cases—including the large-dollar IRA accumulation strategies cited by financial industry stakeholders—are about valuation issues. IRS officials said these issues are expensive to audit and often must be pursued through litigation in court. For example, IRS examination officials said that determining that an asset was undervalued cannot be made without expensive auditing and litigation. Each case requires extensive resources, including significant time of examiners, engineers, appraisers, appeals officers, and attorneys and fees to obtain appraisals from external contractors, according to examination officials. Examination and Chief Counsel officials said that valuation cases are a matter of opinion, and typically involve taxpayers with lots of resources. Taxpayers can find appraisers who will value assets in an IRA the way they want, and IRS faces difficulty in that it has to procure and present its expert testimony about the valuation. An improper valuation made many years prior to its discovery by SB/SE also may fall outside the 3-year examination statute of limitations discussed above.

For example, IRS Chief Counsel officials said IRS has not completed an audit in which the founder stock purchase facts were present. DOL retains the ultimate authority to interpret whether such a transaction would constitute a prohibited transaction. prohibited transactions. According to IRS, abuses frequently are not reflected on any filed tax return and are difficult to detect within the general 3-year statute of limitation period. When certain prohibited transactions occur, the IRA loses its tax-favored status and is treated as distributing all of its assets at the FMV on the first day of the year when the prohibited transaction occurred. Once IRS examiners detect a prohibited transaction, the taxpayer can dispute when the income should have been reported.

There are few judicial opinions regarding prohibited transactions, according to IRS officials. They also said that the 2013 Tax Court ruling in Peek v. Commissioner (see text box) sets a useful precedent for increased IRS enforcement of the prohibited transaction in more complex, higher dollar value cases. Building on Peek, SB/SE is working on honing procedures for examiners to use in determining whether an IRA case may have violated prohibited transactions that are similar to the Peek case. IRS examination officials said that the process would help IRS make decisions about the validity of transactions without having to go to DOL for every case. They said that Peek will help them more confidently identify prohibited transactions and encourage custodians as well as IRA owners and their advisors to be more aware of what is noncompliant. As of September 2014, IRS said the fact-pattern was an ongoing effort.

Two individuals, Lawrence Peek and Darrell Fleck, each established traditional IRAs, rolled over funds from existing retirement accounts, set up a new corporation, and sold all of the stock of the corporation to the IRAs. They then used the funds from the sale of the stock to buy the assets of a business and executed personal loan guaranties with respect to that purchase. Thereafter, Peek and Fleck converted their traditional IRAs into Roth IRAs funded by the same stock. The Roth IRAs subsequently sold the now-significantly appreciated stock of the corporation and treated the gain as deferred. IRS asserted deficiencies against Peek and Fleck on the grounds that the loan guaranties were prohibited transactions. The Tax Court agreed and held that Internal Revenue Code § 4975(c)(1)(B) prohibits taxpayers from making loan guaranties either directly to their IRAs or indirectly to their IRAs through an entity owned by the IRAs. The Court further held that the IRAs ceased to qualify as IRAs when the prohibited transactions originally occurred and therefore the Roth IRAs were also void because the prohibited transaction continued as to those accounts. The Court also upheld accuracy-related penalties imposed by IRS.

Peek and Fleck appealed the Tax Court decision. As of October, 10, 2014, the case before the Tenth Circuit Court of Appeals was still pending.

In 2009, the IMT proposed several legislative changes to address enforcement challenges IRS encounters in auditing IRA activity. These include: (1) limiting the types of investments IRAs can make to publicly traded or otherwise marketable securities with a readily ascertainable fair market value; (2) expanding the definition under “disqualified person” to address work performed by the IRA beneficiary’s siblings on behalf of the IRA-owned entity or operation; and (3) expanding the statute of limitations in Internal Revenue Code Sec. 6501 to 6 years for all IRA activity. The team’s 2009 legislative recommendations were approved by the Service- wide Compliance Strategy Executive Steering Committee in 2010.2012, the issue management team met again to study abusive IRA trends and continued to recommend legislative change. As of September 2014, no further action has taken place. Ultimately, Treasury has to review all In tax legislative proposals and presents the administration’s tax proposals for congressional consideration. In the fiscal year 2014 and 2015 budgets, Treasury proposed an overall cap on tax-favored retirement saving accumulations.

As IRS begins collecting data on nonpublic IRA assets from Form 5498, it will be positioned to quantify the number of IRAs and associated FMV held in hard-to-value asset types with greater compliance risk. As discussed above, the new asset-type data—if available electronically— will help IRS in selecting examination cases. IRS examination officials said that research using the new data could aid in developing the business case for further action to address noncompliance. Specifically, additional research by IRS could help to evaluate the feasibility of the proposals to require greater disclosure of potentially undervalued asset types as transactions of interest or require reporting of prohibited transactions as listed transactions. Moving forward with a service-wide strategy to target enforcement efforts would hinge on IRS first conducting the research to understand how many taxpayers and the reported amounts of IRA assets are at risk of noncompliance.

IRS Outreach and Education Increase Taxpayer Understanding of Complex IRA Rules but Are Not Explicit about the Risk of Alternative Investment Noncompliance

IRS has included taxpayer service and outreach in its strategies to improve compliance with IRA tax laws. As we reported in 2008, financial industry organizations and advisor representatives we interviewed complimented IRS Publication 590 Individual Retirement Arrangements (IRAs) (Publication 590) for translating the many complicated IRA contribution and distributions rules into “plain English” to help taxpayers comply.minimum distribution requirements and IRA contribution limits.

IRS continues to target outreach to help taxpayers understand Insights about noncompliance detected by enforcement can help IRS identify opportunities to educate taxpayers on how to better comply. IRS has a system for examiners to communicate issues to IRS’s external communication office, Communication and Stakeholder Outreach. ATTI chairs an emerging issues team that meets quarterly to address new compliance risks and may identify issues for the communications office. Research identifying the numbers and types of custodians and taxpayers holding hard-to-value assets could also help IRS target outreach activities and strategies for improving compliance with IRA asset valuation and prohibited transaction requirements. For example, IRS could provide notices targeting custodians and taxpayers with nonpublic IRA assets with a reminder about their responsibilities and the potential tax consequences of engaging in self-dealing and other prohibited transactions.

Examination officials said one challenge in educating the public is a promoter industry that advertises IRAs with alternative assets that also give taxpayers “checkbook access” (i.e., more control over IRA investment choices compared to other IRAs). These promoters might not disclose the compliance risks and responsibilities taxpayers take on when investing in nonpublicly traded assets. The promoters’ advertising may leave less sophisticated taxpayers at risk for unintentional noncompliance with IRA laws. IRS guidance targeting attention on the compliance responsibilities and risks inherent in investing in nonpublic IRA assets and directly controlling IRA assets could help taxpayers make more informed decisions. In 2009, IRS issued a revised publication explicitly warning that it does not approve or endorse particular types of assets for IRAs. Targeted at protecting taxpayers from fraudulent IRA sales pitches, this notice advises taxpayers to proceed with caution when encouraged to invest in a general partnership or limited liability company. Publication 590 describes what prohibited transactions are but does not make the explicit connection that certain asset types pose greater potential for prohibited transactions. As a result, some taxpayers may be unaware that certain IRA investment decisions have greater risks for committing prohibited transactions that could trigger loss of their IRAs’ tax-favored status. In contrast, for custodians, the IRS instructions for Forms 5498 and 1099-R plainly state that nonpublic assets and assets under IRA owner control have a greater potential for prohibited transactions. General reminders are a low cost way to draw attention and caution taxpayers about the compliance risks associated with certain IRA choices.

Conclusions

Congress envisioned IRAs as a moderate tax benefit to help individuals not covered by employer-sponsored plans to obtain income sufficient for a secure retirement, not as a vehicle for accumulating significant tax- preferred wealth. Without further consideration from Congress, individuals with these limited, occupationally related opportunities to engage in sophisticated investment strategies may accumulate considerable tax- preferred wealth in IRAs. The result is a revenue loss to the federal government through a circumvention of the longstanding rationale for IRA contribution limits. However, Congress can reorient existing laws to address the excesses of these strategies, so that all taxpayers have similar opportunities to reap the benefits of IRAs. Congress could, for example, address the build-up of unnecessarily large IRAs in a variety of ways: by limiting the types of investments held in IRAs, enforcing standards such as a minimum required value for investments in an IRA, or by setting a ceiling on accumulations in an IRA and requiring an immediate distribution of balances above that ceiling. Without such a readjustment, the intended broad-based tax benefits of IRAs will continue to be skewed towards a select group of investors.

With respect to individual taxes, IRS has dedicated enforcement resources to identifying taxpayers who may be building IRA balances improperly. It is critical to collect data on alternative IRA assets with a higher risk of noncompliance, given that the valuation issues at the heart of the strategies to build large IRAs pose high costs for IRS enforcement and carry a risk of IRS failing to prove wrongdoing in court. Moving forward, IRS has the opportunity to use the data to further research IRA noncompliance, such as whether IRAs invested in nonpublicly traded shares are predicated on noncompliance, as industry stakeholders we spoke with allege. Such research is a necessary step toward designating strategies leading to high-dollar IRAs as problematic and targeting examination resources efficiently. Positioning IRS to take full advantage of the new Form 5498 data hinges on IRS digitizing the data for compliance case selection and examination. While IRS estimates capturing the data for the relatively few paper filing would add small costs to processing the forms, the benefits—in terms of less forgone revenue, a greater perception of a fair tax system, and better use of enforcement resources—would outweigh those costs.

Existing data from DOL and SEC on employer-sponsored plans and the performance fees charged by private equity firms and hedge funds provide information that could also assist IRS in assessing the valuation of assets in IRAs. We previously recommended that DOL and others improve the usefulness, reliability, and comparability of Form 5500 data in part by providing more transparency into assets held in employer- sponsored plans. Providing this information is important because it helps regulators better understand the types of assets held in tax-favored retirement accounts. If DOL were required to improve the transparency of assets held in employer-sponsored plans, IRS could have better information on where the assets in a large IRA may have originated. In addition, data about how private equity firms and hedge funds distribute their carried interest could also be of use to IRS as it decides whether to move forward with a case against an IRA owner based on valuation.

The new asset-type data also gives IRS more information about IRAs at greater risk for self-dealing abuse and other prohibited transactions. As IRS increases it examination presence, evidence on the obstacles encountered in pursuing prohibited transactions and noncompliant activity engaged in for years may demonstrate whether it would be worthwhile to change the current 3-year statute of limitations for tax assessment with regard to IRAs.

In an environment where less-sophisticated taxpayers can be lured by “checkbook access” to IRAs invested in unconventional assets, IRS has an opportunity to warn taxpayers about the added responsibilities and compliance risks inherent in investing and managing alternative assets in IRAs. Current IRA guidance aimed at taxpayers does not acknowledge the greater risks for committing prohibited transactions—even though Form 5498 instructions for custodians plainly make this point. Without an explicit caution, taxpayers may continue to make un-informed decisions about IRA investments that put them at a greater risk of noncompliance and loss of their IRAs’ tax-favored status.

Matter for Congressional Consideration

To promote retirement savings without creating permanent tax-favored accounts for a small segment of the population, Congress should consider revisiting the use of IRAs to accumulate large balances and consider ways to improve the equity of the existing tax expenditure on IRAs. Options could include limits on (1) the types of assets permitted in IRAs, (2) the minimum valuation for an asset purchased by an IRA, or (3) the amount of assets that can be accumulated in IRAs and employer- sponsored plans that get preferential tax treatment.

Recommendations for Executive Action

We are making five recommendations to the Commissioner of Internal Revenue.

To improve IRS’s ability to detect and pursue noncompliance associated with undervalued assets sheltered in IRAs and prohibited transactions, we recommend that the Commissioner of Internal Revenue:

Approve plans to fully compile and digitize the new data from electronic and paper-filed Form 5498s to ensure the efficient use of the information on nonpublicly traded IRA assets.

Conduct research using the new Form 5498 data to identify IRAs holding nonpublic asset types, such as profits interests in private equity firms and hedge funds, and use that information for an IRS- wide strategy to target enforcement efforts.

Work in consultation with the Department of the Treasury on a legislative proposal to expand the statute of limitations on IRA noncompliance to help IRS pursue valuation-related misreporting and prohibited transactions that may have originated outside the current statute’s 3-year window.

To help taxpayers better understand compliance risks associated with certain IRA choices and improve compliance, we recommend that the Commissioner of Revenue:

Building on research data on IRAs holding nonpublic assets, identify options to provide outreach targeting taxpayers with nonpublic IRA assets and their custodians, such as reminder notices that engaging in prohibited transactions can result in loss of the IRA’s tax-favored status.

Add an explicit caution in Publication 590 Individual Retirement Arrangements (IRAs) for taxpayers about the potential risk of committing a prohibited transaction when investing in nonpublicly traded assets or directly controlling IRA assets.

Agency Comments

We provided a draft of this report to the Secretary of the Treasury, the Commissioner of Internal Revenue, the Secretary of Labor, and the Chair of the SEC for comment. In a September 18, 2014, letter (see app. VI), the IRS Deputy Commissioner for Services and Enforcement generally agreed with our recommendations. On October 2, 2014, the Associate Director and Chief Counsel for SEC’s Division of Investment Management voiced various legal and other concerns regarding implementation of a recommendation, designed to assist the IRS for tax reporting purposes, to expand reporting requirements on private equity firms and hedge funds to require disclosure of a general partner’s agreements for distributing carried interest. As a result, we redirected the recommendation to IRS as part of an existing recommendation that IRS conduct research using new Form 5498 data on non-public IRA assets. We shared the revised recommendation with IRS officials, who continued to agree with it. IRS, Treasury, SEC, and the Department of Labor provided separate technical comments, which we incorporated in our report where appropriate.

In the IRS letter, the Deputy Commissioner emphasized that rules governing IRAs can be complicated for both the IRS and taxpayers. The Deputy Commissioner also highlighted efforts that IRS has undertaken to conduct enforcement, such as the AUR program and compliance initiative projects. The Deputy Commissioner acknowledged that IRA noncompliance can span IRS units and that the issue management team allowed cross-functional coordination to address noncompliance.

IRS agreed with our assessment that digitizing IRA information return data could improve case selection. However, the Deputy Commissioner said that IRS is faced with competing funding priorities and will continue to evaluate the priority of digitizing additional Form 5498 information.

IRS also agreed to conduct research using the new Form 5498 data to identify IRAs holding nonpublic assets and use the information for an IRS-wide strategy to target enforcement efforts. The Deputy Commissioner said that the SB/SE Abusive Transactions and Technical Issues function has begun to develop research objectives to refine enforcement efforts using the additional information that IRS will obtain from the revised Form 5498 data.

The Deputy Commissioner agreed that legislation to extend the period of limitations for assessment of tax associated with IRA noncompliance would remove an obstacle to IRS efforts to pursue identified IRA noncompliance. The Deputy Commissioner added that IRS will discuss with Treasury proposals regarding the statute of limitations on assessing tax associated with IRA noncompliance.

The Deputy Commissioner said IRS agreed to build on research data on IRAs holding nonpublic assets to identify options to provide outreach, such as reminder notices. The Deputy Commissioner said that as IRS analyzes the data, it will identify options to provide targeted outreach to taxpayers with IRAs holding such assets to increase awareness of prohibited transaction rules and penalties for failure to comply with these rules.

The Deputy Commissioner agreed with our recommendation to add an explicit caution in Publication 590 for taxpayers about the risk of committing a prohibited transaction when investing in nonpublicly traded assets or directly controlling IRA assets.

As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies to Secretary of the Treasury, Secretary of Labor, IRS and SEC. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov.

If you or your staff has any questions about this report, please contact James R. McTigue, Jr. at (202) 512-9110 or Charles A. Jeszeck at (202) 512-7215. You may also reach us by email at mctiguej@gao.gov or jeszeckc@gao.gov. Contact points for our offices of Congressional Relations and Public Affairs are on the last page of this report. GAO staff members who made major contributions to this report are listed in appendix VII.

Appendix I: Objectives, Scope, and Methodology

This report: (1) describes the number and types of taxpayers with individual retirement accounts (IRA) and the size of IRA balances in terms of aggregate fair market value (FMV), adjusted gross income (AGI), filing status and age; (2) examines how IRA balances can become large; and (3) assesses how the Internal Revenue Service (IRS) ensures that taxpayers with IRAs comply with IRA tax laws.

Measuring IRA Balances and What Is Considered Large

To describe the taxpayers with IRAs by the accumulated balances in terms of FMV, AGI, filing status and age, we used an Internal Revenue Service (IRS) Statistics of Income (SOI) sample of individual income tax returns for tax year 2011 (the most recent year available) as well as IRS “IRA Contribution Information” Form 5498 data associated with the SOI sample. Our analysis of SOI statistical data is subject to sampling errors because the SOI data are based on a sample of tax returns as filed. In addition, the data do not reflect IRS audit results. The SOI sample of individual income tax returns does not include those who do not file a return. However, some IRA custodians submitted Form 5498s on nonfilers. An IRS official said SOI attempts to include additional information on nonfilers by sampling documents, including Form 5498s, which have no associated individual income tax returns. Form 5498 filings without a matching return were sampled at approximately 1:1,000. In 2011, about 3,800 nonfilers were sampled, none of whom had unusually large IRA balances.

We aggregated the total FMV for all IRAs associated with a return (including inherited IRAs as IRS data do not readily identify inherited IRAs) to obtain an accumulated IRA balance. We used the taxpayers as our unit of analysis. Taxpayers filing joint returns are treated as a single unit and the IRAs owned by both spouses are aggregated. Our analysis of SOI data is subject to errors from sampling as well as from the small sample of returns with higher IRA balances. About 99 percent of taxpayers with IRAs have accumulated balances of $1 million or less. However our group of interest was that small group of taxpayers with large IRA balances and estimates based on this small group may not be precise and have very wide associated confidence intervals. Because of the skewness of the distribution for taxpayers with IRA balances greater than $25 million, we used a statistical technique referred to as bootstrapping or resampling to estimate the confidence interval.

About 5 percent of the estimated taxpayers with IRAs had at least one associated IRA with blank FMV information. We treated the blank FMVs as zeros. If these IRAs did not, in fact, have zero balances, they could affect our estimates’ upper bound considerably. However, IRS officials told us they generally treat blank FMVs as zeros based on their understanding of IRA custodians filing practice. We compared Form 5498 information for particular IRA owners to information from their income tax and Form 1099R information returns. Working with IRS, we identified a number of reasons why blank FMVs could be zeros such as: (1) the entire account balance was distributed; (2) the balance was rolled over to another IRA; (3) the owner of the IRA was deceased and IRA assets were transferred to a beneficiary; (4) tax year contributions were made to a new IRA account for a prior calendar year.

In addition to the number of taxpayers and FMVs for their aggregated IRAs, we presented the data for two separate groups: 1) those with IRA balances of $1 million or less and 2) those with IRA balances of more than $5 million and the confidence intervals associated with the estimates. We do not report on taxpayers with IRA balances greater than $1 million to $5 million to avoid disclosure of taxpayer information.

We compared the two groups on three types of IRAs—traditional, Roth, and other IRAs that included employer-sponsored SEP and SIMPLE IRAs. We used eight categories of AGI, which is the individual’s gross income minus adjustments that include deductions for trade or business expenses, losses from the sale or exchange of property, contributions to pension and other retirement plans and alimony payments. Our AGI categories were $0 or less, $1 to $20,000, $20,001 to $50,000, $50,001 to $100,000, $100,001 to $200,000, $200,001 to $500,000, $500,001 to $1,000,000, and

Greater than $1,000,000.

About 1 percent to 2 percent of the taxpayers reported zero AGI. We did not use the modified AGI used to determine eligibility for IRA contributions which added certain items such as foreign housing expenses and student loan deductions back to the AGI. For the filing status comparison, we used three categories—single, married filing jointly and others, which included married filers who were filing separately, head of household, and qualifying widow(er). For the comparison of age we used 2 categories: those younger than age 65 and those age 65 and older. As our unit of analysis was the taxpaying unit, our age-65-and-older category included the filer, spouse, or both who were age 65 or older. To assess the reliability of the data we used, we reviewed IRS documentation and interviewed agency officials familiar with the data. We determined that these data were sufficiently reliable for the purposes of this report. However, the IRS SOI sample may not provide a precise estimate of the number of taxpayers or other quantities when the number of taxpayers in a particular reporting group is very small.

The predominant type of defined contribution (DC) plan, the 401(k) plan, became available in 1980. Prior to 1987, DC plans had a single limit on employer and employee contributions. The Tax Reform Act of 1986 imposed a limit on employee deferral contributions, but still maintained the total limit on annual contributions. scenarios are intended to illustrate the upper bound on total contributions over time based on the statutory annual limits for each type of tax- preferred retirement account and do not reflect how much individuals typically choose to contribute. Our scenarios illustrate balances accumulated by an individual in an IRA or DC plan. For a married couple filing jointly, both spouses in concept could contribute at the statutory maximum.

To illustrate how much an individual could accumulate under each scenario, we reviewed historical stock returns, specifically the Standard & Poor’s 500 broad stock index return. Intended to illustrate possible accumulations based on the upper bounds on contributions, the two contribution scenarios assuming 100 percent investment in the stock market are not intended to represent how individuals typically choose to invest. As shown in table 7, we also looked at a range of other possible asset allocations: (1) a 70-percent investment in the S&P 500 and a 30- percent investment in corporate bonds; (2) a glide path starting with a 70- percent investment in the S&P 500 and a 30-percent investment in corporate bonds, and shifting over time to end with a 30-percent investment in the S&P 500 and a 70-percent investment in corporate bonds; (3) a 30-percent investment in the S&P 500 and a 70-percent investment in corporate bonds; and (4) a 100-percent investment in corporate bonds. For the asset allocations with a mix of stocks and bonds, the portfolio was rebalanced annually. We also calculated the DC contribution scenario with investment returns equal to historical interest rates reported by the Social Security trustees for special-issue government bonds as a proxy for an accumulation with a less aggressive investment allocation. The scenarios do not reflect any investment or administrative fees and expenses. Likewise, the scenarios do not reflect any leakage from withdrawals or employer plan loans over the period.

We also calculated the rate of return necessary to accumulate a balance of $1 million or $5 million under each scenario.

How IRAs Can Become Large

To examine how IRA balances can become large, we conducted literature reviews on IRA investment strategies and held semistructured interviews with more than 60 finance industry stakeholders, government officials, and academics. We conducted initial literature reviews on general topics and key words related to IRAs, contribution limits, and tax policy. We selected a first round of interviewees from these literature reviews and from referrals from GAO stakeholders who have conducted work on retirement, finance, and tax policy. We sought referrals for additional interviews from our first round of interviewees, as well as from more targeted literature reviews based on our initial reviews.

We also searched for documentary evidence of the IRA investment strategies we identified through our interviews and literature reviews. We could not determine IRA investment strategies from IRS data because the IRS does not collect data on asset types held in IRAs. Given this limitation, we searched publicly available filings with the Securities and Exchange Commission, such as the Form S-1 filed by companies seeking to conduct an initial public offering of their stock on public markets, to research the number of nonpublicly traded shares beneficially owned by directors, executive officers, and holders of more than five percent of any class of the company’s voting securities. These individuals often comprise the company’s founders. We also searched publicly available Form 5500 filings with the Department of Labor (DOL) for the employer-sponsored DC retirement plans of selected private equity firms and hedge funds, primarily 401(k) and profit sharing plans. Specifically, we searched the filings of private equity firms and hedge funds that (1) reported holding partnership interests; (2) are members of the Private Equity Growth Capital Council, an advocacy, communications, and research organization and resource center for the private equity industry; or (3) are cited in the Forbes list of the highest earning hedge fund managers and traders of 2013. The findings of this analysis cannot be generalized to the entire population of private equity firms and hedge funds operating in the United States but provides insights into one potential alternate strategy for accumulating large IRAs.

Our framework for evaluating the performance of tax expenditures draws on long-standing criteria we have described—economic efficiency, equity, simplicity, transparency, and administrability—that can be used to evaluate tax policy. In our review, we focus primarily on (1) the extent to which strategies a few individuals may use to accumulate large IRA balances align with the intended purpose of IRAs; (2) whether tax treatment of individuals who may engage in these strategies is fair and equitable, and (3) the consequences for the federal budget of these IRA strategies.

To provide context for how certain types of nonpublicly traded shares and partnership interests can generate IRA balances of tens of millions of dollars, we constructed two examples. The first example demonstrates how a company founder can invest in nonpublicly traded shares of a newly created company using an IRA, and how these nonpublicly traded shares can grow in value if the company raises capital from outside investors and becomes a publicly traded corporation. The second example demonstrates how a key employee at a private equity firm can invest in a particular type of partnership interest called a profits interest using an IRA or DC plan, and how these profits interests can grow in value if the private investment partnership is successful.

Assessing IRS Enforcement

To assess IRS’s examinations of IRA rules and provisions, we developed criteria for evaluating an enforcement program on IRAs. Generally, the basis for the criteria included relevant laws and our previous work on tax administration and policy as well as our previous work and other organizations’ work on good management practices. From our research, we concluded that the seven criteria in table 7 were appropriate. We shared the criteria with IRS examination officials. In response to the officials’ comments, we considered potential resource and budget limitations in applying the criteria.

To apply the criteria, we collected documentation on IRS enforcement procedures, such as relevant sections of the Internal Revenue Manual and other IRS publications on guidance for IRA compliance. We also interviewed relevant IRS enforcement officials with Small Business/Self- Employed (SB/SE); Wage and Investment (W&I); the SB/SE Lead Development Center; Large Business and International Global High Wealth industry; National Research Program; IRS Chief Counsel; Research, Analysis and Statistics; Estate and Gift Tax; and Tax Forms and Publications. We then compared the findings of our research with the criteria. Table 8 summarizes our determination of how IRS performed on the criteria.

We used statistics from several databases in our work on assessing IRS enforcement, including the Audit Information Management System, Examination Operational Automation Database, Publication 6961 data, Information Return Program Case Analysis System, and Lead Development Center database. To ensure the data’s reliability, we reviewed documentation on the databases and, where necessary, interviewed agency officials. We determined that these data were sufficiently reliable for the purposes of this report.

We conducted this performance audit from June 2013 through October 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: Illustration of Earnings and Tax Effects of Traditional and Roth Individual Retirement Accounts

Figure 10 shows the benefits a taxpayer might receive for investing in a tax-advantaged traditional or Roth individual retirement account (IRA) compared to taxable account or investments, given certain assumptions in four different types of investments: a traditional IRA, a Roth IRA, an investment or account that is taxed annually at ordinary income tax rates, and an investment that is subject to capital gains tax rules. The figure uses a simplified model to show the after-tax rates of return that result from these scenarios over a 20-year period. Each case assumes earnings of $1,000 before taxes for contribution in year 1 and distribution of the accumulated balance in year 20. Investment earnings over the 20- year period are assumed to be a constant pretax 5 percent. Assuming a constant federal ordinary income tax rate of 25 percent, the traditional IRA and Roth IRA achieve similar results although the tax benefits have different paths. For the traditional IRA, the individual can invest a $1,000 tax-deductible contribution in year 1, and taxes on the contribution and investment earnings are deferred until distribution. For the Roth IRA, the individual can invest $750 after tax with investment earnings tax-exempt at later distribution. While the amount contributed to the account is greater in the first year for the traditional IRA owner, the amount that is available for the taxpayer for consumption after taxes on distribution is the same for the traditional owner and the Roth owner. The traditional IRA owner puts the tax saving in the account to grow to ultimately pay the tax on the account; the Roth owner pays the tax upfront and has no further tax liability. For both Roth and traditional IRA accounts, the after-tax rate of return is 5 percent. In contrast, the taxable account, which is subject to taxes on both the original earnings contributed as well as the annual investment earnings, has an annual after-tax rate of return of 3.75 percent. If an investment were held outside of a retirement account and subject to capital gains taxes only, there would be no initial deduction of amounts invested. Similar to the case of a traditional IRA account where tax on income is deferred until distribution, no capital gains tax would be owed until the asset was sold and gain was realized, which in the example happens at the end of the 20-year period. Upon sale, any gain would be subject to the capital gains tax rate. The capital gains tax rate is generally lower than the ordinary income tax rate that is applied to distributions from a traditional IRA. As a result of the deferral of tax until sale and the preferential capital gains tax rate, the after-tax rate of return for the capital gains asset would be 4.5 percent, less than if the asset were held in an IRA of either type but higher than if the investment had been made in a taxable account where income earned was taxed annually at ordinary income tax rates.

The simplified example above showed how contributions to traditional and Roth accounts can earn the same rate of return after taxes if tax rates do not change over time. If tax rates vary over time, this equivalence may not hold. For example, if an individual or household is subject to a relatively high tax rate when a contribution is made and a low tax rate when earnings are distributed, a traditional account would result in a higher rate of return. On the other hand, if tax rates are low when a contribution to a Roth account is made and rates are higher when funds are distributed, the Roth account would result in a higher rate of return.

Appendix III: Tables from Statistics of Income Data for Tax Year 2011

This appendix shows the confidence intervals for our analysis of the Statistics of Income (SOI) data about individual retirement accounts (IRA).

Appendix IV: Examples of Strategies to Accumulate Large Individual Retirement Accounts

The two examples below demonstrate how a small number of individuals could generate large individual retirement account (IRA) balances by leveraging their access to nonpublicly traded shares and profits interests.

Example 1: onpublicly Traded Shares

Figure 11 illustrates an example of how founders of successful companies can generate IRA balances of tens of millions dollars by investing in nonpublicly traded shares in their newly created company. The example is based on Securities and Exchange Commission (SEC) filings detailing the transactions of a technology company founder and assumes the following: In 2008, the founders of a newly created company authorize the issuance of up to 100 million shares with an initial value of $0.00125 per share.

One company founder opens a Roth IRA with an after-tax contribution of $5,000, and uses the Roth IRA to purchase 4 million nonpublicly traded shares in the company.

The following year, the company raises money by selling nonpublicly traded shares to a private equity fund that focuses on venture capital opportunities (venture capital firm) for $10 per share. As part of this transaction, the company founder sells 1,000,000 shares from her Roth IRA. The founders stipulate that they will retain an “additional consideration” in these shares if the outside investors can someday sell them for more than $30 per share. Specifically, the company founder will receive 20 percent of the profits above $30 per share.

In 2012, the company offers shares to outside investors through an initial public offering of shares at a price of $25 per share.

By 2014, the company has enjoyed continuing success and its shares trade on public stock exchanges at $60 per share. The founder retires and sells the remaining shares in her Roth IRA. Additionally, the outside investors of the venture capital firm sell the shares they purchased in 2009 for $60 per share.

Example 2: Profits Interest

Figure 12 illustrates an example of how a key employee of a private equity firm can generate an IRA balance of tens of millions of dollars by investing in a profits interest that gives him or her the right to a portion of the general partner’s carried interest in a successful fund. The example assumes the following about a general partner entity consisting of 10 key employees: In 2004, the general partner of a private equity firm that focuses on buy-out opportunities contributes $10 million to start a new $1 billion buy-out fund. The general partner raises the rest of the capital needed to start the fund from outside investors, known as limited partners.

The general partner negotiates a performance target that needs to be met in order to get paid for managing the fund. If the general partner meets this performance target, the limited partners pay the general partner a performance fee equal to 20 percent of the fund’s total profits, called the general partner’s carried interest in the fund.

One key employee of the private equity firm rolls over $500,000 from a former employer’s 401(k) plan to an IRA and uses it to purchase a profits interest in the general partner. In exchange, the general partner will distribute 5 percent of its carried interest to the key employee if the fund is successful.

The general partner and key employees successfully invest in portfolio companies over a 10-year period and exceed the performance target set for the limited partners.

On the last day of the fund, the general partner distributes initial contributions and 80 percent of the fund’s profits to the limited partners.

The general partner retains its initial contributions and 20 percent of the fund’s profits as a carried interest. The general partner then distributes 5 percent of this carried interest to the key employee’s IRA.

Appendix V: Printable Figure 9 on Form 5498

The figure below is a printable version of figure 9 found earlier in the report.

Appendix VI: Comments from the Internal Revenue Service

Appendix VII: GAO Contacts and Staff Acknowledgements

GAO Contacts

Staff Acknowledgements

In addition to the contact named above, Tamara Cross and MaryLynn Sergent (Assistant Directors), Eric Gorman and Tom Moscovitch (analysts in charge), Amy Bowser, Bertha Dong, Monika Gomez, Gene Kuehneman, Ed Nannenhorn, Albert Sim, Walter Vance, Sonya Vartivarian, and Craig Winslow made key contributions to this report. Also contributing to this report were James Bennett, Joanna Berry, Rachel DeMarcus, Ellen Grady, David Lin, Donna Miller, Karen O’Conor, Stewart Small, Frank Todisco, and Kathleen van Gelder.