Does the IRS Audit Self Directed IRAs?

Does the IRS audit selfdirected IRA

Many investors with self-directed IRAs opt out of investing in stocks in favor of alternative investments like real estate and private equity, which may be legal but must abide by certain rules to remain compliant.

One such rule is the prohibited transaction rule, which stipulates that no person may gain personal benefits from investing through an IRA account. To prevent this situation from arising, it is advisable to double check all information found within account statements (including prices and valuations) regularly.

What is a Self-Directed IRA?

Self-Directed Individual Retirement Accounts, or SDIRAs, give investors greater investment control of their retirement funds. An SDIRA gives IRA holders access to alternative investments like real estate, precious metals and private equity that may not be offered through traditional brokerage accounts managed by firms.

Investors seek SDIRAs for various reasons, including higher returns and more diverse portfolios. It is crucial to be aware of all associated risks and fees.

One of the greatest dangers associated with SDIRAs is their nontransparency – financial and operational. Without understanding who you’re doing business with or if your investments are legitimate.

As SDIRA tax rules can be complex and making one mistake can void all your retirement savings, there are also prohibited transactions which can cost a great deal in penalties and taxes – it is therefore imperative that you work with a professional who can guide you away from potential traps to maintain compliance for your account.


Self-directed IRAs give investors more options and flexibility, but also present risks pertaining to information and liquidity issues.

Self-directed IRA custodians generally allow investors to invest in an expansive selection of “alternative assets.” These include real estate (though there may be specific rules surrounding such investment); precious metals and commodities, crypto assets, private placement investments, promissory notes for foreclosed properties as well as life insurance policies.

Prior to investing in alternative assets through an IRA, it’s crucial that you understand and adhere to its exclusive benefit rules and other elements of IRC 4975. For instance, loans cannot be extended from within an IRA account directly to an individual or direct relative within its purview; or you cannot provide services on property owned by your IRA account.

Transacting business via this method may violate the exclusive benefit rule and lead to penalties and taxes. Furthermore, it’s often difficult to accurately value alternative investments provided by promoters in account statements.

Prohibited Transactions

Understanding prohibited transactions when managing a self-directed IRA is of the utmost importance, as these rules restrict what your IRA can invest in, who it can work with and how it should interact with the investment. As this can be confusing and lead to serious mistakes when reviewing investments for potential prohibited transaction issues. When reviewing investments for potential prohibited transaction issues it’s essential that professional advice from financial planners, tax consultants or real estate specialists be sought immediately.

Prohibited transactions arise when any individual (or a disqualified person) directly benefits from investments made within their IRA account, or when their IRA investments in property owned by them, someone related to them, or entities in which they hold control interests.

Other examples may include purchasing stock in a corporation in which a disqualified person owns controlling interest, leasing assets to or from that individual and buying collectibles such as art. All of these transactions could cause unrelated business taxable income or debt-financed income and could disqualify your IRA account.


Self-directed IRA proponents believe investing outside of mainstream channels improves investment diversification; however, a self-directed IRA may still lack diversification.

Self-directed IRA investments tend to be illiquid investments with difficulty getting valued accurately; alternative assets may not have their financial information audited by a public accounting firm; Project entity accountants could incorrectly send the K-1 form directly to the IRA custodian instead of to its owner due to misperceptions that an LLC owned by an IRA qualifies as a partnership (Box E and F of K-1).

Additionally, an unregistered promoter who attempts to sell an illiquid asset at a higher price than it could fetch on the open market can lead to greater tax consequences than initially purchased cost. Therefore, it is crucial that you verify all information within your self-directed IRA account statements, such as investment price and expected returns.

Raymond Banks Administrator
Raymond Banks is a published author in the commodity world. He has written extensively about gold and silver investments, and his work has been featured in some of the most respected financial journals in the industry. Raymond\\\'s expertise in the commodities market is highly sought-after, and he regularly delivers presentations on behalf of various investment firms. He is also a regular guest on financial news programmes, where he offers his expert insights into the latest commodity trends.

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